Canadian Natural Resources (NYSE:CNQ) is allocating the bulk of its capital into developing oil properties in North America in 2011. The company will use part of this capital to advance the development of various heavy oil properties in its portfolio.
TUTORIAL: Commodity Investing 101
Heavy oil refers to oil that has a high viscosity or resistance to flow, with an API gravity between 10 and 20 degrees. Most heavy oil deposits require specialized production techniques to reduce the density so that the oil can be produced.
One heavy oil area that Canadian Natural Resources is devoting capital into is the Pelican Lake project in Alberta. The company reported production of 39,000 barrels per day from Pelican Lake in the first quarter of 2011.
Canadian Natural Resources is employing polymer flood operations to stimulate production from the large heavy oil deposits at Pelican Lake. In 2011, the company plans to spend $531 million on operations here, a 13% increase over 2010. This will cover the cost of 85 wells in 2011 and result in 6% production growth for the year.
Canadian Natural Resources has a long-term plan to use polymer flooding on up to 88% of its Pelican Lake properties. The company estimates that this technology might increase production here to as much as 80,000 barrels per day by 2016.
Other companies with operations at the Pelican Lake area include Cenovus Energy (NYSE:CVE), which is also using enhanced oil recovery methods to produce heavy oil. The company is currently producing 20,000 barrels per day from this area.
Evolution Petroleum (NYSE:EPM) is using enhanced oil recovery methods at the Delhi field in Louisiana, where the company is injecting carbon dioxide into wells to stimulate production.
Other Heavy Oil Assets
Canadian Natural Resources has other heavy oil properties in its portfolio and has budgeted $950 million CAD in capital in 2011 to develop these assets. This represents a 46% increase over the $650 million CAD spent in 2010. The company plans to drill 827 wells in 2011 and recomplete another 528.
The annual capital requirements of developing these other heavy oil assets will range between $850 million and $950 million CAD annually over the next five years.
Canadian Natural Resources estimates that non-Pelican Lake heavy oil production will range from 103,000 to 107,000 barrels per day in 2011, up 13% from 2010. The company is targeting 7% annual production growth over the next five years and estimates that heavy oil production will peak at 130,000 barrels per day in 2014.
Although Canadian Natural Resources sees value in its heavy oil assets, other exploration and production companies have divested properties with this exposure. In 2010, Nexen (NYSE:NXY) sold the company's heavy oil properties to a private oil and gas company for $975 million CAD.
The Bottom Line
Canadian Natural Resources plans to spend billions to develop heavy oil assets at Pelican Lake and other areas in 2011, as the company continues to allocate most of its capital to oil opportunities. (For additional reading, also take a look Peak Oil: Problems And Possibilities.)
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