Move over Saudi Arabia. Today’s petroleum and gas companies are rushing to find alternative sources around the globe. Some people suggest that Canada’s province of Alberta, which is rich in oil sands, may be the site of the next oil boom.

“There is more oil in the oil sands of Alberta than in Saudi Arabia,” says Neil Camarta, Shell’s senior vice-president for oil sands. “Canada has a huge resource of over a trillion barrels, from which we believe ultimately 300 billion barrels are recoverable from the oil sands.”

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In comparison, the US Department of Energy estimates that Saudi Arabia holds around 264 billion barrels of ‘black gold’.

The oil to which Mr Camarta is referring is sticky tar that is mined from the earth, not the black liquid that spurts up from oil-wells. And extracting oil from this tar involves more expensive technology than that involved in processing its liquid counterpart. For Alberta’s oil sands to be usable, they must be upgraded through a manufacturing process. Oil sands are substantially heavier and more viscous than other crude oils because they consist of sand, bitumen, mineral rich clays and water. Bitumen, a product of the oil sands, requires upgrading to synthetic crude oil or dilution with lighter hydrocarbons to make it transportable by pipeline and usable by refiners.

“This involves a huge petrochemical process that is very capital intensive,” says Mr Camarta. “Oil sand is very much a manufacturing business. And, in our case, also a mining business. But Canada offers the next biggest market for producing energy on earth.”

According to Mr Camarta, Shell can grow its business from its current capacity of 150,000 barrels a day (b/d) to about 500,000b/d. “We have a huge potential because Shell has nine billion barrels of reserves in the ground in Albert in oil sands,” he says.

Industry estimates call for $60bn of investment planned for the oil sands business during the next decade. By 2010, oil sands production is anticipated to be more than half of Canada’s production. “We are talking about big resources and world-scale, huge investments that are capital intensive, engineering intensive, and technologically intensive,” says Mr Camarta.

Alberta’s source of oil sands is vast, lying beneath 140,800kmsq of the province. It is the world’s largest known hydrocarbon source and an advantage of mining the resource is that, despite the cost, oil sands are unlikely to run out – whereas oil-wells eventually run dry.

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“The oil sands in Alberta is going to be the oil sands story of the future,” says Brandt Sangster, senior vice-president of oil sands for Petro Canada. “The reason is because of the decline in conventional light sweet crude. Given that it is a mature basin, people are not finding big pools anymore. Therefore, the overall production of light sweet crude is declining.”

Economic upshot

The potential for oil sands has huge economic implications. There are about 1807 oil sands lease agreements with the province, which cover 32,300kmsq. This leaves almost 80% of possible oil sands areas still available for exploration and leasing.

“The ongoing development of Canada’s oil sands plays an important role in the industry,” says John Dielwart, chairman of the Canadian Association of Petroleum Producer’s (CAPP) board of governors. “Oil sands accounted for just over half of the gross additions to Canada’s crude oil and equivalent reserves in 2002. Of the $24.7bn our industry invested in Canada in 2002, $6.7bn was invested in oil sands projects.”

Companies like Petro-Canada have a significant interest in weaning their refinery off conventional crude. “Right now it uses 85,000 barrels of convention crude and 50,000 barrels of synthetic crude from oil sands,” says Mr Sangster. “One thing that is certain is that it will be built more and more on the heavy oil from the oil sands.”

He points out that oil sands allows oil companies to keep the economy in Canada and opportunities for Alberta growing.

Investments are already enormous. After years of construction and cost overruns that bumped up the final price tag by 50% to $5.7bn, Shell Canada and partners Chevron Canada and Western Oil Sands celebrated the start-up of Canada’s third open-pit oil sands mine and upgrader, the Athabasca Oil Sands Project.

Cost pressures

Meanwhile, fearful that cost pressures would send its $5.8bn oil sands strategy much higher, Petro-Canada now has a much cheaper plan to spend $1.2bn on retro-fitting its Edmonton refinery to handle nothing but oil sands crude, while striking a deal with competitor Suncor Energy to use its northern Alberta upgrader to process at least 27,000b/d of bitumen.

“This agreement is a win for both companies,” says Rick George, Suncor president and CEO. “It’s an excellent fit with Suncor’s strategy of building stable markets for our products through long-term contracts. At the same time, the plan to process bitumen supplied from Petro-Canada’s Mackay River facility provides Suncor with more flexibility in feeding our production growth plans.”

By reconfiguring Petro-Canada’s refinery and supplying it with feedstock through an agreement with Suncor Energy Inc, the company will effectively process 53,000b/d of bitumen, providing for existing and future steam-assisted gravity drainage (SAGD) production from Petro-Canada’s leases.

“They [Suncor] will upgrade our bitumen into a sour synthetic crude,” says Mr Sangster. “This will be taken to our operation in Edmonton, which will be prepared with equipment to run a sour synthetic crude so that it can be upgraded all the way to the finished product.”

Steam technology

Other northern Alberta milestones in 2003 included the approval of Houston-Based ConocoPhillips and French energy giant Total for the $1.1bn Surmont oil sands plant, which uses steam technology to access deep bitumen reserves. Oklahoma-based Devon Energy proceeded with its $550m Jackfish oil sands plant, which also uses steam technology instead of larger, more expensive open pit mining.

Rubber stamping these investments is a key geological study released by Alberta regulators, which served as the basis for deciding to shut off a number of natural gas wells in the province to protect vast oil sands reserves. The risk is that some of the crude may not be able to be pumped to the surface using steam-injection techniques, as several companies are planning, Petro-Canada and Nexen Inc among them.

These investments will have many spin-off effects for Alberta. “The work we are doing in Edmonton will use thousands of trades people and contractors,” says Mr Sangster. “There are local benefits as well. Then there are major pieces of equipment that are purchased around the world. There are big economic spin-offs, huge royalties that go to government, the taxes from profits made here and good opportunities for our aboriginal folks in the First Nation communities. We made opportunities for them to participate in bidding for pieces of work they can handle as well.”

The application of SAGD will become increasingly important because of its ability to make vast resources/reserves accessible. Now that many of the oil players have announced plans to develop mined bitumen resources and SAGD and other thermal extraction technologies as alternatives for producing unmineable oil sands reserves, venture capital groups see opportunities ahead.

BA Energy Inc, a member of Calgary-headquartered Value Creation Group (VCG), is involved in constructing and operating an oils sands upgrader in Strathcona County. Known as the Heartland Upgrader, the facility will be built in three phases that will ultimately be capable of processing 150,000b/d of oil sands bitumen plus associated diluent.

Economic upgrading

Dr Columba Yeung, president of VCG, says that the Heartland Upgrader, which was announced in December, could represent an investment of $2bn in Greater Edmonton. “Other companies, such as US energy giant Koch Industries and Petro-Canada, had to cancel their projects mainly because upgrading is so capital expensive,” he says. “The key is to find economic upgrading. Once companies in Alberta find the solution, the province will have the ability to tap into the largest hydrocarbon deposits in the world.”

There are economic implications, too, in being a neighbour of the US, which is the largest refining market in the world. “If you can produce oil sands economically to provide oil to the North American refineries then Canada’s oil future is very promising,” says Mr Yeung.

Northwest Capital, a small venture capital firm in Calgary, wants to build a third-party heavy oil upgrader to process bitumen into light sweet crude. “We think it is time for a third-party upgrader to be built,” says Rob Pearce, partner at Northwest. The plan is to build a 50,000b/d upgrader, probably located near Edmonton. “The idea is that it would be supported by producer commitments of bitumen to the upgrader, who would pay a processing fee,” says Mr Pearce. “A great many plans are being announced to bring the bitumen on but the marketplace can only take so much bitumen. So we take the view that this bitumen needs to be upgraded.”

R&D investment

Research and development (R&D) is boosting the industry. Alberta’s oil sand companies invest C$75m-C$100m ($57.5m-$76.7m) annually in R&D to improve technology and processes to make the industry economically viable. And it is this R&D and new technology that provides the greatest promise to Canada’s future in oil.

According to Mr Pearce: “There has been a lot of technology investigation R&D work over many years, some government-sponsored, others sponsored by the bitumen oil patch players, individuals and entrepreneurs who have pursed their own different technology and processes to reduce the capital costs of building an upgrading plant.

“A lot of money has been spent on trail and error and pilot programmes. Some have been successful, others not. Our approach will be conventional but with a new catalyst that will improve the process to make the economics make sense.”

Technological boosts

Mr Sangster points to SAGD as the newest technology; he believes it will be the most economic and efficient with the highest recovery rates. “Companies are now looking at injecting vapour in with the steam to reduce the amount of energy that must go into the well,” he says. “Bottom hole pumps are also making it possible to get the bitumen to the top without applying as much pressure. Fibre optics are also making it possible for us to understand what is going into our wells. You can diagnose what is going on in the reservoir by watching the temperature.”

Local universities and the Alberta Research Institute play a large part in the R&D efforts.

Thanks to technological advancements, the cost of oil sands production has declined significantly in the past 20 years. “[Costs] have come down tremendously from C$30 a barrel in the 1970s to C$10 a barrel today,” says Shell’s Mr Camarta. “Also helping is today’s higher oil prices. At Shell, we plan our projects around the oil prices being significantly less than they are today. But the fact that prices are high today helps our start-up costs in Alberta. It encourages people to move their projects ahead aggressively.”

Oil prices

While consumers are complaining about higher prices at the petrol pumps, higher oil prices are also having a big impact on the oil sands industry. “These higher prices are creating greater cash flows,” says Mr Pearce. “Companies have more money to spend on this. Plus, as time goes by and there is greater confidence that oil prices will stay high, there is greater impetus to pull these lower value bitumen resources out of the ground. One issue that has clearly underscored the industry is that these are high-cost resources to extract. Companies need some confidence that oil prices will remain high to make these investments economically viable.”

The war in Iraq and efforts there to rebuild its oil fields is a wild card in the equation. Iraqi oil fields will affect the oil sands industry but cannot outweigh the benefits of obtaining oil from a secure nation such as Canada.

“There also seems to be a surprising amount of cohesion among the OPEC [Organization of Petroleum Exporting Countries] countries,” says Mr Pearce. “I am surprised at how well they have managed to maintain price discipline. But with the decline of the US dollar relative to many other currencies, the effective price to these other countries, Canada included, is reduced. Some think that the price of crude oil has entered a new phase that will stay at these higher levels because of the combination of lack of spare production capacity, continued turbulence in Iraq, a weakened US dollar and increasing worldwide demand.”

In this scenario, oil sands and Alberta have a great future.

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