Excelsior Energy Ltd. (ELE-TSXV)

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July 10, 2009 Issue

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Excelsior’s Proprietary Combustion Overhead Gravity Drainage (COGD) Technology Provides The Potential To Cut Capital And Operating Costs And Reduce The Amount Of Gas And Water Required By 80% In Exploiting In Situ Bitumen Resources

Company Profile:

Excelsior Energy Ltd. (TSXV: ELE) is an early stage, oil sands company with 58 operated sections on two contiguous blocks in the Hangingstone and West Surmont areas of the Athabasca Oil Sands Region near Fort McMurray, Alberta. The Company has developed a proprietary in situ combustion technology (“Combustion Overhead Gravity Drainage” or “COGD”) which has game-changing potential in the development and recovery of heavy oil and bitumen. An application for an experimental pilot project to field demonstrate the COGD technology will be submitted at the end of the second quarter of 2009 with a targeted start up in early 2011. In addition the Company indirectly holds a 100% working interest in UK North Sea Licences P1500 and P1691 covering four part-blocks through its 75% owned subsidiary ENS Energy Ltd. Excelsior's strategy is to capture oil and gas appraisal and development opportunities where we can leverage Management’s diverse international operating, heavy oil and field development expertise with developing technologies to produce oil and gas.

Dr. David A. Winter, CEO and Director

Geologist; 25 years of international, multi-discipline industry experience in increasing senior management positions with British Petroleum, Sun Oil, Canadian Occidental (now Nexen), Alberta Energy Company (now EnCana) and Calvalley Petroleum. Extensive international oil and gas field development experience in diverse offshore and onshore operating environments including North Sea, China, Netherlands, S.E. Asia and Yemen.

Energy
Oil Sands Exploration
(ELE-TSXV)

Excelsior Energy Ltd.
Suite 1510, 734-7^th Avenue S.W.
Calgary AB Canada T2P 3P8
Phone: 403-537-1015
 

Interview conducted by: Lynn Fosse, Senior Editor, CEOCFOinterviews.com, Published – July 10, 2009

CEOCFO: Dr. Winter, you have a long history in the industry; why have you chosen to be with Excelsior today?

David Winter: “Essentially, I wanted to start my own company. I’ve had a lot of success being a part of leadership teams that have built business units with larger companies, and I had the desire to branch out on my own and try my skill-sets and execute my own oil and gas growth strategy. It was to move away from the constraints of large independents, into the smaller more entrepreneurial side of the business and to grow an E&P company from scratch.”

CEOCFO: What is your strategy and focus?

David Winter: “Myself and my partner Robert Bailey, who is an engineer, started Excelsior towards the end of 2005 with the strategy to employ our technical skill-sets and experience in the development of oil and gas fields, especially those that are perceived to be problematic. This perception might be due to complex geology, which is my expertise, or the need for specialist engineering solutions, or involved complex hydrocarbons, such as heavy oil; Rob has a huge background in heavy oil. So we really started off looking for heavy oil opportunities and large resource type, heavy oil plays.”

CEOCFO: Would you tell us about the properties that you are working with today?

David Winter: “We operate approximately 58,000 acres gross in the Hangingstone area of the Athabasca oil sands region in Northeast, Alberta. We are about 27 kilometers south of the Fort McMurray, which is the heart of the oil sands region. The public face of the oil sands is the mining operations of oil sands and their attendant environmental issues. The total recoverable resources of the oil sands is estimated to be about 174 billion barrels of recoverable bitumen. Of that huge volume, only 20% of that resource can be mined. The remaining 80% is at depths too deep to mine and needs to be recovered by in situ recovery mechanisms. These commonly use injected steam such as cyclic steam recovery or steam assisted gravity drainage (SAGD).There are also a variety of new technologies that are being developed to try to exploit the bitumen from the deeper reservoirs. These include in-situ combustion where a portion of the bitumen is burned to create the energy to melt the bitumen, the use of solvents, and enhanced SAGD. Excelsior has developed an in situ combustion technology termed COGD, which is the acronym for Combustion Overhead, Gravity Drainage and is planning a 1,000 bopd experimental pilot project at Hangingstone. With in situ recovery mechanisms, the environmental footprint is much smaller than for mining. Indeed their footprint is approximately the same size as conventional oil and gas operations, and less than many other public industries.

To date, our primary focus is the Hangingstone property that comprises about 39 square miles of contiguous oil sand leases. The attraction of the property is two key factors. One is favorable geology. The reservoir is thick and has great reservoir quality. Secondly, it is very close to industry and utility infrastructure. That is a key plank of our strategy; to look for assets that are close to existing industry infrastructure and public utilities, so that we are not building roads or pipeline into the more remote parts of the region, and we do not have to bring in gas or water into the area. That is a key driver for cycle-time and for capital efficiency; basically extracting as many barrels for as few dollars and in as quick a time as possible. At Hangingstone we are located on a major highway that runs from Fort McMurray to Edmonton, we have a major gas pipeline crossing the property. We have also identified a non-potable water source for our process water. Water is going to be the key issue and the most divisive issue in oil sand development in the coming years. There is a great deal of concern about how much fresh water the mining operations are using and taking out of the Athabasca River. The steam recovery mechanisms will also be using a lot of water to just generate the steam. With SAGD recovery the equivalent of 2 to 3 barrels of water is used to produce one barrel of bitumen. Around 90% of that water is recycled but with the large number of projects planned the water needs are still enormous. We are very fortunate in Hangingstone that we have encountered an aquifer, which is non-potable, extensive and cannot be used for human consumption. This provides us with a good source of process water, which is more than adequate for our needs.

In the last year, we have focused our attention on alternative recovery mechanisms that could address the key issues for in situ recovery; access to gas, water, steam and the large capital and operating costs associated with generating steam. We’ve developed a proprietary in situ combustion process named “Combustion Overhead Gravity Drainage”, ‘COGD’ for short, to recover bitumen as alternative to SAGD. We plan to burn a portion of the bitumen in the ground to provide us with the energy to melt the bitumen. The beauty of the COGD in situ combustion process is that it provides an opportunity to dramatically reduce the capital and operating costs. It could reduce the amount of gas and the amount water required by about 80%. A successful COGD demonstration would have a huge impact on in situ recovery mechanisms for bitumen and reduce the commercial threshold for bitumen production. Our analysis indicates that SAGD projects need between $75 and $80 per barrel WTI to become economically viable.”

Experimental laboratory work and computer simulations indicate that higher recoveries, an increase of about around 50%, may be possible using in situ combustion than for SAGD. This is largely due to the higher operating temperatures under in situ combustion, around 600 degrees centigrade, compared to SAGD, around 200 degrees centigrade.

CEOCFO: Will you be licensing that technology to others somewhere in the future?

David Winter: “That’s an option, but first of all what we are doing is applying to put in place an experimental pilot project in the Hangingstone area to test the technology. It has the potential to be a disruptive technology. It will have the opportunity to replace SAGD as the mainstream in situ recovery mechanism.”

CEOCFO: Development is always expensive; what is the financial picture like for Excelsior today?

David Winter: “The experimental pilot itself will cost between $35 and $50 million to execute over a four year period. As oil sands pilots go, it is relatively inexpensive. If we ramped it up to a more commercial scale of 10,000 barrels a day, which is similar to some of the small footprint SAGD projects, we would then be looking at a price tag of around $250 million to put the project together. By comparison, that 10,000 barrel a day SAGD project would cost somewhere between $350 and $400 million to build. To pin it down to a bottom line, a 10,000 barrel a day SAGD project, from our economics, requires a WTI levelised supply cost of around $80 a barrel to develop.We would expect that a COGD, 10,000 barrel a day project would require a WTI levelised supply cost of around $50 a barrel. Those economics were run using the supply costs from the fall of 2008. With the opportunity of higher recoveries per unit cost and supply costs falling as a result of the recent downturn in the industry, the WTI levelised supply costs for COGD could potentially be as low as $40-$45 WTI a barrel.”

CEOCFO: In closing, why should potential investors pay attention to Excelsior?

Mr. Winter: “Investing in oil sands now is like buying an option on oil prices. Excelsior’s current share price values its recoverable resource barrels at about $0.15 per barrel. Long term, over a 2 or 3-year period, I think oil prices are going up. The fundamentals haven’t changed despite the recent economic crisis; global oil supply is declining (rapidly in major producers such as Mexico) and is underscored by the delay and cancellation of major projects around the world. The fall in global oil demand is not going to decline fast enough to offset the fall in global supplies. Therefore, the current low price environment is setting in motion another oil price crisis in 2 to 3 years, as demand starts to pick up with an improvement in global economies. The value of bitumen in the ground on a project that has an project application approved is around $1.00 a barrel. That is the near term attraction of Excelsior right now; invest in barrels at $0.15 cents a barrel with the opportunity to take those up to $1.00 a barrel, once we have our application approved (estimated around June 2010). The next step is to take a project to commercial production at which point resources are valued at closer to $10 per barrel. That is the scale of the value growth that Excelsior offers.”

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“Myself and my partner Robert Bailey, who is an engineer, started Excelsior towards the end of 2005 with the strategy to employ our technical skill-sets and experience in the development of oil and gas fields, especially those that are perceived to be problematic. This perception might be due to complex geology, which is my expertise, or they need specialist engineering solutions, or involved complex hydrocarbons, such as  heavy oil; Rob has a huge background in heavy oil. So we really started off looking for heavy oil opportunities and large resource type, heavy oil plays.” - Dr. David A. Winter