U.S. energy future rests with development of Canadian oil sands

Knight Ridder NewspapersOctober 5, 2005 

FORT McMURRAY, Alberta—Along a giant patch of Canada's Far North, where moose outnumber people, a vital part of America's energy future seeps out of riverbanks and is hidden below soft prairie grass.

These Canadian oil sands will help keep American SUVs running in the years to come.

Oil sands?

In the north of the remote Alberta province rests the equivalent of 1.7 trillion barrels of oil. An estimated 176 billion barrels is recoverable with today's technology, and perhaps twice that amount is potentially recoverable. But this oil can't be pumped from the ground the conventional way. It's spread across more than 54,000 square miles, about the size of North Carolina, and is mixed with sand and clay.

"It's the single-largest hydrocarbon deposit on the Earth, and it's next door to the biggest market for oil products, the United States. What's wrong with it? It's crap oil," said Neil Camarta, senior vice president of oil-sands operations for Shell Canada.

"You've got to use a lot of energy and a lot of pots and pans to extract it from the sand, and you have low-quality oil. It's a high-cost business and a lot of capital and a lot of operating costs," Camarta said.

Don't mistake that for discouragement.

"The good news is, once you've got those pots and pans on the ground, you never run out of oil. The resource is almost infinite, so we never decline," Camarta said.

Canada already quietly has surpassed Saudi Arabia as the United States' largest foreign supplier of crude oil and petroleum products. The U.S. Energy Department believes foreign oil will account for as much as 72 percent of U.S. supplies by 2025.

The sands contain a tarlike grade of crude oil called bitumen, which must be separated from the dirt through a costly, complicated boiling process. Hydrogen is added, sulfur and nitrogen removed, and the final product is synthetic crude oil.

Shell's Athabasca Oil Sands Project—a joint venture between Shell, ChevronTexaco and other companies—already produces about 155,000 barrels of oil a day. Within a decade, it should produce half a million barrels per day.

America consumes 20.7 million barrels a day, and of that about 12.1 million barrels are imports.

Shell runs the newest of the three well-developed oil-sands operations. All three expect to produce at least half a million barrels of oil within a decade. Suncor Energy Inc., formerly part of the Sun Oil Co., began producing synthetic crude oil in 1967. Syncrude Canada Ltd. has operated since 1978; 25 percent of it is owned by Imperial Oil, whose majority shareholder is ExxonMobil.

"This is the one place where you can bring on oil. You know the costs, you know what you're dealing with," said Robert Esser, director of global oil and gas resources at Cambridge Energy Research Associates. "It's in the process of taking off—it's not just starting; it's there. These are major companies and major sums of money entering this playing field."

Oil-sands operators are expected to produce this year more than 1.1 million barrels of oil a day, for the first time surpassing Canada's conventional oil production, which is forecast for 1 million barrels a day.

By 2020, oil-sands operators and their partners will have invested more than $100 billion to make real what just a few years ago was dismissed as a pipe dream.

"The scale is unimaginable compared to what had been envisioned," said D. Guy Jarvis, a vice president of Enbridge Pipelines Inc., an important piece of the oil sands' future.

Enbridge, based in Calgary with U.S. operations in the Gulf Coast region, plans to build by 2009 the 780-mile Gateway Pipeline. It would take oil-sands oil to the Pacific Ocean, where tankers could take it to California or China, whose state oil companies this year bought into various oil-sands partnerships.

Oil-sands production is projected to reach 2.3 million barrels of oil per day by 2010, 3.4 million barrels by 2015 and 5 million barrels by 2035.

Arriving at those numbers won't be pretty.

Two tons of dirt must be mined and processed to produce a single barrel—or 42 gallons. Around the clock, huge three-story trucks carrying up to 400 tons snake through vast mine pits that literally resemble mini-Grand Canyons.

"We really are digging the biggest hole on Earth," said Myles Kitiwaga, an environmentalist with Toxics Watch Society of Alberta in the provincial capital of Edmonton. The environmental group is one of several that fear strip mining is far outpacing the restoration of land.

When one arrives at oil-sands operations, Alaska-like wilderness abruptly ends and heavy industry begins. Chimneys belch smoke. An open pit stretches as far as the eye can see. Before sunrise, a miles-long procession of pickup trucks and buses crawls north from Fort McMurray, a boomtown five hours from the nearest city.

Half an hour away at Syncrude's operation, mined dirt moves along a conveyor belt that handles 14,000 tons of earth an hour, or 35 loads from the three-story trucks. Giant shovels dig more than 1 million tons of earth a day. Crushers smash the oily earth into chunks 16 inches or smaller, which then are mixed with steaming water and fed by pipeline into an extraction plant that separates oil from sands.

Less than two decades ago, production costs were as high as $30 a barrel. That's come down to less than $18 a barrel—still high considering it costs some countries less than $4 a barrel to produce conventional oil. But oil now sells for between $60 and $70 a barrel. The math is simple. Oil sands are profitable.

"It the early ྌs, we had to prove that the technology would work and the system would work and the economies of scale would be there. Then ... we began to hone in on the costs," said Jim Carter, Syncrude's president and chief operating officer. "Fortunately, the timing has just been perfect, with the world's crude oil demand going up and prices going up accordingly. It's made it a pretty attractive business."

Success brings challenges, however.

So many projects are happening at once that it's difficult to find both skilled and unskilled labor, engineers and pipe welders. And with several more oil-sands projects being developed, everything from tires for the gargantuan trucks to metal pipes for scaffolding is scarce. Consequently, prices for everything are soaring.

And because of their remote location, oil-sands operators must pay high wages.

"I managed to pay more than three-quarters of my student loans in the nine months I worked just outside Fort McMurray. And they were some hefty loans because I had four years in university," boasted Amanda Hogg, 23, who just left a job as an oil-company chemist. "They're paying big bucks."

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For more information about the oil sands:

http://www.alberta-canada.com/oandg/files/pdf/oilsands_spring2005.pdf

For more information about the world oil supply:

http://www.eia.doe.gov/oiaf/aeo/

———

(c) 2005, Knight Ridder/Tribune Information Services.

PHOTOS (from KRT Photo Service, 202-383-6099): CANADA-OILSANDS

GRAPHIC (from KRT Graphics, 202-383-6064): CANADA-OILSANDS

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