Abstract: The Lower Cretaceous McMurray Formation in northeastern Alberta, Canada, hosts about 800 billion barrels (137 billion cubic meters) of bitumen in place. Interbeds of sand and mud (often called inclined heterolithic stratification, or IHS) exist in virtually every McMurray oil sand deposit. They may even be the dominant component in some oil sand successions. Their sedimentary characteristics and distribution in a reservoir for in-situ extraction using steam assisted gravity drainage (SAGD) technology, are important factors that determine SAGD performance and strategies of positioning horizontal well pairs. Therefore, characterization of IHS in an SAGD reservoir is a very important and valuable exercise to evaluate SAGD performance. To improve 3-D modeling on SAGD performance, mudstone interbeds are studied using several different approaches: variable resolution volume of shale (V_sh) qualification; grain size and fine analyses; mudstone interbed "types" classification; borehole image interpretation; vertical permeability (K_v) quantification of individual mudstone interbeds, (using) flow simulation techniques from core-based micro-models, core CT-scan image analyses, the study of connectivity between the sand beds that are separated by mudstone, and quantification of steam rise rates through or around mudstone interbeds. These studies confirm that mudstone interbeds in IHS can be very sandy and they can be discontinuous because of bioturbation, dewatering and/or erosion. Their K_v is highly variable. Some "mudstone interbeds" are actually mud-filled burrows that penetrated into sands from the top surface of the sands. All of these characteristics indicate that mudstone interbeds in IHS can be very leaky and are expected to be permeable to variable degrees during SAGD operations. This is especially true for those mudstone interbeds associated with sand-dominated IHS. SAGD reservoirs with IHS may behave quite differently, depending on IHS thickness and occurrence, individual mudstone interbed thickness, their K_v, and more importantly, their lateral extent.