What Are The Koch Brothers Up To In Alberta's Oil Sands?

There's been a tempest of internet chatter over the recent Washington Post story which claimed the Koch brothers are now the largest oil sands leaseholders in the province of Alberta, even ahead of supermajors Royal Dutch Shell B (RDSb) and ConocoPhillips (NYSE:COP). The Koch subsidiary is reported to hold at least 1.1 million acres, an area almost the size of Delaware.
 
Because of the Koch's political ties, the story is of interest to those who have tried to link the Koch brothers to the proposed XL Pipeline through which a portion of Alberta's bitumen is likely to flow, although the Koch brothers insist no such connection exists. Therefore the newspaper's story is of great interest to the political pundits, but relatively few are talking about the bigger question, namely --- Why do the Koch brothers have such a huge footprint in Alberta's oil sands in the first place?
 
The question is of immediate interest to investors, because Koch Industries is a $115 billion outfit and one of America's most powerful corporations. If the Koch brothers are as involved in Alberta's oil sands as the Washington Post reports, then investors should want to know why.
 
According to the article, the Koch holdings are primarily concentrated in the Peace River region of Alberta --- a lesser-known oil sands area compared to the much higher-profile Athabasca region where all the major surface operations are based. Unlike the enormous bitumen-mining operations in Fort McMurray which are relatively simple to excavate, the Peace River oil sands deposits are located underground, several hundred meters below the surface. They are known as in-situ deposits because they are deeply-buried sand formations saturated with extra-heavy oil. Up until a few short years ago, these deposits were mostly shunned by the major producers. But as technology improved and oil prices rose, all that began to change.
 
Since Koch Industries is a private corporation, they are under no obligation to give details on their massive oil sands lease-blocks in the Peace River area. In fact, their website provides almost no information on the subject. Therefore in order to find out more about their holdings, I turned to the other oil companies in Peace River and began going through their websites. What I discovered was interesting.
 
It turns out a large portion of Koch's Peace River oil sands holdings are concentrated in a single area comprising about 800 square miles. Their lease-block in this area covers nearly a dozen townships. That's a massive land position, by anyone's standards. But why is Koch there? It turns out that Koch has surrounded an exploration company which has discovered a significant deposit --- an underground geological platform which is saturated with 3.4 billion barrels of extra-heavy oil of which 887 million barrels are recoverable, according to the company's 51-101 compliant report. The company is Strata Oil and this is the map they've released on their website. As you can see, Koch has surrounded them to the northeast.
 
It turns out that Koch isn't the only major player that's taken an interest in the region. Shell is directly to the south, as is Husky Energy. Both these companies have assembled substantial lease-blocks in the adjacent townships.
 
As I began to look more deeply into the play, the multi-zone potential of the region became evident to me. While neither Shell, Koch, nor Husky are revealing the full extent of their plans, there appear to be three major oil zones which are being targeted in the area. They are all enormous.
 
First, there's the underground oil sands formation which contains a very thick, extra-heavy type of oil which only flows when heat is applied to it. Shell was the first one to really hone-in on this prize, and is now ramping up to 80,000 barrels per day at their nearby Carmon Creek project.
 
Second, there's the slightly deeper carbonate-based formations, which, like the sands, contain extra-heavy oil requiring thermal treatment. Shell has shown great interest in exploiting carbonate-hosted bitumen deposits in Alberta, paying $465 million for their initial carbonate lease-blocks in the Grosmont platform to the east. In fact, Alberta's carbonate-hosted bitumen is considered by many to be "the next oil sands" and has been estimated by the provincial government to contain 447 billion barrels of crude, of which 89 billion barrels may be recoverable using SAGD or CSS technology.
 
And third, there are what appear to be a number of highly-valuable pools of heavy oil which flow without thermal treatment. The wells are essentially conventional --- they are cold-flow, primary production. NYSE-listed Baytex Energy has moved aggressively into the region and is exploiting these pools with incredible success. In fact, they've acquired more than 300 sections of oil sands leases and have so far drilled 183 cold-production horizontal wells with a mindblowing 100% success rate, according to their website. They are producing from an average pay-thickness of 15-20 meters. It's so lucrative that Baytex has announced they will allocate a larger percentage of their 2014 budget to the Peace River area than any of their other operations, including their shale oil projects in the Bakken --- reinforcing my view that Alberta’s oil sands deposits may trump their shale oil counterparts just on the basis of economics alone.
 
It's therefore little wonder that Koch has moved so heavily into the Peace River oil sands play. They've astutely assembled an incredible land position in one of North America's most valuable oil-producing regions. Between the thermal in-situ oil sands deposits, the substantial cold-flow bitumen pools, and the promising carbonate bitumen reservoir, Koch may be sitting on a multi-billion barrel oil sands portfolio which keeps the company rolling in profits for decades to come.