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THE WALL STREET JOURNAL: Oil Sands Are Shifting in Alberta

Wall Steet Journal image

Costs, Regulation
Are Slowing Boom;
Game for Big Players
February 5, 2008; Page A8

CALGARY, Alberta — After years of headlong growth, Canada’s oil sands have hit a speed bump.

Escalating costs, labor shortages, tax increases and the threat of tighter climate-change laws are clouding the prospects of one of the world’s biggest sources of oil. And while multinationals can cope with the tougher operating environment, smaller companies are struggling.
“About a dozen of the smaller oil-sands players are coming to me saying we can’t make this work,” says Brian Maynard, vice president of the Canadian Association of Petroleum Producers, an industry group. “Their economic model is no longer viable.”

A mixture of sand, water, clay and bitumen, Canada’s oil sands lie under an area of boreal forest larger than Florida. Alberta estimates that the province has 174 billion barrels of recoverable bitumen, making Canada’s oil reserves second only to those of Saudi Arabia.

But the oil is extremely costly to extract. Most future production will require high-pressure steam to be injected into the ground to separate the gooey bitumen from the sand it clings to, and vast amounts of natural gas must be burned to produce the steam. Multi-billion-dollar upgraders are needed to convert the bitumen into synthetic crude oil.

The turning-point came around four years ago, when crude began its rally and oil sands became economic. Thousands flocked to Alberta to seek their fortune. Fort McMurray, the hub of the oil rush, was dubbed “Fort McMoney.”

Richard Gusella, chief executive of Connacher Oil & Gas Ltd., says he paid $20 an acre for land near Fort McMurray in January 2004, when oil cost $30 a barrel. “In October, crude went up to $60 and the price of land went up to $2,000 — $4,000 an acre,” he says.

The majors also piled in. Canada was that rare beast — an oil-rich nation where the state didn’t confiscate your oil fields. In fact, Alberta was so lightly regulated that environmentalists called it the “Nigeria of the North.” France’s Total SA, Anglo-Dutch Royal Dutch Shell PLC, StatoilHydro ASA of Norway, Exxon Mobil of the U.S. and the United Kingdom’s BP PLC all have invested in the area.

The result: a massive boom. Oil sands projects valued at $100 billion are currently in the pipeline, cementing Canada’s position as the No. 1 crude-oil supplier to the U.S. Northeast of the city of Edmonton, in an area nicknamed Upgrader Alley, oil producers have built massive plants to process northern Alberta’s bitumen. Eight new upgraders have either been proposed or are being built.

Yet in the past year or so, Canada’s reputation for stability and predictability has begun to slip.

Last year “was a year of very volatile change,” says Greg Stringham, a CAPP vice president. “Policy uncertainty” is one of the biggest challenges the oil-sands industry faces this year, he says.

The changes are being driven in part by the beginnings of a local backlash. Fort McMurray has seen its population nearly double to 65,000 from 34,000 in 1996. That has placed a huge strain on everything from hospitals to waste-water treatment plants. Five years ago, an average family home in Fort McMurray cost $350,000. Now it is more than $600,000.

Wood Buffalo municipality, which includes Fort McMurray, has lobbied unsuccessfully for a moratorium on new oil-sands projects. “We don’t have the capacity to accommodate new people until we can get the services in place,” says Mayor Melissa Blake.

As local concerns grew, so did regulatory pressure on the industry. Authorities have imposed restrictions on water use, tougher rules on land reclamation and caps on emissions of toxic gases like sulfur dioxide. They have also required industrial companies to reduce the intensity of their greenhouse-gas emissions.

That was driven by a growing realization of the environmental harm wrought by oil sands. Producing a barrel of synthetic crude oil from Alberta’s bitumen generates on average more than three times more greenhouse-gas emissions than conventional crude. In Canada, oil sands are now the single largest contributor to the growth of gases linked to climate change.

Ecologists have called Alberta’s climate-change policy toothless. They say reducing “emissions intensity” — making companies emit less for every barrel they produce — hasn’t stopped total emissions growing along with oil output.

“The oil sands guys are being given a very easy ride,” says Simon Dyer of the Pembina Institute, a Canadian environmental think tank.

Tougher regulations may be a matter of time. At December’s climate change talks in Bali, Indonesia, Canadian Prime Minister Stephen Harper argued that all major emitting countries should sign on to a new greenhouse-gas reduction deal. Many oilmen are bracing themselves for more stringent legislation in the years to come.

“I’d like to say there’s no regulatory risk in Alberta, but I can’t any more,” says Neil Camarta, senior vice president at Petro-Canada. “The screws are getting tighter.”

Alberta’s government last year held public consultations on a new climate-change plan that is due to be unveiled in the coming weeks. According to Pembina, the message from Albertans was for much tougher government action on global warming, including absolute emission targets.

Already, oil-sands projects are coming under more scrutiny. “Regulatory approval is taking a year now, for every project you apply for,” says Connacher’s Mr. Gusella. Every plan now requires a full environmental-impact assessment, he says.

Alberta’s government sees the solution to climate change in technology which would capture CO2 from power plants and oil-and-gas operations and store it underground. Energy companies back the idea, saying it could help reduce emissions by 20 million tons a year by 2020. But the costs are exorbitant — as high as $120 per ton. That could turn out to be hugely expensive for a company like Royal Dutch Shell, which will emit 15 million to 20 million tons of CO2 a year as it ramps up production at its Alberta oil-sands project to 770,000 barrels a day.

Fiscal pressures are also increasing. Faced with simmering public anger at Big Oil’s soaring profits, Alberta last year increased the royalties oil producers have to pay the provincial government. Though the increase was less onerous than many had feared, it raised the cost of capital for some companies, forcing them to delay big projects.

Analysts say that has led to a shakeout. Majors like Shell with easy access to capital, expertise at managing big projects and the technology to reduce carbon emissions can roll with the punches. But smaller companies are being bruised.

Synenco Energy Inc. said last May it couldn’t afford to build its $10.7 billion Canadian dollar (US$10.8 billion) Northern Lights bitumen mining and upgrading project, which it owns in a joint venture with Chinese state-controlled oil giant Sinopec, as rising costs rendered the venture uneconomic. It said it would explore “strategic alternatives” that could include the sale of the company. Synenco slashed its work force and saw its share price plummet.

“Two years ago, anything with oil sands in the name was attractive,” says Peter Tertzakian, an economist at Calgary-based ARC Financial Corp. “Now there’s more discrimination between the large established players and the junior, entrepreneurial companies.”

All these changes come amid a substantial rise in industry costs — for steel and other materials such as cement — and a dire labor shortage. “Costs are rising as fast as oil prices,” says Brian Straub, executive vice president of Shell’s Athabasca venture. “Our capital costs are now two-to-three times higher than they were when we started the base project in the late 1990s.”

That is forcing some to have a rethink. Canadian producer Nexen Inc. last October said it was reviewing its overall execution strategy on oil sands in light of “uncertainty regarding climate change regulations” and changes to the royalty regime.

Meanwhile, Petro-Canada has delayed its huge Fort Mckay oil-sands development while it assesses the impact of the royalty change.

The new climate is already being reflected in revised forecasts for oil-sands production. Mr. Maynard of the CAPP said the group has scaled back its estimate for 2020 oil output from 4.3 million barrels a day to 3.8 million barrels. Current production is 1.1 million barrels a day.

The oil sands remain a huge draw, but the initial enthusiasm of the first boom years has given way to greater realism as barriers to entry emerge. “This is not a game for the weak of heart or the shallow of pocket,” says Petro-Canada’s Mr. Camarta. “This is a big game for the big players.”

Write to Guy Chazan at [email protected] and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

1 Comment on “THE WALL STREET JOURNAL: Oil Sands Are Shifting in Alberta”

  1. #1 Jeff
    on Mar 9th, 2008 at 21:05

    A friend of mine sent me a link of a company he was going to invest in, OilSands Quest, Inc., at about $4/share. The company hasn’t produced one drop of oil, and probably won’t until 2011 or so.

    They control a lot of land, I don’t think they own it. I guess it’s hit or miss, the company stock could go skyward. They’re also projected to lose another $68 million or so this year.

    What’s your take on this company?



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