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Oil Sands Could Sink Oil Imports

By Ken Silverstein

Scarcity may be the mother of invention. When the demand begins to outstrip a finite supply, prices invariably rise and the free market comes up with alternatives. Such is the thinking when it involves coping with the current oil situation that now forces consumers to pay $2.50 at the gas pump. What to do?


Enter oil sands: The idea is that the abundant resource could supplant our dependence on foreign oil imports within a decade, or two. And as the technology to produce the stuff improves, the cost to find it could drop and the ultimate oil discoveries might escalate. According to CIBC World Markets, oil rigs are the primary source of all new findings today. But, as conventional sites become less productive, the bank says that Canadian oil sands will become the single biggest contributor to incremental global supply by 2010.

That's a rosy outlook that must be tempered with enthusiasm. "Oil sands are a good resource," says Paul Grimmer, president of Eltron Research in Boulder, an energy firm working on hydrogen solutions among other things. "The big challenge is whether it is technically feasible. It is. But it requires large amounts of natural gas and water."

Oil sands, sometimes called tar sands, are buried in the ground. It is a rich resource with as much as 500 years worth of reserves. And much of it can be found in our friendly neighbor to the north, Canada. It is mined and processed, much like coal. The subsequent oil is separated out through a highly energy-intensive process and it ultimately produces a tar-like substance that is chemically split to make crude oil. It all takes lots of water and natural gas, making it an expensive undertaking at present.

According to the U.S. Geological Survey, Canada will soon rival Saudi Arabia when it comes to recoverable oil production. Two years ago, the government agency ranked Canada 20th on the list of global oil potential suppliers with about 5 billion barrels of oil that could be mined. Today, it's second on the list with 175 billion barrels -- all because of its oil sands deposits. By contrast, Saudi Arabia has an estimated 260 billion barrels of oil reserves.

The unconventional oil commodity now accounts for about a third of Canada's production. But, the agency says that it could supply 70 percent by 2025. Experts at Shell Oil Co. say there are as much as 2 trillion barrels of reserves in Canada's domain and that more and more will become accessible with the development of new technologies that allow for cheaper production -- accounting for the 500-year estimate. Altogether, about 70 nations including the United States have oil sands deposits.

The Canadian enterprise Suncor Energy has been producing crude oil from oil sands since 1967 while the joint Canadian-U.S. company Syncrude has been doing the same since 1978. Their potential is reflected through their stock prices: The former, for example, now produces 270,000 barrels a day and has plans to expand that to 500,000 by 2012. Its stock has risen by 400 percent in the last five years.

"Fundamentals point to the continued strength in crude oil prices and (Canadian oil sands companies are) in an enviable position to benefit from this market," says Marcel Coutu, CEO of Canadian Oil Sands Trust, which is the country's largest income trust.

Environmental Issues

Clearly, the need for alternative fuel sources as well as unconventional petroleum is strong. In 2002, global oil consumption was at least twice as great as new oil discoveries. Today, the world community uses 85 million barrels a day while the United States consumes a quarter of that.

Meantime, emerging nations such as China and India are demanding ever-increasing supplies of oil to feed their expanding economies. Altogether, demand for oil will rise by 54 percent in the next 20 years, says the U.S. Department of Energy. To meet the expected future demand, it says that global production would have to jump by 44 million barrels of oil per day.

It takes at least five years to bring new oil supplies on line. At the same time, once-plentiful lifelines in the North Sea and Kuwait are depleting. Demand won't fall. So, it all means that gas prices will remain high when compared to historical levels. Therein lays the incentive to develop new sources of production, or other transportation alternatives. The market now reflects the possibilities: A member of the Canadian Parliament told CBS' 60 Minutes that the oil sands frenzy is bigger than America's Gold Rush in 1849.

But there's a catch, or a few of them at this point: It costs about $3 a day to develop a barrel of oil in the Middle Eastern nations compared to roughly $20 a barrel for oil sands in Canada. And recall the process whereby the oil is extracted from the dirt? Well, that cycle consumes a lot of energy because developers have to burn oil or natural gas to separate the oil from the elements. That adds cost. It also creates more carbon emissions thought to cause global warming.

Beyond those barriers, the mining of the commodity leaves an awfully large footprint in the wilderness. At the same time, environmental organizations are concerned that the optimism surrounding oil sands will only add to the world's dependence on fossil fuels at a time when it says that cleaner and sustainable energy alternatives are available.

Others are also expressing caution. "It takes a lot of natural gas to process oil sands, and much more will have to be allocated," says James Halloran, Wall Street analyst for National City Bank in Cleveland. Without the added natural gas, "technological improvements will have to be made to make up for the lack of it. At some point, the cost to the environment may limit production growth." Producers, meanwhile, are having trouble getting the needed resources to support increased development of oil sands.

The oil companies don't dispute any of the concerns. As far as the mining and production processes go, they say that Canadian law requires them to replant destroyed forestland and that they are continually trying to find new ways to limit their harmful air emissions.

Still, the one pervasive reality hovering over the whole discussion is that there are oil constraints that have led to higher prices and worries over future supplies.

The profile of oil sands is therefore rising. If the projections bear fruit, the commodity may provide a lifeline. And the good news is that it can be found in neighboring Canada that is business-friendly.

Ken Silverstein is Editor-in-Chief of EnergyBiz Insider. EnergyBiz Insider is published three days a week by Energy Central. For more information about Energy Central, or to subscribe to EnergyBiz Insider, other e-newsletters and EnergyBiz magazine, please go to http://www.energycentral.com/. Petroleumworld not necessarily share these views.

Editor's Note: This commentary was originally published by EnergyBiz Insider, February 15, 2006; Page A21. Petroleumworld reprint this article in the interest of our readers.Petroleumworld reprint this article in the interest of our readers.

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Petroleumworld 02/19/06

Copyright ©2006 Ken Silverstein. All rights reserve

 

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