Canada's Black Gold

March 16, 2007

Oilsands might be the new black gold. But the fuel source, which has the potential to replace vast supplies of foreign oil and which is largely found in Canada, is under attack there and elsewhere.

Ken Silverstein
EnergyBiz Insider
Editor-in-Chief

Canada's House of Commons submitted a report that says the federal government should wipe out the billions in tax breaks it gives to the oilsands industry, noting that developers are earning record profits and no longer need the subsidies. The analysis does say that oilsands do provide tremendous economic opportunities for Canadians. It, nevertheless, urges policymakers to proceed with caution and to carefully examine the social and environmental impact of pursuing this energy source.

"The committee recommends that the federal government, specifically the Department of Natural Resources, base all of its actions in the area of oilsands development on sustainable development and polluter-pays principles," says the report, published in part in a Canadian newspaper. Critics of the current policy complain that the exploration of oilsands are dirty and create a lot of greenhouse gas emissions tied to climate change.

Conservatives, meantime, are expected to voice opposition to any significant policy changes at a hearing this month. Proponents of new and fully subsidized development argue that it takes at least five years to bring new oil supplies on line. At the same time, once-plentiful oil lifelines in the North Sea and Kuwait are depleting. Demand won't fall. Gas prices will therefore remain high when compared to historical levels. Therein lays the incentive to develop new sources of production, or other transportation alternatives. The market now reflects the possibilities.

Indeed, unconventional oil sources will account for about a third of the world's oil supply in a decade's time, says Cambridge Energy Research Associates. That's up from 10 percent in 1990. Canada would then become one of the world's leading producers of oil, turning out anywhere between 2.3 million barrels a day to 4 million barrels a day by 2015, according to the U.S. Energy Information Administration and the Canadian government, respectively.

Major U.S. companies dominate the oilsands scene in Canada, including ConocoPhillips, ExxonMobil and Royal Dutch Shell. Canadian-born enterprises Suncor Energy and Syncrude are big as well. Suncor, which was active in the sector when oil prices were just $10 a barrel, now produces about 237,000 barrels a day and has seen 14 percent increases in net income in recent times.

Experts at Shell say there are as much as 2 trillion barrels of reserves in Canada's domain and that more and more will become accessible with the development of new technologies that allow for cheaper production. Altogether, about 70 nations including the United States have oilsands deposits.

"Managing the impacts of growth will remain a significant challenge," says Rick George, Suncor's CEO. "But we are back on track with our efforts to actively manage greenhouse gas emissions. We are determined to close the gap through a commitment to innovation, leading edge research and sound management of our day-to-day operations."

Technical Impediments

As the technology to produce oilsands improves, the cost to find it could drop and the ultimate oil discoveries might escalate. According to the U.S. Geological Survey, Canada ranked 20th on the list of global oil potential suppliers with about 5 billion barrels of oil that could be mined just a few years ago. Today, it's second on the list with 175 billion barrels -- all because of its oilsands deposits. By contrast, Saudi Arabia has an estimated 260 billion barrels of oil reserves.

The fact that huge volumes of oilsands can be found in friendly Canada is welcome relief for many. Disruptions in supplies from the Middle East are common. And political uncertainties in Russia, Nigeria and Venezuela add to the angst. At the same time, U.S. regulations make it difficult to explore many federally-controlled areas now off limits to production that are thought to be rich in supply.

But is the recovery of oilsands technically feasible? Oilsands in particular is mined and processed, much like coal. The subsequent oil is separated out through a highly energy-intensive process and it ultimately produces a tar-like substance that is chemically split to make crude oil. It all takes about two barrels of water to produce one barrel of oil. The process can also use a lot of natural gas, which is in short supply and which contributes to climate change.

Comparatively, it costs about $3 a day to develop a barrel of oil in the Middle Eastern nations compared to at least double that for a barrel for oilsands in Canada. Beyond that, the mining of the commodity leaves an awfully large footprint in the wilderness. At the same time, environmentalists and some policymakers alike are concerned that the optimism surrounding oilsands will only add to the world's dependence on fossil fuels at a time when it says that cleaner and sustainable energy alternatives are available.

"Mounting environmental and social costs associated with oilsands activities in particular make it increasingly clear that it would be irresponsible to continue on a `business-as-usual' course," says the Canadian government report advocating the repeal of tax breaks. "It is time to begin the transition to a clean energy future."

Canadian lawmakers will soon decide whether they want to continue the same level of support for the industry. The oil companies, meantime, are responding by committing to apply the latest pollution control equipment to minimize their footprint. Suncor, for example, is working on carbon capture technologies.

The reality is that oil constraints have led to higher prices and the need to consider other fuel options. Enter oilsands, which may one day cut into foreign oil supplies and provide some political and economic relief to nations around the world.