LETTER TO SHAREHOLDERS, continued
OIL GROWTH
As mentioned, in 2008 we expect to invest $295 million to grow production. Given the current commodity market, we intend to spend about 60% of our capital developing our drill-ready heavy oil projects at N. Midway diatomite, S. Midway and Poso Creek in California and developing our light oil opportunities at Brundage Canyon and Lake Canyon in Utah’s Uinta basin. Our economics in these areas are excellent with rates of return ranging from 30% to 70% given an oil price of $75/Bbl and a natural gas price of $7.50/MMBTU.
Production from the diatomite in March 2008 is approximately 1,500 barrels per day (Bbls/D) with a steam-to-oil ratio of about six to one. We currently have a number of recently drilled wells in an early phase of steam injection. We expect to see 2008 production average 2,200 Bbls/D. The economics of this asset are outstanding with solid returns down to oil prices of $40/Bbl. We are planning for a continual drilling program there over the next four years and have allocated $50 million in 2008 for development.
Expansion of our Poso Creek steam flood also contributed to our growth last year as we doubled production to 1,950 Bbls/D. In March 2008 production is averaging 2,750 Bbls/D. Our aggressive drilling program and the resulting growth have increased the demand for steam at this asset. We have begun operation of our fourth conventional steam generator at Poso Creek and we expect production to average 3,270 barrels per day in 2008.
At our S. Midway asset we intend to continue with our successful utilization of deeper horizontal wells to minimize production declines, target oil pay zones just above the oil-water contact and maximize reservoir recovery through continuous steam injection along the reservoir’s flanks. Horizontal drilling has had a large impact in our more mature fields and has allowed us better access to bypassed oil at the oil-water contact as well as improved overall economics. Over 50% of production in our S. Midway asset is from horizontal wells although they account for only 10% of total producing wells.
In the California asset teams, a key to oil production growth in 2008 is an increase in steaming, which is the mechanism we use to heat the reservoir to allow the heavy oil to flow to the well bore. In 2008 we are targeting a 25% increase in average steam injection to assist with increasing oil production from thermally enhanced projects.
For the Uinta asset team our plan this year is to continue with a one-rig program at Brundage Canyon and to drill between six and 10 wells in the Ashley Forest south of Brundage Canyon. We will drill these wells under a category exemption as we await the approval of an Environmental Impact Statement (EIS), which we expect to be completed in the first quarter of 2009. This area contains up to 275 drilling locations. The first wells drilled will help assess this area’s overall potential. We look to grow production upon the appraisal of the Green River oil formation as this is contiguous to our existing successful light oil development.
Our Lake Canyon acreage will be the focus of additional appraisal as we expand the limits of the known resource through additional wells penetrating the Green River and Wasatch formations. We intend to pursue the most promising areas for further development as well as looking for potential bolt-on opportunities adjoining the acreage. We estimate that if 20% of Lake Canyon’s 169,000 acres is prospective, the resource potential could be as much as 50 million BOE on 80-acre spacing, providing another asset for continuing production growth.