Rapid increases in oil production from Alberta’s oil sands deposits have more than offset declines in conventional oil from Canada. In fact, most of the province’s oil production is now non-conventional oil. There is almost no geological risk in exploiting these resources because they are near the surface and easy to find. The main risk is economic due to high production costs.
Don Stowers, Editor, OGFJ
The oil sands of Alberta, along with oil shale deposits in the western United States, could be the key to energy independence for both the US and Canada for many years to come, say some industry observers. Efforts to unlock these riches have increased significantly, along with the number of players taking part in the effort, in the past few years since crude oil prices have gone through the roof.
Canadian oil sands production is expected to reach 1.2 million barrels per day during 2006 - more than double the production level in the year 2000.
Over the next decade, production increases from just two of the current oil sands producers, Suncor and Syncrude, will add another 2.4 million barrels per day to output. With 80% of Alberta’s oil sands acreage still available for lease, there is enormous potential for further investment and growth, and US, Chinese, and other foreign companies are clamoring to get in on the action.
Photo courtesy of Suncor Energy Inc.
Oil sands, also referred to as tar sands or bituminous sands, are a combination of clay, sand, water, and bitumen - an organic semisolid that is highly viscous, black, sticky, and soluble in carbon disulfide. Asphalt and tar are common forms of bitumen, a degraded form of oil that will not flow toward the producing well without the injection of steam, which makes it difficult and expensive to produce.
However, when the oil sands are close to the surface, the oil-like bitumen can be removed using open-pit mining. When the deposits are deeper, they can be extracted by drilling wells with new in-situ production techniques such as steam-assisted gravity drainage, which reduces the viscosity of the bitumen via steam injection.
The Athabasca oil sands, along with the Peace River and Cold Lake oil sands, are the three major bitumen deposits in Canada. The Athabasca formation is the largest of the three and the only one shallow enough for surface mining. Most of the sands range from 130 to 200 feet thick and are covered by 3 to 10 feet of peat bog.
Suncor Energy, then called Great Canadian Oil Sands Co., first began mining the Athabasca sands (named for the Athabasca River) in 1967. Syncrude and Shell Canada are two other major oil sands players. All three companies convert the bitumen into synthetic crude oil for shipment to refineries in Canada and the US.
The Oil Sands Discovery Centre in Alberta claims there are an estimated 1.7 to 2.5 trillion barrels of bitumen in place in that province - more oil than the known reserves in the entire Middle East.
The US Energy Information Administration’s more modest estimate is that Alberta’s oil sands give Canada the world’s second-largest oil reserves after Saudi Arabia. In a recent report, the EIA raised Canada’s proven oil reserves to 180 billion barrels - up from 4.9 billion barrels - after including the oil sands. This latest estimate puts Canada ahead of Iraq with its 112.5 billion barrels.
Guy Caruso, EIA administrator, noted, “Canada will be producing a lot of oil from the development of these [oil] sands, but the quality of those reserves differs substantially from the Saudi reserves in terms of cost and ability to [increase production].”
He cautioned that there is “a difference in the absolute amount versus the ability to turn that into productive capacity.”
The Canadian Association of Petroleum Producers (CAPP) estimates that total recoverable reserves in Alberta’s oil sands is about 315 billion barrels, of which 80% will require steam injection. Production costs range from about $10/bbl up to around $14/bbl, so oil sands projects are economically feasible with crude oil prices in the $18/bbl to $20/bbl range, says a CAPP official.
In the past five years, the Alberta Department of Energy says that industry has allocated $24.7 billion towards oil sands development, either to expand existing projects or develop new ones. From 2002 to 2010, another $15 billion in investment is on the books for potential development. In addition, there are several dozen companies planning nearly 100 oil sands mines and in-situ projects, totaling about $100 billion in capital investment.
It is predicted that the Alberta oil sands will create tens of thousands of new jobs across Canada by 2012.
With increased geopolitical risk in the Middle East, Africa, and elsewhere, the US is looking increasingly to Canada as a supplier of crude oil and refined products. Look for this mindset to increase proportionally with increased threats of terrorism and nationalization, say industry observers.
There are an estimated 1,800 oil sands lease agreements in place with the Province of Alberta totaling 12,350 square miles of developable territory, according to Alberta’s Department of Energy. The agency says that 80% of the province’s exploitable oil sands areas are still available for lease, exploration, and development.
So long as favorable economic conditions prevail, the potential for favorable investment opportunities will continue to be good.
Total raw bitumen production in the oil sands now exceeds Alberta’s total light and heavy conventional crude production. Roughly 39% of all oil produced in Canada is from oil sands, according to the CAPP. By 2015, it will account for 75% of Western Canada’s crude oil production, says the organization.
Within a decade, all unconventional sources will account for approximately 35% of world oil supply, says the Massachusetts-based Cambridge Energy Research Associates (CERA).
Photo courtesy of Suncor Energy Inc.
Major players at this time in the Canadian oil sands include Suncor Energy, Imperial Oil, Canadian Natural Resources, Shell Canada, EnCana, Devon Energy, Canadian Oil Sands Trust, and Petro-Canada. But there are a host of additional companies - Canadian, US, Japanese, etc. - that are participating in some fashion, either as an operator, joint venture partner, of member of a consortium.
T. Boone Pickens, who operates a hedge fund out of Dallas, has invested about $5 billion in Canada, 10% of it in the oil sands. He says it represents the fund’s single largest investment in Canada.
The Chinese are also actively looking to lock up some of the oil sands production, say several sources.
In an interview with Oil & Gas Journal’s Guntis Moritis in 2004, Suncor, the largest oil sands operator, said his company has a different approach to production than conventional producers.
“We’re a bit more like a manufacturing company,” said Rick George, Suncor president and CEO. “A large part of the rest of this industry is chasing the world for reserves. We have a very different strategy. We have the reserves. [Our strategy] is about using technology to produce as cheaply as possible and as environmentally friendly as possible. We have no exploration risk and also have no decline curve, so we have a completely different business model from a conventional crude oil producer.”
As for Suncor’s resource, he added, “It’s not unlimited, but at today’s rate we have reserves to last over 100 years. If you ask most oil companies that question, they barely know what they will be doing next quarter, let alone 7 years out.”
Suncor also produces about 200 MMcfd of natural gas that George says is important because it is “a natural hedge against our own energy consumption.”
Suncor’s operating costs in 2004 were around $12/bbl. The operating cost of the in-situ project is highly dependent on the cost of gas to generate steam.
And, although there is no exploration risk or political risk, there are operating risks. Failures are costly. One fire at a Suncor facility slashed output by half, and full production did not resume for months. The risk is not unlike that in the refinery industry, says a Suncor official.
Canadian bitumen stands poised to expand to US markets, says David J. Hawkins, president of Hawkins Gas Consultants Ltd. in Calgary. He thinks that increased pipeline movement of raw bitumen production from Canada to the US could mitigate North America’s vulnerability to crude supply disruptions and require the construction of new pipelines and the expansion of existing ones.
Target markets include a pipeline to the West Coast of Canada with marine movements to California and Asia. There have also been proposals for new pipeline connections to Kansas and Oklahoma and the US Gulf Coast.
Hawkins says the best markets for Canadian heavy crude and bitumen are refineries with asphalt plants and cokers. There is a concentration of such facilities near the Texas and Louisiana coasts. However, as the market for Alberta bitumen expands, he thinks it is prudent for prospective producers to investigate the economics, technical feasibility, and strategic implications of all their options in getting the product to market.
Although most of the oil sands production is exported to the US at this time, that could change. China and the US are negotiating with Canada for a bigger share of the oil sands’ rapidly increasing input.
An agreement has been signed between PetroChina and Canada’s Enbridge to build a 400,000 barrel-per-day pipeline from Edmonton to the Kitimat, British Columbia, to export synthetic crude oil from the oil sands to China and elsewhere in the Pacific region, plus a 150,000 bpd pipeline running the other way to import condensate to dilute the bitumen so it will flow.
Sinopec, China’s largest refining and chemical company, and China National Petroleum Corp. have bought or are planning to buy shares in major oil sands developments.
The government of India has also announced plans to invest $1 billion in the Athabasca oil sands in 2006. As many as four Indian companies are involved.
Not everyone is happy with oil sands production however. The environmental footprint of open-pit mining can be devastating to the landscape. Rivers and lakes near the mines are polluted, which has a negative impact on wildlife and human habitation as well as the tourism industry.
Environmentalists point out that Canada, which ratified the Kyoto Protocol in 1990 and agreed to reduce greenhouse gas emissions, has actually increased its total emissions by 24% since that time. Much of this is attributed to oil sands development.
Wired magazine recently published a report on the Alberta oil sands, which it calls “The Trillion-Barrel Tar Pit.” Brendan Koerner, the author, says he traveled to Fort McMurry, Alberta - about 250 miles north of Edmonton - in midwinter “to learn more about a filthy sort of alchemy, one that turns sludgy, sticky earth into sweet crude oil.”
Koerner noted that Shell and ChevronTexaco jointly opened a $5.7 billion oil sands project last year, and that Syncrude, which has been mining the deposits since 1978, last year shipped 77 million barrels of its trademark Syncrude Sweet Blend, mainly to US refineries. Syncrude is a joint venture of 8 Canadian and US energy companies.
Photo courtesy of Suncor Energy Inc.
Last year, Robert Collier, a San Francisco Chronicle staff writer, authored a piece in which he called the oil sands “the world’s most expensive, most polluting source of oil under large-scale production.” He noted that extracting four barrels of crude oil from the sands requires burning the equivalent of a fifth barrel.
Collier added that each day the Alberta mines and refineries release an amount of greenhouse gases equivalent to more than a third of the state of California’s daily automotive emissions. In-situ drilling, he noted, is much more expensive than open-pit mining and requires about four times as much natural gas to create the steam.
Expensive it is. Capital investment is intensive, and becoming a participant in the Canadian oil sands is not for the weak-kneed, said one analyst. But many in the industry believe that the vast non-conventional petroleum deposits in Alberta are North America’s best means of securing its energy future. OGFJ
