Annual Report 2007
Unlocking The ValUe
oF heaVy oil
P R O F I L E
Pearl Exploration and Production Ltd. is a publicly traded company headquartered in Calgary, Alberta and focused on delivering disciplined growth by establishing a North American portfolio of heavy oil projects with an emphasis
on large resource opportunities. Pearl is traded on the TSX Venture Exchange under the symbol “PXX”. Pearl’s Swedish Depository Receipts trade on First North, OMX Nordic Exchange under the symbol “PXXS”.
As the western world’s energy producers seek new sources of oil, Pearl Exploration is positioned with a vast heavy oil
resource assembled over the past two years:
c o n T e n T S
Letter to Shareholders ... 2
Questions and Answers ... 4
Financial and Operating Highlights ... 8
Why Pearl Chose Heavy Oil ... 11
Operations Review ... 12
Heavy Oil Properties At-A-Glance ... 16
Reserves ... 22 Corporate Information ... IBC
a n n U a l a n d S p e c i a l M e e T i n g
The Annual and Special Meeting for Pearl Exploration and Production Ltd. will be held at 10:00 am MDT on Thursday, May 15, 2008 in the Viking Room of the Calgary Petroleum Club at 319 – 5th Avenue S.W., Calgary, Alberta.
All shareholders are invited to attend the Annual and Special Meeting. If you are unable to attend, we encourage you to complete and return the proxy form to Pearl’s office.
195 million barrels of proved plus probable plus possible reserves.
319 million barrels of identified contingent resources.
BlackrodSaskatchewan Alberta
Montana
CaliforniaUtah
Texas Onion Lake/Fishing Lake Salt/Ear Lake
Druid
West Rozel/Gunnison Wedge Southern
Alberta Gas Promised Land
Fiddler Creek
Topanga Mooney
Palo Duro San Miguel Queen City
2 0 0 7 A C H I E V E M E N T S
6 acquisition transactions. 55% growth in production.
90% increase in proved reserves.
Keith Hill
President and Chief Executive Officer
TO OUR SHAREHOLdERS:
Unlocking the value of heavy oil is what Pearl is all about – since the day of inception. Heavy oil will be playing an ever-increasing role in world oil consumption as new sources of light crude become more and more elusive. Global energy demand will persistently push the limits of available supply. Diminishing availability of conventional oil and high prices will drive improved technology, refining capacity and infrastructure to recover and process heavy oil.
Recognizing this as a largely overlooked opportunity, Pearl has been on a mission to accumulate heavy oil assets and has built a portfolio of quality projects. The emphasis is on large resource upside potential while achieving a balance of low-risk development. The focus is in North America where much of the world’s quality heavy oil resources lie and offer the most value due to proximity to markets. The untapped potential in North America is huge and Pearl is positioning itself to take full advantage.
Over the course of 2007, Pearl added substantially to its production and resource/
reserve base through six corporate and land
acquisitions and a major development drilling program – accomplishments we are very proud of.
Much of the operations were focused on development drilling to raise production levels to the 2007 guidance range of 12,000 to 14,000 boe/d. Our year-end exit rate came in at the low end of the range at 12,100 boe/d yet represents a 55% increase over the year-end 2006 exit rate. In total the Company drilled 170 wells in 2007 throughout its properties utilizing as many as five rigs at a time.
As a result of these efforts, our Proved Reserves increased by 90%, our Probable Reserves by 89% and our Possible Reserves by over 500%.
The quadrupling of our combined total Proved plus Probable plus Possible Reserves from 50.7 to 194.9 MMboe illustrates the value and quality of the assets acquired and developed during the year.
Other activities during the year focused on converting our large-scale resources into reserves through steam and other enhanced oil recovery techniques and this work will
S T r A T E g I E S V I S I o N
Acquire large heavy oil resources and focus on converting those resources to reserves through implementation of pilot programs including: water flood, steam flood, polymer flood, and Steam-Assisted Gravity Drainage (SAGD).
To become the leading heavy oil company in North America.
continue with much greater emphasis in 2008.
Contingent resources today stand at over 326 MMboe with oil-in-place numbers internally estimated at 5-8 billion barrels.
The Company has set a capital budget of
$61 million for 2008 with the majority of it allocated to resource conversion programs, including continued work on steam pilots at the San Miguel project in Texas, the Onion Lake project in Saskatchewan and the Blackrod project in the Athabasca region of northern Alberta, all of which offer great upside potential.
Pearl will also be initiating studies to examine options for upgrading and/or refining technologies on its core properties to increase per barrel netback economics. In addition, in order to dedicate more capital and intellectual resources to core properties, the Company will investigate the rationalization of certain non-core assets located in Saskatchewan and Southern Alberta.
As a predominately heavy oil producer, the Company’s realized oil price is exposed to significant fluctuations resulting from the market volatility of the light-to-heavy price differential. Although West Texas Intermediate pricing is at historic highs, the light-to-heavy differential varies widely from month to month and can result in significant revenue swings. During the fourth quarter of 2007, the Company’s realized wellhead pricing ranged from the low $50/bbl range in November to the low $30/bbl range in December. This negatively impacted revenue in the fourth quarter. For the first quarter of 2008, the light-to-heavy
differential has narrowed considerably and the Company is expecting wellhead pricing for the quarter to average in the low to mid
$50/bbl range.
The year 2007 was a busy, productive year for the Company. The management team was greatly strengthened by the appointment of Randy Neely as CFO and Dean Tucker as VP Canadian Business Unit as well as the addition of several other key members of the team. As well, our shareholder base was broadened through the listing of Pearl’s shares on the First North Exchange in Stockholm.
In the months to come, the Company will continue to strengthen and to focus on adding value. Pearl has recognized the enormous potential in heavy oil and will continue to aggressively grow and upgrade its heavy oil resources creating a unique, innovative and highly attractive niche for itself in the oil and gas sector. Investment in heavy oil stands to reap extraordinary rewards and the Company intends to be front and center.
I would like to very much thank our shareholders for their continued support through the market turbulence of 2007 and look forward to a successful 2008 and beyond as we follow our mission of unlocking the value of heavy oil.
On Behalf of the Board,
(signed) “Keith Hill”
Keith Hill
President and Chief Executive Officer February 28, 2008
2 0 0 8 g o A L S
By obtaining economies of scale and operational efficiencies, we will be able to improve profitability in our core areas and finance our operations through cash flow.
To increase reserves and product values, we will seek out, explore, analyze and test emerging technologies and existing processes.
Pearl’s goals are two-fold:
concentrated growth and value enhancement.
Q. Q.
WHy InvEST In HEAvy OIL? WHy THE FOCUS On EARLy-STAgE RESOURCES RATHER THAn ESTAbLISHEd PROdUCIng PROPERTIES?
Our founding principle is that the ability to find significant new reserves of light oil is a thing of the past – heavy oil must eventually occupy a greater place in the energy chain. We see heavy oil as a largely overlooked opportunity that we intend to take advantage of. Diminishing availability of conventional oil and high prices will drive improved technology, and conversion of refining capacity and infrastructure to recover and process heavy oil. Although early-stage resources are the most technically challenging they also have low entry costs and provide the most upside potential.
ARE yOU PLAnnIng TO dO Any
AddITIOnAL ACQUISITIOnS In THE nEAR FUTURE; IF SO, WHAT IS yOUR OPTIMAL ACQUISITIOn TARgET And WHy?
We will consider additional acquisitions if they offer the value/reserve upside we seek.
There are still great undervalued opportunities in North America where competition remains limited. Although our corporate goal of having 10 billion barrels of oil-in-place is intact, our primary focus for the coming year is on converting our existing resources to reserves and moving possible reserves into the probable and proved reserve categories. Our optimal acquisition target is within North America, reasonably close to infrastructure, and offers high upside in resources/reserves.
A. A.
Q.
WHAT ARE yOU dOIng TO MAxIMIzE RESERvE RECOgnITIOn In yOUR RESOURCE-TO-RESERvE PROjECTS?
Upgrading our large-scale oil resources to proved and probable reserves is our number-one priority for 2008 and 2009. Converting these resources to reserves will add enormous value to the Company. This will be achieved primarily through our steam pilot projects in San Miguel, Texas; Onion Lake, Saskatchewan; and the Blackrod project in the Athabasca region of Alberta.
Q.
WHAT IS yOUR PLAn TO TURn IT AROUnd?
We’ve established a sound production base and we now plan to return to our core strategy of building resources and reserves.
We continue to believe that heavy oil will gain a much greater position in the world energy market and are positioning ourselves to take advantage of this eventuality. Therefore in the near-term we intend to focus the majority of our efforts on our core properties in Canada and the United States. We will place less emphasis on acquisitions and continued production growth, and greater emphasis on advancing steam pilot projects designed to convert our captured large-scale resources into proved and probable reserves. We will also pursue various options designed to increase per barrel profitability, including implementation of field infrastructure and, potentially, upgrading or low-tech refining applications.
Q.
WHy HAS yOUR STOCK dROPPEd SO PRECIPITOUSLy SInCE LAST SUMMER?
Overall market conditions for the past year have been challenging for the entire sector. Macro economic news has repeatedly shaken investor confidence worldwide even in light of record oil prices. In terms of Pearl specifically, we focused last year primarily on building our production base, which was an extensive undertaking. As a result, the market zeroed in on our production business and lost track of our core strategy of building and growing heavy oil resources and reserves.
A. A.
A.
Q.
MAny OF THE ASSETS yOU HAvE FOR SALE WERE RECEnTLy ACQUIREd; WHy SELL THESE ASSETS TOdAy IF yOU THInK OIL PRICES ARE gOIng HIgHER In THE FUTURE?
When acquiring or merging with another company, some assets may not meet our core objectives or have the value-added potential that Pearl requires. Upon review and evaluation we have determined that it would be best to rationalize non-core assets, allowing us to focus on key projects that offer greater value for the Company.
Q.
Q.
WHAT OTHER THIngS CAn yOU dO TO gET A HIgHER RETURn On yOUR ExISTIng PROPERTIES And yOUR HEAvy OIL PROdUCTIOn?
We continue to assess the application of proven processes and technologies to increase reserves and product values.
We are conducting a cost/benefit analysis of acquiring or building an asphalt plant and/or a small-scale refinery, which may allow Pearl to retain a larger portion of the existing light- to-heavy oil price differential. We also keep ourselves informed of emerging technologies that claim to have the ability to modify the molecular structure of heavy oil – in other words, turning heavy oil into lighter, more valuable oil.
CAn yOU dECREASE yOUR OPERATIng COSTS SUFFICIEnTLy TO MAKE yOUR PROjECTS MORE RObUST UndER LOWER OIL PRICES?
We believe that by concentrating our operations in a few core areas with large-scale potential we can justify the capital expenditures required to ultimately decrease per barrel operating costs to be in line with the best operators in the heavy oil industry.
Q.
WHAT ARE yOUR OPERATIng COSTS In yOUR CORE AREAS, And WHAT ARE yOU dOIng dIFFEREnTLy THERE vERSUS yOUR nOn-CORE AREAS?
Our overall operating costs for 2007 were $15.73/boe. In certain areas where we have achieved significant economies of scale we have been able to make great progress in reducing costs per boe. In our Mooney field, the operating cost upon acquisition about 15 months ago was more than
$20/boe. As a result of increased production and the installation of infrastructure, we have driven down costs to approximately $10/boe. While this field may not prove to be typical, we expect to make significant improvements at our other core properties as well.
A.
A. A.
A.
Q. Q.
HOW SHOULd An InvESTOR vALUE yOUR
“RESOURCE” PROPERTIES?
Our underlying value will grow as our resources are converted to reserves. Currently we believe our captured resource properties have high option value to the investor which, over time, as we apply intellectual capital and with technological advances, the value will become tangible and increase by an order of magnitude.
WHAT SORT OF THIngS ARE yOU dOIng TO AdvAnCE THOSE PROPERTIES?
Aside from concentrating our capital program on our pilot projects we have also built a talented heavy oil operations team. With the refocusing of our efforts on resource conversion, these employees will be deployed away from production and drilling back to reserve growth. We continue to build our team through an active recruitment program and the use of enhanced oil recovery consulting specialists.
Q.
WHEn WILL InvESTORS KnOW WHETHER THE “RESOURCE” PROPERTIES CAn bE COnvERTEd TO RESERvES And ECOnOMIC vALUE?
Current-year value appreciation is expected to be realized through pilot success at Onion Lake and Mooney. Over the next 12 to 18 months viability decisions are expected for San Miguel, Fiddler Creek and Blackrod.
A.
A. A.
F I N A N C I A L A N D o P E r A T I N g H I g H L I g H T S
Fifteen Twelve
F i n a n c i a l
months ended months ended($000s, except per share data) December 31, 2007 September 30, 2006
Total revenue 128,524 3,635
Funds from operations 21,646 (1,247)
Per common share
Basic and diluted ($) 0.17 (0.03)
Net earnings (loss) (227,206) (8,953)
Per common share
Basic and diluted ($) (1.73) (0.23)
Capital expenditures(1) 231,747 47,632
Total assets 575,865 129,067
Total long-term financial liabilities 16,586 9,296
Working capital (34,152) (3,757)
Shareholders’ equity 489,380 102,091
Weighted average shares outstanding (basic) 131,223,521 38,648,736 Weighted average shares outstanding (diluted) 132,525,404 38,992,416
Common shares outstanding at period-end 189,241,716 51,913,016
(1) Excludes non-cash acquisition costs.
See notes and consolidated financial statements for details.
O p e r a t i o n a l
Daily Production
Oil – net production (bbls/d) 5,295 96
NGL – net production (bbls/d) 15 –
Natural gas – net production (mcf/d) 10,309 626
Total net production (boe/d) 7,029 201
Sales Prices
Oil – average selling price per bbl ($) 40.31 50.21
Natural gas – average selling price per mcf ($) 6.39 5.97
Operating costs ($000s) 50,531 847
Operating costs per boe ($) 15.73 11.57
R e s e r v e s ( F o r e c a s t P r i c e s )
Light and Medium Oil Heavy Oil Natural Gas boe
Gross Net Gross Net Gross Net Gross Net
(Mbbls) (Mbbls) (Mbbls) (Mbbls) (MMcf) (MMcf) (MMboe) (MMboe)
Total proved 248 209 19,552 15,810 16,536 12,967 22,575 18,191
Total probable 192 170 26,835 21,951 10,280 8,527 28,754 23,551 Total proved
plus probable 441 379 46,386 37,761 26,817 21,496 51,329 41,743 Total possible 49 41 142,783 121,691 4,528 3,744 143,587 122,356 Total proved
plus probable
plus possible 490 420 189,169 159,452 31,345 25,240 194,916 164,099 Note All numbers used throughout this report are expressed in Canadian dollars. Oil equivalent amounts referenced have been calculated using a conversion ratio of six thousand cubic feet of natural gas to one barrel of oil. The use of boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based on an energy equivalency.
“Gross Reserves” are Company’s working interest share of remaining reserves before deduction of royalties.
“Net Reserves” are Company’s working interest share of remaining reserves less all Crown, freehold and overriding royalties.
Through both acquisitions and through the drillbit, Pearl achieved a 285% growth in proved plus probable plus possible reserves in calendar 2007.
Our goal for 2008 is to concentrate on moving our possible reserves and contingent resources into the more valuable category of proved and probable reserves.
In calendar year 2007 our proved plus probable plus possible reserves NPV10 value under the forecast price increased in value by over 100%. A major contributor to this growth came through our acquisition of interests in the Blackrod area in the Athabasca region of northern Alberta.
2006 2007
50.7 194.9
PROVED PLUS PROBABLE PLUS POSSIBLE RESERVES (Gross; forecast prices and costs) (MMboe)
2006 2007
$ 496 $ 1,035
RESERVES VALUE (Proved plus probable plus possible − NPV10 before tax; forecast prices and costs) ($mm)
2006 2007
50.7 194.9
PROVED PLUS PROBABLE PLUS POSSIBLE RESERVES (Gross; forecast prices and costs) (MMboe)
2006 2007
$ 496 $ 1,035
RESERVES VALUE (Proved plus probable plus possible − NPV10 before tax; forecast prices and costs) ($mm)
2006 2007 2008 2009 2010
Blackrod
Saskatchewan Alberta
Montana Western Canada Sedimentary basin
Williston basin
California Utah
Texas Onion Lake/
Fishing Lake Salt/Ear Lake
Druid
West Rozel/
Gunnison Wedge Southern
Alberta Gas
Promised Land
Fiddler Creek
Topanga Mooney
Palo Duro
San Miguel Queen City
A D o M I N A N T H E A V y o I L P L A y E r
Pearl focused on acquiring and building a significant base of production and continuing to add significant resource plays to its portfolio.
Pearl’s focus was on establishing a base of production and acquiring large-scale resource fields.
Pearl intends to focus on conversion of resources into reserves and operational efficiencies.
Pearl anticipates the success in pilot projects will allow the Company to begin significant recognition of probable and proven reserves.
Pearl will begin to develop its proven resource plays on a commercial basis and monetize projects where value has been added through reserve reclassification.
Heavy oil basin
W H y P E A r L C H o S E H E A V y o I L
1.
HEAvy OIL IS COnTRIbUTIng SUbSTAnTIALLy TO FUTURE U.S. And WORLd OIL SUPPLIES.
The ability to find significant new reserves of light oil is largely a thing of the past – heavy oil must eventually occupy a greater place in the energy chain.
2.
SIgnIFICAnT IdEnTIFIEd RESOURCE-In-PLACE WITH LARgE, LOW-RISK dEvELOPMEnT POTEnTIAL.
• There is more recoverable heavy oil and bitumen in the world than conventional light oil.
• 82% of the bitumen is located in Alberta. The infrastructure requirements – pipelines and refining capacity – will ultimately work to Pearl’s advantage.
3.
nORTH AMERICA WILL bE InCREASIng THE AMOUnT OF HEAvy OIL AS A PROPORTIOn OF THE HydROCARbOn MIx
.• Major refinery upgrading projects are underway worldwide – 2 million barrels per day in added capacity in North America alone.
• Projects are underway to relieve the pipeline bottleneck by 2012.
• Refinery complexity is increasing to handle heavier crude with higher sulphur content.
4.
LOW CAPITAL InvESTMEnT FOR nOn-THERMAL PRIMARy RECOvERy PROjECTS.
Competition for large heavy oil resources in North America is limited outside of the San Joaquin Basin and the Athabasca region, resulting in low entry costs.
5.
POTEnTIAL FOR SIgnIFICAnT RETURnS On InvESTMEnT.
Oil prices should continue to rise as demand growth is forecast to outpace supply increases.
o P E r A T I o N S r E V I E W H E A V y o I L 1 0 1
Heavy oil is becoming an increasingly important component of world oil supply and Pearl has positioned itself strategically to take advantage of this shift.
The evolution of the oil industry in North America to date can be loosely characterized into three broad phases. These phases are:
1. Early Domestic Supply Roughly the period from the advent of the petroleum industry up until the early 1970s. Domestic production of conventional light sweet oil was increasing.
2. Maturing Domestic Supply – Rise of Imports From the 1970s to the 1990s.
Domestic production flattened off and imports were used to meet rising demand versus production imbalance.
3. Decline of Conventional Supply – Increasing Imports and Unconventional Development The current phase.
Domestic production is declining steadily and imports have risen rapidly to offset the declines. Competition for foreign supplies
has put upward pressure on prices making unconventional production more economic.
Availability of inexpensive, light sweet crude is peaking throughout the world. Importance of oil sands and heavy oil supplies is growing.
North American refinery inputs will become increasingly heavy and sour.
As the North American oil industry has matured we have begun to witness the gradual shift in production from conventional (light sweet oils) to unconventional resources (heavy sour oils). This can be demonstrated by the gradual increase in oil density and sulphur content of U.S. refinery inputs over the last two decades as shown in the chart below.
North America has run out of large, cheap, easily accessible, domestic light sweet crude supplies. Although increasing prices may help delay the reliance on imports by making marginal production economic, ultimately any increases in North American demand will
33.0
32.5
32.0
31.5
31.0
30.5
30.0
29.5
29.0
API
API (degrees)
SULPHUR CONTENT
SULPHUR WT. (%)
1.75
1.50
1.25
1.00
0.75
0.50 JAN 87 JAN 89 JAN 91 JAN 93 JAN 95 JAN 97 JAN 99 JAN 01 JAN 03 JAN 05 JAN 07 JAN 85
U.S. Refinery Crude Oil Input Qualities by Density (API) and Sulphur (Wt. %)
30
25
20
15
10
5
0
1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 2024 2028
DEMAND
MILLION BARRELS PER DAY
ACTUALS ESTIMATES
Increasing Demand/Supply Gap
SUPPLY
have to be supplied through either imports or increases in domestic unconventional heavy oil production. Unless vast, new, politically stable and reliable supplies of light sweet crude are found, or technological advancements dramatically decrease the world’s reliance on petroleum products, the importance of North America’s domestic unconventional heavy oil supplies to the long-term economic prosperity of the region cannot be overstated.
Pearl’s view is that North American domestic demand will continue to outpace supply (see chart below). This demand gap will increasingly need to be filled with unconventional domestic heavy oil supplies in order to limit the region’s political and economic exposure to oil imports from countries with ideological regimes or political instability.
With 195 MMboe of proved plus probable plus possible reserves identified and over 5 billion barrels of heavy oil resources estimated to be in place, Pearl is ideally suited to benefit from these inevitable market conditions.
With a diverse portfolio of projects in heavy oil basins ranging from Southwestern Texas to
Northern Alberta, Pearl has taken advantage of current low entry costs to acquire vast amounts of heavy oil resources.
Pearl is strategically positioned to take advantage of the approaching market conditions through the use of enhanced and unconventional recovery techniques on these significant heavy oil resource plays. Thermal techniques such as cyclic steam stimulation (CSS) and Steam-Assisted Gravity Drainage (SAGD), and other approaches including water and polymer flooding, are seen as keys to unlocking the value of these resources.
Pearl is currently in the early stages of piloting various enhanced recovery techniques at several of our fields and we are expecting to see results from these pilots within the next 6-18 months.
Successful pilot programs will prove the technical and commercial viability of our strategy and create value for Pearl by ultimately moving large portions of our possible reserve base into more proven/valuable reserve categories.
Pearl has large heavy oil resources, is applying advanced techniques to demonstrate the value of those resources and believes in a future where these resources are increasingly important. We are thinking forward about our energy future.
U.S. Domestic Production and Supply of Crude Oil
U N D E r S T A N D I N g H E A V y o I L E C o N o M I C S
THE vALUE OF A bARREL
Naturally occurring crude oils contain many hydrocarbon compounds and the ratio of these different compounds within the crude determines a particular crude oil’s value. All crude is not created equal. Crude is valued based on the yield of products that result from the refining process. Light sweet crude is more valuable to refiners because it requires less processing and produces a high yield of valuable end products such as gasoline and diesel fuel. Heavy crude requires much more processing in order to produce similar yields of gasoline and diesel fuel. The additional processing required for heavy crude, known as cracking, is energy-intensive and requires expensive catalysts. Because of this, heavy crude normally trades at a discount to light sweet crude. This discount can be volatile depending on market conditions, the availability and price of condensate diluent for pipeline shipping purposes, and refiners’
capacity to handle heavy crude. In the long- term, as light oil becomes increasingly scarce and more refiners add capacity to handle heavy crude, demand for heavy crude oil should increase. Pearl believes that the increasing demand will shrink the heavy oil discount.
PRICIng A bARREL OF HEAvy OIL
Many factors go into determining the price of a heavy oil barrel. Pearl’s heavy oil generally trades relative to a benchmark Canadian heavy crude called Lloydminster Blend, or LLB. LLB is a blended crude stream composed of heavy oil
from the wellhead and a condensate blending agent. Condensate is an extremely light-gravity oil that is added to the heavy oil stream to allow it to be transported by pipeline. The heavy oil on its own would be too viscous or thick to pump effectively down the pipe.
LLB trades at a discount to light oil. By taking the LLB price and subtracting the cost to blend heavy oil produced in the field up to LLB specifications, as well as any transportation charges, one is left with what is known as the wellhead netback. This is the price Pearl receives for its production.
TyPICAL HEAvy OIL bARREL
The following illustrates the typical economics of a barrel of heavy oil.
Based on the following assumptions:
(all prices in Cdn$/bbl)
OIL PRICE
$80.00 WTI
WTI/LLb dIFFEREnTIAL
$24.00 (30% historical WIT/LLB differential)
bLEndIng
$10.00 (diluent costs) TARIFFS
$1.00
WELLHEAd nETbACK
$45.00
H E A V y o I L T E C H N o L o g y
Pearl is focused on applying advanced recovery techniques to unlock the value of heavy oil.
3.
WaTERFLOOD
In this well-established method an array of parallel horizontal wells is drilled into the reservoir at a nominal spacing of 150-200 metres. Water is then injected into alternating wells. This water injection restores reservoir pressure and helps to “sweep” additional oil towards the production wells, increasing overall recovery. Produced water is separated from the oil and re-injected into the formation to reduce overall water demand.
WATERFLOOd And POLyMER FLOOd
1. 2.
Cyclic steam stimulation (CSS) is a thermal recovery technique whereby steam is pumped down a series of vertical wells at high pressure, then allowed to permeate the reservoir. The injected steam heats the surrounding oil, reducing its viscosity and allowing it to flow more easily. The increased pressure also increases reservoir permeability by increasing fracturing, and increases overall formation pressure to further aid in oil production. Following a waiting period the injection wells are converted to production and pump oil to the surface, after which the cycle is repeated.
Stage 3 PRODUC
TION
Stage 2 SOAK PHASE
Cyclic Steam StimulationSefton Resources Inc.
Stage 1 STEAM INJECTION
CyCLIC STEAM STIMULATIOn
Steam-Assisted Gravity Drainage (SAGD) is a continuous thermal process whereby two parallel horizontal wells are drilled near the bottom of the reservoir, one on top of the other with separation of about five metres. Steam is then injected into the upper well. A steam chamber is formed and connects to the lower production well. The steam and pressure mobilize the heavy oil in the affected portion of the reservoir, which flows down the steam chamber and collects in the lower production well. The hot, mobile heavy oil is then pumped to the surface.
Steam Assisted Gravity Drainage
Producing Well Steam Injection Well
STEAM-ASSISTEd gRAvITy dRAInAgE
pOLyMER FLOOD
Polymer flooding is technically similar to water flooding.
The major difference is that a polymerizing agent is mixed with the water before injection. The polymer increases the viscosity of the injected water, improving the efficiency of its “sweep” of the reservoir. Polymer flooding thereby can increase the recovery factor of a reservoir’s oil-in-place over and above recovery generated by water flooding alone.
H E A V y o I L P r o P E r T I E S A T - A - g L A N C E
P r o p e r t y
year-end 2007 P+P Possible Undeveloped 2007(1) 2008Exit Production Reserves Reserves Land Capital Capital
(boe/d) (MMboe) (MMboe) (000 net ha) ($MM) ($MM)
Canadian
Mooney 2,800 15.1 3.6 19,040 $ 87.1 $ 19-22
onion lake 2,500 12.8 3.6 3,737 $ 38.7 $ 10-12
Blackrod – – 107.0 1,344 $ 5.5 $ 6.5-7.5
United States
San Miguel – 3.9 10.8 17,593 $ 6.6 $ 13-15
Fiddler creek – 3.4 14.1 17,767 $ 20.8 $ 2-3
Other core and
non-core properties 6,800 16.1 4.5 118,018 $ 133.4 $ 1.5-10.5
Total 12,100 51.3 143.6 177,500 $ 292.1 $ 61.0
(1) Calendar 2007, including both cash and non-cash acquisition costs.
2007 production (exit rate) 2,800 boe/d Proved plus probable reserves 15.1 MMboe 2008 capital program $19 MM – $22 MM Land Holdings
Developed 768 ha (gross); 728 ha (net) Undeveloped 19,392 ha (gross); 19,768 ha (net)
M o o N E y , A L b E r T A
Pearl currently has an average working interest of approximately 98% in over 70 sections in the Mooney field which is located in north- central Alberta. Pearl (current project operator) originally had a 74% working interest in the area through the acquisition of Atlas Energy and subsequently acquired an additional 24% working interest through the July 2007 acquisition of Ravenwood Energy’s interest in the project and lands. Mooney is a conventional heavy oil field which produces from the Bluesky sand formation. Higher recovery factors are expected as a result of the relatively low oil viscosity (16 degree API gravity) and the favourable reservoir characteristics which facilitate efficient oil flow. Pearl maps the potential area of the Mooney Bluesky heavy oil pool at approximately 31 sections. Stratigraphic test wells have been drilled on the west side of the field to evaluate the areal extent of the Bluesky accumulation. Additional stratigraphic test wells will be required in the future to further delineate the field. During 2007, a total of 27 new horizontal oil wells were drilled and placed on production. The average production for 2007 was 1,800 boe/d net to Pearl.
The reservoir properties and the high quality oil also make the pool conducive to water flooding which is expected to further enhance
recovery. A preliminary water flood simulation study showing higher secondary recoveries in the range of 13-19% has been prepared by independent reservoir engineering consultants.
A water flood pilot project in this pool started in July 2006 after converting the original horizontal oil well in the pool to a water injector with current injection rates at approximately 1,200 barrels per day. Initial pressure response is being seen in the two offsetting oil producers.
Pearl plans on expanding its water flood project area in 2008.
T71
T70 T72 T73 T74 R7W5
R8 R9
R10 R11
2008 delineation well 2008 delineation well Pearl oil well Pearl land Mooney
#MBDLSPE .PPOFZ
0OJPO-BLF 4BO.JHVFM
.POUBOB6UBI1SPQFSUJFT
#MBDLSPE
.PPOFZ
4BO.JHVFM 0OJPO-BLF
'JTIJOH-BLF
1SPNJTFE
-BOE 'JEEMFS
$SFFL
8FTU3P[FM
(VOOJTPO
8FEHF
4BTLBUDIFXBO
6UBI
"MCFSUB
4BTLBUDIFXBO
"MCFSUB
4BTLBUDIFXBO
"MCFSUB
5FYBT
.POUBOB
Pearl land
2008 delineation well Bluesky pool
2008 horizontal well Pearl oil well T71
T70 T72 T73 T74 R7W5
R8 R9
R10 R11
2008 delineation well 2008 delineation well
Pearl oil well Pearl land Mooney
T71
T70 T72 T73 T74 R7W5
R8 R9
R10 R11
2008 delineation well 2008 delineation well
Pearl oil well Pearl land Mooney
T72
T71
T70 T74
T73
R11 R10 R9 R8 R7W5
o N I o N L A k E , S A S k A T C H E W A N
Pearl currently holds a varied working interest between 87.5% and 100% in 41 sections of land located in the Onion Lake area in Saskatchewan.
Pearl is the operator of the Onion Lake Heavy Oil Project which is located along the Saskatchewan/
Alberta border near Lloydminster. Approximately 19,200 acres (30 sections) of land overlies a thick accumulation of heavy oil in the Creatceous Dina sand formation which has been the primary formation for development by the Company.
Pearl began a multi-well development drilling program at Onion Lake in January 2007 which continued throughout the balance of the year resulting in a total of 70 wells being drilled. Prior to commencement of this drilling program, production from Pearl’s Onion Lake lands was approximately 350 boe/d. The average production for 2007 was 1,290 boe/d net to Pearl. Centralized facilities for sand and oil handling are slated for construction in 2008.
During 2007, planning and procurement for a thermal recovery pilot were completed and regulatory approvals received. The necessary wells were drilled in December and construction began on pilot facilities in late 2007. Commissioning of facilities will begin in the first quarter of 2008 in order that the pilot will be fully operational in the first half of 2008.
T55 T56
T53 T54 T57 R26W3
R27 R1W4
Pearl oil well Pearl gas well Pearl location Pearl land Onion Lake
#MBDLSPE .PPOFZ
0OJPO-BLF 4BO.JHVFM
.POUBOB6UBI1SPQFSUJFT
#MBDLSPE
.PPOFZ
4BO.JHVFM
1SPNJTFE
-BOE 'JEEMFS
$SFFL
8FTU3P[FM
(VOOJTPO
8FEHF
4BTLBUDIFXBO
6UBI
"MCFSUB
4BTLBUDIFXBO
"MCFSUB
4BTLBUDIFXBO
"MCFSUB
5FYBT
.POUBOB 0OJPO-BLF
2007 production (exit rate) 2,500 boe/d Proved plus probable reserves 12.8 MMboe 2008 capital program $10 MM – $12 MM Land Holdings
Developed 3,636 ha (gross); 3,187 ha (net) Undeveloped 4,287 ha (gross); 3,737 ha (net)
T57
T56
T55
T54
T53
R1W4 R27 R26W3
Pearl land Pearl gas well Pearl oil well
Pearl location Dina pool
T55 T56
T53 T54 T57 R26W3
R27 R1W4
Pearl oil well Pearl gas well
Pearl location Pearl land Onion Lake
T55 T56
T53 T54 T57 R26W3
R27 R1W4
Pearl oil well Pearl gas well
Pearl location Pearl land Onion Lake
T55 T56
T53 T54 T57 R26W3
R27 R1W4
Pearl oil well Pearl gas well
Pearl location Pearl land Onion Lake
b L A C k r o D , A L b E r T A
On July 18, 2007 Pearl, along with its two joint- venture partners, acquired 2,816 contiguous hectares of oil sands leases located in the Athabasca oil sands region of northern Alberta.
In addition, Pearl and its joint-venture partners acquired an additional 1,024 hectares in this project in December 2007. Pearl holds a 35%
working interest in these lands directly for which possible reserves have been assigned.
Pearl also holds an approximate 37% ownership of Serrano Energy Ltd., one of two other joint- venture partners in this project.
The Company has plans to drill one appraisal well this year and is in the process of preparing an application for required government approvals of a thermal pilot project utilizing SAGD technology. Upon confirmation of positive results from this appraisal well, and receipt of the required regulatory approvals, a SAGD pilot comprised of a single well pair and related facilities will be initiated.
2007 production (exit rate) 0
Possible reserves 107.1 MMboe
2008 capital program $6.5 MM – $7.5 MM Land Holdings
Undeveloped 3,840 ha (gross); 1,344 ha (net)
T76
T75 T77 R17W4
R18 R19
Pearl land Blackrod
#MBDLSPE .PPOFZ
0OJPO-BLF 4BO.JHVFM
.POUBOB6UBI1SPQFSUJFT
#MBDLSPE
.PPOFZ
4BO.JHVFM 0OJPO-BLF
'JTIJOH-BLF
1SPNJTFE
-BOE 'JEEMFS
$SFFL
8FTU3P[FM
(VOOJTPO
8FEHF
4BTLBUDIFXBO
6UBI
"MCFSUB
4BTLBUDIFXBO
"MCFSUB
4BTLBUDIFXBO
"MCFSUB
5FYBT
.POUBOB
T77
T76
T75 R17W4
R19 R18
Pearl land
Lower Grand Rapids Existing well logs
T76
T75 T77 R17W4
R18 R19
Pearl land Blackrod
T55 T56
T53 T54 T57 R26W3
R27 R1W4
Pearl oil well Pearl gas well
Pearl location Pearl land Onion Lake
S A N M I g U E L , T E X A S
Pearl (through its wholly-owned subsidiary, Newmex Energy (USA) Inc.) is a 50% participant in the development of a large, shallow depth, heavy oil deposit located in the Maverick Basin in southern Texas. Under the terms of the Participation Agreement between Pearl and The Exploration Company of Delaware Inc.
(“TXCO”), a San Antonio based oil and gas company, Pearl and TXCO each own a 50%
working interest in certain leases and have agreed to jointly develop the leases, together with any additional leases acquired within the area of mutual interest described in the Participation Agreement, for the production of heavy oil and other hydrocarbons.
The San Miguel heavy oil project focuses on the San Miguel sandstone which is a large, well defined heavy oil deposit that contains an estimated two to three billion barrels of oil-in-place (1 to 1.5 billion net to Pearl).
Pearl and TXCO operated a cyclic steam pilot in 2006 – 2007 and determined that cyclic steam was not economically viable. However, the data gathered, combined with data acquired in historic San Miguel pilots, provides a strong indication that SAGD will be economic. Pearl and TXCO are currently converting the cyclic
steam pilot to a SAGD pilot. In addition, along with the conversion of the cyclic steam pilot to a SAGD pilot, a second, larger production pilot to the north of the existing facility is being developed. The second pilot is expected to be operational in the second half of 2008.
#MBDLSPE .PPOFZ
0OJPO-BLF 4BO.JHVFM
.POUBOB6UBI1SPQFSUJFT
#MBDLSPE
.PPOFZ
4BO.JHVFM 0OJPO-BLF
'JTIJOH-BLF
1SPNJTFE
-BOE 'JEEMFS
$SFFL
8FTU3P[FM
(VOOJTPO
8FEHF
4BTLBUDIFXBO
6UBI
"MCFSUB
4BTLBUDIFXBO
"MCFSUB
4BTLBUDIFXBO
"MCFSUB
5FYBT
.POUBOB
Pearl land
T55 T56
T53 T54 T57 R26W3
R27 R1W4
Pearl oil well Pearl gas well
Pearl location Pearl land Onion Lake
Former Production Pilot
Conoco Pilot Mobil Pilot
Existing Pilot Area
Area of Mutual Interest
Proved plus probable reserves 3.9 MMboe 2008 capital program $13 MM – $15 MM Land Holdings
Developed 80 ha (gross); 40 ha (net) Undeveloped 35,565 ha (gross); 17,593 ha (net)
F I D D L E r C r E E k , M o N T A N A
In November 2007 Pearl acquired heavy oil assets located in Montana and Utah. The assets acquired include a 100% working interest in several large heavy oil resource development projects referred to as Fiddler Creek, Promised Land, West Rozel and Gunnison Wedge. Initially Pearl is focussing on activities at the Fiddler Creek Project.
Fiddler Creek is comprised of three large anticlinal structures. The associated Pryor, and Upper and Lower Greybull Formations are estimated to contain between 400 and 750 million barrels of oil-in-place (a current in-house estimate associated with the Company’s acreage). In the past, all of these zones have produced heavy oil to varying degrees.
Pearl initiated the assessment and development of the first of these assets in December 2007 by drilling an appraisal well, Beartooth Federal 43-33, into the Fiddler Creek field of Stillwater County, in southern Montana. The well was drilled into the main structure of the property, the Fiddler Creek Dome, in order to extend the known limits of the southwestern portion of the field, and it will be further evaluated during the first half of 2008 to validate reservoir continuity and potential reserve additions. In addition to this well, an existing well, Mowell #1, was re-completed for evaluation. Both wells are connected to tank facilities to gather reservoir and production data that will be used to confirm and complete a field development study.
Proved plus probable reserves 3.4 MMboe 2008 capital program $2 MM – $3 MM Land Holdings
Developed 80 ha (gross); 80 ha (net) Undeveloped 17,767 ha (gross); 17,767 ha (net)
#MBDLSPE .PPOFZ
0OJPO-BLF 4BO.JHVFM
.POUBOB6UBI1SPQFSUJFT
#MBDLSPE
.PPOFZ
4BO.JHVFM 0OJPO-BLF
'JTIJOH-BLF
1SPNJTFE
-BOE 'JEEMFS
$SFFL
8FTU3P[FM
(VOOJTPO
8FEHF
4BTLBUDIFXBO
6UBI
"MCFSUB
4BTLBUDIFXBO
"MCFSUB
4BTLBUDIFXBO
"MCFSUB
5FYBT
.POUBOB
15E 16E 17E 18E
4S
5S
6S Beartooth #43-33
Mowell #1
Pearl land Pryor formation
T76
T75 T77 R17W4
R18 R19
Pearl land Blackrod
r E S E r V E S
S U M M A R y O F O I L A n d g A S R E S E R v E S F O R E C A S T P R I C E S A n d C O S T S
Light and Medium Natural Gas
Crude Oil Heavy Oil Natural Gas Liquids
Gross Net Gross Net Gross Net Gross Net
Reserves category (Mbbls) (Mbbls) (Mbbls) (Mbbls) (MMcf) (MMcf) (Mbbls) (Mbbls)
Proved developed producing
Canada 152 124 7,331 5,852 11,833 9,440 18 11
United States 18 15 – – 99 77 – –
Total proved developed producing 170 139 7,331 5,852 11,932 9,517 18 11
Proved developed non-producing
Canada 49 44 2,089 1,813 2,642 2,033 1 –
United States 13 11 – – 215 161 – –
Total proved developed non-producing 62 55 2,089 1,813 2,857 2,194 1 –
Proved undeveloped
Canada 16 15 9,017 7,235 1,747 1,257 – –
United States – – 1,115 910 – – – –
Total proved undeveloped 16 15 10,132 8,145 1,747 1,257 – –
Total proved
Canada 216 183 18,437 14.900 16,222 12,729 19 11
United States 32 26 1,115 910 314 238 – –
Total proved 248 209 19,552 15,810 16,536 12,967 19 11
Total probable
Canada 154 138 20,594 16,826 10,089 8,377 14 9
United States 38 32 6,241 5,125 191 150 – –
Total probable 192 170 26,835 21,951 10,280 8,527 14 9
Total proved plus probable
Canada 371 321 39,031 31,726 26,312 21,107 33 20
United States 70 58 7,355 6,035 505 389 – –
Total proved plus probable 441 379 46,386 37,761 26,817 21,496 33 20
Total possible
Canada 46 39 117,903 101,240 4,196 3,492 – –
United States 3 2 24,880 20,451 332 252 – –
Total possible 49 41 142,783 121,691 4,528 3,744 – –
Total proved plus probable plus possible
Canada 417 360 156,934 132,966 30,508 24,599 33 20
United States 73 60 32,235 26,486 837 641 – –
Total proved plus probable plus possible 490 420 189,169 159,452 31,345 25,240 33 20
DeGolyer and MacNaughton Canada Limited has independently evaluated the Company’s Canadian and United States reserves effective December 31, 2007. The reserves information contained in the DeGolyer and MacNaughton report was prepared in accordance with the requirements of National Instrument 51-101
Standards of Disclosure for Oil and Gas Activities (“NI 51-101”). Complete NI 51-101 oil and gas reserves disclosure for Pearl as at December 31, 2007 is included in Pearl’s Reserve Report filed on SEDAR at www.sedar.com or available on Pearl’s website at www.pearleandp.com.
S U M M A R y O F n E T P R E S E n T v A L U E S O F F U T U R E n E T R E v E n U E
Unit Value
Before
Income Tax
Before Deducting Income Taxes after Deducting Income Taxes Discounted
Discounted at (%/year) Discounted at (%/year) (10%/year)
Reserves category 0% (M$) 5% (M$) 10% (M$) 15% (M$) 20% (M$) 0% (M$) 5% (M$) 10% (M$) 15% (M$) 20% (M$) $/boe Proved developed
Producing
Canada 166,137 151,299 139,074 128,787 119,979 166,137 151,299 139,074 128,787 119,979 $ 14.68 United States 1,355 1,277 1,208 1,147 1,092 1,355 1,277 1,208 1,147 1,092 $ 35.01 Total proved developed
producing 167,492 152,576 140,282 129,934 121,071 167,492 152,576 140,282 129,934 121,071 $ 14.75 Proved developed
non-producing
Canada 40,515 29,555 22,018 16,641 12,675 40,515 29,555 22,018 16,641 12,675 $ 8.54 United States 1,742 1,517 1,331 1,177 1,047 1,742 1,517 1,331 1,177 1,047 $ 27.26 Total poved developed
non-producing 42,257 31,072 23,349 17,818 13,722 42,257 31,072 23,349 17,818 13,722 $ 8.88 Proved undeveloped
Canada 71,270 45,686 28,192 15,891 7,032 71,270 45,686 28,192 15,891 7,032 $ 3.02 United States 16,731 13,686 11,350 9,519 8,061 16,731 13,686 11,350 9,519 8,061 $ 10.18 Total proved undeveloped 88,001 59,372 39,542 25,410 15,093 88,001 59,372 39,542 25,410 15,093 $ 3.79 Total proved
Canada 277,922 226,540 189,284 161,319 139,686 277,922 226,540 189,284 161,319 139,686 $ 8.86 United States 19,828 16,480 13,889 11,843 10,200 19,828 16,480 13,889 11,843 10,200 $ 11.58 Total proved 297,750 243,020 203,173 173,162 149,886 297,750 243,020 203,173 173,162 149,886 $ 9.00 Total probable
Canada 338,242 213,369 143,928 101,948 74,877 268,781 167,458 110,994 76,773 54,705 $ 6.41 United States 114,470 91,169 74,145 61,286 51,306 84,597 67,503 54,890 45,304 37,838 $ 11.75 Total probable 452,712 304,538 218,073 163,234 126,183 353,378 234,961 165,884 122,077 92,543 $ 7.58 Total proved plus probable
Canada 616,164 439,909 333,212 263,267 214,563 546,703 393,998 300,278 238,092 194,391 $ 7.60 United States 134,298 107,649 88,034 73,129 61,506 104,425 83,983 68,779 57,147 48,038 $ 11.72 Total 750,462 547,558 421,246 336,396 276,069 651,128 477,981 369,057 295,239 242,429 $ 8.21 Total possible
Canada 3,047,994 913,639 341,282 153,013 76,571 2,238,574 662,001 239,867 101,294 45,188 $ 2.88 United States 507,963 366,853 272,630 207,073 159,994 352,421 255,894 190,627 144,846 111,802 $ 10.93 Total possible 3,555,957 1,280,492 613,912 360,086 236,565 2,590,995 917,895 430,494 246,140 156,990 $ 4.28 Total proved plus probable
plus possible
Canada 3,664,158 1,353,548 674,494 416,280 291,134 2,785,277 1,055,999 540,145 339,386 239,579 $ 4.15 United States 642,261 474,502 360,664 280,202 221,500 456,846 339,877 259,406 201,993 159,840 $ 11.12 Total proved plus probable
plus possible 4,306,419 1,828,050 1,035,158 696,482 512,634 3,242,123 1,395,876 799,551 541,379 399,419 $ 5.31
