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THE WALL STREET JOURNAL: As Prices Surge, Oil Giants Turn Sludge Into Gold

New Reserves
Total Leads Push in Canada
To Process Tar-Like Sand;
Toxic Lakes and More CO2
Digging It Up, Steaming It Out
March 27, 2006; Page A1
FORT MCMURRAY, Alberta — In February, engineers from French oil giant Total SA fired up colossal drum boilers to generate steam that will be pumped to a depth of 300 feet under the frozen ground here. If all goes well, by May, the steam will marinate a tar-like mix of oil and sand until the crude begins to flow.
Nearby, Total will go after the oil-soaked sands closer to the surface, scraping away an ancient forest of spruce and poplars and shoveling the black soil into two-story dump trucks. Fully loaded, the trucks weigh as much as a Boeing 747. Total will then use industrial versions of giant washing machines to remove the oil, generating enough liquid waste to create vast toxic lakes.
Heavy-duty oil-extraction projects like these are turning Fort McMurray into the first great oil boom town of the 21st century. A Florida-size section of sandy soil beneath the boreal forest in this sparsely populated area of Northern Canada is loaded with bottom-of-the-barrel petroleum.
These deposits were once dismissed as “unconventional” oil that couldn't be recovered economically. But now, thanks to rising global oil prices and improved technology, most oil-industry experts count oil sands as recoverable reserves. That recalculation has vaulted Venezuela and Canada to first and third in global reserves rankings, although Venezuela's holdings in extra-heavy crude are a rough guess. Saudi Arabia is No. 2. Not including the oil sands, Canada would fall to No. 22. Led by Total, nearly every major Western oil company as well as their Chinese and Indian brethren are gearing up to go after the deposits here. In all, they plan to spend more than $70 billion in the next decade unlocking the oil from the sand.
The surging interest in Canadian oil sands is stark evidence that the world isn't about to run out of oil. Instead, it is running low on readily accessible light, sweet crude — oil that flows like water, has few impurities and can be easily turned into gasoline. As the good stuff gets scarce, Big Oil is turning its attention and pouring money into extra-heavy crude, such as the giant deposits near Fort McMurray and another similar one in Venezuela.
But heavy oil has big economic and environmental drawbacks. It costs more to produce and takes more energy to turn into gasoline than traditional light oil. Recovering and processing Fort McMurray's heavy crude releases up to three times as much greenhouse gas as producing conventional crude. And upgrading it into refined products, such as gasoline or diesel, will require a gigantic investment to retool global refineries.
“The light crude undiscovered today is getting scarcer and scarcer,” says Jean-Luc Guiziou, president of Total's Canadian operations. “We have to accept the reality of geoscience, which is that the next generation of oil resources will be heavier.”
Total is making the biggest bet on heavy crude of any of the half-dozen international Western oil giants. Nearly one-fifth of its commercial reserves are in heavy-oil belts, according to oil consultant Wood Mackenzie, a larger portion than any of its Western rivals. Its stockpile of heavy-oil reserves is second only to that of Exxon Mobil Corp., a company that is more than twice as large. Total has spent years developing the complex technology needed to extract oil from tar sands in the frigid environment of Northern Canada. So much heat is required to separate the oil from the tar that Total briefly floated the idea of building a nuclear-power plant there.
The rush into the oil sands also has turned a longstanding belief about fossil fuels and the environment on its head. For years, environmentalists have argued that higher gasoline prices would be good for the Earth because paying more at the pump would promote conservation. Instead, higher energy prices have unleashed a bevy of heavy-oil projects that will increase emissions of carbon dioxide, suspected of causing global warming.
“As oil prices have gone up, you get this increased desire to get out onto the new frontiers of oil,” says Marlo Raynolds, executive director of the Calgary-based Pembina Institute, an energy and environment think tank. “We're now getting into the dirtiest sources of oil anywhere.” To be sure, rising energy prices have spawned more interest in renewable fuel sources, but those investments pale in comparison to what's going on here.
Canada, which exports more oil to the U.S. than any other country, already is having trouble meeting its pledge to cut CO2 emissions largely because of its mushrooming heavy-oil production. By 2015, Canada's Fort McMurray region, population 61,000, is expected to emit more greenhouse gases than Denmark, a country of 5.4 million people.
Canada's northern forest contains at least 174 billion barrels of recoverable heavy oil, equivalent to five years' supply for the planet, according to the Alberta Energy and Utilities Board. Venezuela has perhaps even more in the Orinoco River delta. By comparison, Saudi Arabia has about 260 billion barrels of more traditional crude, or 8½ years' global supply, according to the Energy Information Administration, the statistical arm of the federal Department of Energy. Heavy oil also is being produced in the Middle East, the Caspian Sea, Brazil and even in California's San Joaquin Valley.
In northern Alberta, the oil-sands boom is remaking the landscape. The mining operations have clear-cut thousands of acres of trees and dug 200-foot-deep pits. The region is dotted with large man-made lakes filled with leftover waste from the mining operations. To chase off migratory birds, propane cannons go off at random intervals and scarecrows stand guard on floating barrels.
Alberta's energy minister, Greg Melchin, says oil-sands development creates a minimal environmental disturbance that is outweighed by the opportunities and jobs created. “It's worth it. There is a cost to it, but the benefits are substantially greater,” he said.
Environmental groups are increasingly critical of the government's reluctance to regulate the oil sands. “The pace of development is outstripping our ability to manage the environmental issue,” says Mr. Raynolds of the Pembina Institute. “Our unwritten energy policy is dig it up and sell it as fast as possible.”
The remarkable properties of Fort McMurray's oil sands have been known for centuries. Native tribes mixed the tar-like substance with tree sap to waterproof their canoes. In the 1960s, companies now known as Suncor Energy Inc. and Syncrude Canada Ltd., a consortium of oil companies, opened oil-sands mines in the area. Both operations stumbled through periods of low oil prices but are now rapidly expanding.
When oil was trading at $12 a barrel in the late 1990s, Big Oil had little interest in oil sands. But surging energy prices have made heavy-oil investments significantly more attractive. It costs about $25 a barrel to produce crude from Canada's oil sands, an acceptable cost when oil is trading for $60 a barrel. By comparison, it can cost as little as about $5 a barrel to produce crude in the Middle East and $15 in the deep waters of the Gulf of Mexico.
For Paris-based Total, the world's fifth-largest publicly traded energy company by market capitalization, the oil sands play to its strengths. Total had its roots as a refiner rather than an exploration and production company. Oil sands were easy to find but hard to process.
Total's first foray into heavy oil was in Venezuela's Orinoco belt. In 1997, the company's giant $4.2 billion Sincor project there began producing market-grade crude. Sincor, which Total owns with Norway's Statoil ASA and Petróleos de Venezuela SA, now produces 180,000 barrels of oil a day.
The same year, Total opened an office in Calgary to determine if a similar investment was warranted near Fort McMurray. It was soon clear to Total engineers brought in from Sincor that Canadian oil sands were more technically difficult than Venezuela's heavy-oil belt. The key difference: The heavy oil in Venezuela was quite warm and flowed easily, albeit slowly, while in Canada the oil-sand mixture had the look and consistency of tar-like Play-Doh. But Canada was attractive because it offered a haven from politically unstable oil hotspots.
In November 1999, Total teamed up with the financially struggling Gulf Canada Resources Ltd. on a promising project called Surmont. Gulf Canada was later acquired by Conoco Inc. and is now part of Houston-based ConocoPhillips.
For Total, sorting out the mechanics of producing this heaviest of oils fell on the shoulders of Mr. Guiziou, a French earth scientist who had worked his way into management from his first assignment studying the geology of Argentina. In 2001, when he was being considered for the Canadian job, he flew into Fort McMurray to see what the oil sands were about. Having worked in the industry for years, he was accustomed to the look and feel of oil fields. But when he visited Syncrude's mine, where giant cranes scooped up the oil-soaked earth in buckets capable of carrying 100 tons, he was flabbergasted. “It was another world,” the 44-year-old Mr. Guiziou says.
In some places near Fort McMurray, the oil sands are close to the surface and can be mined. But at Surmont, located southeast of Fort McMurray, the oil sands are 1,200 feet underground, far too deep for a mining operation. The partners in the venture needed to find a way to get the oil.
The solution was steam. In 1978, Roger Butler, an engineer with Imperial Oil Ltd., an independent company majority-owned by Exxon Mobil, hit on the idea of drilling two wells that start off vertically, then slowly bend until they are horizontal and located one on top of the other. The top well would pump steam into the reservoir while the other pumped oil out.
Surmont was to be Total's and Conoco's first venture with the technology, so in late 1997 they started small with a 1,000-barrel-a-day pilot. They pumped steam down a pipe laced with millions of tiny slits, each no wider than the thickness of a piece of paper. The initial results were encouraging but expanding into a full-scale project took several more years.
One pressing issue: Several companies, including Paramount Resources Ltd., were producing natural gas from a shallow underground zone above the oil sands. Total and its partner convinced an Alberta regulatory body that the gas project threatened the much larger oil deposit. The theory was that if the gas were allowed to be pumped out, the steam chamber would lose pressure and Surmont would have to be scrapped. In a landmark ruling, an Alberta regulatory body ordered 146 gas wells shut off in 2000.
In December 2003, Total and ConocoPhillips decided to build the first phase of Surmont. The steaming is slated to begin later this year, with production expected to grow to 27,000 barrels a day next year. Future expansions could bring it to 200,000 barrels a day — a good-size oil field but not the biggest in the area.
At Surmont, Total was merely an investor with ConocoPhillips and its predecessor companies operating the project. Last year, the French company went from being an investor to a full-fledged participant in the oil-sands boom.
In September, it bought Deer Creek Energy Ltd. for $1.6 billion, acquiring its only significant asset: a giant oil-sands project called Joslyn north of Fort McMurray. Once fully developed, Joslyn is expected to yield 200,000 barrels a day for decades. Total plans to produce oil from Joslyn by both mining and by shooting steam underground.
Becoming an operator, Mr. Guiziou needed to confront environmental problems as Total expanded its heavy-oil holdings in Canada. Mining oil sands generates enormous volumes of liquid waste that are stored in toxic lakes that have concentrations of naturally occurring naphthenic acid, an odorless liquid used to help paint dry quickly. The prospect of cleaning up these lakes is “daunting,” the Canadian National Energy Board, a federal regulatory body, noted in a 2004 report. “There is currently no demonstrated means to reclaim fluid fine tailings,” it said.
Since the lakes are likely to be around for years to come, Mr. Guiziou is working on a plan that will result in smaller lakes. He hopes to install a new technology at Joslyn that will suck out water and leave a smaller volume of waste laced with metals before it is dumped in the lakes. But he said the technology “needs to be proved at the industrial scale.” Total expects to conduct a test later this year at a neighboring facility.
Total is also trying to figure out ways to curb greenhouse-gas emissions at its Fort McMurray facilities by using pure oxygen instead of air in its combustion engines. The company is running a pilot project in Lacq, France, to capture carbon dioxide in exhaust flues more effectively. If the technology proves workable, it could be used in Fort McMurray as well.
Despite the environmental concerns, there is a strong economic incentive for Alberta's free-market-oriented government to let oil-sands development gallop ahead. Alberta added nearly 26,000 jobs in resource extraction in the past two years. That 25% jump helped drive the province's unemployment rate down to 3.1%, a 30-year low, according to the government. For the first time, every Albertan received a 400 Canadian-dollar ($340) check from the government earlier this year from an unexpected fiscal surplus.
Total and other oil companies are continuing to announce new oil-sand projects and shovel money into the region. Earlier this month, Chevron Corp. said it planned to spend “billions” to turn 75,000 acres into a 100,000-barrel-a day field. And last week, Royal Dutch Shell PLC said it had spent nearly $400 million to lease 219,000 acres west of Fort McMurray, shattering records for public-land leases.
In February, Total moved quickly to file the regulatory permit for Joslyn to move to the front of a growing queue of projects. With all the development, everything is in short supply, including steel, energy to power the projects, fresh water and skilled construction workers.
Some projects could end up being delayed for years. “It's like you've got one door frame and the Three Stooges trying to get through at the same time,” said Tom Ebbern, executive managing director of Tristone Capital, a Calgary-based investment adviser. “Without a doubt, we can become the next Saudi Arabia but it will take 10 years longer than the market thinks.”
Write to Russell Gold at [email protected]
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