BY FAX AND BY COURIER
August 22, 2006
Ms. April Sifford
Branch Chief
United States Securities and Exchange Commission
100 F Street, NE
Washington, D.C.
20549-7010
Dear Ms. Sifford:
RE: FORM 40-F FOR FISCAL YEAR ENDED DECEMBER 31, 2005
(FILE NO. 333-90736)
-------------------------------------------------
Reference is made to comments regarding the Form 40-F (the "FORM 40-F") of
Western Oil Sands Inc., a Canadian corporation (the "COMPANY"), for the fiscal
year ended December 31, 2005 received from the Staff (the "STAFF") of the
Securities and Exchange Commission (the "COMMISSION") in a letter from the
Division of Corporation Finance, dated August 8, 2006 (the "COMMENT LETTER").
The discussion below is presented in the order of the numbered comments in the
Comment Letter and we have reproduced the comments for ease of reference.
Certain capitalized terms in this letter are used as defined in the Form 40-F.
The Company's responses to the Staff's comments are as follows:
FORM 40-F FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
EXHIBIT 2
1. PLEASE INCLUDE A SIGNED COPY OF YOUR INDEPENDENT AUDITORS' REPORT IN
AN AMENDED FILING.
Response to Comment 1:
In response to the Commission's comment, the Company will file an amended Form
40-F with the Commission that includes a signed copy of its independent
auditors' report as requested, once the Staff of the Commission has confirmed
that there are no other comments of the Staff that need to be reflected in an
amended Form 40-F.
CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - UNITED STATES ACCOUNTING PRINCIPLES AND REPORTING
CONSOLIDATED BALANCE SHEETS
2. WE NOTE THAT YOU HAVE REPORTED THE DIFFERENCES RELATED TO YOUR PROPERTY,
PLANT AND EQUIPMENT ON A NET BASIS. PRESENT THESE ADJUSTMENTS ON A GROSS
BASIS WITH SEPARATE DISCLOSURE OF THE AMOUNTS OF ACCUMULATED
DEPRECIATION AND AMORTIZATION.
1
Response to Comment 2:
The Company acknowledges that the Staff's comments are technically correct. The
Company had reported the differences relating to our property, plant and
equipment on a net basis as we concluded that the differences disclosed on a
net basis compared to disclosing the differences on a gross basis were not
material. We propose to comply with the Staff's request in our future filings
and to not file an amendment to our Form 40-F for the year ended December 31,
2005 as we believe that reporting our property, plant and equipment on a net
basis versus on a gross basis is immaterial, as illustrated below.
On the Consolidated Balance Sheets as at December 31, 2005 and in Note 21
attached thereto, we reported Property, Plant and Equipment ("PP&E") on a net
basis (As Reported - $1,352,605, US GAAP - $1,309,080, resulting in a
difference of $43,525) and referenced Notes iii and vi as the supporting detail
for the difference.
- -------------------------------------------------------------------------------
TOTAL US GAAP DIFFERENCES - NET BASIS
AS REPORTED US GAAP DIFFERENCE
----------- ------- ----------
Property, Plant, and Equipment 1,352,605 1,309,080 (43,525)
- -------------------------------------------------------------------------------
Had the Company presented PP&E on a gross basis, the amounts would have been as
follows:
- -----------------------------------------------------------------------------------------------------------------
TOTAL US GAAP DIFFERENCES - GROSS BASIS
ACCUMULATED
COST DD&A NET
----------- ----------- -----------
PROPERTY, PLAN AND EQUIPMENT -- AS REPORTED 1,463,271 (110,666) 1,352,605
----------- ----------- -----------
Borrowing Costs and The End of Pre-Operating Period (Note iii) 6,489 (2,488) 4,001
Pre-Feasibility (Note iv) (48,972) - (48,972)
Other 1,446 - 1,446
----------- ----------- -----------
(41,037) (2,488) (43,525)
----------- ----------- -----------
PROPERTY, PLANT AND EQUIPMENT -- US GAAP 1,422,234 (113,154) 1,309,080
- -----------------------------------------------------------------------------------------------------------------
The difference between the net adjustment and the gross adjustment to PP&E cost
is $2,488 or less than one percent of net PP&E. Therefore, we had concluded
that the difference related to our PP&E on a gross basis versus a net basis was
immaterial.
EXHIBITS 4 AND 5
3. REVISE THESE CERTIFICATIONS IN AN AMENDED FILING TO CONFORM THE TITLE
AND WORDING EXACTLY AS SET FORTH IN GENERAL INSTRUCTION B(6)(A) OF FORM
40-F.
Response to Comment 3:
The Company is a foreign private issuer as defined under the Securities
Exchange Act of 1934 Rule 3b-4. Upon our review of the certifications pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002, we consider the wording of
the certificates to match the required wording set forth in the Act and of that
under Rule B(6) as it pertains to a foreign private issuer. The Company draws
attention to the Commission's extension of compliance dates for Section 404 of
the Sarbanes-Oxley Act, which permits foreign private issuers that file annual
reports on Form 40-F and are large accelerated filers to comply with Section
404 in their annual reports for fiscal years ending on or after July 15, 2006.
2
Accordingly, and based on this exemption, in the view of the Company, certain
of the certifications that the Staff may consider to be improperly omitted,
specifically that the Company's CEO and CFO are responsible for internal
controls over financial reporting and have designed a system of internal
controls over financial reporting, are not required until the Company files its
annual report of Form 40-F covering its 2006 fiscal year (which ends December
31, 2006).
The Staff may also consider the inclusion of the title of the certifying
officer in the introductory line of the certification to be an impermissible
alteration of the wording of the certification. The Company considers the
certifying officer's title to clarify the authority of the certifying officer
rather than alter the wording of the certificate. However, as your comment may
indicate that it is the view and preference of the Commission that the title of
the certifying officer should not be included in the introductory line, the
Company will, in future filings, name the certifying officer in the
introductory line and state the title of the certifying officer only under the
signature of the certifying officer.
ENGINEERING COMMENTS
GENERAL
4. SUPPLEMENTALLY PROVIDE THE GLJ PETROLEUM CONSULTANTS REPORT AS
REFERENCED ON PAGE NINE AND THE NORWEST CORPORATION REPORT AS REFERENCED
ON PAGE 19.
Response to Comment 4:
GLJ PETROLEUM CONSULTANTS REPORT
Please be advised that the GLJ Petroleum Consultants Report referenced on page
nine is contained in the Form 40-F under Appendix A of the Annual Information
Form for the fiscal year ended December 31, 2005.
NORWEST CORPORATION REPORT
Please see enclosed for a copy of the confidential Norwest Corporation Report
as of December 31, 2005 dated March 15, 2006. Please be advised that the
Company is providing this report in confidence and respectfully request that
this report not be made public beyond the review by Commission Staff.
RESERVES, RESOURCES, AND LAND PAGE 9
5. YOU STATE THAT GLJ PETROLEUM CONSULTANTS PREPARED A REPORT AS OF
FEBRUARY 13, 2006 WHICH INDICATED LEASE 13 CONTAINED 1.6 BILLION BARRELS
OF OIL. PLEASE NOTE THAT REGULATION S-X, RULE 4-10 (A)(L)(III) CLEARLY
STATES THAT: "OIL AND GAS PRODUCING ACTIVITIES DO NOT INCLUDE THE
EXTRACTION OF HYDROCARBONS FROM SHALE, TAR SANDS, OR COAL." OIL DERIVED
FROM THE PROCESSING OF MINED BITUMEN OR TAR SANDS CANNOT BE INCLUDED IN
PETROLEUM RESERVES AS SHOWN IN YOUR FILING. UNDER INDUSTRY GUIDE 7,
PLEASE RE-STATE THE MINED BITUMEN OR TAR SANDS RESERVES FOR THE
ATHABASCA OIL SANDS PROJECT.
Response to Comment 5:
The Company advises the Staff of the Commission that it prepares its oil
reserves information in its Canadian Annual Information Form pertaining to the
extraction of oil from tar sands in accordance with Canadian National
Instrument 51-101 ("NI-51-101"), issued by the Canadian Securities
Administrators. NI 51-101 specifically includes extraction from tar sands as an
oil and gas activity and recognizes synthetic oil as a product type, and
therefore permits it to be included with oil and gas reserves. The Company's
reserves have been independently evaluated by GLJ Petroleum Consultants.
3
Western is permitted to use the Multi-Jurisdictional Disclosure system's Form
40-F, which permits incorporation by reference, the Canadian Annual Information
Form (AIF). The AIF is not subject to the rules and regulations of the
Commission, including regulation S-X and, therefore, the Company is not subject
to the requirements of the Commission's Industry Guide 7, as referenced in the
Staff's comments.
6. DISCLOSE THE PRICE FORECAST YOU USED TO ESTIMATE YOUR TAR SANDS
RESERVES. PLEASE NOTE THAT INDUSTRY GUIDE 7 STATES RESERVES ARE THAT
PART OF A MINERAL DEPOSIT, WHICH CAN BE ECONOMICALLY AND LEGALLY
EXTRACTED AT THE TIME OF THE RESERVE DETERMINATION. THE STAFF RECOGNIZED
THAT COMMODITY PRICES CAN BE VERY VOLATILE, AND CONSEQUENTLY HAS ALLOWED
SOME LEEWAY IN THE PRICES USED IN RESERVE ESTIMATES, AS LONG AS THE
PRICES ARE BASED ON THE HISTORIC THREE-YEAR AVERAGE PRICE.
Response to Comment 6:
Please refer to note eight on page 12 on our Form 40-F for the disclosure of
the price forecast that was used to estimate our tar sands reserves.
The Company hereby acknowledges that:
o the Company is responsible for the adequacy and accuracy of the
disclosure in its filings, including the Form 40-F;
o Staff comments or changes to disclosure in response to Staff comments do
not foreclose the Commission from taking any action with respect to the
Company's filings, including the Form 40-F; and
o the Company may not assert Staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
If you have any questions concerning the above responses, please do not
hesitate to contact the undersigned at (403) 233-1707.
Yours truly,
WESTERN OIL SANDS INC.
/s/ David A. Dyck
- ---------------------
David A. Dyck
Senior Vice President and Chief Financial Officer
:JB
Enclosure
4
PROPERTIES OF INTEREST:
BITUMEN RESOURCE ASSESSMENT
AS OF DECEMBER 31,2005
Submitted to:
WESTERN OIL SANDS INC.
March 15,2006
NORWEST CORPORATION
Suite 400,205 - 9th Ave SE
Calgary, Alberta
T2G OR3
Tel: (403) 237-7763
Fax: (403)263-4086
Email calgary@norwestcorp.com
www.norwestcorp.com
NORWEST CORPORATION
- -------------------------------------------------------------------------------
NORWEST CORPORATION
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
1 INTRODUCTION & SCOPE OF WORK ...........................................1-1
2 DESCRIPTION OF PROPERTIES ..............................................2-1
3 GEOLOGIC SETTING .......................................................3-1
4 DATABASE ...............................................................4-1
4.1 DATA SOURCES...................................................4-1
4.2 BITUMEN CONTENT DATA...........................................4-1
4.3 DATA VALIDATION................................................4-1
5 GEOLOGICAL MODELING.................................................... 5-1
5.1 SOFTWARE.......................................................5-1
5.2 MODEL DEFINITION...............................................5-1
5.3 MODELING APPROACH..............................................5-1
5.3.1 FADES MODEL-LEASES 13 AND 90..........................5-2
5.3.2 GRADE MODEL - LEASE 88/89 AND 9.......................5-3
5.4 ORE/WASTE DISCRIMINATION.......................................5-3
5.5 BASE OF MINEABLE OIL SANDS.....................................5-4
5.6 MODEL VALIDATION...............................................5-4
5.7 UNCERTAINTY....................................................5-4
6 BITUMEN RESOURCES......................................................6-1
6.1 ESTIMATION APPROACH............................................6-1
6.2 CRITERIA AND FACTORS APPLIED...................................6-1
6.3 CLASSIFICATION OF RESOURCES....................................6-1
6.3.1 METHODOLOGY...........................................6-1
6.3.2 COMPARISON OF THE NI51-101 AND NI43-101
RESOURCE CLASSIFICATION SCHEMES.......................6-2
6.4 RESULTS........................................................6-4
6.5 LEASE 17 RESOURCES.............................................6-5
LIST OF TABLES
TABLE 2.1 LEASE SUMMARY....................................................2-1
TABLE 6.1 NI 51-101 & NI 43-101 RESOURCE CONFIDENCE AND
CLASSIFICATION SCHEMES...........................................6-4
TABLE 6.2 DISCOVERED RESOURCES (MILLIONS OF BARRELS OF BITUMEN-IN-PLACE)...6-5
TABLE 6.3 RESOURCE CLASSIFICATION CRITERIA.................................6-5
LIST OF FIGURES
FIGURE 2-1 OIL SANDS LEASES LOCATION MAP.....................FOLLOWS SECTION 2
FIGURE 4-1 LEASES 13 AND 90..................................FOLLOWS SECTION 4
FIGURE 4-2 LEASES 88 AND 89..................................FOLLOWS SECTION 4
FIGURE4-3 LEASES 9 AND 17...................................FOLLOWS SECTION 4
===============================================================================
WESTERN OIL SANDS INC. 05-2690
PROPERTIES OF INTEREST
BITUMEN RESOURCES REPORT
TOC-1
- -------------------------------------------------------------------------------
NORWEST CORPORATION
- -------------------------------------------------------------------------------
CERTIFICATE OF AUTHOR
This report has been prepared for Western Oil Sands Inc. by Norwest
Corporation. The report provides the results of and describes the work
undertaken to estimate the resources within those leases accessible to the
Athabasca Oil Sands Project (AOSP) Joint Venture Partners.
All data contained herein has been reviewed and interpreted by, or under the
direct supervision of Virginia Odegaard, P.Geol.
Norwest Corporation APEGGA permit number P - 5015.
Dated this 15th day of March, 2006.
"ORIGINAL SIGNED AND SEALED BY AUTHOR"
--------------------------
Virginia Odegaard, P.Geol.
Manager, Geology
NORWEST CORPORATION
===============================================================================
WESTERN OIL SANDS INC. 05-2690
PROPERTIES OF INTEREST
BITUMEN RESOURCES REPORT
TOG-2
- -------------------------------------------------------------------------------
NORWEST CORPORATION
- -------------------------------------------------------------------------------
1 INTRODUCTION & SCOPE OF WORK
Newest Corporation ("Norwest") was engaged by Western Oil Sands Inc.
("Western") to complete an assessment of the resources within leases
accessible to the Athabasca Oil Sands Project (AOSP) Joint Venture
Partners, pursuant to the Area of Mutual Interest ("AMI") that Western has
advised Norwest that Western has the right to participate in, should it
choose to do so. These properties, or "subject areas", include:
East of Athabasca River:
o Lease 13
o Leases 88/89
o Lease 90
West of Athabasca River:
o Lease 9
o Lease 17
Norwest obtained data for each of the subject areas from Shell Canada
Limited ("Shell"), which were provided at the request of Western. These
data were used to construct 3D geological models from which bitumen
resources were estimated. The only exception was Lease 17, which has
sparse drill hole data. Norwest reviewed but did not model publicly
available data in Lease 17 in order to prepare an estimate of bitumen
resource potential in this lease area.
The bitumen resources described herein are reported in accordance with
National Instrument 51-101 and its referenced document the Canadian Oil
and Gas Evaluation Handbook ("COGEH"). In addition, Section 1.6 of the
Companion Paper to NI 51-101 states that, with respect to Oil Sands and
Other Non-Conventional Activities:
"THE CSA ENCOURAGE REPORTING ISSUERS THAT ARE ENGAGED IN
NON-CONVENTIONAL OIL AND GAS ACTIVITIES TO SUPPLEMENT THE DISCLOSURE
PRESCRIBED IN NI 51-101 AND FORM 51-101F1 WITH INFORMATION SPECIFIC
TO THOSE ACTIVITIES THAT CAN ASSIST INVESTORS AND OTHERS IN
UNDERSTANDING THE BUSINESS AND RESULTS OF THE REPORTING ISSUER. IN
PARTICULAR, THE CSA ENCOURAGE REPORTING ISSUERS ENGAGED IN OIL AND
GAS ACTIVITIES THAT INVOLVE MINING TO CONSIDER THE FOLLOWING WHEN
MAKING DISCLOSURE ABOUT THOSE ACTIVITIES:
o IN RESPECT OF TECHNICAL ASPECTS OF MINE DEVELOPMENT AND
OPERATIONS, NATIONAL INSTRUMENT 43-101 STANDARDS OF
DISCLOSURE FOR MINERAL PROJECTS AND FORM 43-101F1 TECHNICAL
REPORT."
===============================================================================
WESTERN OIL SANDS INC. 05-2690
PROPERTIES OF INTEREST
BITUMEN RESOURCES REPORT
1-1
- -------------------------------------------------------------------------------
NORWEST CORPORATION
- -------------------------------------------------------------------------------
Therefore, the format and content of a NI 43-101 Technical Report for
mining projects were considered during the preparation of this report.
The effective date of the resource estimates provided in this report is
December 31,2005.
===============================================================================
WESTERN OIL SANDS INC. 05-2690
PROPERTIES OF INTEREST
BITUMEN RESOURCES REPORT
1-2
- -------------------------------------------------------------------------------
NORWEST CORPORATION
- -------------------------------------------------------------------------------
2 DESCRIPTION OF PROPERTIES
The subject areas are located in the Athabasca Oil Sands Area, north of
Fort McMurray in northeast Alberta, as shown on Figure 2-1. The oil sands
leases vary in size and tenure term as summarized in Table 2.1.
TABLE 2.1
LEASE SUMMARY
- --------------------------------------------------------------------------------
Oil Sands Lease Size
- -------------------------- Operator (Ha) Expiry Date
Name Number
- --------------------------------------------------------------------------------
Lease 13 0727277080T13 Albian Sands Energy Inc. 19,948.8 Indefinite
- --------------------------------------------------------------------------------
Lease 88 0727288080T88 Shell Canada Limited 11,375.04 31 Aug 2009
- --------------------------------------------------------------------------------
Lease 89 0727288080T89 Shell Canada Limited 5,974.72 31 Aug 2009
- --------------------------------------------------------------------------------
Lease 90 0727288080T90 Shell Canada Limited 1,166.44 31 Aug 2009
- --------------------------------------------------------------------------------
Lease 9 0747400120009 Shell Canada Limited 6,027.96 14 Dec 2015
- --------------------------------------------------------------------------------
Lease 17 0747401100017 Shell Canada Limited 8,704 04 Oct 2016
- --------------------------------------------------------------------------------
33,248.16
- --------------------------------------------------------------------------------
The Muskeg River Mine as well as the Jackpine and Sharkbite development
areas are located within Lease 13.
===============================================================================
WESTERN OIL SANDS INC. 05-2690
PROPERTIES OF INTEREST
BITUMEN RESOURCES REPORT
2-1
[GRAPHIC OMITTED]
OIL SANDS LEASES LOCATION MAP
FIGURE 2-1
- -------------------------------------------------------------------------------
NORWEST CORPORATION
- -------------------------------------------------------------------------------
3 GEOLOGIC SETTING
The bitumen resources of the subject areas are found in the oil sands
horizons of the Lower Cretaceous (Aptian) McMurray Formation of the
Mannville Group. The McMurray Formation is informally subdivided into
three units - the Lower, Middle and Upper McMurray - which reflect an
overall marine transgressive sequence. These McMurray sediments were
generally deposited in a north-south trending depression on the
pre-Cretaceous unconformity in argillaceous limestones and lime mudstones
of the Middle Devonian (Givetian) Beaverhill Lake Group. Marine sediments
of the Clearwater Formation comprise the youngest and uppermost bedrock
units found in the subject areas.
Erosion of the underlying Cretaceous strata during deposition of
Quaternary sediments resulted in the removal of the Clearwater Formation
in some areas. To a lesser extent, removal of some of the McMurray
Formation is also evident to the north. Pleistocene age deposits of
fluvial and glacial origin overlie the eroded bedrock surface and in many
areas these are capped by organic deposits (peat and organic soil) of
Holocene age.
===============================================================================
WESTERN OIL SANDS INC. 05-2690
PROPERTIES OF INTEREST
BITUMEN RESOURCES REPORT
3-1
- -------------------------------------------------------------------------------
NORWEST CORPORATION
- -------------------------------------------------------------------------------
4 DATABASE
4.1 DATA SOURCES
The drill hole data used in the modeling and estimation of bitumen
resources were obtained from Shell, at the request of Western. The
data originated from exploration and development holes drilled by
Albian Sands Energy Inc. ("Albian") and Shell as well as previous
lease holders. Data from drill holes located outside the limits of
the subject areas were also included in the database. These
additional data assisted in the reduction of'edge effects' in the
modeling process.
The location and distribution of drill holes with data used in this
work are shown in Figures 4-1 to 4-3. Shell's winter 2005-2006
program was underway at the time of this assessment; no drill data
from that program were included in this assessment. Due to delays in
the processing of drill hole data from the winter 2004-2005 program,
not all of these data were included either.
Topographic data necessary for the development of the 3D geological
models were obtained from Shell and Albian.
4.2 BITUMEN CONTENT DATA
Bitumen content data are generally obtained from drill core samples
using Dean Stark analysis methods. Core samples are kept frozen
during transport to the laboratories to prevent disintegration of the
core as well as degradation of the bitumen. Samples are normally
taken from the bitumen-bearing intervals but are also drawn from
barren zones. Sample intervals average approximately 0.3 m in length
although in older drill holes interval lengths of 1.5 m were common.
New measurement methods for bitumen content in core are currently in
development however these were not evident in the data provided for
this work.
Some bitumen content information was interpreted using down hole
geophysical logs, where drill core was unavailable.
4.3 DATA VALIDATION
Numerous data validation routines were applied to the database to
look for data problems such as out-of-range values, unrecognized
identifiers (i.e., facies), or overlaps or gaps in down hole
information. Identified errors were corrected as appropriate.
===============================================================================
WESTERN OIL SANDS INC. 05-2690
PROPERTIES OF INTEREST
BITUMEN RESOURCES REPORT
4-1
[GRAPHIC OMITTED]
OIL SANDS LEASES 13 and 90
FIGURE 4-1
[GRAPHIC OMITTED]
OIL SANDS LEASES 88 and 89
FIGURE 4-2
[GRAPHIC OMITTED]
OIL SANDS LEASES 9 and 17
FIGURE 4-3
- -------------------------------------------------------------------------------
NORWEST CORPORATION
- -------------------------------------------------------------------------------
5 GEOLOGICAL MODELING
5.1 SOFTWARE
Norwest used Mintec's MineSight(C) software for the development of
the 3D geological models for the subject areas. MineSight has been
adapted from the traditional mining industry for use in oil sands and
is commonly used in Athabasca oil sands geological modeling efforts.
5.2 MODEL DEFINITION
All data point location information was provided in metric units, and
was converted to UTM NAD 83 coordinate system within the drill hole
database and the geological models.
The extents of the various models developed for this work are shown
on Figures 4-1 to 4-3. Information pertaining to geology and resource
characteristics was represented in three dimensional blocks in each
model.
5.3 MODELING APPROACH
For the purposes of the estimation of bitumen resources, Norwest
constructed the geological models using a 3D block modeling approach
in each of the lease areas, with the exception of Lease 17.
A 3-D block format is the most common method to "model" a surface
mineable oil sands resource. In this case, a 3D block model
represents a depth from topography to the bottom of the resource or
target zone within a project modeling region (i.e., a lease area).
The model consists of contiguous cells, commonly called "blocks", of
sizes suitable for the particular deposit. The block, or cell size in
all models constructed for this assessment were 100 m x 100 m x 1 m
(x, y, z).
Each block has a fixed position within the 3D model and contains a
list of variables, or numeric identifiers, denoting which formation
it falls within, the type of material it represents (sand, mud,
etc.), its bitumen content ("grade"), as well as other pertinent
information. Each variable has a numeric range. In the case of
bitumen grade, the range is from 0.00 - 20.00 wt%. Therefore, each
block has a "bitumen" variable that contains a number between 0 and
20.
The assignment of formation identifiers, bitumen values, etc., to
each model block is accomplished by extracting information from the
drill holes and interpolating it to the model blocks. Interpolative
tools are used to best estimate what is represented in a given model
block and to quantify the uncertainty associated with the estimated
value.
===============================================================================
WESTERN OIL SANDS INC. 05-2690
PROPERTIES OF INTEREST
BITUMEN RESOURCES REPORT
5-1
- -------------------------------------------------------------------------------
NORWEST CORPORATION
- -------------------------------------------------------------------------------
In surface mineable oil sands modeling, two different modeling
approaches are commonly used; a facies-based or a grade-based
approach. The decision between which modeling approach to use is
normally dependant on the amount and detail of available data.
5.3.1 FACIES MODEL - LEASES 13 AND 90
Within Leases 13 and 90 the quality of the information contained
within the drill hole data was sufficient to employ a facies-based
modeling approach. Approximately ten million fixed position model
blocks were contained within the model area. Each model block was
populated with drill hole data necessary to estimate the resources
within the lease boundaries. A summary of this model development
process is provided below:
o A total of 2,119 drill holes were used to model Leases 13
and 90;
o Each drill hole collar was reconciled to the provided
triangulated topographic surface;
o Formation surfaces of the top of Devonian, as well as the
top of each McMurray Member, were generated using the
stratigraphic "picks" within each drill hole;
o These stratigraphic horizons were used as constraints to
allow for the assignment of Formation codes to each of the
model blocks;
o A "watersands" horizon was also developed using the
existing drill hole data. This surface was used as a
boundary to control grade estimation above and below this
horizon;
o Facies within the drill holes were grouped together into
statistically equivalent groups called "facies association
groups" (FAG). These groups, as well as wt% bitumen, were
composited into 1 m fixed length intervals throughout each
McMurray Member;
o FAG composite intervals were used to populate the McMurray
coded model blocks with equivalent facies grouping codes
using a Sequential Indicator Simulation (SIS) approach.
Only composited FAG's from a given McMurray member could be
used to populate the equivalent member code within the
model blocks;
o Composited wt% bitumen values were populated into the model
blocks using Sequential Gaussian Simulation (SGS). Only
composite intervals with the equivalent FAG's of the model
blocks could be used to populate those respective model
blocks with bitumen grade. Therefore, grade interpolation
remained constrained within each respective rock type, and
within each respective McMurray Member;
o All interpolation routines considered the bottom of the
Middle McMurray Member as the datum for determining the
vertical position of a given composite interval; and
o Variography was employed for the consideration of
anisotropy during SIS and SGS population.
===============================================================================
WESTERN OIL SANDS INC. 05-2690
PROPERTIES OF INTEREST
BITUMEN RESOURCES REPORT
5-2
- -------------------------------------------------------------------------------
NORWEST CORPORATION
- -------------------------------------------------------------------------------
5.3.2 GRADE MODEL - LEASE 88/89 AND 9
Within Leases 88/89 and 9 the quality of the information contained
within the drill hole data was sufficient to employ a grade-based
modeling approach. Approximately 8.4 million and 5.4 million fixed
position model blocks were contained within the Lease 88/89 and Lease
9 model areas respectively. Each model block was populated with drill
hole data necessary to estimate the resources within the lease
boundaries. A summary of this model development process is provided
below:
o A total of 458 and 164 drill holes were used in the Lease
88/89 and Lease 9 modeling endeavours respectively;
o Each drill hole collar was reconciled to the provided
triangulated topographic surface;
o Formation surfaces of the top of Devonian, as well as the
top of each McMurray Member, were generated using the
stratigraphic "picks" within each drill hole within the
Lease 88/89 model area. Only the top of the Devonian and
top of the McMurray Formation were generated in the Lease 9
model area, as the drill hole quality prevented further
resolution;
o These stratigraphic horizons were used as constraints to
allow for the assignment of formation codes to each of the
model blocks;
o Wt% bitumen values were composited into 1 m fixed length
intervals throughout each McMurray Member or McMurray
Formation;
o Composited wt% bitumen values were interpolated into the
model blocks using an Inverse Distance Squared algorithm.
Only composite intervals with the equivalent McMurray
Member as the model blocks were used to populate those
respective model blocks with bitumen grade. This
constrained grade population to within the appropriate
geological zone; and
o Grade interpolation considered the bottom of the Middle
McMurray Member and the top of the Devonian as the datum
for determining the vertical position of a given composite
interval within Lease 88/89 and Lease 9 respectively.
5.4 ORE/WASTE DISCRIMINATION
Ore/Waste discrimination is the process of identifying each model blocks
as either ore or waste. The criteria used for this were based on a minimum
vertical mining selectivity of 3 m and a minimum average cut-off grade of
7 wt% bitumen. Each model column was independently processed and assigned
groupings (minimum of three contiguous 1 m blocks) of ore and waste.
===============================================================================
WESTERN OIL SANDS INC. 05-2690
PROPERTIES OF INTEREST
BITUMEN RESOURCES REPORT
5-3
- -------------------------------------------------------------------------------
NORWEST CORPORATION
- -------------------------------------------------------------------------------
5.5 BASE OF MINEABLE OIL SANDS
The ratio of total volume to bitumen-in-place ("TV:BIP") provides an
indicator of surface mining potential by quantifying the relationship of
bitumen volume to the total volume of material under consideration:
TV:BIP = Total Volume (waste + ore) m3
-----------------------------
Bitumen-In-Place m(3)
= Waste Volume + Ore Volume
-------------------------------------------------------
((Ore Volume x Ore Density) x %Bitumen)/Bitumen Density
Each model column was processed to determine the lowest occurrence where
both cumulative and incremental TV: BIP values were less than or equal to
12:1. Each base of mineable oil sands surface was subsequently used to
constrain resource estimations.
5.6 MODEL VALIDATION
Standard validation routines were undertaken in a sequential manner and
included:
o statistical check of drill hole database for incorrect or
missing data;
o evaluation of all generated geological surfaces for anomalous
features or cross-over with other surfaces;
o review and check of all bitumen content composite data;
o utilization of cross-sections throughout the model to validate
the bitumen content interpolation and subsequent ore/waste
assignment; and
o Various geostatistical comparisons of each resource model vs.
the declustered drill hole data.
5.7 UNCERTAINTY
Uncertainty in the estimation of bitumen resources was quantified using an
approach that considers the distance of resource model blocks to the
nearest drill hole. Although other approaches are available, this method
is traditionally used with respect to surface mineable oil sands deposits
in the Athabasca region.
===============================================================================
WESTERN OIL SANDS INC. 05-2690
PROPERTIES OF INTEREST
BITUMEN RESOURCES REPORT
5-4
- -------------------------------------------------------------------------------
NORWEST CORPORATION
- -------------------------------------------------------------------------------
6 BITUMEN RESOURCES
6.1 ESTIMATION APPROACH
The estimation of bitumen resources was accomplished using 3D geological
block models, except in the case of Lease 17. The model blocks contain
information relating to the bitumen content. The bitumen in blocks meeting
specific resource-limiting criteria was summed to provide an estimate of
bitumen resources in-place.
6.2 CRITERIA AND FACTORS APPLIED
No risk, dilution, mining losses, mining constraints, plant recovery
factors or mine pit constraints were applied during the estimation of
in-place resources.
Constants used for all calculations were as follows:
o Ore and Waste Density = 2.08 tonnes/m(3)
o Bitumen Density = 1.0122 tonnes/m(3)
o One Barrel of Bitumen (42 US Gal) = 0.158987m(3)
The basis for the estimation of bitumen resources in a surface mineable
project has traditionally been based on three key limiting criteria:
o Minimum bitumen content of 7 wt%;
o Minimum mining thickness of 3 m; and
o Maximum TV:BIP of 12:1.
In addition to these criteria, where pit shells were available, these were
used to constrain the estimation of resources within specific pit areas.
6.3 CLASSIFICATION OF RESOURCES
6.3.1 METHODOLOGY
Compared with most other hydrocarbon deposits, the Athabasca Oil Sands
have been intensely explored over many decades. The distribution of the
deposit is so well known that it is often possible, even using public
data, to determine various economic and mining recovery properties of the
field from place-to-place. On this basis, most of the field is considered
to be a Discovered Resource. This classification is consistent with the
COGEH description of Discovered Resources which are described as "those
quantities of oil and gas estimated on a given date to be remaining in ...
known accumulations". The amount of exploration drilling and testing is
sufficient for the
===============================================================================
WESTERN OIL SANDS INC. 05-2690
PROPERTIES OF INTEREST
BITUMEN RESOURCES REPORT
6-1
- -------------------------------------------------------------------------------
NORWEST CORPORATION
- -------------------------------------------------------------------------------
bitumen in those areas of the Athabasca Oil Sand deposit to be classified
as Discovered Resources. The bitumen resources of these areas have
attributes that are typical for surface mining projects as well as
characteristic of oil and gas accumulations.
NI 43-101 addresses a wide variety of commodities that are planned for
extraction using mining recovery methods. While mineable oil sand is
specifically excluded, the commodities that are addressed include base and
precious metals, coal, industrial minerals and diamonds. For all of these
commodities, and indeed for all materials subject to mining as the method
of extraction, the distinction between reserves and resources is a
critical one. Resources of any ore are materials that may have economic
attributes, but reserves of those materials must be able to be recovered
economically. In mining projects the cost structure of each operation is
very complex and it is usually not possible to be sure that a particular
project will be economic until after an appropriate engineering study is
completed. For this reason NI 43-101 requires that all potential product
materials be classified as Resources until a feasibility study, which
demonstrates the economic merits of the project, is completed. Once this
is done the potential product materials can be re-classified as Contingent
Resources or Reserves. Clearly, under 43-101, the identification of
materials as Reserves is subject to very stringent economic tests.
Although the phrase "feasibility study" is not referred to for disclosure
under NI 51-101 the requirement to perform stringent economic tests is
clearly stated. Disclosure for reserves under NI 51-101 requires that
capital and operating costs and the details of a variety of other economic
and legal characteristics for the deposit be provided. These requirements
are the same as those needed for classification of reserves under NI
43-101. For mineable oil sand deposits typical feasibility studies contain
a wide variety of engineering design details and economic analysis
results. These are the first data for such a project that are available to
reliably define the current or future economic attributes for the bitumen
ore material distributed across the deposit. Consequently, it is Norwest's
belief that the allocation of Discovered Resources, either to the various
categories of Reserves or to Contingent Resources, should only occur upon
the completion of at least a preliminary feasibility study, as defined in
NI 43-101 and its associated document, the CIM Definition Standards on
Mineral Resources and Mineral Reserves (November 14, 2004).
6.3.2 COMPARISON OF THE NI 51-101 AND NI 43-101 RESOURCE CLASSIFICATION
SCHEMES
Previously, the resources for many of the mining projects in the Athabasca
Oil Sands Area were reported using terms commensurate with reporting
requirements related to Mining, i.e. as specified in National Instrument
43-101 and the referenced Canadian Institute of Mining guidelines for
reserve and resource classification and reporting. However, legislation
now requires reporting of bitumen resources under NI 51-101. The following
discussion provides
===============================================================================
WESTERN OIL SANDS INC. 05-2690
PROPERTIES OF INTEREST
BITUMEN RESOURCES REPORT
6-2
- -------------------------------------------------------------------------------
NORWEST CORPORATION
- -------------------------------------------------------------------------------
background to allow comparison of previously reported resource volumes to
the resources estimated and classified using the current approach.
In the NI 43-101 classification scheme that applies to material defined as
Resources there are always three classes and these are referred to as
Measured, Indicated and Inferred. Quantities allocated to each Resource
categoty are separate from the quantities assigned to each of the other
classes and usually each class is reported separately. In fact, NI 43-101
specifically prohibits the adding and reporting of material assigned to
the Inferred category to that of the other two classes. It is important to
note that the terms Measured, Indicated and Inferred are a reflection of
differences in the certainty of the estimated values and thus the
confidence that may be placed in them.
In the classification scheme of the COGE Handbook which applies to
Reserves and Resources reported under NI 51-101, resources are subdivided
into three classes that reflect the confidence level that can be assigned
to the quantities that are expected to be recovered from a particular
deposit. The categories are referred to as Low Estimate (P90), which is
the most conservative, through realistic or Best Estimate (P50) to High
Estimate (P10), which is the most optimistic. This procedure is analogous
to that for the classification of reserves in the same system. In that
case, the Proved estimate is considered conservative, the Proved plus
Probable Estimate is considered realistic and the Proved plus Probable
plus Possible Estimate is considered optimistic.
In the classification schemes that apply to both NI 43-101 and NI 51-101
the terms Proven, Probable and Possible refer to different levels of
confidence for Reserve classification. The terms Measured, Indicated and
Inferred are used for resource classification in NI 43-101 and have the
same confidence connotation as Proven, Probable and Possible,
respectively, of the NI 51-101 scheme.
There is a significant difference in the reporting procedure for resources
under NI 43-101 compared with that of NI 51-101. Measured, Indicated and
Inferred resources are reported in separate categories for NI 43-101
reports but they are combined in NI 51-101 such that Low includes
Measured, Best includes Measured plus Indicated and High Estimate includes
Measured plus Indicated plus Inferred. These relationships are illustrated
in Table 6.1.
===============================================================================
WESTERN OIL SANDS INC. 05-2690
PROPERTIES OF INTEREST
BITUMEN RESOURCES REPORT
6-3
- -------------------------------------------------------------------------------
NORWEST CORPORATION
- -------------------------------------------------------------------------------
TABLE 6.1
NI 51-101 AND NI 43-101
RESOURCE CONFIDENCE AND CLASSIFICATION SCHEMES
- --------------------------------------------------------------------------
Material C0GEH - NI 61-101 NI 43-101
Category ---------------------------------------------------------
Confidence Level
- --------------------------------------------------------------------------
Resources Low Estimate (P90) Measured
---------------------------------------------------------
Best Estimate (P50) Measured + Indicated
---------------------------------------------------------
High Estimate (P10) Measured + Indicated + Inferred
- --------------------------------------------------------------------------
6.4 RESULTS
The scope of Norwest's work was limited to the assessment of Discovered
Resources over each of the subject areas. These are in-place resources
only. No mine plans were considered nor any dilution, mining losses or
plant recovery factors applied to these resource estimates.
Resources were estimated for each of the Lease areas and are summarized in
Table 6.2. For all the subject areas, except Lease 17 as discussed in
Section 6.5, they include all material meeting the following limiting
criteria without consideration to other aspects of mineability such as pit
slopes or recovery:
o Minimum bitumen content of 7 wt%;
o Minimum mining thickness of 3 m; and
o Maximum TV:BIP of 12:1.
Leases 88/89, 90 and 13 boundaries were provided by Shell Canada. These
updated boundaries, illustrated in Figure 2-1, are conditional on approval
of agreements between adjacent lease holders. In Lease 13, the Discovered
Resources do not include the Muskeg River Mine pit areas.
===============================================================================
WESTERN OIL SANDS INC. 05-2690
PROPERTIES OF INTEREST
BITUMEN RESOURCES REPORT
6-4
- -------------------------------------------------------------------------------
NORWEST CORPORATION
- -------------------------------------------------------------------------------
TABLE 6.2
DISCOVERED RESOURCES
(MILLIONS OF BARRELS OF BITUMEN-IN-PLACE)
- -------------------------------------------------------------------------------
AREA P90 Low P50 Best P10 High
Estimate Estimate Estimate
- -------------------------------------------------------------------------------
Lease 9 431 899 1,360
- -------------------------------------------------------------------------------
Lease 13 (outside the MRM area) 3,194 5,028 5,251
- -------------------------------------------------------------------------------
Lease 88/89 856 2,038 2,382
- -------------------------------------------------------------------------------
Lease 90 162 253 269
- -------------------------------------------------------------------------------
Lease 17* - - 750
- -------------------------------------------------------------------------------
TOTAL 4,643 8,218 10,012
- -------------------------------------------------------------------------------
These are "in-place* resources: No dilution, mining losses or plant
recovery factors were applied to these resource estimates.
* See Section 6.5 for discussion of Lease 17 estimates.
The range of uncertainty was based on drill hole density. The P90 estimate
reflects resources in areas of closely spaced drill holes while the P10
estimate includes resources in areas with widely spaced drill holes. With
reference to Table 6.1, resource classification for all leases except
Lease 17 was based on the uncertainty associated with extrapolating
information from drill holes according to the distances shown in Table
6.3.
TABLE 6.3
RESOURCE CLASSIFICATION CRITERIA
(NOT INCLUDING LEASE 17)
- --------------------------------------------------------------------------------
LEVEL OF CERTAINTY DISTANCE TO NEAREST DRILL HOLE DISCOVERED RESOURCE CLASS
(m)
- --------------------------------------------------------------------------------
Measured < 195 P90
-
- ---------------------------------------------------------------
Indicated > 195 and < 390
- P50
- -----------------------------------------------------------------------
Inferred >390 P10
- --------------------------------------------------------------------------------
6.5 LEASE 17 RESOURCES
There are six drill hole locations in Lease 17 (Figure 4-3). Only two have
geophysical logs and some core data; one other hole has core data only.
Drill hole locations in the surrounding area were checked and only three
have marginally useful data.
===============================================================================
WESTERN OIL SANDS INC. 05-2690
PROPERTIES OF INTEREST
BITUMEN RESOURCES REPORT
6-6
- -------------------------------------------------------------------------------
NORWEST CORPORATION
- -------------------------------------------------------------------------------
Potential ore thickness in Lease 17 and the surrounding area varies from
less than 10m to over 15m, at reasonable grades. However, the depths at
which these ore intervals are located suggest higher TV:BIP ratios. The
McMurray Formation is thinner in this area, ranging up to only 60m in
thickness. This is consistent with neighboring trends. There is evidence
that the lower interval can be wet, which is not uncommon in the lower
McMurray fluvial channel sands.
The Lease 17 resources are classified as P10 resources and are comprised
entirely of what would be called 'Inferred' resources under NI 43-101 and
its associated document, CIM Definition Standards (November 14, 2004),
which states:
"DUE TO THE UNCERTAINTY WHICH MAY ATTACHED TO
INFERRED...RESOURCES, IT CANNOT BE ASSUMED THAT ALL OR ANY PART
OF AN INFERRED...RESOURCE 'WILL BE UPGRADED...AS A RESULT OF
CONTINUED EXPLORATION."
The bitumen resources estimate for Lease 17 was inferred using the
following assumptions:
o Ore at reasonable depths is likely distributed over only a
portion, ~1/2, of lease area;
o Ore thickness is approximately 15 m over this portion of the
lease;
o Average in-place bitumen content: 10 wt%;
o Partings or minimum mineable thickness was not considered; and
o No risk or recovery factors were applied.
No construction of ore or resource maps was undertaken for this area, due
to insufficient exploration data. However, our review suggests that
bitumen-bearing sands in Lease 17 contain a potential of as much as 750
million barrels in-place.
This estimate is not directly consistent with the classification of
resources by distance from valid drill holes, since the quality of the
data in this lease and the surrounding area is generally poor. Instead, a
review of the limited core, log and analyses data was completed to prepare
a qualitative estimate of the potential in this lease area from which a
quantitative estimate was inferred. Clearly, obtaining good quality data
through a comprehensive coring program would contribute to the
understanding of the bitumen potential in this lease area.
===============================================================================
WESTERN OIL SANDS INC. 05-2690
PROPERTIES OF INTEREST
BITUMEN RESOURCES REPORT
6-6