Canada is in the middle of a quiet oil boom
Tar sands, long too expensive to process, help make it major U.S. source
By Peter Klein
CNBC
updated 2:29 p.m. MT, Mon., April. 7, 2008
Ft. McMurray, Alberta - With oil prices hovering near a hundred dollars a barrel, there’s a major oil boom underway. It’s not happening in the sweltering heat of Texas or the dry desert of Saudi Arabia, but on the frozen Canadian tundra where oil producers are developing a new source of fossil fuel.
It may seem like unlikely terrain for one of the biggest oil booms in recent memory. But Canada’s “oil sands” have helped make it the leading supplier to the United States.
Here in Alberta — a once-desolate outpost 800 miles north of the U.S. border that has gone from ghost town to boom town — you won't see any spouting geysers, or traditional pumps drilling for oil deep underground.
The oil — trapped in dark sticky sand — sits just below the surface of the earth waiting to be mined. Brad Bellows, a spokesman for oil company Suncor, explained that first step is to claw the oil mixed with sand out of the earth, using some monster machines.
“(We use) the biggest trucks in the world. These are the biggest shovels in the world,” he said. “You can smell the oil even in the winter when it's frozen.”
There's more oil up here in the Canadian sub-Arctic than in all of Saudi Arabia. These tar sands stretch on for about 50,000 square miles.
Oil companies have known about this region for more than half a century. But it wasn't until recently that it was worth getting the oil out of this desolate landscape. That's because the operations that take place in these Alberta tar sand mines are complicated and expensive, and involve scooping, hauling and processing the oil sand to turn it into actual oil.
It was an investment most companies weren’t willing to make just a few years ago, when the cost of a barrel of oil was a fraction of the price it is today. But Suncor's CEO Rick George saw the potential, and in the early 1990s gambled that investing in oil sands would someday pay off.
“That was a big bet,” he said. “It doesn't look like a big bet in the rearview mirror, I must admit. But it was a big bet at the time.”
The company began looking at the idea of producing oil from tar sands as long ago as the late 1990s, when oil prices had fallen to $10 a barrel. The huge deposits have been studied and well-documented for decades, so there’s little risk of not finding oil. But because it’s so much more expensive to produce, betting huge amounts of capital to develop tar sands was a gamble.
But it paid off. With oil prices hovering around $100 a barrel, Suncor is now worth $45 billion, many times its value just a few years ago.
And the Alberta oil sands industry has helped propel Canada into an enviable position as the single largest supplier of oil to the United States — a fact that few Americans are probably aware of.
“Maybe not the average American on the street,” said George. “I think 'the Street' though — Wall Street and the investors — have a pretty good idea."
Do they ever. Canadian oil giants are now most welcome on Wall Street; Suncor executives were even invited to ring the opening bell at the New York Stock Exchange.
Suncor alone produces 280,000 barrel of oil a day at this mine — operating 24 hours a day, seven days a week, 365 days a year. At $28 million a day, it’s not hard to see why they don't take Christmas off.
But getting people to work in this frigid, remote part of Canada isn't easy, which is why companies pay upwards of six figures to those who drive these monster rigs. That kind of money attracts people from all walks of life.
Carrie Simms was a special education teacher in Newfoundland when she heard about this opportunity in Alberta.
“Alberta was the place to be, so hopped on a plane and here I came,” she said. “This is where all the action was happening.
In fact, the town outside the oil mines, Ft. McMurray, is a classic boom town — complete with a casino by the same name. Some of the world’s best-known oil companies have recently set up shop or expanded operations here to take advantage of the new oil-sands rush. And for an industry accustomed to dealing with coups and civil wars amid their pipelines, working in one of the world's most stable and peaceful countries is a striking change.
Shell's senior vice president Brian Straub recently took over Canadian operations, after tours in the Middle East and Asia.
“We deal with our own challenges in Canada,” he said. “(Like) the weather … But we do have a lot of advantages in Canada, there's no doubt. And I think political stability is the key advantage that we have.”
Colorado's governor, Bill Ritter, who sits on a federal task force that's trying to develop domestic sources of oil, visited the tar sands in November and came away inspired.
“Energy security is also about national security,” he said. “It was helpful to me to see the oil sands — to understand that we have these rich deposits of oil … It increases the stability for us as a country.”
And what could be better than doing business north of the border? Doing it south of the Canadian border — in the U.S.
Inspired by the success of the tar sands, Gov. Ritter and the task force are looking into a long-forgotten source of oil in his own home state of Colorado — oil locked up not in sand but in a rock called oil shale. The task force concluded that by 2035, oil shale could contribute up to 7 million barrels of oil a day — a third of America's oil needs.
Oil shale looks pretty much like any other rock except for one thing: oil shale burns. That's because it's rich in a substance called kerogen, which if left alone, would after millions of years eventually turn into the traditional oil that's pumped from traditional wells. But heating it up speeds up the process and turns this black rock into black gold — oil.
Shell is at the forefront of the potential new American oil boom. The company has spent some $200 million on oil shale— more money shale than on any other research.
“It's like every good investment,” said Straub. “You're going to have to invest something at the front end to realize the value of that investment over time.”
Shell scientists say they may very well have found a solution to the problem of converting oil shale rock into light crude — the most valuable kind of fuel — by pumping hot water deep into oil shale deposits.
“If we go forward with oil shale, it could be the best commercial development in the history of the state of Colorado,” said Ritter.
But no one's building boomtown casinos here just yet. Colorado went down this road before, only to be disappointed. Back during the last oil crisis, in the early 80s, Exxon and other companies tried to tap oil shale in Colorado. But when they couldn't figure out an efficient way to extract the oil, they pulled the plug.
“And I mean, they pulled out in a day,” said Ritter. “Everybody up there who was around in 1982 remembers that experience and I think understands why we are so stubborn about going forward in a measured and really a responsible way in terms of the mining of oil shale.”
Perhaps the biggest concern is that an oil shale boom could cramp Colorado's style as a wilderness playground and harm the state's fragile ecosystem.
“There's so much we don't know,” said Ritter. “We don't know the impact on air, the impact on groundwater. Because at the end of the day those are the very concerns we have with the development of oil shale.”
Judging by the oil sands experience in Alberta, oil shale proponents have their work cut out for them. Entire tracts of pristine forests have been cleared to make way for strip mining of this oil-rich sand.
“Locally it's completely destructive,” said David Keith, a professor of earth sciences at the University of Calgary. “Oil sands mining turns what was previously undisturbed forest into a big hole in the ground.”
Keith says the scarring of this earth is just a small part of the problem. Extracting oil from tar sands and oil shale releases three times as much carbon dioxide as traditional oil drilling.
“As conventional oil, the stuff that's easy to pump, the stuff that's cheap, gets scarce, the industry will move to further down the food chain — the industry will move to things like oil sands, to oil shales,” he said. “And each of those things has a bigger carbon footprint than the original light oil it replaced.”
Suncor says it has cut its carbon emissions in half in the past decade, and most of the oil companies in Alberta are working on reducing their water and energy usage. But it may be too little, too late to meet Canada's global pledge. Canada has signed on to the Kyoto Protocol, which calls for a cut in greenhouse gases by 2012.
“It's obvious we're not going to meet the Kyoto targets,” said George. “Tar sands is just one factor.”
Some critics of fossil fuels have questioned why companies like Suncor are putting so much effort into developing more oil instead of looking into alternative energy sources. George counters that argument with a reminder that the world still depends heavily on hydrocarbons for transportation fuels.
“If you think about the jet you flew in to get here to Calgary, if you think about transportation by car, we're going be very dependent on that for the foreseeable future,” he said.
Last month, Canada announced strict new rules requiring the oil sands industry to capture the majority of its carbon emissions. It's a move welcomed by oil companies like Shell, which say they do need to address the climate issue if they're going to keep extracting oil far into the future.
“There’s no doubt my company shares the global concern around climate change,” said Straub. “So having taken that as a given we're working constantly on new technologies to address the CO2 issues. We believe that a lot of the conventional resources are into decline. And that's why they require unconventional resources like ours in the oil sands."
