Canada is home to one of the largest oil reserves in the world, the Alberta oil sands. Extracting oil from the vast resource is tricky, costly and hard on the environment. Still, oil majors are investing billions of dollars in the tar sands, as exploitation “now makes economic sense.”
By Frank Kuin in northern Alberta
Halfway from Fort McMurray, a dusty oil town in northern Alberta, on the way to a Royal Dutch/Shell construction site located even farther north, the paved road suddenly ends. It’s been a half hour since the gigantic excavators and smoke-bellowing factories of oil producers Syncrude and Suncor were in sight. The last few hundred meters of pavement are on a bridge appropriately named ‘bridge to nowhere’.
A road of sand, pebbles and dirt winds further north, through a forested and muggy mosquito paradise. Then a shed comes into view, marking the secured entrance to the Albian Sands Project – Shell’s most ambitious construction project in the world.
About 2,500 construction workers cover a huge expanse, working on a project that’s a first for Shell. At the heart of the operation is a giant square pit, where large dump trucks are coming and going. Scaffolds as tall as rollercoasters will be equipped with conveyor belts to transport material from crushers at the edge of the pit to sky-high chemical centrifuges.
For now, the installations are skeletal, surrounded by excavators, construction sheds, trenches and rust-coloured chunks of pipeline. But in a few years, vast quantities of oil will flow here — not drilled to the surface, but dug up.
“This is the largest mining project anywhere in the world at this time,” says Emilio Maestrini, chief building supervisor of Albian Sands. He is a veteran of copper, gold and diamond mines in various parts of the world. “What we are building here is a unique combination of two cultures: mining and oil,” he says. For Shell, that’s a new approach, Maestrini adds: “A mining operation is something other than sticking a pipe into the ground and starting to drill.”
“We’re building a unique combination of two cultures: mining and oil”
The mine at Albian Sands comprises half of the so-called Athabasca Oil Sands Project, Shell’s ambitious venture into the ‘oil sands’ or ‘tar sands’ of Alberta. Oil sands are composed of an underground mixture of tar, water and sand, from which, after excavation and separation, bitumen can be extracted. Bitumen, a thick, viscous form of crude oil, is then upgraded and refined into synthetic, light oil.
The open pit is the source of the oil sand. It has emerged after the removal of a layer of about 25 meters of normal clay soil. Trucks as tall as houses will continue to excavate the pit, layer upon layer, in the coming years. Eventually, the hole will be closed by filling it with the residual sand and clay. This kind of oil production is unique in the world; while oil sands also exist in other places, such as Russia, only Canada has attempted to exploit them as an alternative to conventional oil.
In addition to the mine at Albian Sands, the Athabasca Oil Sands Project consists of the Scotford Upgrader, a processing plant near Edmonton, 450 km to the southwest, next to an existing Shell refinery. A pipeline will link the plant to the mine. The project will cost $3.5 billion (Canadian) – the largest investment ever by Shell Canada – but Shell thinks it’s worth it to claim a share of one of the world’s largest oil reserves.
The oil sands of Alberta contain an estimated 1.8 billion barrels of oil, about seven times the known reserves of Saudi Arabia. At least 300 million barrels (containing 159 liters) of that can be exploited with existing technologies, amounting to about 15 per cent more than Saudi Arabia’s reserve. Shell’s portion contains about 6 billion barrels, enough for 50 years at a planned production rate of 155,000 barrels a day.
“It is a very large source of oil, and we don’t have to look for it,” says Neil Camarta, vice-president of Shell Canada. “It will last us for a long time, and we can raise the production to more than 500,000 barrels a day. All this, next door to the largest market in the world, the United States.”
As far as the Americans are concerned, Canada is a pleasantly stable and dependable source of energy, compared to the member states of OPEC, the Organization of Oil Exporting Countries. Last year, Canada was the largest foreign supplier of oil to the U.S., followed closely by Saudi Arabia, Mexico, and Venezuela.
“It is a very large source of oil, and we don’t have to look for it”
But there is a catch: the exploitation of this kind of oil is considerably more difficult, and way more expensive, than the production of conventional oil. Although the presence of the oil sands in northern Alberta has been known for centuries – the aboriginal people of the area used the tar in the 18th century to make their canoes watertight – the challenge of the modern day has always been to find an economical way to exploit them. Notably, how do you separate the syrupy bitumen efficiently from the sand?
The production process has mostly been developed over the past decades by the two Canadian pioneers of the oil sands: Suncor and Syncrude. Suncor, formerly the Great Canadian Oil Sands, a crown corporation, is the oldest company active in the oil sands. It has just raised its production to roughly 225,000 barrels a day and is in the midst of an expansion which should see a doubling of production by 2008. Syncrude, a consortium of 10 Canadian oil companies, is the largest player. It produces about 250,000 barrels a day and is planning to raise that to 460,000 between now and 2008. Both companies are investing billions of dollars.
“What it comes down to is that we wash the sand from the oil,” says Karen Saunders, a spokeswoman for Syncrude, during a tour of the Syncrude complex. “In a way, we are a big laundromat.”
The separation technique used by Suncor and Syncrude was invented in the 1920s by Canadian chemist Karl Clark. It makes use of the fact that each sand particle in the oil sands is surrounded by a thin layer of water. Clark literally put a batch of oil sand in a laundry machine, added caustic soda, and started a warm cycle. The result: after stopping, the sand sinks to the bottom while the bitumen floats to the top, with a layer of murky water in the middle.
The principle is simple and this method is the most effective to date. But applying it on an industrial scale presents obstacles that have scared off investors for decades. To start, an awful lot of dirt has to be moved to get a barrel of oil. Then it takes a lot of energy to heat all the necessary laundry water. Finally, after separation, you still only have bitumen, and further processing is required to end up with oil that is suitable for refining. All these processes cost a lot of money.
“What it comes down to is that we wash the sand from the oil”
The main challenge of the oil sands is to reduce production costs. Twenty years ago, Syncrude spent more than $30 (U.S.) to produce a barrel of oil. Last year, after many years of refining the process – the laundry temperature has been steadily lowered, for instance – that had been reduced to $13. With oil prices between $20 and 30 a barrel, there is room for a healthy profit margin. But production costs per barrel are still twice as high in Alberta as they are in Kuwait.
Nevertheless, thanks to the pioneering efforts of Suncor and Syncrude, the oil sands are now worth exploiting for oil companies like Shell, says Mr. Camarta of Shell Canada. “Syncrude and Suncor have significantly reduced production costs with improvements in technology and productivity,” he says. “They have become ever better at what they’re doing. We will also get better at it, bringing costs down further.”
In addition, the oil sands are free of exploration costs, while conventional oil spends roughly $4 per barrel on finding new sources. Add the fact that conventional oil reserves are running out, and the oil sands have reached a turning point, says Camarta. “Exploitation now makes economic sense.”
As a result, Shell is not the only newcomer. Other companies, including Exxon, Chevron, and Texaco, also want a part of the action. Investments totalling $21 billion in additional production facilities are now under construction or have been approved. Another $30 billion in plans is pending approval. According to Bill Almdal, head of an organization in Fort McMurray that is overseeing the booming growth of logistical facilities, “production is about to take off.” By 2010, production from the oil sands should be raised to two million barrels per day, equal to the current oil production of Nigeria.
Not everybody is happy with that growth. Environmentalists say that production from the oil sands is one of the most polluting forms of energy generation on earth. Taken together, Suncor and Syncrude are the fourth largest source of CO2 emissions in Canada.
Opponents also question the excessive use of natural gas. The enormous energy needs for the production process are met with electricity generated from natural gas, a much cleaner source of energy than the crude oil that the process produces. According to Greenpeace Canada, the billions of dollars invested would be better spent on cleaner forms of energy than on difficult sources of oil, which will only prolong North American dependence on fossil fuels. Greenpeace calls for “a stop to the expansion of all oil sand projects.”
Greenpeace calls for a stop to the expansion of all oil sand projects
Oil companies say that they are working hard to clean up the production process. Hundreds of millions of dollars are being spent on research and development to reduce greenhouse gas emissions. With some success on a per-barrel basis, they claim – but due to the expansion of overall production, net emissions are still rising. Some call for government-imposed emission ceilings.
Philip Lachambre, vice-president of Syncrude, argues against production barriers. “We must remain competitive with the low cost producers in OPEC. Countries such as Saudi Arabia, Mexico and Venezuela are not limited by any obligations regarding climate change. We cannot afford extra costs for climate policy.”
Lachambre argues that the industry is constantly looking to improve on its own accord. Of the $4 billion that Syncrude is spending on the third stage of its current expansion, one quarter is dedicated to making the production process cleaner and more energy efficient. “We don’t want anything more than to reduce the amount of energy needed to produce a barrel of oil,” he says. “We’ll keep working on that to be able to compete directly with other oil producers.”
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