In December the Canadian House of Commons ratified the Kyoto Treaty on climate change after months of debate and despite protest from most Canadian industries and provincial governments. "I am for protecting the environment, but I am against signing Kyoto. And I am for an effective made-in-Canada plan for emissions reductions...," Gwyn Morgan, president and chief executive officer of EnCana Corp., told the Canadian Chamber of Commerce in an address last fall. Alberta's heavy-oil producers worry the accord will hurt the economics of their operations, which are already sensitive to oil and gas prices. Even so, 2003 marks a rare turning point: for the first time in Canadian history, production of synthetic oil made from heavy-oil sands will surpass conventional light-oil production, according to an analysis by FirstEnergy Capital Corp., Calgary. Later this year, synthetic output will reach 611,000 barrels a day, while light-oil production will total about 570,000 barrels a day. (For more on this, see "Alberta's Heavy Oils," Oil and Gas Investor, October 2001.) The Canadian government has yet to outline how industry will meet its commitments under Kyoto to reduce greenhouse gas emissions or buy emissions credits. Further, implementation is not assured until final ratification of the treaty by a designated number of countries. Approval by Russia has been rumored to occur later this year and would satisfy that requirement. "The potential cost of Kyoto is unclear, placing large uncertainty on all companies in our coverage universe that have production in Canada, especially those with oil-sands exposure [such as EnCana, Nexen and Canadian Natural Resources]," says a recent Lehman Brothers report. The effects on heavy oil could be severe. "If the government decides companies will be responsible for 100% of the emissions costs, then we estimate the net present value of Nexen's Long Lake and Canadian Natural Resources' Horizon projects will be reduced by about 30% and 40%, respectively," says the report. Delays or cancellations of Alberta's heavy-oil projects are possible, Lehman warns. A few companies have already reacted strongly. Canadian Natural has delayed start-up of its C$8-billion Horizon project by one year, to 2008, and cut its budget because of cost concerns and Kyoto. The project has 6 billion barrels of recoverable, heavy oil. Calgary-based TrueNorth Energy, which is owned by Koch Industries of Wichita, Kansas, announced it will defer construction of its Fort Hills oil-sands project and close its Fort McMurray, Alberta, office, "retreating" to Calgary. This is after C$120 million of expenditure during the past four years, and after getting Alberta regulatory approvals in October. The company cited escalating costs experienced by other operators, tough capital markets and uncertainties about the impact of the Kyoto decision. It had intended to produce 95,000 barrels a day by 2005. On the other hand, TotalFinaElf announced in January that it wants to get into the heavy-oil play. The company is buying half of ConocoPhillips' 87% share in Surmont, a heavy-oil project south of Fort McMurray. Devon Energy holds the rest. The $1-billion project is expected to produce about 25,000 barrels a day by 2006, and 100,000 barrels per day by the end of the decade. TotalFinaElf's announcement grabbed oil-industry attention because this is its first meaningful participation in Canada's energy industry in 20 years. The Paris-based oil giant hopes to bring to Alberta the heavy-oil expertise gained from its bitumen operations in Venezuela's Orinoco Basin. Regardless of political events or new players, western Canada's production mix will change significantly in the next few months due to heavy oil. That's when three new oil-sands projects in Alberta ramp up production, says FirstEnergy Capital Corp. analyst John Mawdsley. They are Petro-Canada's MacKay River and Imperial Oil's Cold Lake steam-injection projects, and Shell/Western Oil Sands/ChevronTexaco's Athabasca mining project called Albian. They will collectively add about 210,000 barrels per day of new production-a 10% increase in western Canadian crude and liquids production since August. In addition, EnCana's Foster Creek project and Canadian Natural's Primrose project will add another 5,000 to 10,000 barrels a day this year, FirstEnergy says. Shell's Athabasca project at Albian accounts for the bulk of the new output. First production was due in February and was to increase to 155,000 barrels per day of bitumen. First production at phases 11 to 13 at Imperial Oil's Cold Lake project was scheduled to begin in the first quarter. The company began steam injection there late last year. By the end of this decade, Cold Lake, which is Imperial's largest single asset, could be producing as much as 180,000 barrels a day. Calgary-based Suncor Energy Inc., another large heavy-oil producer, announced that its 2003 budget of C$1.05 billion will devote C$711 million to its oil-sands operations. Dollars will be used for the first stage of its new Firebag in-situ project and construction of a new vacuum unit for its heavy-oil upgrader, as well as maintenance at existing facilities. The company's daily oil-sands production is expected to increase to 260,000 barrels by 2005. "Our capital spending plan illustrates that Suncor remains keenly focused on well-managed and predictable oil-sands growth," said president and chief executive Rick George. -Leslie Haines