Ken Silverstein
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Nations around the world are demanding ever increasing amounts of oil. But supplies are shrinking and causing crude oil prices to rise to record levels. The phenomenon has forced major energy giants to set their sights on unconventional oil supplies and specifically reserves flush with oil sands. Estimates are that in a decade at least 3 million barrels a day could be derived from Canadian fields, sharply cutting into foreign exports.

The problem, however, is that turning thick and dirty oil sands into a cleaner and usable petroleum substance requires lots of natural gas and water - resources that are also in high demand. Environmentalists, therefore, have trouble with the concept, noting that it will put more pressure on already scarce commodities while at the same time contribute to global warming.

According to CIBC World Markets, the Middle East oil cartel along with other oil producers like Russia and Mexico are not only struggling to grow production but also to manage their internal rates of consumption. As a result, their collective crude exports - that make up 60 percent of current world oil production - will fall by as much as 7 percent by 2010. Consequently, oil prices will keep going up.

"One of the few areas where production can be expanded significantly is the Canadian oil sands, a vast reservoir of bitumen in which extraction and refining economics are becoming increasingly attractive as world oil prices continue to set new highs," says Jeff Rubin, chief economist at CIBC World Markets. "Already at over a million barrels per day, production is slated to triple over the next decade and by 2020 could well be producing over 4 million barrels per day of synthetic crude, catapulting Canada to the front ranks of oil producers."

New oil is being discovered, says Rubin. But, much of it simply offsets the declining production from existing fields in the North Seas and in Kuwait. Within the next decade, he adds that the production of Canadian oil sands will surpass development from deep water wells as the single largest source of new global supply. And virtually all of the increase in Canadian oil production, he adds, will be slated for exports and go mostly to the United States.

The multinational oil firms are salivating at the chance to get more involved. Already, ConocoPhillips, ExxonMobil and Royal Dutch Shell have financial stakes along with Canadian enterprises Suncor and Syncrude that are still the major players there. Those oil companies appreciate Canada's pro-business climate, realizing that other nations favor their own state-run enterprises and put onerous restrictions on foreign-operated ones.

Expensive Riches

Alberta is the richest province with oil sands reserves estimated at between 1.7 trillion and 2.5 trillion barrels. That amounts to 13 percent of the world's oil reserves. But, the oil is embedded in a mixture of sand, water and clay that makes it heavier and dirtier than traditional supplies.

It's also expensive to mine. But with oil prices at around $88 a barrel, it has become an attractive venture. According to Statistics Canada, more money is being plowed into the oil sands industry in that nation than all other forms of mining. Investment in the area is already at least $50 billion (U.S) - an amount that will certainly rise dramatically as production triples over the next decade.

In addition to the cost of production tied to oil sands, the commodity has become a huge environmental target. Canada's quandary is that it is under conflicting pressures. One side is asking that it feed the world's energy appetite while the other is demanding that it cut its greenhouse gas emissions. Lots of natural gas must be burned to heat the water that is subsequently used to separate the oil from the tar in which it is mixed. Environmentalists are not just concerned about the increased emissions. They are also apprehensive that clean-burning gas will be diverted to refine the dirtier oil sands.

At the same time, the process requires vast quantities of water for every barrel of oil sands that is produced. And oil companies have yet to find an environmentally safe way to dispose of the used water.

But the major oil firms are determined. Right now, they are sitting on piles of cash. Because their access to other oil rich areas is limited, they are destined to drill increasing amounts from Canadian oil sand deposits. As they do, the technologies used to find those discoveries will get better and presumably more ecologically friendly.

Clearly, the need for alternative fuel sources as well as unconventional petroleum is strong. Altogether, the demand for oil will rise by 54 percent in the next 20 years, says the U.S. Department of Energy. To meet the expected future demand, it says that global production would have to jump by 44 million barrels of oil per day - a challenging task, given the impediments to supply.

"To mitigate these risks, expansion of all economic energy sources will be required, including coal, nuclear, renewables, and unconventional oil and natural gas," says the National Petroleum Council. "Each of these sources faces significant challenges -- including safety, environmental, political, or economic hurdles -- and imposes infrastructure requirements for development and delivery."

Canadian oil sands are not a panacea and cannot supplant foreign oil exports. But the commodity's place in the global energy realm will become much more substantial. Overall, that's a positive trend. But, long term, the goal is to move beyond petroleum and into cleaner burner alternatives.

 

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