TomCo Energy: Oil sands project moving forward
TomCo (LON:TOM) is an oil & gas exploration and production company which, operates in the Uinta basin in Utah. The company has announced a joint venture (JV) to unlock the potential for oil sands development within the area using an innovative new production technology.
The Uinta basin and adjacent formations hold some of North America’s largest deposits of oils sands. In December 2019 TomCo announced a project in conjunction with the global EPCI company Valkor LLC, to examine a scalable modular production plant that could be used to extract oil from the sands with cost efficiency and low environmental impact. The JV announced on June 19th aims to take this project to its next stages and to establish a production facility that could be operational before the end of 2021 in our view.
Fuel oil not crude
The process which is under development would produce a low sulphur fuel oil product that could be sold directly into the market place as bunker fuel for shipping, rather than being sold as a crude product to refineries. In this report, we examine how this improves the commercial dynamics of TomCo’s proposition. Among other things, the price of bunker fuel has not gone below $30/bbl at any point in the recent market turbulence.
Aside from the ready-for-market output product, the separation system has other unique advantages compared with existing oil sands separation technologies, including:
- Limited environmental impact, with a modest water requirement, and no “dirty” sand to remediate at the end of the process
- A scalable modular system with limited capex requirement
Innovative non-conventional energy technology
On June 19th TomCo announced the formation of a new joint venture called Greenfield Energy LLC, to be owned on 50/50 basis between TomCo and Valkor. Further to this on July 2nd TomCo announced a capital raise of US$1.5mln. The capital raised will be used for two main purposes.
Firstly, funds will be used to conduct upgrade work to a test plant in Asphalt Ridge within the Uinta basin. This is being operated and managed by Valkor and will be transferred to the Greenfield JV. This plant will serve to validate the separation technology.
Secondly, the new capital will fund TomCo’s contribution towards a FEED (Front End Engineering Design) study being conducted by Valkor to demonstrate the viability of a commercial plant capable of producing 10,000 barrels per day (bpd) of fuel oil from oil sands. In the release on July 2nd TomCo notes that a preliminary draft pre-FEED study has given the board increased confidence in the economic viability of such a plant.
The Uinta basin is thought to hold over 10 billion barrels of oil in the form of oil sands. We believe that there is future scope to extend production well beyond the initial 10,000 bpd being targeted.
Next steps and potential upside
Modular separation plant for oil sands:
TomCo is involved in the development of a new system for processing of oil sands, based on a process which has undergone initial development and testing by another operator in Utah. This process could be commercialised on a relatively fast timescale.
Low capex requirement and a clean production process
Globally oil sands are already being exploited on a large scale, but the system being examined by TomCo will use a new processing technology that differs from the systems used by the larger-scale operations which are well-established in Canada. The new process offers modest initial capex, flexible scalability, and eliminates the expensive disposal of ‘dirty’ sand at the end of the process.
Output is ready-to-use fuel, enhancing the economics of the project
And perhaps most importantly, the process under development would produce low-sulphur bunker oil ready for use in shipping and power generation, rather than producing crude oil which requires refining.
Objectives and timeframe
The following table summarises the timeline of recent events, together with our own expectation for further project milestones.
Timeline
Source: Proactive Research
Oil sand/tar sands
Tar-sands, also known as oil sands, are sands that are saturated with bitumen, which is a highly viscous form of oil. Extraction of oil from oil sands already represents a large scale commercial undertaking globally, especially in the Athabasca region of Alberta, Canada. The following map shows major known oil sands deposits in the world, with the size of dot being illustrative of the relative size of the resource.
Biggest oil sands resources are in Canada, Venezuela and Russia.
Utah is at the top of tier-2
Major global oil sands resources
Source: Proactive Research
The dot in the middle of the USA represents the Green River formation, which includes the Uinta basin. The following table summarises the biggest oil sands deposits identified:
Three major deposits: Asphalt Ridge, PR Springs, Sunnyside
Major oil sands deposits in the Uinta basin
Source: Utah Geological Survey 1996
The following map shows the location of these oil sands deposits within the Uinta basin:
Oil sands deposits within the Uinta basin
Source: Utah Geological Survey 1996
The TomCo tar-sands project
The main method for separating oil from oil sands involves using large gravity separation tanks to produce diluted bitumen, which can then be sent for refining. Issues with this method of separation include 1) large capex requirement, 2) very large requirement for water, 3) dirty (oiled) sand to be disposed of, and 4) bitumen output that contains high levels of sulphur.
The Greenfield project aims to use an innovative separation technology that gets around some of the problems with the “traditional” process.
In December 2019 TomCo signed an MoU (memorandum of understanding) with Valkor, a global engineering procurement construction and installation specialist, to work on the development of a new process for oil sands separation.
Valkor will bring expertise from its experience working with Petroteq Energy, an oil sands specialist also based in Utah, which uses its own proprietary separation process. Valkor holds a licence to use the Petroteq process within the USA. Under the Greenfield JV TomCo and Valkor will apply this technology to establish a 10,000 bpd production facility once the technology has been fully validated and a suitable location for oil sands extraction has been identified.
This process has a number of advantages over conventional oil sands separation techniques:
- A modular, scalable extraction plant
- Lower start-up capex
- Lower water requirement
- By-product of clean sand, requiring no expensive remediation
- Output of sweet (low sulphur) heavy oil, potentially suitable for use as marine bunker fuel, with no further refining
The following diagram illustrates the Petroteq process.
Oil sands systems from Petroteq
Source: Petroteq
The steps in the process are numbered in the diagram, as follows:
- Tar sands ore is crushed
- Conveyance system to the feed bin which mixes ore with first phase solvent
- Further solvent added at the separation stage
- Oil and solvent mix is separated from sand
- Sand is put through a cleaning process, and residual oil and solvent recycled
- Sediment extraction from the oil and solvent
- Fluid is heated to separate the solvent from the oil
- Secondary extraction column prepares the fluid for solvent separation
- Evaporated solvent is recycled
- Heavy oil is ready for sale
This shows the process exactly as configured by Petroteq. The upgrade work that is to be carried out by Valkor at the test site will result in a new configuration. Nonetheless, we believe that the Petroteq approach gives a reasonable illustration of the approach that is being developed.
Economics
The economics of this methodology are attractive, particularly for an operation that will start out at a relatively small scale when compared with some existing oil sands industry projects.
One of the most important features is that this process will produce low sulphur fuel oil, ready to sell direct to market without further refining.
The fuel oil market
Regulations introduced by the International Maritime Organisation, which took effect in January 2020, demand that sulphur content in marine fuels be reduced from 3.5% to 0.5%. This has led to a shift in demand within the marine fuel market, illustrated by the following chart.
A major shift from high sulphur marine fuel to low sulphur
Demand for marine fuel oil by category
Source: Quadrise plc
The increase in demand for low sulphur fuel oil (LSFO) provides a degree of price support for these products. During the recent period of very high volatility in the energy market, the price of LSFO has retained its premium to crude oil (or to higher sulphur fuel oil). The following chart shows the recent price action in LSFO (global average price).
Low sulphur fuel oil stayed above US$40 per barrel through recent oil market volatility
Price of low sulphur fuel oil
Source: Ship and bunker
These are weekly figures. The absolute daily low point for LSFO in recent months was US$35. We believe that even at that low point, it is possible that the TomCo oil sands operation would be able to run at a profit.
Economics of the new separation system
TomCo and Valkor have not yet completed their evaluations, and therefore there are no definitive cost figures available for the new system. However, we can make some deductions based on the system as it was configured by Petroteq. The following chart shows the expected production cost at various different levels of output.
Production cost at different output volumes
Production costs for the Petroteq system
Source: Petroteq presentation data October 2019
* "Heavy diff" is the discount applied to some heavy oils versus crude benchmarks
One important difference for the system that is currently being developed is that the “heavy diff” would not apply. The output product will be low sulphur fuel oil. As such there is no discount compared to crude oil. In fact the product sells at a premium to crude.
The Greenfield JV is aiming to establish a production facility capable of producing 10,000 barrels per day. As a base-case estimate we would therefore find it reasonable to assume a production cost slightly lower than the middle scenario in the chart above, and stripping out the heavy diff.
There are still details of the project financing arrangement to be finalised before we can arrive at an estimate for the net profit which would accrue to TomCo. However, the underlying economics of the project suggest this is a major opportunity for the company, even in the current environment for energy prices.
During the remainder of 2020 we expect further details on the structure of the project and the results of the next stages of technical studies.
Flexibility in targeting the final end market
We have highlighted marine bunker fuel as an end market for Greenfield’s product. However, this is not the only possibility.
The final stage of the separation process is being configured to apply a system developed by a company called Quadrise (LON:QFI), to produce a water/oil emulsion which can be used as a direct substitute for existing fuels in three main applications:
Output fuel able to target three different end markets
- Marine bunker fuel
- Medium/low-speed diesel reciprocating engines, typically used for industrial power generation
- Fuel oil for heating or for water-boiling power generation
The in-built flexibility in terms of product applications allows an additional level of revenue optimisation and risk mitigation.
Conclusions
It is not possible to precisely quantify the financial upside potential for TomCo at this stage. The profitability of the separation is still subject to the results of ongoing studies.
Nonetheless, we find it instructive to consider the total revenue opportunity relative to the current market cap of the company.
At a production volume of 10,000 bpd and at the current market price of US$46.40 (Low Sulphur Fuel Oil) this would equate to US$464k per day of revenue. Compared with TomCo’s current market cap of £3.1mln, we argue that this revenue opportunity could represent significant upside for TomCo shareholders.
This is made economically possible by the unique characteristics of the new separation process
Unique characteristics of the new oil sands separation process
- An output product of low sulphur fuel oil, which requires no further refining
- A modular production system with low capex requirement
- Modest water requirement, and no “dirty” sand to be remediated at the end of the process