U.S. Oil Sands: Interview With American Sands Energy's Management

| About: American Sands (AMSE)

Summary

US oil sands commercial scale production is likely to start next year and is likely to take off.

American Sands Energy Corp will start production two years from now if all goes well and is likely to be the most likely candidate as a model due to water-free process.

Compared to Canadian oil sands extraction, there seem to be enough advantages to make US oil sands more profitable, therefore we should expect extraction to be viable.

Just as the shale oil story is starting to stall out, there is increasing evidence surfacing of the beginning of a new oil boom in the US. It will not be as spectacular as the shale oil boom. By the end of the decade, production might still be measured in the tens of thousands of barrels, but production will start in the next few years and there are encouraging reports of cost-effective and environmentally sound techniques being deployed and hopefully it will be proven as commercially viable in the near future.

Interview with American Sands Energy (OTCPK:AMSE) CFO & CEO in regards to their water-free production process due to start commercial production in 2016.

I had the pleasure of being given the opportunity to put some questions to Mr. Dan Carlson, CFO as well as the company's CEO, Mr. William Gibbs about their project in Utah as well as the overall bigger picture of the US oil sands industry prospects. It was an eye opener in terms of just how likely we are to having another major American oil boom. We discussed the wider prospect of oil production in the region, including already existing facilities and resources such as the local workforce, transport as well as nearby refining capacity. We also discussed American Sands Energy and its current efforts to reach commercial production in 2016. We discussed the company's unique technical approach, its current acreage, reserves and finances through questions I sent through e-mail as well as a phone conversation.

Before I go on to the conversations, I want to mention the resource itself. Most cited reserve estimate is for 12-19 billion barrels in place, of which not all of it is recoverable. Unlike the Canadian oil sands, which is water-wet, US oil sands are hydrocarbon-wet, which is a difference I discussed with American Sands CFO in detail in terms of the difference it makes to the extraction process and the bottom line.

American Sands technical aspect of the project (sounds promising):

The phone conversation I had with Mr. Carlson, mainly focused on the hydrocarbon-wet resource and the company's unique 100% water-free approach to production, which so far proved successful on a pilot project scale.

Given the hydrocarbon-wet, rather than the water-wet nature of the deposits, Canadian extraction techniques are not viable. In Canada steam is used to separate the bitumen molecules from the sand which is known as the in-situ process, which will access 80% of the reserves. The mining process involves digging up the oil sands and mixing it with water in order to produce a slurry, which is then heated in order to separate the bitumen from the sand. The water used ends up in the tailing ponds which people are concerned about on environmental grounds.

American Sands Energy will not produce any tailing ponds. The solvent they use was shown to be almost 100% recoverable and re-usable. It is applied to the ore and then the solvent, the oil and the sand are separated.

Source: American Sands Energy homepage.

The left over sand is clean and can be used to fill in excavated areas, or sold for other uses. There is far less need for heat and no need to produce steam, therefore there are lower emissions involved in the production process and the ratio of energy return on energy invested is much better compared to Canadian oil sands.

Q & A with Mr. Dan Carlson CFO and Mr. William Gibbs CEO.

ZB Q: With American Sands Energy Corp's (ASEC) water-free process, do you think that aside from the environmental benefits of not having to use water, there may be some other benefits compared to the competition, such as a far better energy return on energy invested? This is a major topic when it comes to Canadian oil sands operations where some estimates put the energy return ratio at 4-5/1.

DC & WG A: "We have numerous advantages on a cost basis relative to Canadian projects. On a capex side, we don't have the large upfront infrastructure costs; we have a road and power to the site already, have a local work force (don't need to build housing facilities) and do not need to build a tailing pond. On the back-end, our bitumen is ready for sale and we don't require an upgrader. Our process, being ambient temperature and under vacuum (as opposed to high pressure), is much less expensive on an equipment basis. These savings are due to both the physical makeup of oil-wet sands and the location in Utah, near infrastructure. As a case in point on the latter issue, we are located 6 miles from the largest garbage dump in the US with a co-gen facility and a separate rail-heading."

"On an opex basis, the low pressure and ambient temperature of our process means that our energy costs are a fraction of the Canadian costs. We use 60% less energy than a typical Canadian project. This is because we don't heat, treat or handle water and because our solvent has a boiling point much lower than water. These cost advantages are all due to the physical makeup of oil-wet sands versus water-wet. We speak of these cost advantages in our PPT, which I have attached."

ZB Q: When it comes to the competition in the region, a Canadian company called US Oil Sands Inc (V.USO) (OTC:UERLF), received a permit for its Utah operations and is likely to commence with production. Do you foresee this to be a net positive for you or a net negative from ASEC's point of view? What I have in mind when asking this question is longer term prospects of expanding operations. On one hand more production in the region may convince someone to build a pipeline or a refinery nearby. On the other hand, it may lead to a grab for prime acreage as we have seen in other relatively new oil fields, making the acquisition of additional acreage more expensive. Where do you see things going in respect to such issues in the longer term?

DC & WG A: "We are excited about US Oil Sands going into production. We believe that any positive news for the industry will be well received by investors, not only leading to higher multiples for trading valuations, but positive press about the environmentally benign aspects of oil-wet sands operations. From a longer term perspective, we believe that, as the industry moves into production, there will start to be a rush for properties. We believe that we will be an ideal partner as this happens, as we have the best process and we will be in prime position to partner or license on numerous other projects. In terms of nearby infrastructure, there are 5 refineries in the greater Salt Lake City area that can take our production. I wouldn't anticipate, however that more are built as production ramps; as I'm sure you're aware, there has been one new refinery built in the US in the last 30 years or so."

ZB Q: As far as transportation goes, we have seen issues arise with Canadian oil sands where there is at present a wide discount compared to the WTI price. We have also seen this issue come up with Bakken producers. Do you foresee a transportation related discount for US oil sands as well? If so, how large of a discount?

DC & WG A: "We are aware of the transportation issues in Canada that have led to significant discounting. Being 150 miles from refineries and with ample trucking available, we aren't overly concerned with getting our oil to market. We actually will be looking to displace Canadian bitumen in the refinery mix in Salt Lake City, where they currently import substantial product from Canada. We do however, model a 25% discount to WTI for our internal estimates, just to be conservative relative to the market. In addition, there are two oil terminals in Price, Utah that can take our oil and put it on rail. Price is about 20 miles from our site and once on rail, can go to Salt Lake, California or Houston easily, giving us a discount to Brent pricing rather than WTI."

ZB Q: Turning to reserves, ASEC's homepage mentions that you hold the rights to produce on 1,800 acres, where you estimate with a 50% certainty that there are 150 million barrels that are recoverable. Can you give us an estimate of the total oil in place on the property? Do you foresee any possible future innovations (at current oil price) which may help you recover a greater proportion of the oil in place? Is this something your company is contemplating at this stage of development?

DC & WG A: "The USGS estimate for the Sunnyside area is 3 5o 4 billion barrels of oil in place. Our resource estimate is for recoverable barrels, not barrels in place. The estimate for recoverable barrels uses a 5% cutoff and takes into account current mining techniques and practices, the depth and composite of the resource and other variables that would affect recoverability. There is about 1.1 billion barrels of recoverable bitumen in the total deposit. We currently control leases on 150M barrels and part of our strategy is to acquire or lease the additional barrels over time. We don't have an estimate on barrels using below a 5% cutoff, but if the price of crude were to increase, those barrels would become economical."

ZB Q: Your homepage mentions that commercial production will commence in 2016, with full capacity at 5,000 b/d. Is this still the target date?

DC & WB A: "We expect to be in production 18 months (or sooner) from permitting. Assuming permitting in Q4, 2014, we would hope to be in production by the middle of 2016 at the latest."

ZB Q: As far as ASEC's finances are concerned, do you feel comfortable with your capital resources or with the company's capacity to tap capital resources in order to reach the point of commercial production?

DC & WG A: "AMSE has enough capital to last through the permitting process. We will need to raise additional funds, post permitting, to put us into production. We expect to do this in the equity markets and hope to uplist to NASDAQ simultaneously with the financing."

ZB Q: I want to finish by first of all thanking Mr. Dan Carlson (CFO) and Mr. William Gibbs (CEO) for their time and opportunity they agreed to give me to have this exciting conversation with them. I want to leave this last part open as an opportunity for them to add anything else they wish to let the public know about American Sands Energy Corp, which I may have neglected to cover.

DC & WG A: "We would like to thank you, Zoltan, for your interest in American Sands. We believe our company is a leader in the area of unconventional oil from oil-wet sands and, as such, is in a great position to reap major benefits from the coming growth in this space. We expect global production of heavy oil from oil-wet sands to accelerate rapidly in the next 5-10 years due to the low cost of production and the environmentally benign aspects of our production relative to other unconventional oil producers. This is an exciting time for our company and we appreciate your sharing our story with your readers."

Conclusions:

This interview has opened my eyes to the likelihood of a new major unconventional resource being on the verge of being tapped in the near future. In the wake of the latest bad news on the shale oil front where the largest field, the Monterey in California, which was credited for holding as much as a quarter of all the technically recoverable shale oil in the United States was recently declared virtually un-recoverable by current means of production by the EIA (link), the prospect of another major unconventional play coming on-line is very welcome news.

While I expect American oil sands will never reach the kind of production volumes we have seen from the Bakken and Eagle Ford, I think we will see production levels in the hundreds of thousands of barrels range some time in the next decade, or perhaps as soon as the end of this decade.

The reason I believe this to be the case is because during this interview with the leadership of American Sands Energy, I was given many credible examples of where its particular operation can save money compared to Canadian oil sands operations. The fact that there is no water use, means to tailing ponds. The fact that unlike the Fort McMurray area in Alberta there is a decent supply of local labor means that labor costs will be lower. Energy use, therefore energy costs are estimated to be 60% lower. There is less chance of a deep discount of as much as 20% for WTI versus WCS, as is currently the case with Canadian oil sands. It is therefore logical to conclude that if Canadian oil sands extraction is viable then so will US oil sands. Even if there will be some surprises on the negative side in terms of production costs, I believe there are enough credible advantages to compensate.

There are also some less promising statements made by American Sands leadership in terms of the future of US oil sands. They believe it will take a higher price of oil to go after a higher proportion of the oil in place. I already stated very often in previous articles that I do not believe significantly higher oil prices are to be expected in the foreseeable future, not because we live in a time of plenty but because the economy does not seem to have the needed tolerance for it. The last time WTI tried to rally over $120 a barrel in 2011, there is strong evidence of a correlated demand destruction event in OECD countries (link).

While this may not be a story about the next savior of humanity from recent scarcity which is impacting the world's economy, I think it is a story worth keeping an eye on as it unfolds. Calgary based US Oil Sands Inc is likely to commence production in 2015, with full capacity at 2,000 b/d (link). Unlike the American Sands production process, the US Oil Sands process will involve water use, therefore it is a slightly different process, with different costs involved operationally as well as in terms of public relations. Water use and water pollution are among the top concerns voiced by activists opposed to development of oil sands in Utah (link). Nevertheless it will be a first test of US oil sands commercial viability. American Sands will start producing the year after most likely and I believe that it has an edge over competition due to its water-free process, so if this proves to be commercially viable two years from now, I think it will be the start of another oil rush.

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.