Lust for fossil fuels brings the world to Canada’s oil sands

Published Nov 27, 2011


The helicopter swooping over once-pristine spruce forests provides a close-up view of why the province of Alberta in Canada is among the planet’s most coveted – and contested – petroleum hot spots.

North of Fort McMurray, a boomtown serving tens of thousands of migrant workers, Syncrude Canada’s oil sands operation stretches 192km².

Rivals Exxon Mobil and China Petroleum & Chemical each have bought a piece of Syncrude, one of the dozens of companies that are blasting, digging and steaming soil laden with 143 billion barrels of molasses-like crude called bitumen.

Only Saudi Arabia, with 264 billion barrels, and Venezuela with 211 billion barrels, enjoy greater proven reserves, a BP energy review found in June.

Some of the world’s biggest energy producers have poured C$123 billion (R997bn) into Canada’s oil sands since 1997.

The Canadian Energy Research Institute (Ceri) predicts that these companies will pay another C$137bn by 2020 to tap the region’s unique advantage: rising oil production taking place in a stable democracy close to the massive American market.

Prime Minister Stephen Harper, who began his career at an Exxon unit called Imperial Oil, is encouraging the boom. He wants to pump as much as possible from reserves that were valued at $14 trillion (R118 trillion) by the middle of this month.

Harper is creating jobs and seeking new markets for a country that sends 99 percent of its petroleum exports to the US.

Green objections

Environmentalists, alarmed by spills, desecrated forests and rising carbon emissions, want a moratorium on oil sands projects not yet approved as they battle to curb the use of fossil fuels.

“Oil sands are a big enough pot of money to change the landscape,” says UK-based Neftex Petroleum Consultants chairman Peter Wells. “The Chinese want strategic supplies, oil companies want profits, and environmentalists want to keep Alberta looking as it was.”

The US government leapt into the fray this month. The State Department announced that it was delaying a decision on TransCanada’s proposed 2 673km pipeline from Alberta to the Gulf of Mexico.

President Barack Obama, pressured by environmentalists and citizens along the route, said his administration wanted to protect health, safety and natural resources on the pipeline’s path.

Four days later, TransCanada said it would find a new route that would avoid Nebraska’s environmentally sensitive Sandhills, which shelter a shallow aquifer.

TransCanada had been lobbying Secretary of State Hillary Clinton for approval of the C$7bn pipeline to Texas refineries. The US must approve the conduit because it crosses an international border.

After the delay and TransCanada’s rerouting proposal, the State Department would need a year to 18 months for its assessment, deputy spokesman Mark Toner said. It would put off a decision until after the US presidential election.

The delay or even death of the Keystone XL pipeline would not mean the end of the oil sands, says CIBC World Markets former chief economist Jeff Rubin, the author of Why Your World is About to Get a Whole Lot Smaller: Oil and the End of Globalisation.

Instead, losing that pipeline would push more Canadian oil across the Pacific.

“Prices are higher and customers aren’t so worried about carbon in Asia,’’ he says.

TransCanada chief executive Russ Girling says China is interested in Canada’s crude. “The Chinese have been the single largest investor in Canadian oil sands over the last couple of years.”

Harper will make increasing exports to Asia a government priority. The US delay “does underscore the necessity of Canada making sure that we are able to access Asian markets”, Harper said this month.

Enbridge, Canada’s largest oil pipeline company, is pursuing its C$5.5bn Northern Gateway to the Pacific. It has backing from Asia’s biggest refiner, China Petroleum and Chemical (Sinopec).

Enbridge may also extend its US network from Wisconsin to the Gulf. The company plans to use it to ship as many as 400 000 barrels a day (bpd) of crude from Cushing in Oklahoma to the Gulf Coast.

Oil sands production is inevitable in a world hungry for fossil-based energy, says Bloomberg Industries analyst Christian O’Neill. “Oil is too scarce and too expensive, and there’s too much in Alberta for people to ignore.”

Piracy in shipping lanes near the Persian Gulf and unrest in Iraq, Libya and elsewhere have destabilised supply from members of Opec, while dwindling reserves plague Russia, Mexico, Norway and others with state-owned industries.

“Oil sands are one of the last big petroleum resources available to private capital,” O’Neill says. “One way or the other they will ship it.”

Daily oil sands output will double to 3 million bpd by 2020 and contribute 3 percent of world supply, up from 1.7 percent today, predicts energy researcher IHS Cera.

Neftex’s Wells says he expects that daily output of non-Opec crude will hold steady to 2020 and then drop 17 percent to 33 million bpd during the next decade, based on the firm’s global geologic studies.

Fort McMurray is the locale spawning the controversy. Located northeast of Edmonton and sandwiched between bluffs, whose bitumen seeps into the Athabasca River, the area calls to mind Brobdingnag in Jonathan Swift’s Gulliver’s Travels.

Fort McMurray has grown so fast that 34 000 workers live in dormitories nearby. Refineries glow and mushroom-shaped steam clouds tower overhead, even during winter nights with 17 hours of darkness and minus 40ºC temperatures.

For the US and Chinese companies aiming to cash in, along with France’s Total, Japan’s Nippon Oil Exploration, the UK’s BP and others, the cost is soaring. Operators bid up the price to lease an acre of government land to C$3 110.85 in June, 42 percent more than in July 2010, data show.

North of Fort McMurray, pit mines stretch as far as one can see.

Trucks haul loads of sand that weigh 400 tons – more than a Boeing 747. The sand is boiled and shaken in vats three stories tall to coax out bitumen. The tarlike goo is piped to an upgrader that turns it into a lighter grade by blasting it with 482ºC steam laced with hydrogen.

South of the town, Norway’s Statoil aims to produce 200 000 bpd of crude by 2020. That would equal about one-fifth of its current production, which comes mainly from in and around the North Sea.

“It smells like money,” says Statoil Canada president Lars Christian Bacher.

The veteran of North Sea oil rigs says the extraction method that Statoil and dozens of operators are using in Canada could allay environmental concerns.

Instead of levelling kilometres of forest, Statoil drills wells in cleared patches as small as 1.6ha. Then, in a process called steam-assisted gravity drainage (SAGD), it injects steam into the wells to melt bitumen underground.

Reduce carbon emissions

But even SAGD has drawbacks, Wells says. It requires 28m3 of natural gas and 208 litres of fresh water for every barrel of crude. On top of that, producing petrol from oil sands crude spews 20 percent more carbon than refining the fuel from light crude, he says.

Bacher says Statoil aims to reduce carbon emissions per barrel by 40 percent by 2025 by using less steam and natural gas.

In Fort McMurray, 168km² of waste ponds hold water contaminated with arsenic and mercury. The stench from sulphur residue stacked eight stories tall can reach a helicopter at 300m.

Environment Canada, the government agency that protects human health and the environment, says carbon dioxide emissions from the oil sands may triple by 2020, putting the country further behind on its Copenhagen Accord commitments to slow global warming.

All oil sands development prolongs fossil-fuel dependence, says Nathan Lemphers, an analyst at Canadian environmental research organisation Pembina Institute.

Lemphers’s group wants a moratorium on any oil sands projects that have not been approved. He says taxes on existing operations should pay for wind and solar research. “We’re not trying to shut oil sands down. We want the ecosystem preserved, and we want revenue that’s generated to fund the transition to a cleaner energy economy,” he says.

Canada was not as big a player in the world’s energy debate a decade ago.

In 2001, the US petroleum benchmark called West Texas Intermediate (WTI) crude cost $20 a barrel. That price made oil sands crude prohibitively expensive by comparison, says First Asset Investment Management portfolio manager John Stephenson. By 2011, the WTI price had climbed past the $70-a-barrel threshold needed for oil sands to provide a 10 percent return to investors, he says.

Canada is reaping the rewards. By 2020, Alberta’s annual oil sands royalties may grow fivefold to C$28bn, according to Ceri.

Oil sands helped boost Alberta’s per-capita gross domestic product to C$70 824 in 2010, 75 percent more than Quebec’s.

Many of Canada’s elected officials were backing Pacific pipelines even before the US delayed Keystone XL. “As a country, you want no more than half to two-thirds of your export base tied up with one customer,” says Ron Liepert, who oversaw the boom as Alberta’s energy minister before becoming its finance minister in October.

He did not want to stop with Keystone XL or Northern Gateway. “You’re looking at four or five Keystone- and Gateway-type projects,” he said in September.

Part of his goal is to make it possible for Canadians to charge more for their oil.

As more Canadian and North Dakota oil has landed in Cushing, the influx has pushed the WTI price lower than it would have been without the new supply.

Canada wants the higher prices it says pipelines will bring. Keystone XL was designed to move 700 000 bpd to the Gulf of Mexico. Turning textbook economics on its head, the increased supply would eliminate the WTI/Brent differential, says Suncor Energy chief executive Rick George.

Instead of jamming up with WTI crude in Cushing, the oil would flow to the Gulf, home to almost half of US refineries.

TransCanada studied 14 routes before deciding on the one that traversed Nebraska’s Sandhills and the underlying Ogallala Aquifer.

Nebraska governor David Heineman said earlier this month that most Nebraskans would support the pipeline if it was rerouted away from the Sandhills. Residents had complained during public hearings that the path would threaten the water for people in seven states and a third of irrigated groundwater for US agriculture.

Spills and hazards

The US Environmental Protection Agency buoyed opponents’ claims by saying in June that the State Department had not conducted a thorough analysis of spills and other potential hazards. Despite the rebuke, the department said in August that it saw few environmental risks.

The State Department review was riddled with conflicts, says Steve Kretzmann, the executive director of US environmental group Oil Change International.

“The process is a sham,” he says, noting that Paul Elliott, TransCanada’s chief Washington lobbyist, was the deputy director for delegate selection for the Clinton campaign during her 2008 presidential bid.

TransCanada has had 14 spills from Keystone since the first phase opened in 2010, says Vern Meier, the company’s vice-president of US pipeline operations.

Enbridge, which is planning Northern Gateway, spilled about 20 000 barrels into Michigan’s Kalamazoo River last year from its Line 6B pipeline.

“It’s not a matter of if, but when we have a spill,” says Jackie Thomas, the leader of the Saik’uz band of aboriginal Canadians, who are opposing Northern Gateway.

Northern Gateway, with an initial instalment of C$10 million from Sinopec, is crucial to China’s energy giants. They’ve invested C$17bn in Alberta’s oil and gas industry in 20 months to mid-November.

As the oil sands clashes intensify, the world is flocking to Canada.

With all of these forces in play, Canada’s role in shaping the planet’s energy supply is just beginning. – Bloomberg

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