According to a 4 page website report from Canadian Business :
Andrew Nikiforuk
From the February 12, 2007 issue of Canadian Business magazine
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Within 10 years, Alberta’s tarsands could become the single largest source of new oil in the world. Given rising political unrest or aggressive state capitalism in Russia, Nigeria, Venezuela and the Middle East, the tarsands have simply become the globe’s safest oil investment. Even a U.S. congressional committee recently called the oilsands “a new force in the world oil market” and concluded that they offered two investment rarities: large volumes and “secure access.”
Boasting reserves (174-billion barrels) second only in size to Saudi Arabia, the tarsands have placed Canada in the remarkable position of holding nearly 60% of the investable oil reserves in the world. This explains why Imperial, ExxonMobil, Shell, Total and other energy multinationals have committed nearly $100 billion in a feverish rush to build as many as 51 projects in the sands over the next decade. Not surprisingly, stocks in 10 major firms with key tarsand investments gained a whopping 370% in value between July 2003 and April 2006. “In the big picture, deepwater oil and the oilsands are the only game left in town,” says CIBC chief economist Jeffrey Rubin.
As a consequence, this powerful industry now produces nearly half of the nation’s oil supply, provides the U.S. with nearly 16% of its oil imports–and will soon crown Canada as the world’s fifth- or even fourth-largest oil producer. In the process, the tarsands will generate nearly $51 billion in income for the federal government and $44 billion for the province of Alberta between 2000 and 2020. No wonder Prime Minister Stephen Harper happily refers to Canada as an “energy superpower” and U.S. Energy Secretary Samuel Badham contentedly reports that “the hour of the oilsands has come.”
But how long will that hour last? Certainly, the world’s largest capital project will not only alter the course of Canada’s economy, but will dominate business news for years to come. And yet, as global interest in the resource heightens, investors and taxpayers alike have begun to ask hard questions about costs, carbon emissions, infrastructure and other hidden liabilities. The following key issues may dramatically alter or slow the pace and scale of the tarsands.
The World’s Most Expensive Oil
Although industry marketers prefer the term oilsands, bitumen is not oil. This heavy, viscous hydrocarbon, which according to the Book of Genesis helped glue the Tower of Babel together, is really tar trapped in sand and clay. As a heavy chain of carbon-rich atoms that are high in sulphur content, bitumen takes a lot of money and energy to upgrade to synthetic oil. In fact, raw bitumen can’t even be moved in pipelines without using expensive light oils as a transport fuel. “You know you are at the bottom of the ninth when you have to schlep a tonne of sand to get a barrel of oil,” says the CIBC’s Rubin.
The cost of extracting the gooey stuff continues to unsettle rational economic minds. Neil Carmata, Petro-Canada’s senior vice-president for oilsands, recently opined that the price tag for an open pit mine plus an upgrader climbed from $25,000 to between $90,000 and $110,000 per barrel in the past decade. Given that investors used to spend no more than $1,000 on infrastructure to remove a barrel of conventional oil a day, Houston-based energy investment banker Matthew Simmons of Simmons & Co. International observes that “energy’s pricing committee” has truly flunked in the tarsands.
Chronic labour shortages combined with persistent government failure to sequence projects, has led to staggering cost overruns. When Shell Canada admitted last July that its $7.3-billion expansion plans for its Athabasca project (it currently produces 155,000 barrels a day) could swell to $12.8 billion, U.S. energy analyst Bob Gillon of John S. Herold, Inc. responded with a “My Lord in Heaven….we are getting these things back to where the economics…are going to get skinny in a hurry.” Estimates for Petro-Canada’s Fort Hill’s project–a planned 170,000-barrel-a-day mine plus an upgrader–now range as high as $19 billion. Given that the richest tarsands leases are already being exploited, the Petroleum Technology Alliance Canada, a Calgary-based research group, warned last year that declining quality of the resource means “capital intensity is likely to continue to increase.”
Yet cost overruns (like carbon intensity) define the character of unconventional oil. Rubin even advises investors to get used to persistent markups. He argues that the development of non-conventional oil just means spending more money. (Gulf of Mexico drilling comes with 400% increases, for example.) “What investors have to remember is that in a world of depleting conventional supply, higher costs and delays simply equate to higher crude prices,” he says.
The Infrastructure Deficit
The Alberta government has approved one tarsands project after another with nary a thought about public infrastructure in the past decade. As a result, the city of Fort McMurray and the Regional Municipality of Wood Buffalo (RMWB) face an alarming $1.9-billion infrastructure deficit. The region not only reports a dangerously critical shortage of health care and police services, but also unaffordable housing, rampant social problems and water-treatment woes. Rents are so high that most hospital staff require subsidized housing. “Our quality of life is deteriorating,” Bill Newell, RMWB regional manager, reported to the oilsands Multi-stakeholder Committee, a government-appointed group examining policy options for the oilsands, last fall. While former Alberta premier Peter Lougheed calls the social chaos “a mess,” John Lau, CEO of Husky Energy Inc., has repeatedly warned that the infrastructure deficit has become an impediment to further investment. “The government has not really put a thinking cap on how and what they are going to do,” Lau told the Calgary Herald.
Short of a moratorium, a recession or staggered project approvals, the region’s infrastructure crisis will simply accelerate. After approving another $4-billion project last December, Alberta’s Energy and Utilities Board, the industry regulator and the government of Canada warned that “growing demands and the absence of sustainable long-term solutions must weigh more heavily” in future decision-making.
Production Hype
Just about everybody, from Uncle Sam to the Chinese, has bet on the tarsands to offset conventional declines. On its energy website, the Alberta government even highlights an optimistic Time magazine article boasting that the oilsands “could satisfy the world’s demand for petroleum for the next century.” Cold reality, however, does not support such claims.
Consider a series of popular production forecasts now being seriously hampered by the region’s infrastructure backlog. Canada’s National Energy Board predicts that oilsands production could jump from 1.1 million barrels a day to three million barrels a day by 2015. Prime Minister Harper is even more bullish and predicts “nearly four million” by 2015, while some Alberta groups are talking about three times that amount–or 12-million-a-day output by 2030. Both the Canadian Association of Petroleum Producers and the Canadian Energy Research Institute believe four million barrels a day might be possible by 2020 if environmental and labour challenges don’t tar up the works. That’s still only 4% of the world’s forecasted oil supply in 2025.
At a recent Boston meeting on peak oil, Dave Hughes, a Calgary-based energy specialist with Natural Resources Canada, argued that none of these forecasts will live up to the hype due to the complex and energy-draining process of turning tar into oil. He defined the big stumbling block as a delivery problem. While noting that the oilsands are a “Great White Hope of a panacea to support business as usual,” he added that “forecasts do not live up to the hype.”
Given existing investment levels of $90 billion, Hughes told Canadian Business that he’d be very surprised if oilsands production could exceed 2.8 million barrels a day. To reach four million barrels a day would likely require an additional $110 billion in investment. “The oilsands should be viewed as a marginal interim supply that serves as a bridge to prepare for a less energy-intensive future,” warns Hughes.
Since 1850, the world’s population has increased fivefold, while per-capita energy use has increased eight times, says Hughes. The world now uses 43 times the energy used in 1850, and nearly 90% of it comes from non-renewable sources, such as oil, gas, coal and uranium. “Those levels can’t continue,” says Hughes.
Even the U.S. Congress has its doubts. In its 2006 report on the tarsands, chaired by Jim Saxton (Republican, New Jersey), it acknowledged that the resource can’t be developed rapidly enough to achieve real energy independence for North America. Just to replace Persian Gulf imports alone would require sucking up all of Canada’s projected crude production by 2016: 3.8 million barrels. “North American energy independence thus would require a dramatic ramp-up in oilsands production far beyond any of the current projections,” concluded the report. Yet last January, an oilsands Experts Group Workshop directed by Natural Resources Canada and the U.S. Department of Energy supported a “fivefold expansion” of the oilsands within a “relatively short time.”
The Natural Gas Pit
At one time, the oilpatch used one barrel of conventional oil to find 100 more–a tidy energy profit ratio. The tarsands, a thoroughly unconventional product, make a mockery of such accounting and boast a net energy intensity two to three times that of conventional heavy oil. As a consequence, it now takes the energy equivalent of one barrel of oil to create two barrels of oil from the tarsands.
Much of this energy comes from natural gas, a relatively clean fuel used to
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steam up
the tar or upgrade the carbon-heavy pitch into a marketable product. According to a 2005 report by the Pembina Institute, the industry daily consumes more than half a billion cubic feet of natural gas, or “enough to heat 3.2 million Canadian homes per day.” (In 2006, industry consumption actually surpassed a billion cubic feet daily and partly accounted for falling gas exports to the U.S.) By 2012, the tarsands will burn enough natural gas each day to heat every home in Canada.
Given that experts say Canada has only a nine-year supply of proven natural gas reserves left (undiscovered and unconventional reserves might extend that timeline, but with large environmental costs), former Alberta premier Peter Lougheed has described the natural gas addiction in the tarsands as a waste of a “valuable resource.” Houston investment banker Simmons, author of Twilight In The Desert (a look at Saudi Arabia’s dwindling oil reserves) is even more blunt: “If I were a Canadian, I’d make it illegal to use precious natural gas and potable freshwater to turn gold into lead in the tarsands.” His recommendations for policy-makers are equally stark: go slow, charge for water, cap tarsands production and “find some other way to produce this atrocious resource other than using scarce natural gas….To get more addicted to the tarsands doesn’t make any sense to me.”
Although alternative sources of energy are being developed (such as burning bitumen or coke to create gas as a fuel source), most are more carbon-intensive, with the exception of nuclear energy. To replace natural gas use in the tarsands with nuclear power would require nearly a decade of planning, hellish political controversy and as many as 16 Candu 6 reactors. Yet Gary Lewis, a tarsands engineer and member of Fort McMurray-based Environmentalists for Nuclear Power, argues that such a change would “reduce CO¸ emissions in accordance with Kyoto and not harm gas and oil production in Alberta.”
(See the full article at Canadian Business)
- This might be one of the reasons that USA might want the oil price to be high so that it will be economical to extract those precious oil from Canada…if oil price goes way up…those money invested might reap huge returns but at a huge cost and limited production capabilities in Oil Sands.
My personal opinion, investment should go to old oil fields that have proven reserve but abandoned due to it’s size (Small oil fields that big oil companies don’t bother to extract).
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