Mideast war turns oil sands into gold dust

<a href=www.thestar.com>Analysts cite falling production costs as attraction of Canadian oil sands Mar. 22, 2003. 10:23 AM RICK WESTHEAD BUSINESS REPORTER

Bitumen once was carried out of open-pit mines by conveyors but now huge trucks at Syncrude's North Mine carry it to upgraders, where it is refined into synthetic oil.

The U.S.-led war in Iraq might help accelerate Canada's oil- sands industry.

Oil analysts and executives say the conflict likely will ramp up decades-old U.S. efforts to become less reliant on fuel from the Persian Gulf, and more dependent on Canada, which is politically stable and has a vast supply of the substance used to produce synthetic oil.

"The U.S. is seen as the enemy by many Arab countries and though there was nothing good about 9/11, it crystallized the value of a safe supply source," said Eric Newell, chairman of Syncrude Ltd., the largest producer of oil from the oil sands. "The size of the field is just vast. It's comparable to Saudi Arabia."

Twenty years ago, oil companies such as Suncor Energy Inc. and Syncrude Canada Ltd. began extracting bitumen — a tar-like substance with the consistency of molasses — and processing it into synthetic oil. Now, the companies that own the projects blanketing much of northeast Alberta are poised to bolster profits, thanks to lower refining and exploration costs, assured delivery by pipelines and the declining conventional North American oil industry.

"If the U.S. wants Canada to produce more oil, it's going to come from bitumen," said Ray Cej, the former chairman of the World Petroleum Congress. "All the other areas are on the decline."

At least three-quarters of the known supplies of conventional oil in Western Canada already have been taken out of the ground, while about half the natural gas reserves have been siphoned. More than 90 per cent of the bitumen, however, is waiting to be extracted, said Brian Prokop, an oil analyst with Peters & Co. in Calgary.

Moreover, U.S. President George W. Bush failed this week to open Alaska's Arctic National Wildlife Refuge to oil drilling when the Senate quashed the proposal, a defeat that may spur U.S. interest in Canada's synthetic oil.

"Reliable sources from Canada remain an important element in U.S. energy security," said U.S. Senator Jeff Bingaman, the top Democrat on the Senate energy and natural resources committee. "As conventional reserves are depleted, synthetic crude will become an increasingly important source."

This year, oil companies in Alberta are expected to produce 1 million barrels of bitumen a day, up from 825,000 a year ago, according to a TD Securities report. Within five years, the output is expected to more than double to 2.3 million barrels, which would still need to be upgraded to synthetic oil before it could be transported to U.S. customers through pipelines. Currently, 1 million barrels of bitumen can be upgraded into about 860,000 barrels of synthetic oil.

There's no shortage of bitumen, which was once used by some Native Canadians to seal birch-bark canoes. Under current technologies, which include open-pit mining and the use of steam to extract bitumen from deeper mines, more than 300 billion barrels are expected to be recoverable, according to the Alberta Energy & Utilities Board. By comparison, Saudi Arabia's current proven conventional oil reserves are estimated to be 260 billion barrels.

For Canadian refiners to compete in Texas's oil belt, they'll need to extend the existing arbitrage point of their pipelines about 800 kilometres south to Cushing, Okla., from Wood Bridge, Ill., said Reed Williams, executive vice-president of refining and marketing with Frontier Oil Corp. in Houston.

"Their biggest obstacle is keeping prices competitive and getting their supply further south," said Williams, whose company in January started a five-year agreement to buy heavy oil from Baytex Energy Ltd.

The United States has been trying to wean itself from Persian Gulf oil since at least 1973, when former president Richard Nixon said the country would stop importing oil by 1980. In 1979, president Jimmy Carter renewed the pledge, vowing oil imports wouldn't rise.

Carter turned down the heat in the White House and wore a sweater to underscore his resolve.

No administration has been successful because they "don't have the political will to sustain the policy and say to customers, `you can't buy the cheap oil from the Gulf, you have to buy this more expensive stuff,'" said William Hogan, a Ford administration energy official who's now a professor at Harvard University's Kennedy School of Government.

Another challenge may rest in limiting the costs of production tied to Canada's ratification of the Kyoto Protocol on climate change, which allows government agencies to force oil and gas producers and car makers to lower pollution levels.

Already, Petro-Canada has said its $5.2 billion oil-sands development may be in jeopardy because of the treaty, and Koch Industries Inc., the second-largest private company in the United States, halted construction on a $3.3 billion oil-sands mine led by TrueNorth Energy, its Canadian unit.

But U.S. companies remain interested in Canadian suppliers because oil prices have been competitive and Canada is "as safe a supplier as you're going to find," said Williams of Frontier Oil.

U.S. investors now are turning their attention to Canadian oil- sands refiners.

Suncor, for instance, was featured twice on U.S. business cable television network CNBC last month, while Business Week and Forbes magazines have written company profiles recently. Time magazine is working on a story about the oil sands for an upcoming issue.

Production costs continue to fall said Darlene Crowell, a Suncor spokesperson who said the company has received about 80 calls from interested U.S. investors the past month, double the typical number.

While Suncor shares have fallen 14 per cent during the past year, they have climbed 32 per cent over the past three years.

The shares of other companies with interests in the oil sands have enjoyed similar gains over the last 36 months: Canadian Natural Resources Ltd. is up 21 per cent, Imperial Oil Ltd. rose 30 per cent and EnCana Corp. rose 19 per cent.

The S&P/TSX Energy Index has skyrocketed 49 per cent since 2000. During the same period, the broader S&P/TSX composite index has fallen 13 per cent.

To be sure, Canada isn't the only major source of fuel in the Western Hemisphere. A year ago, the United States, which imports about 60 per cent of the 19 million barrels it consumes daily, imported 23.5 per cent of its oil from the Persian Gulf, down from 27.8 per cent in 1977, as it turned to suppliers in Venezuela, Mexico and Brazil, as well as Canada.

In January, Canada exported an average 1.6 million barrels of crude oil per day into the United States, trailing only Saudi Arabia (1.8 million), according to the U.S. energy department.

The process of upgrading bitumen has been streamlined since 1920, when Alberta scientist Karl Clark first shovelled oil sand into his washing machine and mixed it with hot water and caustic soda, which allowed the bitumen to rise to the surface.

When the first bitumen mine opened in Alberta in 1967, large draglines, which were expensive to maintain, were used to scoop the oil sands on to conveyor belts that carried it to machines where the bitumen was separated from the sand using hot water.

Now, cheaper trucks and shovels are used in most open-pit mines. To reach deeper deposits, steam is injected into wells, making extraction possible.

For years, investors were skeptical about whether the developing the oil sands would be profitable because of the high costs of upgrading and refining. Syncrude's Newell said the industry has invested about $24 billion since 1996 alone.

"It's not an investment for the faint of heart," he said, "but it's one where we're fighting a lot of myths. It's actually become quite profitable."

While it cost more than $30 in the 1970s to refine each barrel of synthetic oil, it now costs about $13 and within the next three years, that cost might drop to $8 a barrel, said Real Doucet, senior vice-president of oil sands with Canadian Natural in Fort McMurray, Alberta.

"The technology is improving, making the oil sands more economical," said Doucet, whose company ships about 400,000 barrels of oil a day to the United States, of which 100,000 is synthetic crude.

One way Canadian Natural Resources and others cut costs is by re-using hot water. In older facilities, millions of gallons of hot water were returned to ponds after being used to separate bitumen from sand. Now, most of that hot water is kept in the refinery, eliminating the need to re-heat it.

Oil closed yesterday at $26.91 (U.S.) a barrel in New York and prices are expected to remain above $20 (U.S.) for at least the next decade.

Even though they may dip if the U.S. topples Saddam Hussein's government, the oil-sands business probably will turn a profit as long as prices don't fall below $17 (U.S.) a barrel, Prokop said.

That's unlikely to happen, Canadian oil executives said, because energy supplies are much lower than they were after the first Gulf War, thanks in part to oil workers striking in Venezuela, and production cuts in Nigeria, another large producer.