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one of a handful of pure plays within the oil sands and one of the few emerging oil sands
Deer Creek Energy Limited
Bow Valley Square 2
Suite 2600, 205 5th Ave S.W.
Calgary Alberta T2P 2V7
President and CEO
Lynn Fosse, Senior Editor
June 30, 2005
President & CEO
Mr. Schmidt has held his current position at Deer Creek since 2001 and has been one of
Deer Creeks directors since 2000. Mr. Schmidt holds both a Master of Business
Administration and Bachelor of Science in Chemical Engineering (with Distinction) from the
University of Calgary. Mr. Schmidt has more than 20 years oil and gas experience with more
than 10 years at the executive level. Mr. Schmidt is Chairman of CAPEX Exploration Ltd., a
private conventional oil and gas company. Formerly, Mr. Schmidt was President of Torex
Resources Ltd. and Pioneer Natural Resources Canada Inc. and was previously the Vice
President Canada at Chauvco Resources Ltd. and Vice President Production and Engineering
at Mark Resources Inc
Deer Creek Energy Limited is a Calgary-based oil sands development company with interests
in both steam assisted gravity drainage (SAGD) and mining assets. Deer Creek has an 84
percent working interest in and is the operator of over 50,000 acres in Oil Sands Lease 24
and 74, collectively known as the Joslyn Project.
Deer Creeks principal
asset is the Joslyn Project located in the regional municipality of Wood Buffalo,
approximately 60 kilometres north of Fort McMurray in northern Alberta.
Deer Creek has been evaluating
the Joslyn Project over the last several years and has embarked upon a multi-staged, risk
managed development plan.
Growth through a series of
phases is expected to capture the tremendous potential of the Joslyn Project while
mitigating risk and leveraging both Company and industry wide experience at each step of
CEOCFO: Mr. Schmidt,
what was your vision when you started with Deer Creek, and how has that come to fruition?
Mr. Schmidt: My original participation with Deer Creek
started at the partner level where I was introduced to the Company and the project. I
later joined Deer Creeks board of directors and then became CEO in July 2001.
My vision has been to steward a start-up company in the oil sands to and to
maximize its participation in the tremendous opportunity it offers. Over the last six
years, Deer Creek has grown and developed into a public company with the asset, the people
and the strategy to capture that opportunity. Today, we are just beginning as Deer
Creek constructs its first full commercial development.
CEOCFO: What is Deer
Creek all about?
Mr. Schmidt: Deer Creek is one of a handful of pure
plays within the oil sands industry and one of only a few emerging oil sands producers.
Deer Creek is unique in the aspect that it has a mining project, which is part of the
original development in the oil sands, as well as SAGD, a thermal process using horizontal
wells and steam for recovery. That opportunity puts Deer Creek in a position where it can
bootstrap its production base and cash flow from SAGD to undertake mining. Our project
scale is not unique in the oils sands, however it is for an emerging company and Deer
Creek has the opportunity to expose its investors and shareholders to a project that has
more than two billion barrels recoverable and more than 200 thousand barrels a day of
CEOCFO: Will you explain
how the oil sands differ from other sources for crude oil?Mr.
Schmidt: The oil sands are a higher cost source of crude which has been
developed slowly over the years. The oil sands are like what coal bed methane or tight gas
was on the gas side of the business; a resource that developed as commodity prices have
increased, and as the need for that supply has intensified. From a worldwide perspective,
as the availability of conventional crude basins has matured and the cost of developing
those projects has grown, the oil sands have become attractive. As a hydrocarbon deposit,
it is one of the largest in the world. It is estimated that there are between
one-and-a-half and two trillion barrels of oil in-place. However, given the
characteristics of the oil sands, only a fraction of that is recoverable. Currently there
is about 175 billion barrels expected to be recovered. In Canada the oil sands currently
produce about a million barrels a day.
CEOCFO: Do you have a
partnership with Enerplus Resources Fund?
Mr. Schmidt: Enerplus Resources Fund has a 16% working
interest in the project; Deer Creek has the balance of 84% and is the operator.
CEOCFO: They are good
people to have as partners!
Mr. Schmidt: Enerplus is a large trust. Gord Kerr, the
trusts President and CEO sits on our board. I was Vice President of Production and
Engineering at one of the predecessor companies of Enerplus and know them well; we have a
very strong relationship with Enerplus as a partner.
CEOCFO: You have done
some new things recently with the project; will you tell us about it?
Mr. Schmidt: Deer Creek is developing its project to in
a practical way and this entails common sense. In 2001, we conducted the original pilot
that was successful and told us a number of things. We followed that up with a
pre-commercial phase in 2004 to shake down construction, drilling and field operation
practices. We now have a 10,000 barrel-a-day commercial development under construction. We
also have the next 15,000 barrel-a-day expansion before the regulators for approval and we
are proceeding with the next 100,000 barrel-a-day expansion of the mining development to
the submitted by year-end or early 2006.
In terms of technology, the oil sands development is
no different from IT and the technologies that have developed on almost everyones
desktop. There are a number of opportunities to improve operations. We are
experimenting in the field with a number of things; one is lower pressure operations in
pump design in our pre-commercial phase. The industry is seeking to improve operations
using pumping equipment in steam projects, to ultimately reduce steam requirements. The
second element is the cost of natural gas. Deer Creek has a partnership with a technical
company called Quadrise Canada Fuel Systems Inc. and a number of other oil sands
producers, and is currently field testing burning heavy oil-based fuels. The objective of
this testing is to confirm the cost of environmental mitigation. The objective would be to
burn our own bitumen to supply energy for the generation of steam and to ensure that we
have the appropriate environmental mitigation so that we can displace natural gas, which
represents sixty to seventy percent of the operating cost for SAGD projects.
In terms of the building-block approach that we have
taken to the project, we have also stepped along with respect to logistics and markets.
Deer Creek recently announced the construction of its own oil pipeline to the main oil
transmission system. We will undertake this project on our own with our partner Enerplus
and Deer Creek will operate the pipeline. We have a non-recourse financing agreement with
a Canadian bank to finance the majority of the pipeline construction, and have
concurrently completed the necessary marketing and end-use agreements. This allows
Deer Creek to continue to pragmatically develop the project in stages with sufficient
capacity for our production from future SAGD stages of development and secure a market as
well as retain a pipeline asset.
Pipeline opportunities to expand markets for
production from Canada continue to grow. There are a number of proposals to move
production to the west coast and to Asia. With Deer Creek retaining its pipeline project
versus a third party owning and operating, we maintain our options deliver our production
to more than one market.
CEOCFO: What challenges
do you see ahead?
Mr. Schmidt: The challenges include execution. These
projects are not small in scale. To be practical, Deer Creek as a company is defining a
logical scale for efficient operations and expansion. That puts the company in a position
to manage capital costs. Large-scale oil sands projects, like large-scale off-shore
projects, have a prime focus on cost control. The ability to control that cost in a
deliberate and disciplined well-engineered way, as well as drawing on services in a
competitive environment, dictate a very disciplined and systematic approach to staged
Other challenges will be faced in heavy oil markets
and refining in the U.S. As well, upgrading developments in Canada are dynamic
because of the potential sources of market and the significant opportunity that upgrading
heavy oil has in terms of the economics as reflected by the current high heavy oil
differentials. Deer Creek as a company is positioning itself to manage the short-term but
maintain the opportunity to not only participate but capture that significant value in
taking heavy oil production from the oil sands to lighter oil products.
CEOCFO: Do you need to add personnel or management to
accomplish your goals?Mr. Schmidt: Yes, Deer Creek, as
it expands, will add more operators at the field and Calgary staff to execute our
expansion plans. The interest in the oil sands has been growing significantly. By phasing
the project with the plans that we have, Deer Creek has positioned itself to add staff in
a manageable way. At the field level, we have approximately fifteen full-time operators on
our project and that will grow to thirty with our commercial development on stream in
2006. To mitigate operating in the remote areas of Fort McMurray, northeast of Edmonton
Alberta, Deer Creek has a camp where operators housed and will be on a schedule of seven
days in and seven days out. We are planning to have a series of flights that our operating
staff would be scheduled to fly in on. This puts Deer Creek in the position where it can
draw from the larger labor pool within Alberta, beyond the more restricted or competitive
labor pool within the Fort McMurry area itself. At the Calgary office, we have
approximately fifty full-time personnel that includes staff and full-time consultants. We
expect to grow this base as we initiate the construction of the mine through 2008, and
estimate approximately 90 individuals in Calgary.
CEOCFO: Why should
potential investors be interested and what should they know that perhaps they do not
realize when they first look at the company?
Mr. Schmidt: Deer Creek is a small company in a large
project game. The interest to potential investors is in asking and answering a series of
questions. First is the perception of the investor regarding energy pricing. If the
perception is that oil prices are expected to remain above $30 WTI, then the oil sands
sector is one that will be of interest because of the characteristics of oil sands as a
large long-life resource. Deer Creek is one of only a handful of emerging oil sands
producers. I believe there are only seven pure play public oil sands companies; of those,
only two are at a stage that offers an early opportunity to grow with the company with a
huge upside. What that means is that if you were going to look at Deer Creeks
project today, apply current technology, current average capital, and current average
operating cost; the project of Deer Creek has a net present worth of between $3, $6 or $9
billion at $30, $40 or $50.00 WTI real oil prices, respectively. That is a significant
opportunity. Our current market capitalization is about $650 million, reflecting to the
investors the opportunity for Deer Creek.
CEOCFO: Has the
investment community recognized the potential?
Mr. Schmidt: Deer Creek began its development
approximately six years ago. We became a public company last July. Since July, we have had
coverage increase to now eleven research analysts following the Company, including both
American and Canadian firms. As Deer Creek continues to execute and deliver on its plans
the value of our project should be more fully recognized.
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