After converting to a trust in 2005, PWE was left holding more than 4 million acres of this undeveloped land.
Although not a typical asset for a trust, this undeveloped land has huge strategic value for Penn West. The company has been able to negotiate deals with E&P firms to develop this land while taking little or no capital risk. Specifically, Penn West allows E&P firms to explore and drill on this virgin land in exchange for a royalty interest in any future production. These farm-in partners take on all the expense of drilling, development, and production processing. Meanwhile, PWE still gets a piece of any future oil and gas revenues from this land. This is an excellent low-risk growth strategy.
In addition, PWE has a history of success with enhanced recovery techniques. Enhanced recovery techniques include a process known as carbon dioxide (CO2) flooding. Contrary to popular belief, oil in a reserve is not trapped in a giant underground pool, but is instead held in tiny holes, cracks, and pores of rock. Because oil is under pressure underground due to geologic forces, it will flow easily to a newly spudded well. But over time, that geologic pressure drops and production falls. When that happens, 60% to 70% of the total oil in the field can be left trapped underground.
In CO2 flooding, a company pumps carbon dioxide gas through injection wells into the edge of an oilfield. The gas is literally absorbed by the oil and helps to re-pressurize the field. As anyone who has ever opened a can of shaken Coca-Cola can attest, carbon dioxide bubbles will force the soda through the top of the container, creating quite a mess. Similarly, carbon dioxide bubbles in oil help push the oil up a well. PWE uses carbon dioxide flooding to push more oil out of its existing wells. The result is both increased recovery and a greatly enhanced reserve life.
For example, one of Penn West's key properties, the Weyburn field, currently accounts for a large chunk of the firm's production. This field was discovered in the 1950s and has already been peppered with 600 wells. But by using a carbon dioxide flood to enhance recovery, PWE estimates that Weyburn will deliver almost two decades of additional reserve life.
PWE also garners around 40% of its total production from mature light oil fields in central Canada. Light oil is easier to refine than other forms of crude and earns a premium price on the global market. Although these fields are mature, PWE expects to garner steady production from the region using its enhanced recovery techniques. |
