High prices revive U.S. heavy oil projects

By Bruce Nichols

HOUSTON, July 10 (Reuters) - With oil prices above $70 a barrel, previously uneconomical U.S. deposits of heavy oil are drawing entrepreneurs to sites far from established fields in California, Canada and Venezuela.

MegaWest Energy Corp. (MGWSF.OB) recently began producing heavy oil in Kansas and is looking at prospects in Missouri, Kentucky and Texas, President George Stapleton said.

Pearl Exploration and Production Ltd PXX.V and The Exploration Company of Delaware Inc. are testing a deposit in Texas, spokeswoman Sophia Shane said.

"Basically, what we're doing is bringing recent advances in thermal production from Canada to apply to known heavy oil deposits in the U.S. that have not been produced," Stapleton said.

Such deposits drew interest during past oil price spikes, notably in the 1970s and early 1980s, "but nothing's been done with it since," Stapleton said.

The oil -- thicker and harder to make into gasoline and other fuels than lighter oils -- is not economical to produce at prices below $30 or $35 a barrel, because it requires some form of underground heating or other treatment to make it flow, Stapleton said.

With higher oil prices, the technology has potential, said Richard Meyer, a retired heavy oil expert and scientist emeritus with the U.S. Geological Survey. "The way things are today, the economics of marginal deposits is no longer marginal," he said.

Even at current prices, not all U.S. heavy oil deposits are practical, Meyer said. Utah, for example, has tar sands, but their characteristics make them harder to extract than those in Canada.

"I think the price would have to get a lot higher before the Utah deposits, for example, were subject to any extensive work," Meyer said.

MegaWest's first production in Kansas is from a field near Chetopa, in the southeastern part of the state. The company is using steam flooding to heat the thick oil to make it flow.

The first load was shipped to a refinery in nearby Coffeyville, Kansas, a few weeks ago. Recent heavy rains and flooding have shut down the refinery, but have not affected Chetopa production, a MegaWest official said.

"We have enough storage to keep producing for a while," MegaWest's Gerry Hampshire said.

Pearl Exploration and The Exploration Company of Delaware are testing steam injection in the San Miguel sector of the Maverick Basin in southern Texas and are looking at new techniques, such as cyclic, rather than steady, steam flooding, to optimize the development, Shane said.

While interesting as business opportunities, U.S. heavy oil deposits "aren't going to make much difference" in reducing U.S. dependence on oil imports, Meyer said, due to relatively low rates of production.

"There's not a whole lot of it compared to what the U.S. consumes," Stapleton agreed, "but it does give us another hydrocarbon source that's not being produced."