Will oil from tar sands enable the global supply to be maintained?

Colin Campbell's projections of a declining oil supply are based on production from conventional wells. Can unconventional sources such as tar sands and oil shales prevent a serious liquid fuel scarcity?

Early in 2003, the Oil and Gas Journal increased its estimate of the size of Canada's oil reserves from 4.9 billion barrels to 180 billion. As a result, Canada now has the second-largest oil reserves in the world, ahead of Iraq, and OPEC's share of the world's oil reserves has fallen by more than 10 percent.

The explanation for this sudden, massive rise was that the journal had included Alberta's vast tar sands as part of the reserves for the first time. In order for an oil resource to be termed a reserve, it must be possible to extract oil profitably with existing technologies and under present economic conditions. "The tar sands had been economic for some time" Colin Campbell commented. "The change in reporting practice was probably made for a political reason - perhaps to undermine OPEC." The U.S. Geological Survey estimates that by 2005, 10 percent of North America's oil production will come from Alberta's sands.

Speaking at the Thurles conference, David Frowd of Shell, which has invested heavily in extracting oil from the Albertan sands, put the Canadian reserves even higher than the O&GJ, at 300 billion barrels, and the world reserves of oil extractable oil from tar sands and shales at 800 billion. He added that if current research into methods of using moderate temperatures to extract heavy oils from oil shales and some types of coal while they were still underground were successful, the world's oil reserves would be vastly increased.

Not everyone is convinced that extracting oil from tar sands makes sense in energy terms although it clearly does financially. The Canadian environmentalist Gary Gallon wrote in The Gallon Environmental Newsletter in October 2002:

Much of the energy used to extract tar sands oil comes from using natural gas. The natural gas price is closely tied to the price of conventional oil, on a BTU basis. So when the price of oil zooms up, the price of natural gas rises accordingly. In fact, today, it is possible that the price of natural gas could increase more than conventional oil due to its environmental benefits over burning coal for generating electricity. This would leave tar sands production in an even worse economic situation.

Campbell also expects the price of gas to the producers to rise sharply, but for a different reason. At the moment, he says, the companies are using 'stranded' gas - that is, gas from fields near the tar sands that have too little in them to warrant building a pipeline to take it to the cities. This gas can be bought very cheaply by the companies because there are no other potential customers for it. "But it is running out fast" he says, "and no one is going to use ordinary oil and gas to produce from the tar sands because they are too valuable."

Gallon believes that it takes so much energy to extract the sand from the bitumen that it almost isn't worth it. "If they were to do a net energy analysis, they would find that it almost takes as much energy to mine, process, refine, and upgrade the bitumen oil they get from the tar sands as the energy in the light oil they are producing. There is a small net energy gain. But it is estimated that 5 to 10 times the amount of greenhouse gases are released processing tar sands as released when processing conventional oil." Accordingly, several investment analysts have warned that if carbon taxes or tradable emissions permits are introduced to restrict greenhouse gas emissions under the Kyoto Protocol, which Canada has signed, the extraction process could become financially unattractive. Koch Industries, a U.S. energy company, recently withdrew from a C$3.5-billion Alberta oil sands project giving Kyoto as the cause even though the cost of producing a barrel of oil is, by some estimates, only around $8.

Gallon lists the problems with tar sand extraction as follows:

Campbell thinks that a lack of water will limit tar sand processing. "The supply is already so tight that the Alberta government wants to charge the companies for it". The American author Richard Heinburg also thinks that water will be a problem, but in a different way. In his 2003 book The Party's Over which looks at future energy supplies and the consequences of a decline in oil and gas production, he points out that the waste water pond of one of the processors, Syncrude, is 4.5 miles in diameter and twenty feet deep. He calculates that it would take 350 similar plants to meet the world's oil needs, and, together, their waste water pond would be half the size of Lake Ontario.

Frowd told the Thurles conference that Shell Canada had started developing the Athabasca Oil Sands Project, a joint venture with ChevronTexaco (20%) and Western Oil Sands (20%) in 1999. It began upgrading bitumen into a lighter oil in March 2003. The project consists of an opencast mine and extraction plant on the Muskeg River, 75 kilometres north of Fort McMurray, Alberta, and an upgrader at Shell's existing refinery at Scotford near Fort Saskatchewan not far from Edmonton. The tar sand is mined using huge excavators and after the bitumen has been separated from the sand it is sent down a pipeline to the upgrader where it is treated with hydrogen purchased from a Dow Chemical plant to turn it into a lighter oil. (Essentially, bitumen is a thick oil because it has a higher ratio of carbon to hydrogen in its molecules than do lighter oils. The upgrader corrects this). The project produces 155,000 barrels a day of bitumen oil but after the hydrogen is added, the volume increases to 170,000 barrels a day. The output is sent for conversion into a range of products to Eastern Refineries in the United States as well as the Scotford Refinery nearby.

Shell's investment in the project, which at one stage employed 14,000 workers and was the biggest construction job in Canada, was said by Frowd to be $2.5 billion. Its two partners put in about $400 million each bringing the total capital cost to $3.3 billion for 1.6 billion barrels of reserves to be recovered over 30 years. In other words, amortising the capital cost over the life of the project works out at about $2 a barrel if interest payments are disregarded. To this must be added the cost of plant maintenance, the wages of the 850 people permanently employed, and, most critically, the cost of the natural gas and the hydrogen used in the extraction and upgrading processes.

Extraction involves agitating the sand in water at 30 to 40 degrees centigrade. The warm water is produced by a natural gas fired CHP (Combined Heat and Power) plant and the electricity is sold to the grid. The hydrogen is also made from natural gas, so the profitability of the process is crucially dependent on the ratio between natural gas and light crude oil prices. Shell says that only 25% more greenhouse emissions are produced in making the oil than would be the case if it produced the oil from conventional sources but that it intends to halve emissions by 2010. However, as these reductions will mostly be made in Shell's operations elsewhere rather than by increasing the efficiency of the mine or upgrader, it is not clear why they should be attributed to the project unless it is for PR reasons.

Frowd read Gary Gallon's comments before his talk and briefly answered some of them. "How do we minimise environmental impact?" he asked. "Low temperature extraction, efficient gas-fired co-generation, progressive land restoration - we have a rolling five-year cycle and the land is to be left biologically at least as productive as it was before. We have maximised water re-use and minimised SO2 emissions. The project was designed jointly with an independent panel of environmental organisations, and its environmental performance is independently monitored." Looking ahead to 2020 he expected that the CO2 released by the process would be being sequestered so that virtually emissionless energy would be being produced - until, that is, it was burned in a vehicle.

"The key point about tar sands is that the resource is huge but the extraction rate is very low," Colin Campbell says. "Production from them will have a negligible impact on the global peak but will slowly increase afterwards. So far only the easiest places have been exploited so production will get exponentially more costly and difficult. Now they dig away up to 240ft of overburden to get to the deposit: to go deeper would be hugely more expensive. So tar sands oil is no panacea but will slightly ameliorate the post-peak decline."

This is one of almost 50 chapters and articles in the 336-page large format book, Before the Wells Run Dry. Copies of the book are available for £9.95 from Green Books.

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