Although vast reserves make Canadian bitumen seem like a good investment, Kyoto concerns and shortages of water, condensate, capital and labor may limit the number of projects.

Production from Canadian oil sands is expected to reach 1 million b/d in 2003 and 1.8 million b/d by 2010. Production of synthetic crude (mined bitumen that has been upgraded so it can flow through pipes) is forecasted to surpass both conventional light oil and in-situ heavy oil production for the first time in history. Known recoverable oil sand volumes in Alberta total 315 billion bbl - more than Saudi Arabia's total reserves. Companies and consortia are planning to invest about US $50 billion in the next decade on new projects and expansions in the Fort McMurray area .

Oil sands mining project updates

A second production train at the Syncrude consortium's Aurora mine is expected to start up later this year as part of Stage 3 of that project. In addition, a $2.7 billion expansion of its Mildred Lake upgrader will increase capacity by100,000 b/d. Next year, Stage 4 will begin a third production train and another upgrader, and Stage 5 should increase production to 500,000 b/d by 2015.

Suncor Energy is now producing 225,000 b/d at its $2.3 billion Millennium project. The company is planning a second mine called Voyageur to come onstream by 2010, and also plans to expand its Millennium oil sand upgrader and eventually add a second one to boost capacity to 400,000 b/d by 2008.
Operator Albian Sands' Muskeg River mine came onstream on Dec. 29, 2002 (see sidebar), and will ramp up production to 155,000 b/d by late 2003 and will be expanded to 225,000 b/d by 2010.
Canadian Natural Resources is planning to begin construction at its Horizon mine in 2004, with first production scheduled for 2008.

TotalFinaElf (TFE) recently decided to buy a 43.5% interest in a proposed $674 million oil sands project called Surmont from operator ConocoPhillips. This four-phase project, expected to produce 100,000 b/d. TFE is considering a regional upgrader project. "It may be intelligent to see if two or three players in the Athabasca oil sands would join to build a regional upgrader at some point in time at the end of the decade," said Jean-Luc Guiziou, president of TFE's Canadian unit.

Limits to mining projects

The limiting factors for all these bitumen mining projects are the huge investments needed and a shortage of the diluent used to make the bitumen transportable through pipelines. Condensate is normally used, but current demand could result in a shortfall as early as 2004.

The Canadian National Energy Board estimates that labor and material constraints will limit total spending on oil sands projects to $2.4 billion per year. High labor costs and expensive equipment prices caused estimates for TrueNorth's Fort Hills project to jump from $1.3 billion to $2.4 billion. Due to this increase and the recent approval by the Canadian government of the Kyoto greenhouse gas reduction protocol, this project has been put on hold, freeing up the workers to join other mining projects.

In-situ heavy oil SAGD projects

Only about one-quarter of Alberta's bitumen reserves is reachable by the truck-and shovel method of extraction. The rest requires in-situ recovery methods such as steam-assisted gravity drainage (SAGD). This technique burns natural gas to create steam that is injected into an upper horizontal well, while the heated bitumen is produced from a lower, parallel horizontal well. SAGD achieves recovery rates of 60%, compared to conventional thermal recovery methods that range from 18% to 25%.

EnCana apparently likes SAGD better than surface mining, as the company recently decided to sell a 10% interest in the Syncrude project to Canadian Oil Sands for $1.07 billion, retaining 3.75% interest. Compared to oil sands mining, which averages between $8 and $10 per bbl, SAGD operating costs are only about $6/bbl. EnCana will focus on expanding SAGD projects at Foster Creek and Christina Lake.
Petro-Canada started up its $196 million MacKay River SAGD project in October 2002. The facilities include a 165-MW electricity cogeneration plant (to start up in 2004) and equipment to recycle 90% of the water produced. Production is expected to reach 30,000 b/d by the end of 2003 and remain at that level for 25 years. Petro-Canada has filed for regulatory approval on a second SAGD project at Meadow Creek. This project is expected to cost $539 million and produce 80,000 b/d beginning in 2007.

Suncor is planning to start up Firebag, a SAGD project that will come on stream late in 2004. The first phase is expected to cost $674 million, and further expansion is planned to achieve 140,000 b/d by the end of the decade. The Firebag leases cover more than 386 sq miles (1,000 sq km) of land containing an estimated 9.6 billion bbl of recoverable bitumen.

Limits to in-situ SAGD projects

In addition to a limited number of skilled SAGD engineers, the increasing cost of burning natural gas is playing havoc with project costs. For example, operating costs for Petro-Canada's MacKay River project are $6/bbl if natural gas prices are $4/Mcf, but gas prices have risen as high as $11/Mcf lately and have settled around $5/Mcf as of mid-March.

Water for steam injection is also in short supply as Alberta has suffered a multi-year drought. The oil patch is currently licensed to use 26% of Alberta's groundwater, and though the government has held months of consultations, so far there have been no recommendations. "Energy is the primary engine that drives the economy of this province," said Alberta Premier Ralph Klein. "We have to allow exploration and production to take place without unduly putting a hardship on the companies that are putting up millions of dollars to explore and to produce."

VAPEX project takes off

VAPEX, or vapor extraction, is a new in-situ technique that uses gaseous propane or butane as a solvent to extract the heavy oil. This method could reduce CO2 emissions by 85% and reduce water consumption compared to other heavy oil extraction methods, but the rising costs of hydrocarbon solvents may adversely affect economics.

Devon Energy's Canadian unit is heading up a $20 million VAPEX pilot project in a joint venture with eight other participants that is expected to last 5-10 years.

Kyoto ratification may stall plans

Canada's ratification of the Kyoto treaty on climate change in December 2002 is expected to tack on about $0.18 per bbl, according to analysts at Peters & Co. in Calgary. Canada is now committed to reducing greenhouse gas emissions by 6% below 1990 levels, and the oil sands industry will have to carry its share of the 240 megatonne CO2 reduction required by the end of the decade. The Canadian government capped the cost of carbon emissions credits at $10/tonne, which has settled things somewhat for planning purposes. However, because 1 bbl of synthetic crude produces three or four times the CO2 compared to 1 bbl of conventional oil, producers are starting to rethink their oil sands investment plans.
Nexen is considering pruning its 2003 spending on its Long Lake development by about C$115 million. This project is expected to be the biggest generator of CO2 emissions per bbl - 50% more than the Syncrude project. "We still have some uncertainties and we want to have those things clarified as we go forward," said Charlie Fischer, chief executive officer.

Canadian Natural Resources reduced its 2003 capital budget for the Horizon project from $203 million to $143 million and delayed engineering design until the second quarter of 2003 due to Kyoto uncertainties. The company is considering locating the secondary upgrader in the US, as that portion represents 40% of the estimated CO2 emissions. If so, Canada could lose 500 construction jobs and $3.6 billion in tax and royalty revenues.

Despite the fact that bitumen is a carbon-intensive resource, over the past 10 years, the Canadian oil sands sector has reduced its overall emissions by 26% while production has increased exponentially. TotalFinaElf's recent farm-in to the Surmont project shows that Kyoto issues haven't totally scared away investments in oil sands projects.

One of the more unusual ideas to reduce CO2 emissions is to use nuclear energy instead of natural gas to create steam for SAGD operations. "On pure economic terms, we should be able to make a decent case. On environmental terms, we can make a strong case," said David Bock, vice president at Atomic Energy of Canada Ltd. His company's newest reactors are smaller and cheaper and could supply several oil sands projects with plenty of steam and electricity.

The potential is there

To date, Alberta's oil sand producers have literally only scratched the surface, extracting less than 1% of the vast reserves. Canada could be producing more than 4 million b/d by 2025 - and maintaining that level for 75 years - if the various obstacles can be mitigated.