In Gloomy Oil Market, $28 Production Costs Win the Day

With crude oil prices hovering around $46/$53 per barrel and the market separating the weak from the strong, Toronto-based MCW Energy Group (MCWEF: OTCQB; TSV: MCW.V) announces that its Utah production costs per barrel have been slashed to $28, making this oil sands project one of the most profitable plays in North America.

While shale producers are taking a nose-dive in this market, experts estimate that MCW's per barrel oil production in Utah is more profitable than 95% of shale oil currently being produced, and more profitable than any other oil sands project in North America.

Right now, Canadian oil sands heavy crude production costs are around $40-$60 per barrel—vastly more expensive than MCW's $28/barrel oil sands production projections at its newly built processing plant in northeastern Utah—a state that is home to some 32 million barrels of heavy crude buried in sand and silt.

Utah is the heart of a massive oil sands venue known as the Green River Formation, which also runs into Wyoming and Colorado and may hold some 3 trillion barrels of recoverable oil. MCW's new oil sands extraction pilot plant—which opened on 1 October 2014--is in the sweet spot of this area, Asphalt Ridge, which is thought to contain nearly a billion barrels of oil on its own.

The company will have 5,000 barrels per day of production coming online here in 2016/2017, and even with cash flow forecasts based on today's dire oil prices, this is a win-win situation for investors. The slash in production cost projections is a result of lower costs of petroleum products used for extraction. But adding to the attractiveness here is an aspect that could reduce production costs by a further $4-$5 per barrel.

MCW is also planning to purchase the Temple Mountain oil sands lease and this would reduce feedstock costs by up to $5 per barrel, bringing total costs down to $23-$24 per barrel—prices that are nearly impossible to find right now.

"Unlike the high production costs and lower energy efficiency levels associated with the mega oil sands projects in Alberta, MCW is in a unique position to take advantage of this unexpected 'silver lining' of lower petroleum product prices," MCW's CTO, Dr. Vladimir Podlipskiy, said in a statement. "Not only have we reduced the costs of these components by 18%, we've also enhanced the automation of our proprietary extraction process, which effectively reduces our labor costs by 20%."

The economics of this play are brilliant in this market, and more expensive Utah projects run by larger players in the Uinta Basin will be registering much weaker signals on investor radar. Houston-based Marathon Oil MRO, EP Energy Corporation EPE and Newfield Exploration Co. NFX—have invested a great deal in Utah's Basin shale, but the focus could now shift to oil sands. Crescent Point CPG has also invested heavily in Utah, and plans to spend $154 million of its 2015 budget in Uinta.

Earlier this week, Newfield--Utah's largest oil producer—laid off 80 of its 540 employees in the state, citing the economic challenges brought on by the continued drop in oil prices.

According to Platts, the Uinta shale is one of the five weakest plays in this oil price environment, while virtually all major US shale plays are now earning average internal rates of return of less than 20%--compared to over 50% in July 2014.

So while Utah's shale plays may suffer, MCW's oil sands math adds up to a clear profit for investors.

More poignant still is a technological breakthrough that promises to deliver the first environmentally friendly oil sands in North America, according to Bloomberg. The news agency also noted that while MCW has pioneered the process, low oil prices and new oil sands extraction technology make this an attractive notion that has prompted another player—Calgary-based US Oil Sands (USO:CN)—to follow in MCW's footsteps with its own plans for a 2,000 bpd plant.

MCW says it can extract Utah's oil sands "without creating the toxic wastelands that have resulted from oil sands projects in Western Canada."

The technological trick is contained in a paint thinner-like solvent the company uses to separate the oil from crushed rock and sand. Significantly, Bloomberg noted, the process does not use any water, which is good news for Utah, where water is extremely scarce.

At the time, Bloomberg noted that MCW could process oil at $38 per barrel, compared with roughly $75 for oil from Alberta. But those costs have continued to come down since then, making it a clear winner in today's oil price environment. And when $28 production costs are further slashed to $23, investors will already have missed the boat.

By James Burgess of Oilprice.com

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