Improving Oil Recovery
Wavefront Energy and Environmental Services (WEE.V, WEESF.PK)
I
first wrote about Wavefront (before I started working for them) when
the share price was around $1 and moving up quickly. After I started
working with Wavefront I made the following statement:
In my capacity as
a newsletter writer, I'm exposed to hundreds of companies a year. It is
extremely rare to find one with as much groundbreaking potential as
Wavefront. My experience and expertise as a petroleum hydrogeologist
over the last 20 years gives me a great deal of comfort with the
reliability of Wavefront's technology and the science behind it.
To a large degree, I am
staking my personal and professional reputation and the ultimate
success of my newsletter on Wavefront. I'm not losing sleep over it.
Why would I bother sticking my neck out when there are literally
thousands of resource based companies out there? What makes this one
special? I'll spare you the breathless "Peak Oil" primer as the theory
doesn't account for rising prices and the application of new
technologies. We aren't going to run out of oil tomorrow. I believe
that human ingenuity and innovation will ultimately keep the petroleum
spigot open long enough for the planet to transition to other energy
sources. I'll refrain from using the promoter's glossary that includes
phrases like "hot stock", "poised to explode" and "buy now!".
Wavefront is not a flash in the pan promotion. They have developed a
revolutionary fluid flow technology that the marketplace is just
becoming aware of.
Improving Oil Recovery
One
of the best places to find oil is in already discovered fields. Robert
Ryan, vice president of global exploration for Chevron, said as much
during a recent American Association of Petroleum Geologists (AAPG)
speech. He believes there are 5 areas of "discovery" that will
determine the world's energy future including exploration, recovery,
renewables, efficiency and talent. Ryan's comments on recovery are of
particular interest:
Imagine if you increase recovery by just a few percent -- a few percent the increase can be huge. There's a lot to recover.
In
fact, the August 2006 issue of World Oil Magazine reports that in the
United States 374 Billion barrels of oil, or approximately 66% of
discovered oil remains stranded in reservoirs.
How do we end up leaving so much oil in the ground? If you have you
ever tried to squeeze all of the water out of a sponge on the first
squeeze, you'll have an appreciation for the challenges of producing
oil out of petroleum reservoirs. Primary recovery of oil
occurs when a well is initially put into production and the oil flows
to surface naturally. This stage of recovery will typically produce
10-20% of the oil in place although it can be as high as 50% of the
original oil in place (OOIP). Secondary recovery occurs
after the reservoir pressure declines and the well no longer flows oil
to surface. The injection of water (waterflooding) is used to maintain
reservoir pressure and to sweep oil from injection wells to production
wells. Typical recoveries are 15-45% of OOIP. Tertiary recovery involves
more technically challenging methods such as the injection of steam,
chemicals, gases, microbes or heat. It is also called improved oil
recovery (IOR) or enhanced oil recovery (EOR).
The fact is that most oilfields are far from being tapped out.
Lets look at what the application of new technologies can do to the
long term production of a field.
Since the Weyburn field was
discovered by Shell in 1955 there was a production peak in 1966
followed by a steady decline. This is very similar to what Hubbert's
peak oil theory predicts although the asymmetric nature of the peak
reflects the application of waterflooding to keep the oil flowing
longer. What is especially interesting is the reversal of the
production decline due to vertical infill wells (burgundy), horizontal
infill wells (yellow) and CO2 injection (light blue).
The
Weyburn field is a great example of how peak oil can be delayed with
improved technology and higher prices. Out of the 1.4 billion barrels
in place, an incremental 10+% will be produced as a direct result of
Encana's EOR efforts. Their estimated 144 million barrels of extra
production is worth over $10 billion assuming $70 oil prices. A 10%
increase in incremental oil recovery is worth a very large fortune
indeed. The capital costs of implementing Encana's CO2 include a ~$100
million pipeline to bring CO2 from North Dakota.
Wavefront expects that Powerwave will rescue 10% or more of trapped oil in mature reservoirs.
This
is not an idle boast. Wavefront's technical team can model how the
Powerwave process will perform in a specific reservoir. There have been
over 100 successful field applications of the process. Capital costs of deploying Powerwave are several orders of magnitude less than initiating a CO2 flood.
Encana
has recently entered into a pre-commercialization agreement with
Wavefront on an active waterflood in Western Canada. At this time the
the exact location of Encana's field has been kept secret. Of course
Encana isn't the only company that Wavefront has talked to and several
more announcements with major producers are pending. (NOTE since this article was published Wavefront added Pengrowth to their client list).
Why Powerwave?
It
is clear that oil companies have all kinds of technologies that can
squeeze extra oil out of the ground. What does Wavefront do that is so
special besides offer a lower capital cost to deploy?
Water flooding is the major method of getting extra oil out
of the ground and many improved oil recovery methods rely on the
injection of various liquids. The bane of these methods is a phenomenon
called viscous fingering. In a perfect world the injection of a liquid
would create a piston- like displacement of the remaining oil in
place. What actually happens is the non-ideal situation where
"fingers" of water bypass the oil.
The degree of viscous fingering or water channeling is directly correlated to waterflood performance. - Alberta Research Council 2005
There
is less viscous fingering when Wavefront's Powerwave process is
implemented. This leads to greater contact and distribution of injected
liquids, as well as accelerated oil recovery. Injection rates typically
increase by 2-5 times without increasing reservoir pressure. Permanent
oilfield applications of the Powerwave process include water flood
injection wells and water disposal wells.
The Powerwave process is not restricted to permanent
installations. There are numerous well intervention scenarios that
require the placement of remedial fluids. The injection of these fluids
may only take a few hours but they can have an enormous impact on a
well's productivity.
Halliburton was impressed enough with Wavefront's technology to
enter into a licensing agreement. Halliburton uses the process in well
stimulations where improvements have been achieved through:
- Enhancing the results of chemical treatments through deeper placement.
- Pinpoint placement of chemical treatments without zonal isolation.
- Creating new flow paths of permeability through a combination of forced fluid injection and pore scale dispersion.
Environmental Applications
While
having a target market that consists of 10% of the oil left in the
ground is huge (37 billion barrels of oil times $70/barrel is $2.59
trillion in the USA alone), Wavefront's Primawave injection process is
marketed to the environmental sector. This market sees $US 4.5
billion/year spent on the injection of chemicals in the ground to treat
contaminants. Wavefront has done successful projects for NASA and
recently announced a project at Vandenberg Airforce Base in California:
Based on previous positive results of Primawave where fluids have been
injected with pin-point accuracy, up to five times faster and with ten
times the distribution distance compared to traditional injection
approaches, the client has systematically identified the process as the
only alternative to successfully introduce the remedial fluids into the
subsurface to meet its targeted goals.
The table in the next column shows results from an light
non-aqueous phase liquid or LNAPL (LNAPLs are also known as "floaters"
- like oil on water) cleanup project in Ontario, Canada.
Removal Rate
Estimated Time to Remove 500 L (5% Porosity) 36.87 yrs 4.87 yrs
Estimated Time to Remove 1000 L (10% porosity) 73.74
yrs 9.97 yrs
The
Primawave process removes more contaminants in less time in
environmental applications. These results represent an order of
magnitude improvement.
People
I
find it telling when a bright technical person leaves a secure position
to work at a smaller company. Wavefront's Vice President of Operations
and Business Development, John Warren, left a position with Halliburton
to work with Wavefront.
Toiling away in relative obscurity are a team of Ph.D.
physicists that have developed predictive reservoir models that allow
Wavefront to determine the expected outcomes of Powerwave and Primawave
implementations.
Apart from their world-class technical expertise, Wavefront's management has serious depth as these bios show:
Brett Davidson
President, CEO, Director
Brett
Davidson heads the Wavefront team and has more than 19 years of
experience in research, development and commercialization of products
and services in the civil, environmental and petroleum disciplines.
Davidson, a founder of Wavefront, has spent the past nine years
developing the company's strategic direction, focusing extensively on
the global commercialization of Wavefront's game-changing technology.
Prior to Wavefront, Davidson was principal of a consulting
company, Subterranean Technologies, which concentrated on issues
surrounding salt mine and cavern design and closeout. He began his
career with Atomic Energy of Canada in Pinawa, Manitoba, and later
managed the Geomechanics Research Group at the University of Waterloo.
D. Brad Paterson
CFO and Director
As
the CFO for Wavefront, D. Brad Paterson draws on more than 15 years of
experience acting as a senior officer and director of publicly listed
companies in order to implement the company's strategic financial
direction. Paterson's knowledge of management and financial accounting,
corporate finance, corporate governance and regulatory markets also
plays a significant role in his ability to supervise financial
management, control, reporting, planning and investor relations.
Before joining the Wavefront team, Paterson led and consulted
in the public listing of private companies, corporate restructurings
and financings, business and assets valuations and acquisitions. In
addition, he served as a senior financial analyst for a private equity
and mezzanine financing firm.
Dennis R. Minano
Director
In
his capacity as director, Dennis R. Minano serves as an advisor on
energy and environmental issues for Wavefront. He also chairs an energy
and transportation group charged with formulating recommendations for
future U.S. policy. In this role, Minano builds on his previous work
aimed at crafting new public policy through several forums.
Prior
to Wavefront, Minano spent 30 years at GM, where he started as an
attorney involved in marketing, product liability, energy and
environmental law. He was then appointed practice area manager of the
environmental and energy legal group and served as a vice president for
GM Communications, where he helped to integrate communication with
business strategy. Minano rounded out his career at GM serving in the
capacity of vice president of Energy and Environmental. Recently,
Minano was appointed Chair of the Board of IntegriGuard LLC, a private
company in the heath care field.
Roger Kazanowski
Director
A
businessman with more than 30 years of experience in the startup and
development of companies, Kazanowski began his career as an automotive
designer at Ford Motor Company. Since then, he has focused on
developing his own businesses, which include Cambridge Products – a
designer and manufacturer of full-scale product lines for FTD Florists
worldwide, Anheuser Busch and Miller Brewing Company – and Business
Television Video Systems, a fully integrated audio/video system for
large retailers, restaurant chains and corporations. Kazanowski sits on
the Board of Directors, Public Broadcast Services (PBS) in Detroit,
Mich.
Walter Stelmaschuk
Director
Stelmaschuk
is well versed in building companies and in the public markets. Prior
to joining Wavefront, he served as president, and later, chairman of
NQL Drilling Tools Inc. (now NQL Energy Services). Stelmaschuk also
served as the president and chairman of National Quick Lube, president
of Mr. Lube USA and vice-president of Midland Doherty Ltd.
Steven W. Percy
Chairman
Before Wavefront, Percy held
several positions with The Standard Oil Company, including manager of
American flagged marine transportation, manager of the Eastern Crude
Oil division, director of operations analysis, director of downstream
strategic planning and development and director of the executive
office. Following the merger of BP and Standard Oil, Percy served as
the group treasurer of the British Petroleum Company p.l.c. and chief
executive of BP Finance International, president of BP Oil and chairman
and chief executive officer of BP America.
Why Buy?
It is hard to put a happy face on a stock that has declined from a high of $5.20 to the current price of $1.19.
(NOTE since this article was published Wavefront reached a high of $1.54 and recently closed at $1.38)
. Management has
endured slurs and blatant character assassination in light of recent
share performance. It is important to remember that this stock had
lengthy slide from a $0.65 high to a low of $0.20 before rocketing up
to $5.20. The stratospheric rise happened on the back of a series of
positive announcements from September 2005 to February 2006. One of the
most positive announcements was that Occidental Petroleum (Elk Hills
Inc.) would be using Wavefront's injection process in a California
heavy oil field.
Unfortunately, a small competitor, Applied Seismic Research
(ASR), sent an email to Occidental in which ASR's president, William
Stern, informed Occidental Petroleum that he believed Wavefront was
infringing ASR's patents.
On February 14, 2006, Wavefront announced a lawsuit against ASR for tortuous interference:
In
management's opinion if ASR had not unlawfully interfered, the success
of the pilot waterflood project would have resulted in significant
revenue to Wavefront for a number of years into the future. Management
is optimistic of a favorable outcome as well as the opportunity to
renew our project with Occidental of Elk Hills. Wavefront and its
licensed providers are moving forward on all fronts with prospective
clients and joint venture partners. Management will not allow the
actions of ASR to interfere with the execution of the Company's
business plan.
ASR had very little cash so collecting damages was not
possible. However, the US District Court gave the following judgement
(announced on October 17, 2006):
Wavefront's "Dragonfly" tool,
either alone or in combination with any other component or process or
manner of use, does not infringe any claim of the ASR patents under any
theory of infringement, including but not limited to direct or indirect
infringement, and induced or contributory infringement; and, Each of
the counterclaims asserted by ASR was dismissed with prejudice.
During the court proceedings Wavefront acquired interests in
related patents in order to strengthen its case. While the court action
negatively affected Wavefront's business and share price, their patents
have been successfully defended in court.
Insiders have consistently bought up shares over the last 6
months in spite of their already significant holdings (over 38% of
Wavefront's shares are under insider and management influence - see
table).
Holders
Insider and management holdings (I & O) 8,080,495 16.6
Insider and management influence (I & O) 18,543,403 38.2
Another
shareholder of note is Sprott Asset Management (Canadian Equity,
Energy, Hedge Fund LP II, and Bull/Bear RSP). You should be able to
get a position in Wavefront at lower prices than Sprott did. Suffice it
to say that this stock is tightly held by insiders and institutions.
Patience
I
hate being patient. I want to find out about a company, write about it
and see my subscribers double their money in a week. I also know that
the big money is made in finding a good idea and sticking with it. That
is why I am reiterating the Wavefront story. I know that innovative
technologies are not adopted overnight. I have personal experience with
this and there is considerable research on "social diffusion theory".
Early adopters don't grow on trees.
Wavefront Produces Petroleum
Risk
taking technical people were generally the first to be sacked during
the downturn in the early 1980s. In order to demonstrate the
effectiveness of Powerwave, Wavefront's management recognized that it
would be advantageous to demonstrate the technology on its own oil
fields as well as forming partnerships with forward thinking oil
companies. Currently Wavefront has interests in two oil properties:
Rogers County, Oklahoma and Rodney South, Ontario. News on production
improvements in these fields is pending (NOTE since this article was published Wavefront acquired mineral
rights to 1,679 acres in Young County, Texas).
Wavefront's Future Plans
- Continuing the existing royalty-bearing license agreement with Halliburton Energy Services to market Powerwave internationally.
- Obtaining leasehold rights to mature, under-producing and
abandoned oil fields in order to implement Powerwave for oil well
stimulation and oil reservoir rejuvenation. - Securing a working
interest in oil production operations with independent producers in
conjunction with the installation of Powerwave. - Providing site-specific Powerwave licensing agreements to major oil producers.
Steady
revenues that the spreadsheet crowd can model are still a few quarters
out. The licensing of Powerwave and Primawave have the potential to
create significant revenue streams. Wavefront is an energy technology
stock that has the potential to alter the shape of "Hubbert's Peak". It
is preferable to accumulate Wavefront on the cheap than to chase it
after an announcement. (NOTE Wavefront's July 31st press release regarding Pengrowth stated the following -
Wavefront continues to pursue additional high-profile opportunities and anticipate similar announcements in the coming weeks.)
This excerpt is modified from the August 4th, 2007 Big Picture Speculator Newsletter.
www.bigpicturespeculator.com
Jim Letourneau, P.Geol.
Jim consults for Wavefront energy and currently owns shares and options.