Senior Reporter Mary O'Driscoll traveled to Alberta this summer to investigate that region's burgeoning "tar sands" projects. This unconventional source of petroleum is now adding one million barrels of oil per day to North America's production base. But tar sands are not a cheap or easy source for oil, and the scale of the project is immense. This special report looks at the processes, investments and environmental consequences as the search for oil moves to this resource, once derided as too costly and difficult to ever reach major commercial development.
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Mary O'Driscoll, senior reporter
FORT McMURRAY, Alberta -- North America's future oil supply, concentrated for decades in the Middle East, might turn out instead to be right in its own back yard.
This frontier mining town carved from the boreal forest 600 miles northeast of Calgary is the staging area for the continent's most staggering energy development project: strip-mining and drilling tar sands in a 54,000-square-mile swath the size of Florida.
The 120-million-year-old tar sands, which are also known here as oil sands, are found in three regions in northern Alberta. There are the vast Athabasca sands that surround this town of 50,000, the Peace River sands to the west and the Cold Lake sands to the southeast, north of the town of Lloydminster.
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| Each 400-ton truck carries sandy bitumen, the equivalent of 200 barrels of crude oil, through Albian Sands' Muskeg River Mine to crushers that break down the sands and mix them with water. Photo by Mary O'Driscoll. |
Alberta officials say 1.6 trillion barrels of oil are locked in the sandy bitumen under the forests and "muskeg" -- bogs with scattered trees and vegetation -- that dominate the landscape. Of that, 175 billion barrels are proven reserves that can be recovered using current technology. Only Saudi Arabia has larger oil reserves.
Production from 29 companies now operating in the three regions exceeds 1 million barrels per day, most of which is shipped to U.S. markets. Tar sands backers project that production will triple -- to near 3 million barrels a day by 2015. That would make it the world's fifth largest crude oil producer.
The numbers have not been lost on U.S. policymakers eager for a source of oil in a politically stable place. Canada is already the United States' largest source of foreign oil, providing 18 percent of its current supply. But tar sands promoters see U.S. imports growing.
With the price of oil soaring, U.S. officials have begun taking tar sands tours. Treasury Secretary John Snow visited in July, congressional staffers and Energy Department officials stopped by early this month and Alberta officials are planning for another high-profile U.S. government trip later this year.
Observers liken the recent interest by oil companies from the United States, Europe and Asia to the dot-com boom of the 1990s or the Klondike gold rush of the 1890s. Alberta officials say industry invested $24 billion in the tar sands from 1996 to 2002, with $70 billion of additional investment announced through 2020.
The Alberta boom is made possible by the recent rise in oil prices to $67 a barrel. Tar sands production for many years had been considered cost-effective at $23 a barrel, and with improvements in exploration and extraction technologies, the price tipping point has fallen into the mid-teens, officials here say.
With the specter of the world reaching "peak oil" production within the next 10 years, investors have warmed up to tar sands. Indeed, the financial services firm Raymond James recently issued a report on tar sands investment potential, saying, "The best time to buy an oil sands company was five years ago, the second best time is today."
U.S. pipeline company Kinder Morgan Inc. is among those buying in. It recently announced its $5.6 billion purchase of Terasen Inc., which owns tar sands pipelines, including one that extends from Alberta to Canada's West Coast -- and to potential new customers in Asia.
But many worry about the pace of development here, and the stress it might place on the environment, an overstressed labor and housing market and social structures in northern Alberta, where Indian tribes have lived for centuries.
"There's a fever among energy executives and senior bureaucrats and politicians," says Dan Woynillowicz, an energy analyst with the Pembina Institute for Appropriate Development, a Canadian group monitoring the environmental and economic effects of tar sands projects.
"We seem to be falling into a bit of a progress trap where we see this progress and economic benefit as hugely positive, and that's overshadowing and perhaps leading to a scenario where our leaders are neglecting to consider whether taking us on the path is leading to growth for long-term benefit," he said.
Indeed, the production and processing that turns the tar sands' bitumen into oil that is further refined into gasoline consume huge amounts of water and energy, primarily natural gas. The strip-mining process scars vast acres of land that must be reclaimed and restored to what is called "equivalent land capabilities."
Noting that Canada is a signatory to the Kyoto Protocol, an international treaty aimed at reducing industrial emissions that contribute to global warming, environmentalists express fears that by 2010 the greenhouse gas emissions from oil sands production alone will make up about 12 percent of Canada's overall emissions target.
Thousands of workers either live at company camps on-site or here in Fort McMurray, where an affordable housing shortage gives rise to tales of people buying $350,000 trailers or sharing apartments with multiple roommates. Retailers, meanwhile, are having a difficult time recruiting people to work in stores and shops at $15 an hour because the local wage structure has been so skewed by high-paying petroleum companies.
The Alberta government is trying to respond to those concerns. It announced the release of nearly 1,000 acres of Crown land last month for new housing and plans to accelerate planned highway improvements here, and it has pledged to work with the nearby municipality of Wood Buffalo to address water and waste water treatment needs.
"Our government will take what we've learned here back to the caucus table so we can ensure that long-term strategies support growth in the region," said Alberta Energy Minister Greg Melchin in announcing the initiatives last month.
The entire process is being watched closely in the United States, where the oil industry and politicians are growing interested in developing oil sands and related oil shale deposits in the Rocky Mountain West. Tax provisions added to the Energy Policy Act of 2005 by Sen. Orrin Hatch (R-Utah) provide for speedy depreciation of equipment for producing oil shale and tar sands, as well as cost-sharing incentives patterned after those the Alberta government provided for its oil sands producers.
Turning tar sands into fuel is at once simple and complicated. Crude in the sands is substantially heavier than other crude. It is composed of sand, bitumen, clays and water. Each grain of sand is surrounded by water, which in turn is surrounded by bitumen.
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| The 400-ton trucks at the Albian Sands site are the largest in the world, with 400 tons of capacity and standing two-and-a-half stories tall. The tires are 11 feet tall. Photo by Mary O'Driscoll. |
Strip mining is used most often to extract oil from the sands, representing about 65 billion barrels of oil, about 20 percent of the total tar sands resource.
Bitumen is mined when it is close to the surface, as it is at the massive Albian Sands Energy Inc. site known as "Lease 13." The project -- owned by Shell Canada, ChevronTexaco and Western Oil Sands Inc. -- uses huge shovels to carve 49-foot tall "benches" in the earth, loading tar sands into 400-ton trucks that are -- at two-and-a-half stories tall -- as big as houses. Each carries enough bitumen to make 200 barrels of oil and can make 30 to 50 trips each shift. The digging process stops when the shovels hit the limestone that marks the mine floor.
Production continues around-the-clock. Trucks take the tar sand to crushers, where it is broken down into cantaloup-size chunks. Each double-roll crusher at Albian can process 14,000 metric tons of tar sands ore per hour. In the summer, the sand breaks up easily, but the bitter cold of northern Alberta's winters make the frozen sand much more difficult to crush.
From the crushers, warm water is added to the sands, which are piped to rotating drums where the sands and water are mixed further to reduce the chunks to golf-ball size.
The sand slurry is then moved among cells that separate the bitumen, sand and water. The sand and water are pumped to holding ponds while the bitumen is further washed with a hydrocarbon solvent.
Synthetic crude oils are created by breaking the heavy bitumen into smaller molecules by adding hydrogen, heat and pressure and removing nitrogen and sulfur. For Albian, that process takes place 306 miles away, at its Scotford upgrader northeast of Edmonton. The Scotford facility is connected by pipeline.
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| The view from the top of Syncrude's coker now under construction, looking southeast across the company's massive oil sands extraction, utilities and upgrading plant in the Athabasca oil sands region of Alberta. The facility shipped 87.2 million barrels of crude in 2004. Photo by Mary O'Driscoll. |
Albian's neighbor to the southwest, Syncrude, processes sands at a massive on-site upgrading plant that is in the final stages of an $8 billion (Canadian) expansion involving the addition of a third state-of-the-art coker to crack the bitumen into naptha and gas oils.
The naptha and gas oils are treated and blended into what the company calls Syncrude Sweet Blend, which is piped to refineries in Edmonton, eastern Canada and the midwestern United States. Syncrude, which is jointly owned by Canadian Oil Sands Trust, Imperial Oil Ltd., Petro-Canada, ConocoPhillips, Nexen Inc., Mocal Energy Ltd. and Murphy Oil Corp., is the largest producer of oil sands crude. One of every 8 liters of gasoline sold in Canada is made from its oil.
Drilling is used to extract oil when the bitumen is deep under hard capstone and cannot be strip-mined. The in situ process is most like conventional oil drilling in that it employs any of a number of steam injection technologies to heat and free the bitumen from the sands. The bitumen is then piped back to the surface, where the bitumen upgrading process begins.
The estimated recoverable resource using the in situ process is about 250 billion barrels, and it is in use in the Peace River, Cold Lake and southern Athabasca areas.
In U.S. political terms, Alberta would be considered a "red state." It is business-friendly, with minimal regulation, and governed by a generally conservative-leaning political structure with an economy built on extraction industries, farming and ranching.
Alberta is home to the Canadian oil and natural gas industries, producing 70 percent of the country's oil and 80 percent of its natural gas and representing 75 percent of the industry's total national spending. The province bills itself as a global leader in energy production with a focus on markets in both the Americas and Asia. The province has offices in Washington, Beijing, Tokyo, Seoul, Mexico City and Munich.
With oil and gas production in the western Canadian sedimentary basin in decline, Alberta officials are focusing on the tar sands. Some 81 percent of Alberta's tar sands mineral rights are owned by the province and managed by the Alberta Department of Energy and are leased to companies for resource exploration and production under competitive, sealed-bid auctions. The Alberta Department of Environment and the Department of Sustainable Resources Development administer complementary environmental policies. The Alberta Energy and Utilities Board regulates all oil and gas activities.
At the end of 2003, 32 companies representing 59 projects were operating in the oil sands, according to the Alberta Department of Energy. Combined, these projects produced 938,000 barrels per day of bitumen.
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| The construction of a new coker at Syncrude's oil sands plant, the largest oil sands operation in the world, is part of an $8 billion (Canadian) expansion geared toward reducing emissions and expanding production at the site. Photo by Mary O'Driscoll. |
Alberta's royalty regime for tar sands, in place since 1997, uses a revenue-less-cost calculation on royalty rates that favors start-up operations. If a company continues to invest in its operations, it would pay royalties equal to 1 percent of its gross revenue. The idea is to help with project cash flows in early years. Companies that have recovered their costs pay royalties tied to either 1 percent of gross revenue or 25 percent of net revenue, whichever is larger.
Cathy Housdorff, director of communications for Alberta's energy office, says the royalty calculation was aimed at encouraging development of tar sands and "takes into account some of the barriers -- higher technological risk and higher capital costs."
Tar sands revenues since 2003 have totaled more than $1.3 billion (Canadian), Housdorff says, with 2003-04 revenues at $197 million, 2004-05 revenues at $718 million and 2005-06 revenues projected at $393 million.
Critics say the province's royalty regime should be revised now that the region is attracting major players with deep pockets. Pembina's Woynillowicz, for one, contends the production and investment should yield more money for the province.
Last year, Pembina issued a report showing that even as tar sands production has been rising consistently since 1995, Alberta's share of the royalties has fallen. At their height, tar sands royalties were $549 million in 1997, about 16 percent of total $3.4 billion in royalties collected in Alberta, the report says. In 2002 -- the latest year considered in the report -- tar sands royalties were $175 million, about 4 percent of the total $4.9 billion collected.
That, the Pembina report says, means the tar sands royalties per unit of oil sands production declined between 1995 and 2002 from $1.6 per barrel of oil equivalent (Canadian) to $0.6 per barrel of oil equivalent.
"Ultimately, what the government set out to achieve has been hugely successful," Woynillowicz said, though he said much of the credit is due to the influence of record oil prices.
"So now, obviously, there is a market driver for stimulating oil sands development, so it's definitely time to look at whether or not the provincial government is adequately collecting [on] the resource that it owns," Woynillowicz said. "The public does own it, and the companies are collecting it on behalf of the public."
Woynillowicz noted the Raymond James report, which specifically cited the low royalty rates collected by Alberta as a contributing factor to its favorable tar sands investment review. The report specifically compared the Alberta investment climate to those of Newfoundland and Labrador, provinces in the far Atlantic region of Canada that are threatening to increase royalties for offshore oil drilling.
Yet, the Tongass is notorious for offering sales that are larger than local mills can handle, a point that frustrates many Alaskans because shipping logs to mills in the lower 48 states offers little benefit to Alaska's local economy. When big stands are cut, many of the cutters are not even from Alaska but rather have migrated from Oregon and Washington looking for work, a point made by numerous southeast Alaskans.
Only recently has the service begun offering "microsales," small timber sales that are affordable and small enough for local mills and can be logged and processed entirely by local people. These small sales have been remarkably successful, and many people want the service to offer more of them, but the service and AFA say a diversity of sales are needed to support the local economy.
"We need some of all of the above," Neill said, adding that the Cholmondeley will likely be broken up into several sales of varying size to match the needs of likely bidders.
Another reason the service continues to offer large sales is because it is easier. According to agency economist Richard Haynes, the small sales take just as much time to prepare as the large sales but offer less timber. To meet the supervisor's annual cut quota, it takes less time and money to offer a few large sales as opposed to numerous small sales.
"We're struggling. It costs just as much to put up a small sale as a big sale. Everyone likes to put up sales that have 5 or 6 million board feet, and yet we need to put up sales that have a couple half million feet," Haynes said.
The future of Alaska's loggers lies in niche markets, which in turn requires small sales of valuable timber cut and processed into specialty items, according to Haynes. "In Alaska the future is different, it's people making not as much product but cutting things for hard value markets," Haynes said.
But it remains to be seen whether the Cholmondeley sale will fit that profile or something else. In the meantime, questions continue to swirl about the sale's potential effects on the local economy and water quality. And residents like Larry McQuarrie can only wait to see what happens next.
Go to E&ETV to watch the October 17 OnPoint featuring Greg Stringham, vice president of the Canadian Association of Petroleum Producers, as he weighs in on Canada's energy future.
Go to E&ETV to watch the March 29 OnPoint featuring Alberta Premier Ralph Klein as he discusses the tar sands' oil potential and planned natural gas and oil pipelines from the Arctic.
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