Operations

The Canadian Heavy Oil Business Unit accounts for more than 70% of current production and more than 73% of oil-equivalent reserves. Baytex's heavy oil operations consist predominantly of cold primary production (i.e., production without the assistance of steam injection). In some cases, Baytex's heavy oil reservoirs are waterflooded, occasionally with hot water. Baytex's heavy oil fields often have multiple productive zones, some of which can be commingled within the same producing wellbore. Production is generated from vertical, slant and horizontal wells using progressive cavity pumps capable of handling large volumes of heavy oil combined with gas, water and sand. Initial production from these wells usually averages between 40 and 600 bbl/d of crude oil with gravities ranging from 11 to 18 degrees API. Once produced, the oil is trucked or pipelined to markets in both Canada and the United States. Heavy crude is usually blended with light-hydrocarbon diluents (such as condensate) prior to being introduced into a sales pipeline. The blended crude oil is then sold by Baytex and may be upgraded into lighter grades of crude or refined into petroleum products such as fuel oil, lubricants and asphalt by the crude purchasers. All production rates reported are for heavy crude only, before the addition of diluents.

In 2010, production in the Canadian Heavy Oil Business Unit averaged approximately 30,058 boe/d, which was comprised of 28,585 bbl/d of heavy oil, 178 bbl/d of light oil and 7,768 Mcf/d of natural gas. During 2010, Baytex drilled 98 (87.6 net) wells in the Canadian Heavy Oil Business Unit resulting in 82 (71.9 net) oil wells, one (0.7 net) natural gas well, seven (7.0 net) stratigraphic test wells, five (5.0 net) service wells and three (3.0 net) dry and abandoned wells, for a success rate of 97%.

The Canadian Heavy Oil Business Unit possesses a large inventory of development projects within the operating areas of west-central Saskatchewan and Cold Lake/Ardmore and Peace River in Alberta. Baytex's ability to generate relatively low-cost replacement production through conventional cold production methods has been key to maintaining our overall production rate. Due to the size of inventory of heavy oil projects, we are able to select from a wide range of investment opportunities to attempt to maintain heavy oil production rates.

Baytex will continue to build value through internal heavy oil property development and selective acquisitions. Future heavy oil development will focus both on the Peace River oil sands area and Baytex's historical area of emphasis around Lloydminster. Our net undeveloped lands in the Canadian Heavy Oil Business Unit totalled approximately 393,000 acres at year-end 2010.