Oilsands Quest files 10-Q Quarterly Report, and updates reservoir test program

    CUSIP No. 678046 10 3
    NYSE Amex:   BQI

    CALGARY, Sept. 10 /CNW/ - Oilsands Quest Inc. (AMEX:  BQI) announces that
its Form 10-Q Quarterly Report for the period ended July 31, 2009, was filed
September 9, 2009, and is available online at www.sec.gov and www.sedar.com.
The company also provides an update on its reservoir test program.
    The following discussion addresses material changes in our results of
operations and capital resources and uses for the three months ended July 31,
2009, compared to the three months ended July 31, 2008, and our financial
condition and liquidity since April 30, 2009. It is presumed that readers have
read or have access to our Annual Report on Form 10-K for our financial year
ended April 30, 2009, which includes disclosure regarding critical accounting
policies and estimates as part of Management's Discussion and Analysis of
Financial Condition and Results of Operation. Unless otherwise stated, all
dollar amounts are expressed in U.S. dollars. All future payments in Canadian
dollars have been converted to U.S. dollars using an exchange rate of $1.00
U.S. = $1.079 CDN, which was the July 31, 2009 exchange rate.


    Three Months Ended July 31, 2009

    -  We completed a public offering of 35,075,000 units at a price of
       $0.85 per unit for gross proceeds to $29.8 million. The units
       consisted of one common share and a warrant to purchase one-half
       common share.
    -  We were granted a one year extension, to May 31, 2010, of our permits
       in northwest Saskatchewan. We may seek and be granted two additional
       one year extensions of each permit if the Company continues to meet
       its obligations under the terms of the permits. We may elect to
       convert all or a portion of the permits to leases.
    -  We signed a Memorandum of Understanding establishing an economic
       relationship with the Birch Narrows Dene Nation in Saskatchewan
       through which the economic benefits of our exploration and development
       activities will be managed.
    -  We announced independent third party resource estimates for our Eagles
       Nest property in Northern Alberta.
    -  We announced the resignation of Jamey Fitzgibbon as President and
       Chief Operating Officer and the transition of these responsibilities
       to Christopher Hopkins, the Company's Chief Executive Officer.
    -  We resumed construction activities at Test Site 1 in preparation for
       the startup of Phase One of the testing.
    -  We began applying heat to the reservoir at Test Site 3 in late 2008
       utilizing a downhole electric heater and we continue to measure
       pressures and temperatures at ten different locations in the reservoir
       subsequent to the removal of the heater element in June 2009.
    -  We have commenced pressure and temperature measurements at Test Site 1
       in order to capture the baseline reservoir pressure and temperature
       before commencing the vertical well test program.
    -  We provided an update of our progress at Test Sites 1 and 3 and
       laboratory and field test studies at the TD Newcrest Unconventional
       Oil Forum held in Calgary on July 8, 2009 and at the Canadian
       International Petroleum Conference held in Calgary on June 16 to 18,
    -  We disclosed our intention to re-organize our non-core assets at
       Pasquia Hills.
    -  We restated our financial statements and filed an amended Form 10-K/A
       for the year ended April 30, 2008 and amended Form 10-Qs for the
       quarterly periods ended July 31, 2008, October 31, 2008 and
       January 31, 2009.

    Operations Summary:

    Exploration Programs

    During the three months ended July 31, 2009, we focused on developing our
2009-2010 oil sands exploration plans for the Axe Lake, Raven Ridge, Wallace
Creek and Eagles Nest areas and our oil shale exploration plans for the
Pasquia Hills area. These planning activities included scouting seismic and
exploration drilling targets, preparing regulatory applications and initiating
consultation processes for approval of the winter drilling program.
    Specific activities we have been planning on our Axe Lake permits include
an overburden core drilling program on permits 208 and 210 and 2-D seismic on
the permits to the north and south of Axe Lake in Saskatchewan. Both of these
programs will further our geological knowledge of the deposits while meeting
work commitments required to extend the exploration permits until May 31,
    We are also continuing with the additional processing and interpretation
of the 1,847 kilometres (1,149 miles) of 2-D and 3-D seismic data collected
and initially processed in the 2007-2008 winter program. This interpretation
is proving valuable in planning for the specific reservoir tests this year and
in assessing the geological structures across our permits.
    We expanded our baseline environmental programs in the Axe Lake and the
Raven Ridge areas in anticipation of a comprehensive Environmental Impact
Assessment report required as part of the application for regulatory approval
for development of Axe Lake. Other environmental work included initiating
baseline environmental studies in the Wallace Creek and Eagles Nest areas. We
commissioned an active (continuous) air quality monitoring station at Axe Lake
during the period, the first of its kind in northwest Saskatchewan, in
addition to our passive (periodic) air monitoring activities which have been
ongoing since 2005.
    In early 2009, we drilled an additional 23 exploration and delineation
test wells in Raven Ridge. The Raven Ridge drilling program has demonstrated
continuity of bitumen characteristics extending from Axe Lake in Northwest
Saskatchewan westward into Alberta and we are in the process of updating our
resource estimates based on the results of this drilling program. We expect to
release these results in October of 2009.

    Axe Lake Area - Reservoir Development Activities

    At Test Site 3, the electric downhole heating program was continued. The
objectives of the field test are to reliably measure pressure and temperature
changes within the reservoir and adjacent formations as a result of heating
and use those measurements to calibrate numerical simulation calculations to
the field measurements in order to reduce uncertainty in future reservoir
planning. The electric downhole heater in well 1OBS 5-29-94-25 provided heat
to the reservoir and pressure and temperatures were measured and recorded
continuously at ten locations in the hot heater well, 1OBS 5-29-94-25, and the
cold observation well, INJ 5-29-94-25. The heater was removed from the well on
June 26, 2009, pressures and temperatures were and are being measured and
recorded during the post-heating period, and an application for perforating
and continued testing of 1OBS 5-29-94-25 and INJ 5-29-94-25 is being prepared.
Our detailed engineering and numerical simulation analysis has confirmed the
formation characteristics anticipated and our ability to establish and control
the relevant fluid heat properties to be used in continued reservoir planning
at Axe Lake. We presented a more detailed description of the conceptual
reservoir simulation model, analytical heat transfer calculations, Test Site 3
geo-models, supporting laboratory work and numerical simulations at the
Canadian International Petroleum Conference held June 16-18, 2009.
    In preparation for the commencement of the field testing of the reservoir
test program we are in the final stages of construction and commissioning of
the facilities at Test Site 1. Phase Three testing in the reservoir test
program are planned:
    Phase One of the test program at Test Site 1 will include the injection
of cold water and will be followed by the injection of hot water and steam
into the reservoir. The purpose of the test is to measure heat and fluid
movement under specific operating conditions on a field scale to complement
our ongoing simulation and laboratory analysis studies. These Phase One tests
are designed to confirm and demonstrate our "bottom-up" thermal recovery
process and they will further enhance our knowledge and modeling of the
thermal and geo-mechanical characteristics of our reservoir.
    Phase Two of the test program at Test Site 1 will evaluate and analyze
information gathered from Phase One regarding mobilization with steam and/or
hot water by measuring field-scale response using horizontal wells.
    As part of the overall Axe Lake development plan, we continue to conduct
advanced economic feasibility, financial planning and risk assessment studies
for full commercial development and the commissioning of an independent study
of infrastructure and bitumen markets to complement our development planning
process. Development of a commercial project remains subject to regulatory and
other contingencies such as successful reservoir tests, board of directors
approvals, financing and other risks inherent in the oil sands industry ("Risk
Factors" Section of our Form 10-K).

    Pasquia Hills Oil Shale Area

    During the period ended July 31, 2009, the Company initiated the planning
and regulatory approval process for an exploratory drilling program on its oil
shale permits in eastern Saskatchewan. These activities included filing
applications and receiving regulatory approvals for drilling up to fifteen
locations, surveying drill locations, negotiating and obtaining access rights
and contracting for the required services. We expect to commence exploration
drilling on these permits in the last quarter of calendar 2009.


    Over the next twelve months we plan to continue the activities necessary
to increase our resource base and to demonstrate the recoverability of our oil
sands resources. Subject to our financial resources, we will continue to
pursue exploration programs on our permit and license lands.
    We are continuing our testing program based on the current geological
interpretation that there is no capping shale in direct contact with our oil
sands reservoir. The results of our advanced laboratory studies and numerical
reservoir simulations indicate that bitumen production can best be achieved
using a reconfiguration of horizontal wells at the bottom of the reservoir.
Our analysis points to the three essential elements for a successful
application of the bottom-up approach to bitumen extraction: (1) establish and
maintain mobility at the bottom of the oil sands reservoir, (2) utilize the
full length of the horizontal wells while the bitumen is being produced, and
(3) implement a comprehensive reservoir monitoring system to observe and
manage the growth of the swept zone. A sequential approach to the reservoir
test program is required, both in the scale of the field operations at Test
Site 1 and by moving from vertical wells to short horizontal wells and then to
commercial length horizontal wells. In addition, as part of future pilot
activities the detailed operations protocol will move from cold water to hot
water to steam at each step for the different well configurations.
    In the Axe Lake reservoir test program, we are now extending the testing
at Test Site 3 and we will be commencing operations at Test Site 1 to
demonstrate that we can establish and maintain communication between vertical
wells at the bottom of the reservoir using water and steam. The following is
an overview of key activities planned in the next twelve months.

    -  We expect to submit an application to perforate the two closely spaced
       vertical wells at Test Site 3 and circulate water at different
       temperatures in order to (1) confirm the establishment of early fluid
       movement, (2) confirm the ability for early stage convective heat
       transfer at the bottom of the reservoir, (3) produce and collect
       samples of bitumen through both hot water and solvent injection, and
       (4) gather preliminary data on the horizontal displacement process.

    -  We expect to submit an application to proceed with the Phase One test
       program at Test Site 1 to inject water and steam in order to
       (1) demonstrate the feasibility of establishing and maintaining staged
       communication at the base of the Axe Lake reservoir (2) evaluate
       reservoir behavior in relation to water and steam injection including
       geo-mechanical effects, and (3) calibrate the Axe Lake relative
       permeability curves for use in our reservoir simulators. Four vertical
       wells for micro-seismic monitoring will be drilled and completed and
       a baseline will be established prior to commencement of vertical well
       operations. The interpretation of micro-seismic signals is expected
       to enable more effective history matching of the horizontal fluid
       flow and convective heat transfer. This phase is scheduled to begin
       in October, subject to regulatory and other approvals.

    -  In preparation for Phase Two of the testing program at Test Site 1,
       we expect to drill and complete observation wells and design,
       construct and commission the necessary surface facilities at the site.
       Water and steam injection into horizontal wells drilled is planned to
       begin following the completion of the surface facilities associated
       with the horizontal test holes. This work will commence after the
       testing and analysis from Phase One is complete.

    -  We may begin field activities related to Test Site 2, where we are
       evaluating the testing of other energy efficient and environmentally
       neutral recovery processes.

    -  We are planning a program to evaluate the characteristics of the
       overburden at Axe Lake in late 2009. The program, in combination with
       our extensive 3-D seismic data, is expected to enhance our
       understanding of the formation overlaying our bitumen deposit.

    -  We expect to continue our reservoir characterization studies and
       continue to evaluate well data, perform petrophysical analyses,
       design and execute pertinent geophysical logging and perform advanced
       laboratory studies.

    -  We expect to submit an application for a pilot project at Axe Lake in
       the fall of 2009. The pilot project application will be partly based
       on a low pressure steam based bitumen recovery process currently being
       tested as part of the reservoir test program and the application will
       trigger an Environmental Impact Assessment.

    -  We are continuing the planning of additional exploration programs to
       further define the location, extent and quality of the potential
       bitumen resource in Axe Lake, Raven Ridge, Wallace Creek, Eagles Nest,
       and adjacent areas as appropriate.

    -  Infrastructure remains a critical element for continued operations
       and we will continue to investigate various pipe line solutions for
       gas and liquids transport, different routing alternatives for
       permanent road access and possible solutions for the provision of

    -  Efforts are also continuing on converting a portion of our
       Saskatchewan permits to lease pursuant to the Oil Shale Regulations,
       1964, as amended. The permits will not be converted to leases until a
       development plan which will require an Environmental Impact Assessment
       has been developed.

    -  We intend to maintain our asset base and core technical team in order
       to advance to commercial development of our resource.

    Liquidity and Capital Resources

    On May 12, 2009, the Company issued 35,075,000 units at $0.85 per unit
for gross proceeds of $29.8 million. The units were issued as part of a public
offering and were comprised of a share of the common stock and one-half of a
warrant to purchase a share of common stock. The Company paid an aggregate of
$1.5 million in fees to a syndicate of agents under the terms of the agency
agreement and $1.2 million of legal fees and other expenses in relation to the
    During the three months ended July 31, 2009, the Company expended $4.4
million on operations and $0.4 million on property and equipment.
    At July 31, 2009, the Company held cash, cash equivalents and short term
investments totaling $56.1 million. At September 1, 2009, the Company held
cash, cash equivalents and short-term investments totaling $53.6 million.
    We believe that we have sufficient funds to carry out our planned
activities over the next twelve months. If we accelerate commercial
development at Axe Lake or any of our other prospects, our cash requirements
will increase significantly. Additional funding may also be required if our
current planned activities are changed in scope or if actual costs differ from
estimates of current plans. We believe the Company will have access to
sufficient funding and sources of capital for its planned activities through
to July 31, 2010. Because we constantly and actively monitor our expenditure
budgets, if sufficient funding is not available we can adjust our expenditure
plans based on available cash. We plan to fund future operations by way of
financing, including a public offering or private placement of equity or debt
securities. Our development strategy also includes considering partners on a
joint venture basis on our specific projects to fund the development of such
projects in a timely and responsible manner. However, there is no assurance
that debt or equity financing or joint venture partner arrangements will be
available to us on acceptable terms, if at all, to meet these requirements.
The Company has no revenues, and its operating results, profitability and the
future rate of growth depend solely on management's ability to successfully
implement the business plans and on the ability to raise further funding.

    Results of Operations

    Net loss

    Three Months ended July 31, 2009 as compared to three months ended July
31, 2008. The Company experienced a net loss of $1,908,301 or $0.01 per share
for the three months ended July 31, 2009 as compared to a net loss of
$14,123,683 or $0.06 per share for the three months ended July 31, 2008. The
decline in the net loss is mainly due to a reduction in exploration activity
and costs in the current quarter as compared to the same quarter last year.
The Company expects to continue to incur operating losses and will continue to
be dependent on additional sales of equity or debt of securities and/or
property joint ventures to fund its activities in the future.

    Exploration costs

    Three months July 31, 2009 as compared to three months ended July 31,
2008. Exploration costs for the three months ended July 31, 2009 were
$3,614,359 (2008 - $10,472,742). The Operations Summary above provides a
summary of the exploration activities conducted in the three months ended July
31, 2009. Exploration expenditures in the three months ended July 31, 2009
related mainly to engineering and construction costs on Test Sites 1 & 3 and
to environmental monitoring activities.

    General and administrative


    Three months ended July 31, 2009 as compared to three months ended July
31, 2008. General and administrative expenses settled with cash for the three
months ended July 31, 2009 were $3,798,450 (2008 - $2,855,016). Expenditures
in the three month period ended July 31, 2009 consist of salaries ($1.0
million), legal and other professional fees ($0.7 million) and general office
costs ($2.1 million). General and administrative expenses in the three months
ended July 31, 2008 consist of salaries ($0.9 million), legal and other
professional fees ($0.9 million) and general office costs ($1.0 million). At
July 31, 2009 there were 48 employees including 8 seasonal field employees, at
July 31, 2008 there were 72 employees including 30 seasonal field employees.
The increase in salaries and wages during the quarter occurred as result of
severance payments.

        Stock-based compensation

    Three months ended July 31, 2009 as compared to three months ended July
31, 2008. Stock-based compensation reversal for the three months ended July
31, 2009 was $1,152,931 (2008 - $3,569,157 expense). Stock-based compensation
expense for the three months ended July 31, 2009 and 2008 consists of
stock-based compensation related to the issuance of options to directors,
officers, employees and consultants. The grant date fair value of the stock
options was estimated using the Black-Scholes valuation model which requires
the input of highly subjective assumptions, including the option's expected
life and the expected stock price volatility determined using the historical
volatility of the price of shares of the Company's common stock. The decrease
this quarter as compared to the same quarter in the prior year is the result
of 2.8 million options being forfeited due to a reduction in the number of
employees and resulting in a reversal of previously recorded stock-based
compensation. Stock-based compensation is a non-cash expense.

    Foreign exchange gain (loss)

    Three months ended July 31, 2009 as compared to three months ended July
31, 2008. A foreign exchange gain of $3,243,691 (2008 - loss of $782,690)
resulted from holding Canadian dollar cash in the parent company with a US
dollar functional currency when the value of the Canadian dollar increased as
compared to the U.S. dollar.

    Depreciation and accretion

    Three months ended July 31, 2009 as compared to three months ended July
31, 2008. Depreciation and accretion expense for the three months ended July
31, 2009 was $448,416 (2008 - $317,726). Depreciation expense relates to camp
facilities, equipment and corporate assets which are being depreciated over
their useful lives of three to five years. Accretion expense relates to the
asset retirement obligation recognized on the airstrip, camp site, access
roads and reservoir test sites which are being brought into income over a
period 10 of 30 years. The change from the quarter ended July 31, 2008 to the
quarter ended July 31, 2009 is not significant and relates to the increase in
assets held during the year.

    Interest and other income

    Three months ended July 31, 2009 as compared to three months ended July
31, 2008. Interest income for the three months ended July 31, 2009 was $58,764
(2008 - $429,278). Interest income is earned because the Company pre-funds its
activities and the resulting cash on hand which is invested in short-term
deposits. The decrease in interest income this quarter as compared to the same
quarter in the prior year reflects the decrease in short term investments and
the decrease in market interest rates over the intervening year.

    Deferred income tax benefit

    Three months ended July 31, 2009 as compared to three months ended July
31, 2008. The deferred income tax benefit for the three months ended July 31,
2009 was $1,497,538 (2008 - $3,444,370) and relates to the tax benefit that is
generated by expensing all exploration costs. This results in a higher tax
basis for the Company's property and equipment when compared to their carrying
value. The deferred tax liability reported on the balance sheet is mainly
related to the book value of property which will not be deductible for tax
purposes and is related to the Company's 2006 acquisition of the minority
interest in OQI Sask.

    Disclosure Controls and Procedures

    As of July 31, 2009, we carried out an evaluation under the supervision
of, and with the participation of our Chief Executive Officer and our Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-15(e) under the
Securities and Exchange Act of 1934, as amended. Based on the evaluation as of
July 31, 2009 our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures (as defined in Rule
13a-15e) under the Securities Exchange Act of 1934) were not effective because
of the material weakness in internal control over financial reporting
described below.
    Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in our
reports filed or submitted under the Securities Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in our reports filed under
the Exchange Act is accumulated and communicated to our management, including
our Chief Executive Officer and our Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure.
    A material weakness is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Company's annual or interim
financial statements will not be prevented or detected on a timely basis. The
material weakness in our internal control over financial reporting as of July
31, 2009 existed as we did not maintain effective processes and controls over
the accounting for and reporting of complex and non-routine transactions.
Specifically, we did not have sufficient appropriate level of technical
knowledge, experience and training in the accounting for asset acquisitions,
stock-based compensation, and deferred income taxes. This control deficiency
resulted in the restatement of the consolidated financial statements for the
years ended April 30, 2008 and 2007 and each of the quarters in fiscal 2009
and 2008. The restatement of the prior periods also resulted in a material
adjustment to the April 30, 2009 financial statement prior to their issuance.
    We plan to remediate the material weakness described above by consulting
with an independent big four accounting firm on complex accounting issues and
obtain written analysis of the accounting options available to us. The
analysis would be reviewed with the independent auditors on the
appropriateness of the accounting treatment for any new transactions. We will
also amend our period close procedures to include access to independent
consultation on technical accounting treatment with respect to highly complex

    Changes in Internal Control Over Financial Reporting

    We regularly review our system of internal control over financial
reporting. There were no changes in our internal control over financial
reporting during the period covered by this report on Form 10-Q that have
materially affected or is reasonably likely to materially affect, our internal
control over financial reporting.

    Other information

    Effective August 28th, 2009, Dr. Claes Palmgren, Vice President Reservoir
Engineering, resigned from the Company for personal reasons. Dr. Palmgren
intends to stay on with the Company on a consulting basis for a period of
approximately six months.

    About Oilsands Quest

    Oilsands Quest Inc. (www.oilsandsquest.com) is exploring Canada's largest
holding of contiguous oil sands permits and licences, located in Saskatchewan
and Alberta, and developing Saskatchewan's first global-scale oil sands
discovery. It is leading the establishment of the province of Saskatchewan's
emerging oil sands industry.

    Cautionary Statement about Forward-Looking Statements

    This news release includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of the U.S. federal securities
laws. All statements, other than statements of historical facts, included in
this news release that address activities, events or developments that our
management expects, believes or anticipates will or may occur in the future
are forward-looking statements. Such forward-looking statements include
discussion of such matters as:

    -  the amount and nature of future capital, development and exploration
    -  the timing of exploration activities;
    -  business strategies and development of our business plan and drilling
    -  potential reservoir recovery optimization processes.

    Forward-looking statements are statements other than relating to
historical fact and are frequently characterized by words such as "plan",
"expect", "project", "intend", "believe", "anticipate", "estimate",
"potential", "prospective" and other similar words or statements that certain
events or conditions "may" "will" or "could" occur. Forward-looking statements
such as references to Oilsands Quest's drilling program, geophysical programs,
reservoir field testing and analysis program, preliminary engineering and
economic assessment program for a first commercial project, and the timing of
such programs are based on the opinions and estimates of management and the
company's independent evaluators at the date the statements are made, and are
subject to a variety of risks and uncertainties and other factors that could
cause actual events or results to differ materially from those anticipated in
the forward-looking statements, which include but are not limited to risks
inherent in the oil sands industry, regulatory and economic risks, lack of
infrastructure in the region in which the company's resources are located and
risks associated with the company's ability to implement its business plan.
The Company's views about the restatement, its remediation of a material
weakness in its controls, its financial condition, performance and other
matters also constitute "forward-looking statements". These forward-looking
statements are subject to risks and uncertainties including, but not limited
to, the results and effect of the Company's review of its accounting
practices; potential claims and proceedings relating to the adjustments to the
Company's financial statements or its accounting practices, including
shareholder litigation and action by the SEC or other governmental agencies
which could result in civil or criminal sanctions against the Company and/or
certain of its current or former officers, directors and/or employees; and
negative tax or other implications for the Company resulting from the
accounting adjustments and other factors detailed from time to time in the
Company's filings under the Securities Exchange Act of 1934. Many of these
risks and uncertainties are beyond the control of the Company. The Company
undertakes no obligation to update forward-looking statements if circumstances
or management's estimates or opinions should change, except as required by
law. The reader is cautioned not to place undue reliance on forward-looking

For further information:

For further information: Riyaz Mulji, Manager, Investor Relations,
Email: ir@oilsandsquest.com, Investor Line: 1-877-718-8941

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Oilsands Quest Inc.

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