Solvent Injection - effect on production and reserI posted this yesterday on the investor village Canadian blue chip board. Thought it might be of interest here.
I've been following the application of solvent injection processes for in-situ recovery of oil from oils sands since Enbridge announced a small investment in an injection process several years ago.
Last fall when Encana split into two components, the oil part, Cenovus had quite a few presentations that touted its oil sands expertise. The slides mentioned they are the most efficient SAGD operator. One of the slides also mentioned that they had done some pilot studies on injecting a solvent into their SAGD wells. They also mentioned a commercial scale test in Christina lake was to begin in the fall (2009).
Well the results are in.
Their June presentation provides more insight on how this is going. Slide 11 shows the results of the Cenovus' solvent injection trials. The solvent increases production by 30% and provides a 15% incremental oil recovery improvement, plus other benefits. The solvent they use is butane.(.05 bbls of solvent per barrel of bitumen). The improved recovery of 15% is probably conservative but what it really means is that their reserves have just increased by 15%.
The other presentations are also good
Big surprise in the presentation is the amount of land they have that was not previously disclosed. What they have in production is just a very small fraction of their land holdings. Pays a small dividend now of 80 cents a year (about 2.9%) which is good for an oil company and they are committed to increasing the dividend after 2011.
Based on the recent share price which is near the 52 week low, I don't think the analysts have clued in on the content of the June presentation and what this means for the economics of in-situ extraction, for Cenovus and by extension for other companies with large oil sands holdings that are amenable to insitu extraction (deep deposits).
It is also important to note that this is not an open pit mining company like Suncor and COS. The in-situ recovery has a much smaller environmental impact and is more akin to underground mining without the tailings waste. It is actually very similar to the in-situ extraction of uranium with no tailings.
It may take a year or two to expand the use of the solvent injection to other operations and obtain the improved benefits on a larger scale. The analysts may clue in before then. The other way to play this is to buy the gas fractioning companies as the solvents are extracted from natural gas and there will be increased demand for the solvents.
I'm not waiting and Cenovus is now my largest common stock holding. The only other two larger holdings are the collection of variable rate preferreds tied to the prime rate (Brookfield B, C and K and Bombardier B, D) which I wrote about in a post about a year ago. BTW the
BBD.pr.B are still good value at $14.30. The dividend has increased twice in the last four months as the prime went from 2.25% to 2.75% with the two fed rate hikes. These variable rate preferreds have some very nice features which make them somewhat like inflation protected annuities, but that's another post.