Pengrowth's (PGH) Lindberg project in Lloydminster, Alberta continues to show growth prospects. A study found that the Lindberg project's bitumen reservoir is homogeneous in nature. A reservoir's characteristics are measured by permeability and porosity. Permeability measures the ease of flow of hydrocarbon in the reservoir while porosity helps in estimation of the amount of hydrocarbon. For the Lindberg reservoir, the permeability and porosity lies in between a narrow range. This could be an advantage to Pengrowth in terms of bitumen reserve quality and the cost of production, resulting in predictable cash flows.
One of the characteristics of a reservoir is the density of the crude obtained from it. API degree is a measure of density of a petroleum product. The API degree of the Lindberg reservoir is around 11, whereas density for oil sands in the Alberta region ranges between7 and 10. Higher API generally indicates lighter crude, and the majority of petroleum crude API degrees range between 10 and 70. The company has higher quality bitumen and a substantial reserve of it. Pengrowth has acreage of around 43 sections in the Lloydminster formation with a potential of around 769 billion barrels of bitumen initially in place, or BIIP. BIIP is an estimate of the amount of bitumen that could be found in a reserve. Therefore, the availability of lighter bitumen throughout Pengrowth's acreage is likely to provide an advantage over other projects in the oil sands.
Another characteristic of a reservoir is the decline rate. Lower decline rates are likely to increase the productive life of a reservoir, resulting in revenues for a longer span of time compared to reservoirs whose decline rates are faster. In the Lloydminster area, where the Lindberg project is located, the decline rate may vary in between 25% to 60% during the first year, while in the central Alberta the decline rate may vary in between 70% to 80%. Pengrowth estimates the decline rate of its Lindberg project to be 10%, further lower than the other reservoirs in the Lloydminster area. This low decline gives the company a basis for long-term revenue generation.
Since the reservoir characteristics are found to be homogenous, the well performance will likely show similar production patterns as the Lindberg project's test wells. Pengrowth's test wells in the Lindberg project are also showing strong performance. These wells have an Estimated Ultimate Recovery, or EUR, of around 1.2 million barrels over the life of the wells with a recovery rate of 23% within the first two years of operation. In terms of recovery factor, Pengrowth expects that the wells could reach around 50% recovery by the end of the fourth year of their operation. A recovery factor of more than 50% for the oil sands is considered high for Steam Assisted Gravity Drainage, or SAGD, process, which Pengrowth uses for bitumen extraction. The project is likely to benefit Pengrowth though enhanced production during commercial production, which is expected to commence in 2015.
Cost control essential
Drifter Projects Ltd is supervising the commercial phase of the Lindberg project construction and is likely to help Pengrowth complete the project on time and within budget. Drifter has a previous track record of completing other SAGD facilities on time and within budget. The Lindberg project is located at a distance of around 24 kilometers from Bonnyville, Alberta, which gives it access to services and skilled workforces. Also, the project spending is tracked daily and compared to the project schedule, ensuring that productivity lapses are detected and corrected as early as possible. The proximity to a major town and close monitoring of the project development is likely to prevent cost inflation of the Lindberg project.
Cost control is a major issue for the projects in the Canadian oil sands. If the Lindberg project is completed on time, than it would be a major cost advantage for Pengrowth. This would be in contrast to the some of the larger oil sands projects, which have seen cost overruns. Some projects have cost runs ranging in between 50% to 100%. Companies like Total (TOT), Suncor (SU), and Imperial Oil (IMO) have found it difficult to manage oil sands projects within budget while some were rendered uneconomic altogether. Imperial Oil's Kearl oil sand project, one of the largest oil sand projects, saw a cost overrun of 60%, inflating the cost of the project to around $12.9 billion compared to an expected estimate of around $7.9 billion. The Kearl oil sand project is expected to produce around 345,000 barrels of per day. Further, Imperial plans to move ahead with developing another project in the Alberta oil sands at a cost of around $7 billion, which is expected to produce around 135,000 barrels of bitumen a day.
Compared to Imperial Oil's project, the Lindberg project is smaller, producing around 12,500 barrels per day in its first phase and will help in controlling costs. Between 1999 and 2008, the supply cost of projects increased from $20 per barrel to $90 per barrel. Because of their size, smaller projects help in the purpose of cost control, as they require less capital for development. Some smaller projects recorded a supply cost of $40 per barrel, and Pengrowth estimates the supply cost to be around $50 per barrel. A lower supply cost per barrel compared to the larger projects is likely to provide better cash flow for the company.
Pengrowth to show tangible results
Pengrowth is focused on providing its investors with a sustainable cash flow through proper planning and execution of its Lindberg project. Studying the Lindberg project has helped the company understand the quality of the reservoir and enhance it for better production. The reservoir being homogenous in nature provides growth opportunities by replicating the success of its test wells. This project also provides the company with effective cost control due to its size, location, and type. These attributes of the Lindberg thermal project are likely to provide long-term cash flow for the company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.