Big money to be found in Canadian oil sands: massive fuel resource just starting to be unearthed.

Very few subjects have gotten more press lately than America's dependence on foreign oil and the need to develop new sources of this fossil fuel. But even as the country looks overseas to find new suppliers, some companies are looking to invest their money closer to home-in the rich oil sands of Canada.

"The bottom line is that we have the largest hydrocarbon resource on earth-larger than that of Venezuela and Saudi Arabia," said Pius Rolheiser, spokesman for Imperial Oil Ltd., a publicly traded company in which ExxonMobil is the majority shareholder. "The resource that we have in place is massive. The challenge to us now is to control the costs associated with its recovery."

According to Rolheiser, the size of the resource is estimated to be up to 2.3 trillion barrels of oil, an amount that could be mined from the oil sands outside of Alberta, Canada, for the next 100 to 1,50 years. Of that 2.3 trillion barrels, however, the recovery of 300 billion barrels is currently considered economically feasible using today's technology. Other estimates, including one by Alberta Energy and Utilities Board, estimates the resource at 1.7 trillion barrels of bitumen, with 175 billion barrels recoverable at the present time, and 315 billion barrels ultimately recoverable.

While the concept of recovering oil out of deposits of petroleum buried in sand and clay was once considered a risky investment by most oil company standards, the rising price of fossil fuel, coupled with advancements in technology, has made mining the oil sands a more lucrative proposition. Considering that the oil sands in northern Alberta are buried in an area roughly the size of Florida, there is much to be gained by developing this underground resource.

Though interest in the area is growing, some companies, such as Suncor Energy Inc. and Imperial Oil Ltd., have been investing in the area since the 1950s and '60s. "There have been attempts at commercial production in this area for 50 years or more," said Brad Bellows, spokesman for Suncor Energy Inc. "We started here in 1967 as Great Canadian Oil Sands Limited, a subsidiary of Sun Oil Company, which was led by J. Howard Pew. His goal was to secure a source of energy to reduce North America's dependence on foreign oil sources, and he was right on the money-just off on the timing by about 40 years."

Though Suncor started in the oil sands in 1967, they didn't turn a profit until 1974. "For a long time, there were a lot of problems with reliability issues in keeping the operation going," Bellows explained. "We saw big changes in 1991 when our company's current CEO, Richard George, did a complete re-examination of the operation and found a way to reduce operating costs from $30 a barrel to $15 a barrel. That caught the attention of a lot of other companies.

"A turning point for the industry also came in 1997 when the Canadian federal government and the Alberta provincial government changed the fiscal structure of taxes and royalties," he added. "That brought a wave of investors in."

IMPROVED TECHNOLOGY LOWERS OPERATING COSTS

One of the biggest technological changes to take place in the 1990s was the conversion of bucket wheel and conveyor belt operations to truck and shovel operations, according to Bellows. "The bucket and conveyor technology was designed to be used for soft mining operations, but in these harsh Alberta winters, it caused a lot of reliability issues," he said.

"While visually, it might look like switching from buckets and conveyors to shovels and trucks is a step backward, it was actually a step forward," he continued. "It was a step up in reliability, flexibility and cost efficiency."

This type of technological advancement made a big difference in the open-pit sand mines in and around Fort McMurray, Canada, which are owned by companies, including Suncor Energy, SynCrude Canada Ltd., Royal Dutch Shell and Chevron Texaco. In 1978, SynCrude Canada began its own open-pit mine in the area as part of a joint venture with Imperial Oil and several other companies. As a founding member of this consortium, Imperial Oil still has a 25 percent interest in these mining operations. One of every 10 barrels of oil produced in Canada is currently provided by SynCrude Canada, which produces 240,000 to 250,000 barrels a day.

"In addition to being involved in open-pit mining, we are also involved in in-situ, or 'in place' production, in which we recover oil from sands 400 to 500 meters below the surface by injecting steam into underground reservoirs," said Rolheiser. "This steam heats and softens the heavy oil, which enables us to pump it to the surface."

Imperial Oil's Cold Lake facility in Alberta, Canada, is the largest in-situ operation in the Western Hemisphere. One of every 20 barrels of oil produced in Canada is from the Cold Lake plant, which produces approximately 150,000 barrels a day. "We acquired the leases in the early 1960s, and began large-scale commercial operations here in 1985," said Rolheiser. "We had the first commercially viable in-situ operation in Canada."

One of the technologies that enabled Imperial Oil to succeed in this venture was their investment in cyclic steam-stimulation, during which high-pressure steam is injected into the oil sands to separate the bitumen from the sand. Imperial Oil also has developed the technology to recycle and treat the water used in its steam operations, which can reach 600,000 to 700,000 barrels of water a day at the Cold Lake plant.

"The ability to recycle this water is a key part of our operation," said Rolheiser, who adds that this technology is also better for the environment. "In three out of four of the existing steam-generation plants at Cold Lake, we are able to make steam using recycled water instead of fresh water. We have reduced the amount of water per barrel of bitumen by more than two-thirds."

INCREASING OIL PROFITS ENCOURAGES NEW PRODUCTION

Just as technological improvements have encouraged companies to invest more into oil sands production, so has the increased profit that comes with growing oil prices. "While improving technology is certainly a huge factor in the development of the oil sands, so is the commodity price," said Rolheiser. "When oil was $15 a barrel, people weren't tromping in. But now that it's in the $60s, everyone wants in.

"When it was $15 a barrel, no one was making a lot of money, especially since you have to spend a lot of money just to get a barrel of bitumen out of the ground," he continued. "But with a lower operating cost, improved environmental performance and energy efficiency, this area is beginning to look very attractive."

According to Rolheiser and Bellows, new companies are expressing interest in the oil sands on a daily basis, as are foreign governments like China and India. Though most surface parcels are already leased, new players are able to enter the field by buying out the companies that hold them. Recently, a French company, Total E & P, bought Deer Creek Energy, an independent Canadian company, to get a stake on the land.

Other companies, like Imperial Oil, are looking to expand on the leases they already hold. "Right now, we are submitting a regulatory application for a major oil sands mining project, called the Kearl Oil Sands Project, which will be wholly owned by Imperial Oil," said Rolheiser. "It's a huge, world-scale opportunity--the number of recoverable barrels of bitumen is estimated at 4.6 billion barrels."

The Kearl Oil Sands Project, which will be located approximately 70 kilometers northwest of Fort McMurray, is expected to produce about 300,000 barrels a day. "At that rate, this site could last 40 to 50 years," said Rolheiser. "It's a vast resource--if Kearl was a country, it would rank as the 28th largest hydrocarbon resource in the world."

A decision on the Kearl project is expected in early 2007, with construction following approval that same year. The first oil from the site is expected to be produced in 2010.

CHALLENGES FACING THE OIL SANDS INDUSTRY

Just as there are many advantages to wringing oil out of the sands surrounding Alberta, there are many challenges facing the companies willing to invest huge sums into its development. To date, all of the companies involved in the area have invested more than $40 billion between 1997 and 2005, including $2 billion per year just by Suncor Energy alone.

"One of the bottlenecks facing more development in this area is the huge amount of capital it takes to get going and the huge amount of labor it requires," said Bellows. The need for skilled tradesmen is growing in the oil sands, where Suncor employs 4,000 direct employees and long-term contractors. In 2003, 10,000 people were directly employed in the oil sands industry, and that number is forecasted to grow to 18,000 by 2008.

Another challenge facing the industry is the fact that it is a fundamentally different operation than what conventional mining companies have come to expect. "What we do here is more of a manufacturing process, where we take a raw, low-value resource and build it into a barrel of oil," said Bellows. "This kind of thing needs to be done on a massive scale and requires shipping a mix of sand, water and bitumen to extractor facilities that upgrade the product we have to a lighter-quality product--what companies would then recognize as oil. Our efforts aren't spent in exploration--we know where the resource is."

Changing low-value bitumen into higher quality oil takes its toll on the environment as well. "Once you mine heavy oil, you need to upgrade it to make it comparable to light crude oil which creates emissions of carbon dioxide, sulfur dioxide and other chemicals," said Rolheiser. "Another issue is the storage and treatment of tailings that are a byproduct of the treatment process. Because of the chemical process, this sediment of water and fine clay takes years to settle."

Companies are currently working on the reclamation of tailings, as well as on returning the soil removed during open-pit mining to its original state. "These oil sands mines are huge-each hole can be 50 to 70 feet deep, and stretch for several miles in diameter," said Rolheiser. "Once these area are mined, we need to have a plan in place to replace the overburden (soil) and reclaim the land. It's a long-term challenge."

"I would definitely say that all of the companies working in the oil sands are keenly aware of the major environmental issues facing us," said Bellows. "In order to get regulatory and societal permission to go forward with these projects, we need to manage these issues, as well as keep up a consistent dialog with government, environmental groups and local communities."

As the oil sands industry continues to grow, it is expected that both Canada and the United States will benefit from this once-neglected resource. Total production from the area, which now numbers about 1 million barrels a day, is expected to reach 3 million barrels per day by 2015, and 5 million barrels per day by 2030.

"The oil sands are becoming the most significant source of hydrocarbon energy in Canada, and there is a lot of upside in having this resource connected to the huge consumer market in the U.S.," said Bellows. Currently Suncor ships about half of its product to the United States, a small amount overseas, and the rest to Alberta and Ontario.

"As the oil sands become a more important part of the North American energy equation, we will see some evolution in the industry," he continued. "Refineries in Canada and the U.S. will need to look at investments that will optimize oil sands synthetic crude blends. It will take a lot of work, investing and forward-thinking policy to realize this opportunity, but I believe that it will happen."