Oilsands Quest files 10-Q Quarterly Report and provides an update on its independent evaluation of resource estimates
The following discussion addresses material changes in our results of operations and capital resources and uses for the three and nine months ended
Management's Discussion and Analysis of Financial Condition and Results of Operations
As a consequence of current capital and commodity market conditions, we have undertaken an aggressive program of expenditure prioritization and control. Our activities are focused on the primary goals of determining the quality of our resources, adding to the Company’s resource quantities and maintaining our asset base and core management and technical team. We have undertaken decisions to curtail and or defer some of our expenditure plans for the remainder of the fiscal year. The impact of these decisions is further detailed in the Outlook section below.
Overview Three Months Ended January 31, 2009 - We continued our in-house computer simulation studies, which are co- ordinated with advanced laboratory measurements by selected industry experts specializing in reservoir structural analysis, petro-physical characteristics and laboratory scale reservoir production testing. The simulation studies are being conducted to provide guidance to our technical team in carrying out the planned on site reservoir test programs and to generate predictions of reservoir responses for comparison to the results monitored during the reservoir test programs. This work will also support sensitivity studies for the commercial development plan alternatives. - Delineation drilling resumed with 3 drilling and coring rigs starting up in the last week of January at our Raven Ridge property. As at January 31, we had drilled 7 exploration and delineation oil sands test. We completed the 20 well program in late February. - We completed the field work on an approximate 40 kilometre (25 mile) 2D Seismic program on our Saskatchewan permit and license lands. - At Test Site 1, we released our construction contractors as construction is nearly complete and we are now preparing the facilities for commissioning. - At Test Site 3, the heating test program is ongoing and we continue to gather data on reservoir characteristics. - At Test Site 2, we have completed the design for a solvent recycle facility. Test Site 2 remains at the planning stage. - In February we announced the appointment of Garth Wong, as Chief Financial Officer. Nine Months Ended January 31, 2009 - In aggregate, we completed three private placements by issuing 23.78 million shares of common stock for total gross proceeds of $91.2 million. - We drilled 55 exploration and delineation oil sands test holes in the Axe Lake and Raven Ridge areas along with 11 exploration test holes on the Pasquia Hills oil shale prospect. Evaluation of the drilling results is underway. - The reservoir test program at Test Site 1 commenced, including the drilling and completion of several test holes for the reservoir test program and the completion of three 750-metre horizontal holes (300 metres length within the reservoir). Two test holes were drilled and completed at Test Site 3 and a heating test program also commenced during the period. - We entered into an Exploration Agreement establishing a formal relationship with the Northern Village of La Loche and certain other local communities in northwest Saskatchewan through which the environmental, social and economic aspects of our exploration activities in northwest Saskatchewan will be managed. - We announced the appointment of Jamey Fitzgibbon, President & Chief Operating Officer and other executives. Operations Summary: Exploration Programs - Oil Sands
During the nine months ended
We continue to collect baseline environmental data for the Axe Lake, Raven Ridge, Wallace Creek and Eagles Nest areas in preparation for future exploration and development programs and a comprehensive Environmental Impact Assessment report, which will be required as part of an application for regulatory approval for development of the Axe Lake area. In addition to our passive (periodic) air monitoring activities, which have been ongoing since 2005, our active (continuous) air quality monitoring station at Axe Lake, the first of its kind in northwest
Axe Lake – Reservoir Development Activities
At Axe Lake, the Company has planned a testing program to take place at three test sites over a number of phases.
Test Site 1 will focus on determining the extent and quality of our resources using thermal recovery processes based on steam and hot water. Test Site 2 is planned to use processes based on mobilization agents other than steam such as hot propane and other gases. Test Site 3 is based on utilizing electrical heating methods to evaluate quality characteristics of the reservoir.
At Test Site 1, we have drilled and completed six vertical test holes and drilled three 750-metre horizontal holes (300 metres length within the reservoir). We have procured the horizontal well instrumentation strings necessary to measure the temperature and pressure in the reservoir. In addition, we have drilled two water source wells which showed excellent fluid mobility and sufficient water withdrawal capacity to meet the current needs of the reservoir test program. We are near completion of the construction of water treatment, steam generation and extraction collection facilities, which includes three steam generators totaling 38 million BTU/hour steam generation capacity, two diesel power generators each with 750 kilowatt power output capacity, water/oil treatment and oil handling equipment, control systems and eight 1,000-barrel heated liquid storage tanks to support related Test Site 1 activities, which are near completion.
At Test Site 2, the front-end engineering and design work on a facility for tests using hot propane vapor, initiated earlier in the year, is now complete. Construction has been deferred until funding is in place for these tests. We continue to investigate the possibility of using mobilization agents other than steam, such as hot propane or other gases, as an alternate or complementary process to steam and hot water for determining the extent and quality of our resources. Information we obtain on the extent and quality of our resources will enable us to optimize recoverability of our bitumen resource.
At Test Site 3, we are conducting initial low energy tests using an electrical heater. This represents the first step towards determining critical reservoir properties at a field scale level. This information will be used for preliminary calibration of our reservoir simulator. Information from the simulator will help maximize the efficiency of the steaming tests on the vertical well program at Test Site 1. To date, two vertical holes have been drilled and the supporting infrastructure has been constructed at Test Site 3. One vertical test hole is equipped with an electric heater to provide heat to the reservoir and both test holes are equipped with sensors to allow for determination of the effective reservoir heat transfer and mobilization of the bitumen at lower temperatures. The program at Test Site 3 is designed as a short-term heating program intended to determine critical reservoir properties (such as thermal conductivity and relative permeability of the reservoir). Heating of the reservoir was initiated in late
Laboratory testing on the porosity, saturation, permeability and mobility characteristics of the reservoir bitumen and overburden at various temperatures in the Axe Lake area was completed. These results are being included in ongoing reservoir simulation activities to further refine the details of our reservoir test program as described above.
We continue to conduct economic feasibility, financial planning and market studies for full commercial development. We are undertaking a wide range of studies to examine infrastructure additions (roads, power, natural gas, and product pipelines), market alternatives, and the economic evaluation of a wide range of development scenarios. The advancement of the engineering work associated with a commercial development has been deferred as part of our prioritization of capital expenditures.
Exploration Programs – Pasquia Hills Oil Shale Prospect
As a consequence of current capital and commodity market conditions, we have undertaken an aggressive program of expenditure prioritization. Our activities are focused on the primary goals of determining the quality of our resources, adding to the Company’s resource quantities, and maintaining our asset base and core team. We have undertaken decisions to curtail and/or defer some of our expenditure plans for the remainder of the fiscal year.
The five year initial term of the Company’s Saskatchewan Oil Sands Permits will expire on
At Test Site 1, we are preparing for the commissioning and start-up of this test during 2009. Detailed planning of the test is on-going, including incorporating the results generated from Test Site 3. We plan to drill an observation well which may be utilized as a disposal well, subject to testing and regulatory approval.
Steam injection at Test Site 1 may begin in 2009, subject to completion of the facilities, regulatory and other approvals. Water and steam will be injected into the reservoir in order to mobilize the bitumen at the bottom of the McMurray formation using the vertical test holes. Water and steam injection into the horizontal wells may begin following the completion of the surface facilities associated with the horizontal test holes and will incorporate results from the vertical well program.
We plan to continue the activities necessary to determine the characteristics and properties of the Axe Lake area, as well as conducting exploration programs to further define the location, extent and quality of the potential bitumen resource in the Axe Lake and Raven Ridge areas, Wallace Creek and Eagles Nest prospects. Activities may need to be partially curtailed or temporarily put on hold in light of our view to maintaining maximum liquidity and matching the pace of our activities with available funding under current market conditions. Results from our planned activities are expected to enable us to establish a commercial development plan for the Axe Lake area, including identifying and evaluating an optimal in-situ oil sands recovery process. We also currently intend to maintain our asset base and core technical team in order to advance the commercial development plan for our resource.
At Test Site 3, we are applying heat to the reservoir utilizing a down-hole electric heater and are planning to continue this test. We are considering options to expand the scope of the test, including perforating one or more of the holes and attempting to mobilize and produce small amounts of bitumen.
The overburden characterization program, originally planned for this winter, has been deferred until later in 2009. The program, in combination with our extensive 3D seismic data, is expected to enhance our understanding of the formation overlaying our bitumen deposit.
We have determined that in light of current capital markets, it is prudent to delay our exploration programs in the Eagles Nest and Wallace Creek areas. In addition, we will not begin any field activities related to Test Site 2, where tests on the use of recovery processes based on mobilization agents other than steam, such as hot propane were planned and we have deferred the Design Basis Memorandum (DBM) engineering for a 30,000 BOPD facility, initiated in a prior quarter. Further, development of a commercial project will remain subject to regulatory and other contingencies such as successful reservoir tests, board of directors’ approvals, financing and other risks inherent in the oil sands industry. These risks are described in detail in our Annual Report on Form 10-K, as amended. We will also only conduct those baseline environmental studies necessary to support current activities.
Liquidity and Capital Resources
an aggregate of
During the nine months ended
At the present time, the Company expects its near term liquidity needs will be met by working capital on hand at
The Company plans to fund future exploration and development activities by way of financings such as a public offering or private placement of debt or equity securities. Current conditions in the global and financial markets have currently limited the availability of these resources. The Company cannot provide any assurance that debt or equity financing or joint venture partner arrangements will be available on acceptable terms, if at all, to meet future requirements.
If the Company is unable to fully fund all of its planned activities this may result in delays of our business objectives, and in some cases, the objectives may not be met.
Results of Operations Net Loss
Three Months ended
Nine Months ended
The Company expects to continue to incur operating losses and will continue to be dependent on additional equity or debt issuances and/or property joint ventures to fund its activities in the future.
Three and nine months ended
General and administrative Cash consideration
Three and nine months ended
Three and nine months ended
Depreciation and accretion
Three and nine months ended
Three and nine months ended
Income tax recovery
Three and nine months ended
Under the terms of the Agreement, Mr. Hirji is entitled to retain all stock options granted to him in his former role as an executive officer of the Company for the duration of the Agreement and Mr. Hirji remains eligible to participate in future stock option and other grants during the term of the Agreement at the sole discretion of the Company’s Board of Directors.
Risk Factors 1. The impact of disruptions in the global financial and capital markets on our ability to obtain financing The global financial and capital markets have been experiencing extreme volatility and disruption, including the failures of financial services companies and the related liquidity crisis. Although we expect to meet our near term liquidity needs with our working capital on hand, we will continue to need further funding to achieve our business objectives. In the past, the issuance of equity securities has been the major source of capital and liquidity for us. The extraordinary conditions in the global financial and capital markets have currently limited the availability of this funding. If the disruptions in the global financial and capital markets continue, debt or equity financing may not be available to us on acceptable terms, if at all. If we are unable to fund future operations by way of financing, including public or private offerings of equity or debt securities, our business, financial condition and results of operations will be adversely impacted. 2. Emissions regulations On June 14, 2007 the Government of Saskatchewan announced the Saskatchewan Energy and Climate Change Plan. The Plan's main targets included a 32 percent reduction in GHG emissions from 2004 levels by 2020, and a reduction of 80 percent by 2050. Those targets have been adopted by the new Government which was elected in October 2007. The Saskatchewan Energy and Climate Change Plan, however, is no longer Government policy, and the Government is presently developing a new climate change plan, which may be completed in 2009. In the non renewable energy sector, the Government is working with industry to prepare a report and recommendations with respect to the reduction of flaring, venting and fugitive emissions, with a target completion date of 2009. The Government of Saskatchewan also supports and will work with industry on carbon capture and storage alternatives. As of January 2009, the Government has not adopted regulatory changes to implement GHG emission targets or reductions. It is, however, presently developing climate change legislation which it anticipates will be passed in the 2009. The legislation is expected to create a framework to deal with climate change, including creating the authority to pass regulations.
Interim independent contingent resource estimates
Oilsands Quest also announces the release of interim independent contingent resource estimates for a portion of its Axe Lake and Raven Ridge properties. The estimates were prepared by McDaniel & Associates Consultants Ltd. (“McDaniel”), at the request of Oilsands Quest. The effective date of the contingent resource estimate is
In mid-2008 the Company released McDaniel’s independent estimates of discovered and undiscovered bitumen resource volumes, which were prepared in accordance with the standards set out in the Canadian Oil and Gas Evaluation Handbook (“COGEH”) and National Instrument 51-101 (“NI 51-101″). These estimates are presented in Table 1 below. McDaniel has now classified a portion of the discovered resources as contingent resources. These contingent resource estimates have been prepared for portions of the Axe Lake and Raven Ridge areas only. The Company has not completed estimates for the remainder of Axe Lake and Raven Ridge, or at Wallace Creek and Eagles Nest, all of which the Company believes are prospective. The lands over which the resource assessment was conducted comprise less than 5% of our land holdings.
Similar to some other bitumen accumulations within the eastern portion of
The Company is engaged in undertaking reservoir test programs and related laboratory and reservoir simulation studies to determine the optimum configuration of existing thermal, solvent-based and other, in-situ recovery methods for use in our reservoirs at Axe Lake, Raven Ridge and elsewhere. The recovery methods Oilsands Quest is testing are designed to be independent of the presence or absence of an overlying shale formation. Our recovery processes may offer higher efficiency and superior recovery than steam assisted gravity drainage (“SAGD”).
Oilsands Quest is continuing to advance its reservoir testing programs to further develop and verify its recovery methods. We have not yet completed our pilot tests of the recovery methods. Under the COGEH guidelines, any evaluation of our contingent resource volumes and economics is limited to the use of recovery methods that are developed and verified by testing in our reservoir. While at this time we do not intend to utilize SAGD as a recovery method, the Company engaged McDaniel to conduct its evaluation as an interim measure and this evaluation was completed assuming the use of SAGD. The results are summarized in Table 2 below. The report estimates the volumes of economically recoverable contingent resources at Axe Lake and Raven Ridge, while the remaining bitumen in place would be categorized under COGEH as unrecoverable at this time. The company anticipates that its reservoir test programs, if successful, will result in a significant re-categorization from unrecoverable to contingent resources.
The following tables set out our prior discovered resource estimate and our current contingent resource estimate, prepared by McDaniel as at
Table 1 Summary of Discovered Resources Axe Lake and Raven Ridge Areas as at April 30, 2008 ------------------------------------------------------------------------- Discovered Resources(1) (millions of barrels) ----------------------------- low best high Axe Lake 1,241 1,723 2,334 Raven Ridge 337 566 727 ------- ------- ------- Total 1,578 2,289 3,061 ------------------------------------------------------------------------- (1) This is not an estimate of the recoverable volume of bitumen. A portion of the discovered resources tabulated herein have been further categorized as contingent resources in the McDaniel December 2008 evaluation, as tabulated below. The portion of the discovered resources that have not been classified as contingent resources would be categorized under COGEH as unrecoverable at this time, pending further testing and recovery process development. There is no certainty that it will be commercially viable to produce any portion of the discovered resources. Table 2 Summary of Contingent Resources Axe Lake and Raven Ridge Areas as at December 31, 2008 ------------------------------------------------------------------------- Contingent Resources(2)(3)(4) (millions of barrels) ----------------------------- low best high Axe Lake 0 130 432 Raven Ridge 0 0 94 ------- ------- ------- Total 0 130 526 ------------------------------------------------------------------------- (2) The "best" and "high" estimates have been categorized by McDaniel as economic contingent resources. The low estimate of contingent resources is uneconomic under McDaniel's current price forecast and cost assumptions, therefore no low estimate contingent resources were assigned by McDaniel. There is no certainty that it will be commercially viable to produce any portion of the discovered resources. (3) The recoverable volumes estimated by McDaniel have been classified as contingent resources as opposed to reserves because not all of the conditions for commerciality have been met including corporate and regulatory approvals for development. (4) The estimates of contingent resources have been prepared assuming the use of SAGD as the recovery process.
The estimates in the above tables reflect Oilsands Quest’s 100% interest in the Axe Lake and Raven Ridge areas and represent only those resources that have been independently evaluated. The results of our 53 well drilling program at Axe Lake in late 2008, and at Raven Ridge in early 2009 have not been incorporated into the evaluation. Updates to the Axe Lake and Raven Ridge evaluations and independent estimates of the resource potential of Oilsands Quest’s other lands will follow when complete.
Definitions of Technical Terms used in this release
Discovered resources (equivalent to discovered bitumen initially in-place) are defined within COGEH as that quantity of bitumen that is estimated, as of a given date, to be contained in known accumulations prior to production. The recoverable portion of discovered resources includes production, reserves, and contingent resources; the remainder is classified as unrecoverable. Discovered resources are the summation of all bitumen present, without qualitative or quantitative assessment to determine the exploitable portion of that resource.
Contingent resources are defined within COGEH as those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations using established technology or technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies. Contingencies may include factors such as economic, legal, environmental, political, and regulatory matters, or a lack of markets. It is also appropriate to classify as contingent resources the estimated discovered recoverable quantities associated with a project in the early evaluation stage. Contingent resources are further classified in accordance with the level of certainty associated with the estimates and may be sub-classified based on project maturity and/or characterized by their economic status.
Discovered unrecoverable resources (equivalent to discovered unrecoverable petroleum initially-in-place) are defined within COGEH as that portion of discovered resources which is estimated, as of a given date, not to be recoverable by future development projects. A portion of these quantities may become recoverable in the future as commercial circumstances change or technological developments occur; the remaining portion may never be recovered due to the physical/chemical constraints represented by subsurface interaction of fluids and reservoir rocks.
A range of discovered and contingent resources estimates (low, best and high) was prepared to reflect a range of technical and economic uncertainties and was determined in accordance with COGEH. A low estimate is considered to be a conservative estimate of the quantity that will actually be recovered, which under probabilistic methodology reflects a P90 confidence level. It is likely that the actual remaining quantities recovered will exceed the low estimate. A best estimate is considered to be the best estimate of the quantity that will actually be recovered. Under probabilistic methodology, this term is a measure of the central tendency of the uncertainty distribution (most likely/mode, P50/median, or arithmetic average/mean). It is equally likely that the actual remaining quantities recovered will be greater or less than the best estimate. A high estimate is considered to be an optimistic estimate of the quantity that will actually be recovered, which under probabilistic methodology reflects a P10 confidence level. It is unlikely that the actual remaining quantities recovered will exceed the high estimate.
Cautionary Statement about Forward-Looking Statements
This news release includes certain statements that may be deemed to be “forward-looking statements.” All statements, other than statements of historical facts, included in this news release that address activities, events or developments that our management expects, believes or anticipates will or may occur in the future are forward-looking statements. Also, forward-looking statements are frequently indicated by words such as “plan”, “expect”, “project”, “intend”, “believe”, “anticipate”, “estimate”, “potential”, “prospective” and other similar words, or statements that certain events or conditions “may” “will” or “could” occur. Forward-looking statements such as the discovered and contingent resource estimates, and references to the Company’s reservoir field testing and analysis program, and the timing of such program are based on the opinions and estimates of management and the Company’s independent evaluators at the date the statements are made, and are subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those anticipated in the forward-looking statements, which include but are not limited to risks inherent in the oil sands industry, regulatory, financing and economic risks, and risks associated with the Company’s ability to implement its business plan. There are uncertainties inherent in forward-looking information, including factors beyond Oilsands Quest’s control, and no assurance can be given that the programs will be completed on time, on budget or at all. In addition, there are numerous uncertainties inherent in estimating discovered and contingent resources, including many factors beyond the Company’s control. In general, estimates of discovered and contingent resources are based upon a number of factors and assumptions made as of the date on which the estimates were determined, such as geological, technological and engineering estimates which have inherent uncertainties, the assumed effects of regulation by governmental agencies and estimates of future commodity prices and operating costs, all of which may vary considerably from actual results. All such estimates are, to some degree, uncertain and classifications of resources are only attempts to define the degree of uncertainty involved. The estimates contained herein with respect to discovered resources and to contingent resources that may be developed in the future have been based upon volumetric calculations and upon analogy to similar types of resources, rather than upon actual production history. Estimates based on these methods generally are less reliable than those based on actual production history. Subsequent evaluation of the same resources based upon production history will result in variations, which may be material, in the estimated resources. Additional information relating to our Company, including our Annual Report on Form 10K, can be found at www.sedar.com. Oilsands Quest undertakes no obligation to update forward-looking information if circumstances or management’s estimates or opinions should change, except as required by law. The reader is cautioned not to place undue reliance on forward-looking statements.
Cautionary Note to U.S. Investors – The United States Securities and Exchange Commission permits oil and gas companies, in their filings with the SEC, to disclose only proved reserves that a company has demonstrated by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions. The Company uses certain terms in this press release at sec.gov, such as discovered and contingent resources, that the SEC guidelines strictly prohibit us from including in filings with the SEC. U.S. Investors are urged to consider closely the disclosure in our Form 10-K, as amended, available from us on request at email@example.com or by calling 1-877-718-8941. You can also obtain this form from the SEC at sec.gov. In reviewing this news release, it is necessary to recognize the differences between resources (which are reported as required under Canadian law) and reserves (which are not being reported). Investors are cautioned that the discussion of resource estimates in this news release does not contain any information about deposits that would qualify as deposits of “reserves” under Industry Guide 7. Further, the terms “discovered resource” and “contingent resources” are Canadian terms defined in accordance with the standards set forth jointly by the Society of Petroleum Evaluation Engineers (Calgary Chapter) and the Canadian Institute of Mining, Metallurgy and Petroleum (Petroleum Society) in the COGEH. The COGEH standards differ from the terminology and standards set forth in Industry Guide 7 and, as a consequence, the information contained in this news release may not be comparable to information provided by other similar companies in
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