Financial Times: ‘America’s energy security blanket’

By Ed Crooks
Published: May 21 2007 03:00 | Last updated: May 21 2007 03:00

The scene of the exploitation of the developed’s world’s biggest oil resource is like some dystopian fantasy. Vast pits are carved out of the forest, where machines toil day and night taking hundred-tonne bites out of the earth. Mist rises from sluggish lakes of polluted water and great columns of steam rise into the air.

The process of turning Canada into an energy superpower is an awe-inspiring, but disturbing, sight.

In recent months there has been a renewed surge of interest in the oil sands by international companies. But campaigners are raising the alarm about the environmental damage being caused and they hope to get the issue on to the agenda of the summit of the Group of 8 leaders in Germany next month.

The resource potential of the oil sands is enormous; with 174bn barrels thought to be recoverable using existing technology, the known reserves are exceeded only by Saudi Arabia. Thecompanies operating there have investment plans that imply a rapid increase in the rate at which that potential is realised.

From about 1.2m barrels a day today, the industry reckons production could reach 4m b/d by 2020, potentially making Canada the world’s fourth-biggest oil producer, surpassed only by Saudi Arabia, Russia and the US.

As Brian Hall of IHS, a consultancy, puts it, the oil sands are “America’s energy security blanket”.

For international companies, too, the oil sands are powerfully attractive.

Saudi Arabia is closed for oil production, Iran and Iraq are very difficult, Russia and Venezuela are tightening the screws on internationalcompanies. By comparison, Canada is a dream.

The problem is cost of extraction. The oil is in the form of bitumen, which is solid at normal temperatures, and mixed with sand and clay. So it needs to be heated with hot water or steam to separate it out, either underground, or after being mined by mechanical diggers and carried to an extraction plant in the world’s biggest dump trucks.

After that, the heavy oil extracted needs to beprocessed, in an upgrader, before it can be sold on the crude oil market. Shell Canada, a wholly-owned subsidiary of Royal Dutch Shell, says costs of the whole process work out at about C$25 a barrel.

The costs of new developments have been soaring, largely because of shortages of labour and steel.

But as demand for oil surges in Asia, and fresh sources of supply seem increasingly hard to find, expectations have increased that the price will stay high, encouraging companies to raise the stakes in their oil sands investments.

Last month Shell completed the $C8.7bn (£3.6bn) acquisition of the 22 per cent of Shell Canada that it did not already own, enabling it to integrate the business fully with its US refining and marketing.

In January Shell Canada set out plans to raise its production to 770,000 barrels of bitumen a day.

“Canada is obviously a scale of opportunity which matters hugely to Shell worldwide,” says Clive Mather, Shell Canada’s chief executive, who is being moved aside in the reorganisation.

Also last month, Statoil of Norway agreed to pay $2bn (£1bn) for North American Oil Sands Corporation. This month, Total began theprocess of securing approval to build an upgrading plant near Edmonton, Alberta, to process its oil sands, as part of a C$10bn-C$15bn investment programme.

“Even after all the cost increases, we have not seen any companies scrapping their investment projects,” says Pauline Dingwallof Wood Mackenzie, the analysis firm.

Potential limits to the growth of the oil sands are a lack of resources, in particular the water used to separate the oil from the sand, and the gas used to heat the water.

But there are many initiatives under way both to limit the use of resources and to find new sources of heat and water. The environmental problem for which there is no solution yet in sight is the oil sands’ output of greenhouse gases. Unless there is a change in policies, the oil sands alone are expected to account for nearly half of the increase in Canada’s greenhouse gas emissions to 2010. The Conservative government put forward a plan for a 20 per cent cut in Canada’s emissions by 2020.

However, the oil sands and other large emitters are given special treatment:by the terms of the government’s proposals, they would be committed to reduce only their carbon dioxide intensity relative to their output.

The oil sands are growing at such a rate that that would mean their emissions would continue to increase.

It would in principle be possible to capture the carbon dioxide that is emitted and to store it in underground reservoirs. But the industry agrees that such a development is a decade away and that it would require very considerable government support.

Lorne Johnson, of the WWF, formerly World Wildlife Fund, in Canada said: “The oil sands are the principal economic and hence political obstacle to Canada fulfilling its international commitments.

“They are the goose that laid the golden egg, and no-one wants to kill it.”

Canada’s oil sands then and now

Canada’s oil sands arose about 50m years ago, when oil – formed from the bodies of plankton and other plants and animals – was forced eastwards by the Rocky Mountains. As it migrated, the oil mixed with sand and clay from what had once been an ocean covering Alberta in western Canada. That makes oil sands much harder to exploit than conventional resources in which the oil is trapped in porous rocks. The oil has been known about since prehistoric times – native peoples used it to waterproof their canoes – but large-scale exploitation began only in the 1960s. The latest series of development began in the late 1990s, gathering momentum as the price of oil climbed from less than $12 a barrel in 1998-99 to more than $75 a barrel last year. All the world’s biggest oil companies invest in oil sands, with the notable exception of BP. Royal Dutch Shell, ExxonMobil, Total and Chevron is each represented, with Shell having greatest exposure of the majors. Many other international companies have been investing, including the Chinese, in the shape of Sinopec and CNOOC. Several Canadian companies are also active, including Suncor, which pioneered development of the oil sands, Petro-Canada, EnCana, Canadian Natural Resources and Nexen, which has been the subject of takeover speculation.

Copyright The Financial Times Limited 2007

 

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