Canadian Oil from Tar Sand: Mr. Sandman, Bring Me Some Oil

[ Oil reserves elsewhere are not what they once were …

It is not easy and it is not cheap, and through most of the 1980’s and 1990’s, it was not attractive to pursue, because there was plenty of crude oil available from more convenient sources and the market price was too low to reward large-scale tar sands development.

–BL ]

31 August 2004 | New York Times


FORT McMURRAY, Alberta – From the moment that Suncor Energy’s sleek corporate jet takes off from Calgary each morning, it is obvious that the plane is headed for a boom town. What was once one of the sleepiest corners of Canada’s energy industry is going through a spurt of frenetic development.

The geologists, roughnecks and recently minted M.B.A.’s being ferried north by the Suncor jet are all focused on one objective: an unconventional approach to producing oil by sucking the viscous tar out of the sandy soil around Fort McMurray, a city of 50,000 where the temperature can dip to 40 degrees below zero in the winter.

It is not easy and it is not cheap, and through most of the 1980’s and 1990’s, it was not attractive to pursue, because there was plenty of crude oil available from more convenient sources and the market price was too low to reward large-scale tar sands development.

Both sides of the equation have now changed. North America’s crude oil resources have been so thoroughly explored and developed that experts say there is hardly any left to find, except perhaps in the deep waters of the Gulf of Mexico. In the rest of the world, most of the best places to drill for new oil are off limits to the Western energy industry for political reasons, and existing fields are already pumping every barrel they can.

So, with roaring global demand driving energy prices up to record levels over the last few years and fresh supplies of crude oil so hard to find, Suncor and more than a dozen other energy companies, including Exxon Mobil, ChevronTexaco and Royal Dutch/Shell, are pursuing projects here.

Their output is already crucial to the United States’ energy supply. The flow of oil extracted from Alberta’s tar sands, also called oil sands, surpassed one million barrels a day at the end of 2003, and it is expected to double to two million barrels by 2010, matching the output of significant members of the Organization of the Petroleum Exporting Countries like Libya and Indonesia. Much of the oil goes south across the American border.

Yet while the United States deepens its reliance on Canadian energy – Canada is already the country’s largest supplier of both oil and natural gas, ahead of Saudi Arabia, Mexico and Venezuela – the frenzy of tar sands development in Alberta highlights an uncomfortable fact about the search for unconventional sources of oil to replace dwindling conventional supplies: it depends on petroleum prices staying high for decades to come.

Energy economists in Calgary, the freewheeling commercial capital of this sparsely populated but energy-rich province of three million, say that most tar sands projects are viable only when oil is selling for more than $30 a barrel. [Light low-sulfur crude for October delivery settled in New York yesterday at $42.28 a barrel, down 90 cents for the day.]

It often costs as much as $15 a barrel to get bitumen, a thick, sticky form of crude oil, out of the sands, compared with recovery costs as low as $2 a barrel for crude oil in parts of the Middle East. Refining the bitumen also costs much more than refining light crude. Many energy companies ignored the sands when light crude was fetching just $10 a barrel in the late 1990’s, but no longer.

“The attractiveness for a country like the U.S. is that we’re right next door, politically stable and friendly to private enterprise,” said Peter Tertzakian, chief energy economist at ARC Financial, a Calgary investment firm. “The downside is that it’s costly to produce, and open to criticism from environmentalists, who view the oil sands as a great polluter.”

Anywhere in the world, of course, it takes energy to produce energy. But tar sands operations are especially voracious, consuming about 1,000 cubic feet of natural gas to convert a barrel of bitumen into the light crude that refiners want.

Every cubic foot of gas used to support oil production around Fort McMurray is one less that Canada can export to the United States, where gas, too, is in short supply. The rapid run-up in demand here was cited last year by Alan Greenspan, the chairman of the Federal Reserve, as one reason that natural gas prices remain high in the United States.

Suncor’s operations offer a glimpse of how great an undertaking it is to produce oil here. The company, based in Calgary, was a pioneer in oil sands exploration in the 1960’s, but it has been in only the last few years that its growing production made it influential in the North American oil industry. Its oil sands output averaged 248,000 barrels a day last month. Suncor recently acquired a refinery in Denver capable of processing the oil so it can be sold throughout the United States.

Most of Suncor’s production comes from an operation resembling an immense open-pit mine. Huge Caterpillar and Komatsu dump trucks weighing 240 tons or more carry loads of soil scooped out of the earth with large shovels. The trucks and shovels run around the clock throughout the year, barreling over the frozen soil in winter and struggling through the sticky sand in the summer.

Suncor’s management, led by its Colorado-raised chief executive, Richard L. George, emphasizes productivity in a push to bring down recovery costs. Interruptions are expensive: halting a dump truck costs the company as much as $50 a minute.

Employees at the mine, bused out daily from Fort McMurray, normally work six consecutive 12-hour days, then have six days off; starting pay is about 25 Canadian dollars (about $19) an hour. The rapid development of the oil sands has brought thousands of newcomers to Fort McMurray and pushed up housing prices to some of the highest in Canada: one-bedroom apartments rent for 1,300 Canadian dollars or more a month, and single-family homes average more than 300,000 Canadian dollars.

“After high school, I moved away, but the money brought me back,” said Cynthia Deutsch, 29, a truck driver and a rare born-and-bred McMurrayite. Ms. Deutsch also said that she liked the view from the cab of her 360-ton truck.

Once drivers like Ms. Deutsch deliver the soil to the crushing machines, hot water is used to separate the bitumen from the sand, in a process not unlike an old-fashioned butter churn. It generally takes about two tons of sand to yield one barrel of oil. Different methods are used at projects where the bitumen is extracted underground.

So much natural gas and electricity is used to run machinery and melt away mud that the oil sands operations have become significant contributors to Canada’s total emissions of global-warming gases. Since Canada endorsed the Kyoto Protocol in 2002, committing it to reduce such emissions, energy companies here have taken steps like investing in emission-reducing technology and buying “carbon credits.”

Suncor, for instance, has become one of Canada’s largest developers of wind-generated electricity, and it has acquired tracts of rain forest in Belize to protect them from clearing and logging, offsetting the effects of its tar sands operations, according to Brad Bellows, a company spokesman.

Environmentalist critics say such efforts are little more than window dressing and do nothing to relieve North America’s dependence on oil.

“They’re turning silk purses into sows’ ears, rather than the other way around,” said Thomas Adams, executive director of Energy Probe, a Toronto-based group that promotes energy conservation. “Those who think this is the Saudi Arabia of the month are bound for a shock.”

Environmentalists are not the only tar sands skeptics. Some of the major oil companies, like BP, have steered clear, noting that for nearly a century, attempt after attempt to extract heavy oil from the sands on a commercial scale foundered, littering the area around Fort McMurray with abandoned technologies. The city even has a museum with old equipment, the Oil Sands Discovery Center, on the outskirts of town.

Yet many in the oil industry are betting that the tar sands moment really has arrived this time.

According to the Athabasca Regional Issues Working Group, an organization representing energy companies, some 28 billion Canadian dollars in oil sands investments are planned over the next decade. By next year, the sands are expected to account for half of Canada’s crude oil output and about 10 percent of overall oil production in North America.

The believers received a boost last year when statisticians at the United States Department of Energy started counting oil sands in their estimates of Canada’s oil reserves, raising them more than thirtyfold at a stroke, to 180 billion barrels from 4.9 billion. That vaulted Canada to second in the world rankings, behind Saudi Arabia.

The other country with significant known bitumen reserves is Venezuela, but its efforts to step up oil production have been hindered in recent years by internal political tensions. Suncor, in fact, has begun recruiting Venezuelan technicians who are familiar with bitumen technology and who lost jobs at the Venezuelan state oil company when President Hugo Chávez moved to purge his political opponents from its ranks.

Other analysts have also begun to see promise in oil sands, despite the widespread view that traditional oil wildcatting is still more profitable. Wood Mackenzie, an energy consulting firm, noted in a recent report that internal rates of return on oil sands projects average 13.6 percent, compared with 33.4 percent for offshore oil projects in the Gulf of Mexico and 18.2 percent in the waters off West Africa, which are also attracting large amounts of new investment. But while production in those areas is expected to peak in a decade or so, the oil sands are expected to remain robust for 30 years or more.

The oil sands have transformed Fort McMurray, whose population has quintupled since 1970. It now has its own Harley-Davidson dealership, even though it is far too cold here to ride a motorcycle for much of the year. Fast-food restaurants and other service companies have trouble keeping workers, who quickly jump to the oil sands whenever jobs open up. A local outlet of the Tim Hortons coffee and baked goods chain displays a sign promising help in paying health benefits, free meals, free uniforms and paid training.

Typically for an oil boom town, most of Fort McMurray’s new residents are men. The marquee over the doors of the Oil Sands Hotel advertises a telling range of services: check cashing, gambling with slot machines, and “4 exotic dancers.”

The political risks associated with the oil sands would seem to be tiny compared with volatile places like the Middle East or Venezuela. But that does not mean that the oil boom here has come without revealing a bit of tension between prosperous Alberta and the rest of Canada.

Ralph Klein, the premier of Alberta, said in July that surging royalty payments from oil and natural gas production would allow the province to pay off all its debt by next spring, even as it continues to forward revenue to the national government to support social spending in other parts of the country.

Resentment over those payments has led to a few calls from fringe groups for Alberta to secede from Canada, or at least to collect its own income taxes, organize its own pension plan and replace the Royal Canadian Mounted Police with a provincial police force.

Though far-fetched, such ideas are not entirely foreign to those engaged in the race for oil here.

“Our political guys just like to remind the rest of the country where the money comes from every once in a while,” said Brenda Erskine, a director for community relations for Suncor in Fort McMurray.

Leave a comment