Monday, October 30, 2006

Oil sands: questions over rising costs

I wanted to talk about energy from oil sands today, in response to a couple of recent articles on the subject. Mainly what I and an increasing number of people want to know is, will oil sands prove a sensible solution for our energy needs?

First, a little background on oil sands. Here's a brief summary taken from an earlier post on Alberta's oil sands boom:

The oil sands, or tar sands (depending on your point of view), have always been something of a difficult resource base to exploit. Extracting the heavy oil from thick mats of clay and sand is an energy intensive and land disrupting process. The tar sands deposits are actually mined open pit style or extracted by steam injection, a method which requires large amounts of water and energy.

Add the spectre of sizeable greenhouse gas emissions and it's easy to see that this activity will draw protests on multiple fronts. But even without outside protest, the companies involved in producing energy from the tar sands are encountering difficulties with higher than expected costs. These companies were probably not working from a base of overly-sunny expectations; everyone has known for quite some time that the tar sands projects were economical only during times of high crude oil prices.

What drove people to develop this resource was its sheer size and the prospect of extracting hydrocarbons in a politically stable, mining friendly environment. Alberta's tar sands are estimated to contain 175 billion barrels of oil (proven reserves) and this is where Western development has been concentrated.

A recent Financial Times article, "Optimists hope oil sands deliver", revisted the theme of project complications for Canadian oil sands producers. Petro-Canada's Mackay River project was cited as a prime example of a field hit by soaring development costs. The piece also sounded a skeptical note on oil sands production; it was noted that two tons of oilsands yield just 1.25 barrels of bitumen and a single barrel of crude. In light of the high environmental impact the oil sands projects carry, this is no small point.

Shrewd observers have also pointed out that vast amounts of energy and water are needed to develop the resource. makes exactly this point in, "Curing oil sands fever".

Experts say most of the natural gas Canada currently exports to the United States will be eaten up by the oil sands projects. To fuel further expansion, they say, Canada will have to import natural gas from Alaska. Some have even suggested going nuclear, although that idea has gained little traction so far.

Another constraint is water. Both extracting methods use huge amounts, up to two barrels for every barrel of oil produced.

Even with production running at one million barrels a year, concerns are already being raised over the drawdown from the major rivers that flow through the region.

The heavy use of natural gas in oil sands production may, at some point, be supplanted by near-site nuclear power or some form of renewable energy, but such plans remain speculative for now. What would be interesting, and not a bit ironic, is the possibility of the oil sands producers coming to the forefront in adopting these technologies in an effort to mitigate their high reliance on hydrocarbon energy.

Depletion of water resources is another matter entirely, and one that will have to be addressed through smarter planning and increased use of conservation measures (such as water recycling).

Still, many investors are serious when they say the oil sands could become a bonanza in terms of real energy supply, as well as returns. Jim Rogers, T. Boone Pickens, and Newmont Mining's Pierre Lassonde and Seymour Schulich are some of the astute investors who have invested in the oil sands companies and proclaimed their potential. Will they turn out to be right over the longer term or will rising costs and project difficulties eat away at their investment returns?

One last point. In the most recent issue of Barron's, Andrew Bary notes that output from the oil sands could rise, from the current figure of 1 million barrels a day, to 4 million barrels a day by 2020. He also points out that energy companies will spend an estimated $100 billion dollars to further develop the Alberta oil sands region over the next decade.

Here's a question for knowledgeable readers. What could be done with that $100 billion dollars if applied to the development or improvement of existing renewable/sustainable energy technologies?

Now I'm not speaking of pie-in-the-sky developments or the currently unfeasible notion of a "hydrogen economy"; I'm asking about real technologies and proven advances that could be brought to market through a similar sized investment.

Given the new ways in which scientists and entrepreneurs can share information and collaborate on projects, and the public's current awareness of issues related to energy reliance and global warming, I have say I'm optimistic regarding future advances in this field. By adopting and improving new and existing renewable energy technologies, we just might be able to lessen our reliance on dwindling hydrocarbon supplies.