Palliser Oil & Gas is not your typical heavy oil producer; led by veteran oilman Kevin Gibson, the company is focused on rejuvenating old fields with large oil reserves in place and low recovery factors using a proprietary methodology. Palliser’s HVL (High Volume Lift) methodology sets the company apart from its peers as it has been proven successful in adding production and reserves at very economic metrics from old abandoned oil fields by doubling recoveries and increasing old original well rates by up to 10 times!
Cold flow Heavy Oil Production with Sand (CHOPS)
The initial production phase in the development of a new pool heavy oil prospect starts with CHOPS wells (Cold flow Heavy Oil Production with Sand). Think of heavy oil as a gooey liquid that needs a pump to get it out of the ground but that is not thick enough to require heating to make it flow, hence the cold flow name. A “typical” CHOPS well in the Lloydminster heavy oil belt produces around 40bopd, recovers 50,000 barrels of oil representing a 5-10% recovery factor of the original oil initially in place. The well starts production with a water cut of about 35% that, at the end of the CHOPS phase, increases rapidly to close to 100% at which point it is abandoned as it becomes uneconomic to produce. However, Palliser believes that by using HVL methodology, the company can recover an extra 75,000 barrels per well pushing the recovery factor up to 20%. The best part here is that the company has the results to prove it: PXL’s best HVL well to date has cumulative production of about 150,000bbl of oil and is still producing about 100bopd from a well we drilled in the Edam, Saskatchewan oil field right between several abandoned oil wells in the same producing zone.
Palliser’s High Volume Lift (HVL)
After several years of CHOPS production, the wells experience water break through, as the wormhole network grows and develops over several years and eventually makes contact with the down dip aquifer (flank water), which can be up to a mile or so away from the producing well. It is an important distinction that the water is flank water, versus bottom water, whereas at Provost, AB, the oil is floating directly on top of the water. Because the water is flank water, it must travel a long distance through the wormhole network and through the producing formation rock before it gets to the producing well. There is therefore a limit to the amount of water that can come into the HVL producing well, so as long as you pump the HVL wells at high enough rates, it can stay ahead of the water and the water cut will remain at a ‘lower’ rate. PXL has seen several of its HVL wells restarted after the CHOPS phase at 100% water cut which gradually decreased over a period of weeks or months to as low as 50% as the oil cut increased from 0% to as high as 50%!
Palliser’s wells are planned to smoothly transition to HVL over time by setting up the proper surface equipment on each new well right from the start. When the well is producing as CHOPS well, it will typically have a smaller Progressive Cavity Pump (PCP or screw pump) that is capable of handling 30 – 200 barrels of fluid per day (bfpd), with the pump output varying by speeding up or slowing down the rotation of the pump from the surface. When the well transitions to HVL, the pump is upgraded to a 200 – 600 bfpd pump or to a larger 500 – 1200 bfpd pump. As each well is unique, the pumps are configured to meet the optimum pump speed that produces the highest oil production rates and the lowest water production rates.
Along with new oil, the HVL wells produce significant quantities of salt water that needs to be disposed of. Palliser has been trucking this water and paying fees to dispose of it in someone else’s SWD (Salt Water Disposal) facilities. As a result, PXL’s operating costs increased from the $15 – $20/bbl range in 2009 & 2010 to the current level of ~$32/bbl in 2011. The lower operating costs were associated with CHOPS production and the higher operating costs relate to HVL production. However, the company expects operating costs to be reduced in 2012 to about $20 – $25/bbl per barrel of oil. This will be a blend of pipelined and trucked production, as some wells will not be tied in to SWD facilities until later in the year, or in the rare case, not at all if the capital cost associated with a SWD facility is not justified (currently estimated at about $1.2million + ~$150,000 per well for SWD pipelines).
Palliser’s new approach is to install its own SWD facilities at a much earlier time. In the case of a startup HVL project, the company plans to install the facilities once it has determined that the first well is responding according to expectation before spending a lot of money in trucking fees. To that end, the company applies for the requisite SWD permits from the government very early in the process in order to short circuit the lead time. In the case of a CHOPS project, PXL monitors the water production rates and water cuts and applies for the SWD permits before the well transitions to HVL.
Palliser calls this new approach ‘HVL Pods’ and it involves one central SWD well & facility for 4 to 8 producing oil wells. Pipelines are built to move salt water from the producing oil well batteries to the SWD facility, thereby eliminating the cost to truck and dispose the salt water. Solution gas distribution lines are laid in the same trenches as the SW pipelines, thereby eliminating some or all of the cost for propane required to heat the production tanks in the winter. While it is still early days on these new HVL Pods as the Edam SWD facilities just became operational in the last few weeks, PXL’s model shows that the HVL Pods will achieve excellent economics based on encouraging results from actual experience in the field. The company now has 5 separate SWD facilities (3 at Edam, 1 at Lloyd and 1 at Manitou) with rates increasing from ~40bopd (on a couple of the wells which were shut in after the CHOPS phase) to as much as ~200bopd (the HVL phase) once the wells were pipelined directly to the PXL SWD facilities. The company expects 20-30% of reactivated wells to exhibit a similar curve with production rising to as much as 200 bopd in HVL phase.
Old Fields, New Oil
Palliser PXL.V 0.20 [+0.005] is a junior heavy oil company currently producing 2,150 boepd weighted approximately 98 per cent to heavy oil. In my opinion it is the best junior heavy oil producer out there and right now it is trading at less than $33k/boed. The company drills conventional wells that do not require fracking and its oil weighting makes it very attractive given another year of strong oil prices is expected in 2012, a stark contrast to collapsing natural gas prices. The CEO, Kevin Gibson, formerly of Innova Exploration (acquired by CPG), is co-discoverer of the southeast Saskatchewan Bakken oil field and is currently heading his 4th E&P company.
With operating costs trending lower in 2012 and the “show me” phase coming to an end, I believe Palliser will be handsomely rewarded by the market once the full potential of its HVL methodology is recognized. Palliser’s heavy oil prospect inventory currently stands at 139 locations providing the company with a multiyear drilling inventory and significant growth opportunities. This inventory of CHOPS and HVL Pods projects represents at least 10 million barrels of recoverable oil the company will be pursuing in the next few years. The 2012 capital program is to be released by the end of January. Finally, special thanks go to the CEO, Kevin Gibson, for taking the time to answer all my questions in detail making this report possible!
Disclaimer: I have a position in Palliser Oil & Gas. This article is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment, please do your own due diligence before taking an investment decision.