THE NEW HEAVY-OIL ECONOMICS.

Publication: Oil and Gas Investor

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COPYRIGHT 2006 Hart Publications, Inc.

Technology is improving the ability to produce heavy oil, but there is a new economic paradigm: Portfolio managers can no longer consider the upstream separate from downstream operations.

At room temperature, ultra-heavy oil is as thick as peanut butter. Lighter versions ooze like honey. Temperature affects the viscosity, so if a sample jar of heavy oil is spilled on the ground in cold weather, just wait a few minutes and roll it up like a rug.

The term "heavy oil" can be confusing. It applies to a wide range of crude that requires an equally broad range of techniques to produce it. Most often, producers drill for heavy oil, but in some cases it is mined, using trucks the size of small buildings to haul away the ore. It's important to remember that what works for one heavy-oil field may not work at all in the next.

Until recently, heavy oil in commercial quantities was considered a resource limited to Canada, Venezuela and the western U.S. Viscous crude was known to exist elsewhere, but there was little interest in producing it.

Now, with portfolio managers scrambling to book long-term reserves, heavy oil is drawing more interest. Large-scale production of heavy oil will likely have a profound impact, not only on the structure of the oil industry, but on global politics and economics as well. The Society of Exploration Geologists (SEG) estimates that there could be more than 6 trillion barrels of heavy oil worldwide, with 80% of those deposits in the Western Hemisphere.

California's heavy-oil region, centered in Kern County, has been a steady producer for more than 100 years; four of its largest fields have produced more than 1 billion barrels each. California's history illustrates two of the main selling points for asset managers: Heavy-oil plays tend to last a long time, and they produce a lot of oil.

Far north of California's heavy-oil region lies an even larger supply. The U.S. Department of Energy...

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