This article appeared on oilbarrel.com (which serves the London...

This article appeared on oilbarrel.com (which serves the London brokerage/investor community) yesterday. Note the last sentence.


Production Starts To Mount At Salinas Energy As It Gets Busy With The Drillbit

06.12.2007

Perth-based Salinas Energy is really picking up the pace in California, where it has one project under development, two awaiting production testing and a fourth about to start exploration drilling. Perhaps most important is news from the North San Ardo heavy oil development in the Salinas Basin, where rising production looks set to put the ASX-listed company on a sustainable financial footing.

The Monterey County field is mapped as the northern culmination of the giant San Ardo heavy oilfield, which was discovered by Texaco back in 1947 and has produced over 475 million barrels of 12-degree API oil to date. The crude was extracted first by natural flow and later by cyclic steam stimulation and steamflood techniques, recovering an impressive 40 per cent of the oil-in-place.

With 15 million barrels of oil-in-place, the North San Ardo oilfield isn’t on this scale but it still promises to transform the fortunes of the Australian start-up. The field has 2P reserves of 5.5 million barrels, which represents a 37 per cent recovery factor. The development is now well underway with production steadily climbing as newly drilled horizontal wells are hooked up to the production facilities: this week production was running at 800 barrels per day and should exceed 1,000 bpd before year-end as the remaining wells are completed. By mid-2008, the company hopes to be pumping around 2,000 bpd. Even accounting for heavy oil discounts, this is a commercially attractive project, with margins of over A$30 a barrel.

The company has sought to build a portfolio of these dormant heavy oil projects in California. These are known fields that were abandoned during oil price slumps of the last century but have seen their economics transformed by today’s high oil prices and technological advances.

Earlier this year, for example, the ASX company picked up 100 per cent of the McCool Ranch project, less than one mile from North San Ardo. McCool was discovered in 1964 and stopped producing in the mid-1980s. It is reckoned to hold 4.7 million barrels of oil place, of which Salinas is targeting 1 million barrels. This isn’t a big resource but by tapping into the existing North San Ardo facilities the project economics can be made to work. The key will be reservoir productivity and this should be revealed any day now as the recently drilled Capps 1-22H horizontal well is production tested.

It’s a similar story at Paris Valley, which stopped commercial operations in the late 1970s. This is the second largest heavy oil field (10-14 –degree-API oil) in the Salinas Basin, with oil-in-place estimates of over 100 million barrels. Salinas has conducted a study over the field, in which it hopes to earn a 50 per cent interest, and plans to proceed with seismic and drilling work next year to target some 25 million barrels of recoverable oil. This is a big resource and investors will be keen to get some early newsflow from this possible company-maker.

But Salinas Energy isn’t just a heavy oil play. It also has light oil projects further south in the San Joaquin Basin, where it is targeting prospects of between 10 and 25 million barrels. This first of these to drill was North Yowlumne, which lies to the north of the 113 million barrel Yowlumne oilfield where single wells have produced as much as 3 million barrels at rates varying from 300 bpd to 2,000 bpd.

The first well on North Yowlumne was drilled in 2006 and tested 32-36-degree API oil. It proved sub-commercial. A follow-up well has just been drilled to a total depth of more than 13,000 feet. The shallower secondary objective was disappointing but gas and oil shows were observed over the primary target interval, the Stevens Sandstone, which came in close to pre-drill predictions. The geology looks challenging, with thin interbedded sands and fractured rocks, but an upcoming production test will reveal whether the reservoir is capable of producing at commercial rates.

Finally, Salinas shareholders are also about to be exposed to the company’s first project in Louisiana. The company is set to earn a 25 per cent interest in the Reese project, where the shallow Grainger-1 well is due to spud. This adds additional drillbit excitement to a portfolio that may not be exciting but does offer a sustainable business model as production revenues start to add up. Moreover, if the Paris Valley heavy oilfield lives up to its billing, this a company that could see at least a five-fold increase in its booked reserves within a relatively short space of time.