Canada's oil sands look set to bounce back

Black gold in the cold sand

06 January 2010 21:12  [Source: ICB]

The US needs oil, but it certainly does not need the geopolitical hassles that usually come with it - which is why Canada's oil sands look so good

THE GLOBAL recession has, at least temporarily, put the brakes on for Canada's oil sands industry. But it can bounce back, says a November 2009 report from the France-based International Energy Agency (IEA), if environmental and economic challenges are met.

Canadian oil sand resources are located almost entirely in the province of Alberta, occurring primarily in three areas - Peace River, Athabasca and Cold Lake. According to the Government of Alberta, current capacity is 1.757m bbl/day, up from 2008's 1.2m bbl/day - itself a doubling of 2000's capacity, and a tripling of 1990's capacity.

According to the US-based Council for Foreign Relations (CFR), Alberta's capacity was equal to 1.4% of global oil production, and to roughly 6% of total US oil consumption, 9% of US oil imports, and 24% of US oil production.

"Since 2004, Canada has been the biggest source of US oil imports," says Michael Levi, senior fellow for energy and the environment for CFR.

But current capacity could have been 3.4m bbl/day had $150bn (€104.1bn) in investment for new projects not been derailed by the economy's nosedive, notes the IEA.

"Providing that current challenges can be overcome, Canadian oil sands have the potential to make a significantly greater contribution to global energy security for decades ahead by increasing the diversity of supply," the report says. "However, as an industry whose profitability currently relies on oil prices of $75-80/bbl, the outlook for oil sands in the medium term is less certain."

The drop in oil prices, from about $120/bbl in October 2008 to between $35/bbl and $80/bbl through 2009 has made the crude derived from oil sands less profitable and decreased the incentive for oil companies to invest in expansion.

Attempts were made to develop oil sands resources in the US, but after several pilot projects proved to be commercially unviable, they were abandoned, and attention concentrated on Canada.

"Because of the disappointing results in the US and the expansive reserves in Canada, the technical expertise and financial resources for oil sands development has shifted almost exclusively to Canada and [they] are likely to stay in Canada for the foreseeable future," says Marc Humphries, energy policy analyst for the US-based Congressional Research Service.

Bitumen is a heavy crude that must be upgraded with an injection of hydrogen or by the removal of some carbon before processing. In layman's terms, the crude oil is boiled and washed out of the sands.

On average, oil sands contain about 75% inorganic matter, 10% bitumen, 10% silt and clay, and 5% water, and can be sold as either raw bitumen mixed with a diluent for transportation, or, after upgrading to a light crude, as synthetic crude oil (SCO).

There are an estimated 1.7 trillion bbl of oil sands in Alberta, says the Alberta Energy & Utilities Board, of which 175bn bbl, about 11%, is recoverable under current economic and technical conditions. This makes the region the second-largest oil reserve in the world, after Saudi Arabia's 264.2bn bbl, and ahead of Iran's reserves of 136.2bn bbl.

According to the US Geological Survey, Canadian oil sands account for about 14% of world oil reserves. Over 80% of global recoverable natural bitumen lies in North America, the organization notes.

"This is much larger than the resource contained in the environmentally controversial Arctic National Wildlife Refuge, which is estimated to have less than 10bn bbl," of oil, says Levi.

Of the recoverable oil in the sands, about 35bn bbl (20%) is minable from the surface, with the remaining 141bn bbl considered in situ, or deep underground, and requiring a different set of extraction tools, such as in-place operations like wells.

"The Alberta oil sands represent another potential source of feedstock for the North American industry and more feedstock options are good," says Wendy Lomicka, director of corporate and marketing communications for Canada-based NOVA Chemicals, which is owned by Abu Dhabi, the United Arab Emirates-based International Petroleum Investment Co. "We continue to be very hopeful about development in Alberta resulting from upgrading bitumen."

NOVA admits that the physical proximity of the oil sands to the Alberta chemical industry infrastructure "is a logistical advantage," says Lomicka.

Producing one barrel of SCO can be natural-gas intensive, requiring around 750-1,500 ft3 (21-42 m3) of natural gas, "an amount whose energy content is equivalent to between one-eighth and one-quarter of a bbl of oil," says Levi.

While nearly all of the natural gas used to process oil sands is sourced domestically, the CFR projects that if the oil sands put an inordinate demand on natural gas, more will have to be imported from overseas. The world's largest natural gas reserves are in Russia, Iran and Qatar, notes the CFR.

Nuclear energy has been brought up frequently in the past few years as a substitute for natural gas in SCO production, but Levi says "its practicality is questionable," as "the typical lead time for nuclear projects is also even longer than that for oil sands projects."

Meanwhile, reduced financing for oil sands projects during the economic crash means very large risks for financiers of any nuclear energy construction projects.

"Despite several years with much noise about the potential for nuclear power in the oil sands, no license applications for reactors have yet been filed," Levi adds.

While investing in developing the Alberta oil sands may have slowed somewhat, the transportation of the oil derived from there is another matter.

Canada-based energy firm Enbridge has been building the C$3.7bn ($3.46bn) Alberta Clipper pipeline project, and the C$2.3bn Southern Lights project, scheduled to be completed during the second half of 2010.

With operations scheduled to begin during the first half, the Alberta Clipper project is a 36 inch diameter, 1,000-mile (1,600km) pipeline that will be able to transport 450,000 bbl/day of crude oil from Alberta's oil sands to refineries in the US.

The Southern Lights pipeline will transport 180,000 bbl/day of diluent from the US into Canada, where they are used to thin the heavy crude created from the oil sands. Enbridge has planned C$10.2bn in capital expenditures on new projects from 2009 to 2013.

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By: Ivan Lerner
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