Sands of time give Canada an oil advantage

www.chron.com Feb. 17, 2003, 11:57PM By TOM COHEN Associated Press

FORT McMURRAY, Alberta -- Along the Athabasca River of remote northern Alberta is an engineer's dream: miles of gigantic projects turning once unrecoverable oil from Alberta's tar sands into black gold.

Trucks as big as houses rumble on tires 10 feet tall and shudder under 100-ton loads of oil-rich sand dropped in by towering shovels. The brown-black earth is turned into slurry, then travels by pipeline to plants where it will be refined into crude oil, diesel and other fuels and chemicals.

Such synthetic oil projects -- those involving more than conventional drilling -- often bear a stigma as high-cost, low-yield investment turkeys. The Alberta oil sands, though, have reached high-level production at a workable cost with reserves that will last decades.

And the global terrorist threat and instability associated with conventional oil sources such as the Middle East have made Canadian oil a crucial component of U.S. hopes for a secure energy supply.

"Sept. 11 was a watershed event for the oil sands," said Patrick Bryden, a research analyst for FirstEnergy Capital of Calgary who considers the Canadian resource "a strategic asset for North American oil supplies."

The U.S. domestic supply has matured, while supplies in the Middle East and former Soviet Union are tainted by uncertainty of access, Bryden noted. Political unrest has raised questions about Venezuela, a major U.S. supplier.

"When the going gets tough, the dependable oil is going to come from Canada," Bryden said.

That means the oil sands and the mega-projects that use surface mining or more technologically advanced steam-driven extraction methods to produce almost 1 million barrels of crude or refined oil each day.

Production is expected to reach 1.8 million barrels a day by 2010, with known recoverable reserves of 315 billion barrels, comparable to Saudi Arabia.

Overall, Canada produces 2.3 million barrels a day and exports 1.4 million, all to the United States, making it one of the top four suppliers of foreign oil with Saudi Arabia, Venezuela and Mexico, according to Greg Stringham, vice president of the Canadian Association of Petroleum Producers, an industry lobby group.

The Canadian oil provides 15 percent of total U.S. imports, and industry figures expect that to increase. Suncor Energy Chief Executive Rick George said the U.S. market buys 30 percent of his company's production, and that figure eventually will rise above 50 percent.

President Bush mentioned the oil sands when referring to energy policy last year, thrilling industry leaders, although he used an outdated phrase.

"Bush came out and called them the tar pits," Stringham said.

"That's fine with us, as long as he recognizes the huge size and potential there."

The tar reference comes from Canadian explorers who saw Indians sealing their canoes with the thick, black substance known as bitumen bubbling from the Athabasca River banks.

Decades of persistent but mostly futile research followed, with initial entrepreneurs trying and failing at conventional drilling in the early 20th century.

Scientists figured out as early as 1920 how to mix the black, sticky oil sand with hot water and caustic soda, then shake it up to separate the components, with the heavier sand sinking to the bottom and the bitumen rising to the top.

It took until 1967, though, for Suncor to develop the first major project, and others, including Syncrude, Exxon Mobil, Imperial and Shell, have since put up money to get huge operations going, with a boost from government incentives that helped write down the investment more quickly.

Stringham said total investment in the oil sands, which include the Athabasca River, Cold Lake and Peace River regions around Fort McMurray, 210 miles northeast of Edmonton, was $11.3 billion from 1996-2001, with another $4.6 billion on new projects under construction and at least $16.6 billion more in potential projects through 2010.

Such figures are appropriate for the oil sands, where gigantic mining and refining complexes sprawl across the formerly barren landscape, spewing plumes of steam and smoke.

To industry figures, the known reserves of the oil sands put the emphasis on technology to lower the cost of getting the oil out, rather than the exploration necessary for conventional drilling operations.

Production costs range from $7 to $11 a barrel, depending on the project, with the current oil price up above $30 a barrel.

Most production comes from the surface mining by Suncor and Syncrude, but more steam operations are planned because they can get to deeper reserves and hold down production costs.

Environmental groups call such major investment in oil technology shortsighted, prolonging the focus and dependence on an environmentally harmful industry.

Research and development money should go toward technology such as hydrogen-cell power to eliminate combustion engines, said Robert Hornung, policy director of the Pembina Institute, a nonprofit environmental research and advocacy organization.

Then there is the Kyoto Protocol, ratified by Canada in December, which restricts greenhouse gas emissions blamed for global warming.

With oil sands projects expected to emit up to 20 percent of Canada's total greenhouse gases by decade's end, the Kyoto limits could mean significant costs for producers, Hornung said.

Stringham of the petroleum producers lobby group noted some planned projects are on hold because of rising costs and the Kyoto factor, including a $2.3 billion open-pit mining operation by TrueNorth Energy, a subsidiary of Koch Industries.

"There's several of them that are kind of pausing," he said, "still doing the engineering and spending the hundred million dollars, but not ready to pull the trigger on the billions needed to launch the project."