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Alberta oil sands grapples with too much success Officials argue boom is being mishandled; warn not all projects are likely to move ahead; but Suncor boss confident output can double by 2010 Gary Park PNA Canadian Correspondent
The ups and downs of Alberta’s oil sands have probably been too much for the faint-hearted and likely left even the tough-minded a shade queasy over the past month.
On the upside:
• Bitumen from the oil sands officially replaced light oil as Alberta’s most plentiful crude resource in 2001, causing an Alberta Energy and Utilities Board spokesman to proclaim that the oil sands can now “compete head-to-head with any resource in the world.”
• Alberta Energy Minister Murray Smith, peeved that the oil sands “simply don’t exist” for the United States and some global agencies, has launched an aggressive campaign to have the resource included in global oil reserves estimates. He wants the Paris-based International Energy Agency and the International Petroleum Agency to include Alberta’s reserves of 175 billion barrels of currently recoverable bitumen in their annual reserves reports and boost the world’s proven oil reserves by 30 percent.
• Paul Cheng, a Lehman Brothers analyst, said a multi-billion dollar expansion spree in the oil sands could raise Canada’s oil output by 150,000 barrels per day over the next decade, making Canada one of the few non-OPEC countries capable of increasing production and allowing the United States to find a way to reduce its dependence on volatile Middle East supplies.
On the downside:
• Nexen Inc, a partner in the Syncrude Canada Ltd. consortium, the world’s largest producer of synthetic crude, has confirmed that operating costs at the giant facility rose sharply in the second quarter because of maintenance-related shutdowns to C$30 ($US$19.50) per barrel, putting in doubt the target for 2002 of C$18 (US$11.70) per barrel.
• Neil Carmata, senior vice-president of oil sands development at Shell Canada Ltd., said the oil sands building boom is being mismanaged, meaning the productivity of thousands of workers on the huge development projects is “significantly less” than the industry benchmark.
• Michael Supple, chief executive officer of new oil sands player SynEnCo Energy Inc., warned a raft of planned projects could collapse under their own weight unless the owners start talking more to each other and figuring out ways to better utilize labor and equipment pools. When the building peaks coincide they create a “huge increase in capital cost,” such as the huge overruns that have hit the senior operators, Syncrude Canada, Suncor Energy Inc. and Shell Canada Ltd.
• Suncor president and chief executive officer Rick George said he does not expect all of the projects on the drawing boards to proceed because of soaring costs. “The barriers to entry are quite large,” he said. “These are very large capital projects. It takes a lot of manpower, not only to build them, but also to operate them.” Combined cost of C$50-$80 billion With projected carrying a combined price tag of C$50 billion to C$80 billion, the pace at which the sector moves ahead is “something that a lot of people are going to take a look at, including ourselves,” George told the Canadian Association of Petroleum Producers investment symposium in mid-June.
To protect itself, Suncor is looking for partners and suppliers “who want to work with us for a very long time” and contribute to Suncor’s objective of cutting its cash operating costs to C$9 a barrel from its goal of C$12 this year, although a number of factors pushed that to C$16.25 in the first quarter, he said.
On top of everything, new projects are suddenly under attack from an environmental coalition, which fears the impact of oil sands developments on wetlands in northeastern Alberta and the drain on Alberta’s fresh water resources at a time of severe drought in much of the province.
As an example of the sector’s demands, the Imperial Oil Ltd. sprawling heavy crude complex at Cold Lake uses 500,000 barrels of water per day to produce 120,000 barrels of oil, although the company estimates 90 to 95 percent is recycled.
But the Oil Sands Environmental Coalition has surfaced, mounting a regulatory challenge this month to plans by TrueNorth Energy LP (a subsidiary of Kansas-based Koch Industries Inc.) to develop a C$3.5 billion project to produce 190,000 barrels per day by 2005. Permitting slowdown demanded A spokeswoman for the Pembina Institute, which is part of the coalition, said it is time to slow down approvals until a thorough assessment of the water resources is conducted.
If that view is endorsed by the Alberta Energy and Utilities Board, the next threat is to Canadian Natural Resources Ltd., whose regulatory application for its C$8 billion Horizon project includes plans to divert a river to meet the needs of its 233,000-barrel-per-day venture.
Canadian Natural Resources has argued that the investment “will offset declines in conventional oil production and help secure North America’s energy resources for many years to come.” The environmentalists have yet to be heard from.
In answer to this formidable array of concerns, Bill Almdal, executive director of the Athabasca Oil Sands Developers group and one of the most consistently upbeat voices, conceded the outlook is “very serious ... there is not a simple solution.”
A spokesman for the Association of Professional Engineers, Geologists and Geophysicists of Alberta, identified the key problem as a lack of highly-skilled manpower. “There is a skill shortage in terms of engineering people that can coordinate some of these projects,” he said.
But George pointed to the major motivation for oil sands promoters, noting that Canada can double its volume of synthetic crude to 1 million barrels per day over the next decade without being hit by price discounts in refining markets.
Falling production of conventional light crude in the United States and Canada should mean a strong demand for the volumes squeezed out of Alberta’s oil sands, he said.
“The studies we have show that it shouldn’t be a problem for the foreseeable future,” George said. “After that we’ll work hard on continuing to expand the infrastructure and the marketplace.” Flurry of new applications For all of the negatives, the end of June saw a flurry of new applications filed with the Alberta Energy and Utilities Board:
• Shell Canada along with ChevronTexaco and Western Oil Sands Inc. — its partners in the C$5.2 billion Athabasca venture due to start pumping 155,000 barrels per day later this year — are already moving ahead with the next phase of their development. They have submitted plans for a C$2 billion addition to lift output by 200,000 barrels per day in 2008,with provision for a further phase of 100,000 barrels per day.
• Imperial Oil, an Exxon Mobil Corp. subsidiary, wants to embark on a C$1 billion expansion of its Cold Lake operations. The project is aimed at raising Imperial’s recoverable bitumen reserves by 31 percent to 1.1 billion barrels and boosting production by 30,000 barrels per day to 155,000 barrels per day when completed in 2006. Imperial has set a target for Cold Lake of 180,000 barrels per day over the next 10 years.
• Canadian Natural Resources is delaying portions of its Horizon oil sands project in an effort to avoid the cost overruns that have sideswiped other projects in the region. The company’s original goal was output of 300,000 barrels per day in 2007. But even under its revised plan, the first phase will produce 110,000 barrels per day of synthetic crude at a cost of C$4.9 billion, starting in 2007, followed by another 45,000 barrels per day in 2009 and 77,000 barrels per day in 2011.
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