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Zaragon Oil & Gas discusses Alberta EOR royalty program

Oilfield Technology,

Zaragon Oil & Gas Limited has reported that the revisions to the Enhanced Oil Recovery (EOR) royalty program announced last week by Alberta Energy will have a positive impact on the economics of Zaragon’s Alkaline Surfactant Polymer (ASP) EOR project at Little Bow in Southern Alberta.

Zaragon is currently reviewing the details of Alberta’s modified EOR Crown royalty program, which effectively bring the Alberta conventional oil EOR royalties more in line with existing Alberta oil sands and Saskatchewan conventional oil EOR royalty programs.

Zargon's initial estimates indicate the terms of the revised EOR program could increase Zargon's full cycle rate of return of the first two phases of the Little Bow ASP project by up to 5% (to 22%) and increase the discounted cash flow (PVBT 10%) of phases 1 and 2 of the Little Bow project by up to CAN$ 30 million.

Little Bow project

In Zargon's most recent year end 2013 reserve report, Zargon's independent reserves evaluator McDaniel & Associates Consultants Ltd., assigned 4.48 million barrels of proved and probable oil and liquids reserves and an incremental discounted cash flow (PVBT 10%) of CAN$ 66.3 million to phases 1 and 2 of the Little Bow project. Subsequent to the effective date of the McDaniel report, Zargon has spent over CAN$ 12 million of McDaniel future development capital for project construction, commissioning and more than three months of injection.

Since initial ASP injection commenced in late March, Zargon has injected approximately 1 million barrels of ASP solution into the phase 1 area of the Little Bow Mannville I Pool, at an average injection rate of 102% of design capacity. Pattern injection rates are balanced and are meeting or exceeding reservoir models, and the company has observed no evidence of premature breakthrough.

ASP injection

ASP injection to date constitutes nearly 4% of the reservoir hydrocarbon pore volume (HCPV). Zaragon is targeting an ASP injection volume of 30% of the HCPV followed by a polymer only injection volume of 40% of the HCPV. Analysis predicts a 12% ASP incremental oil recovery factor and peak incremental oil rates of 1700 bpd in 2017 for the Little Bow phases 1 and 2 project area. Phase 2 ASP injection is scheduled to begin in the summer of 2016.

The early project data pertaining to injection rates, voidage replacement and the lack of breakthrough (and related early oil production volumes) imply encouraging reservoir conformance and support Zaragon’s estimates of incremental oil recovery and peak production rates. However, with no sign of early breakthrough, the timing of first oil volumes is delayed.

Oil production

Zaragon is now predicting negligible Little Bow phase 1 volumes in 2014 with a year end 2014 rate of 150 bpd (previously 350 bpd). Incremental production is expected to average 700 bpd in 2015 (previously 900 bpd) and then increase to an unchanged 1550 bpd in 2016, once phase 2 production begins. Follow up phases 3 and 4 will commence after phase 1 and 2 injections are completed.

Without further plant debottlenecking or expansions, Zargon's combined Little Bow project (phases 1 though 4) total production is expected to stabilise at more than 2200 bpd in the 2021 through 2023 period. The long-life stable production profile of the ASP project is well suited for Zargon's dividend-paying business model.

Adapted from press release by Katie Woodward

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