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CANADA: Turning sludge into black gold

by Russell GoldThe Wall Street Journal
May 8th, 2006

In February, engineers from French oil giant Total fired up colossal drum boilers to generate steam that will be pumped to a depth of 300 feet under the frozen ground here. If all goes well, by May, the steam will marinate a tar-like mix of oil and sand until the crude begins to flow.

Nearby, Total will go after the oil-soaked sands closer to the surface, scraping away an ancient forest of spruce and poplars and shoveling the black soil into two-story dump trucks. Fully loaded, the trucks weigh as much as a Boeing 747. Total will then use industrial versions of giant washing machines to remove the oil, generating enough liquid waste to create vast toxic lakes.

Heavy-duty oil-extraction projects like these are turning Fort McMurray into the first great oil boom town of the 21st century. A Florida-size section of sandy soil beneath the boreal forest in this sparsely populated area of northern Canada is loaded with bottom-of-the-barrel petroleum.

These deposits were once dismissed as ''unconventional'' oil that couldn't be recovered economically. But now, thanks to rising global oil prices and improved technology, most oil-industry experts count oil sands as recoverable reserves. That recalculation has vaulted Venezuela and Canada to first and third in global reserves rankings, although Venezuela's holdings in extra-heavy crude are a rough guess. Saudi Arabia is No. 2.

Not including the oil sands, Canada would fall to No. 22. Led by Total, nearly every major Western oil company as well as their Chinese and Indian brethren are gearing up to go after the deposits here. In all, they plan to spend more than $70 billion in the next decade unlocking the oil from the sand.

SWEET CRUDE CRUNCH

The surging interest in Canadian oil sands is stark evidence that the world isn't about to run out of oil. Instead, it is running low on readily accessible light, sweet crude -- oil that flows like water, has few impurities and can be easily turned into gasoline. As the good stuff gets scarce, Big Oil is turning its attention and pouring money into extra-heavy crude, such as the giant deposits near Fort McMurray and another similar one in Venezuela.

But heavy oil has big economic and environmental drawbacks. It costs more to produce and takes more energy to turn into gasoline than traditional light oil. Recovering and processing Fort McMurray's heavy crude releases up to three times as much greenhouse gas as producing conventional crude. And upgrading it into refined products, such as gasoline or diesel, will require a gigantic investment to retool global refineries.

''The light crude undiscovered today is getting scarcer and scarcer,'' says Jean-Luc Guiziou, president of Total's Canadian operations. ``We have to accept the reality of geoscience, which is that the next generation of oil resources will be heavier.''

Total is making the biggest bet on heavy crude of any of the half-dozen international Western oil giants. Nearly one-fifth of its commercial reserves are in heavy-oil belts, a larger portion than any of its Western rivals, according to oil consultant Wood Mackenzie. Its stockpile of heavy-oil reserves is second only to that of ExxonMobil, a company that is more than twice as large. Total has spent years developing the complex technology needed to extract oil from tar sands in the frigid environment of northern Canada. So much heat is required to separate the oil from the tar that Total briefly floated the idea of building a nuclear- power plant there.

INCREASED EMISSIONS

The rush into the oil sands also has turned a long-standing belief about fossil fuels and the environment on its head. For years, environmentalists have argued that higher gasoline prices would be good for the Earth because paying more at the pump would promote conservation. Instead, higher energy prices have unleashed a bevy of heavy-oil projects that will increase emissions of carbon dioxide, suspected of causing global warming.

''As oil prices have gone up, you get this increased desire to get out onto the new frontiers of oil,'' says Marlo Raynolds, executive director of the Calgary-based Pembina Institute, an energy and environment think tank. ''We're now getting into the dirtiest sources of oil anywhere.'' To be sure, rising energy prices have spawned more interest in renewable fuel sources, but those investments pale in comparison to what's going on here.

Canada, which exports more oil to the United States than any other country, already is having trouble meeting its pledge to cut carbon dioxide emissions largely because of its mushrooming heavy-oil production. By 2015, Canada's Fort McMurray region, population 61,000, is expected to emit more greenhouse gases than Denmark, a country of 5.4 million people.

LARGE SUPPLIES

Canada's northern forest contains at least 174 billion barrels of recoverable heavy oil, equivalent to five years' supply for the planet, according to the Alberta Energy and Utilities Board. Venezuela has perhaps even more in the Orinoco River delta. By comparison, Saudi Arabia has about 260 billion barrels of more traditional crude, or 8 ˝ years' global supply, according to the Energy Information Administration, the statistical arm of the federal Department of Energy. Heavy oil also is being produced in the Middle East, the Caspian Sea, Brazil and even in California's San Joaquin Valley.

CHANGING LANDSCAPE

In northern Alberta, the oil-sands boom is remaking the landscape. The mining operations have clear-cut thousands of acres of trees and dug 200-foot-deep pits. The region is dotted with large man-made lakes filled with leftover waste from the mining operations. To chase off migratory birds, propane cannons go off at random intervals and scarecrows stand guard on floating barrels.

Alberta's energy minister, Greg Melchin, says oil-sands development creates a minimal environmental disturbance that is outweighed by the opportunities and jobs created. ''It's worth it. There is a cost to it, but the benefits are substantially greater,'' he said.

Environmental groups are increasingly critical of the government's reluctance to regulate the oil sands. ''The pace of development is outstripping our ability to manage the environmental issue,'' says Raynolds of the Pembina Institute. ``Our unwritten energy policy is dig it up and sell it as fast as possible.''

The remarkable properties of Fort McMurray's oil sands have been known for centuries. Native tribes mixed the tar-like substance with tree sap to waterproof their canoes. In the 1960s, companies now known as Suncor Energy and Syncrude Canada, a consortium of oil companies, opened oil-sands mines in the area. Both operations stumbled through periods of low oil prices but are now rapidly expanding.

When oil was trading at $12 a barrel in the late 1990s, Big Oil had little interest in oil sands. But surging energy prices have made heavy-oil investments significantly more attractive. It costs about $25 a barrel to produce crude from Canada's oil sands, an acceptable cost when oil is trading for more than $70 a barrel. By comparison, it can cost as little as about $5 a barrel to produce crude in the Middle East and $15 in the deep waters of the Gulf of Mexico.

TOTAL'S STRENGTH

For Paris-based Total, the world's fifth-largest publicly traded energy company by market capitalization, the oil sands play to its strengths. Total had its roots as a refiner rather than an exploration and production company. Oil sands were easy to find but hard to process.

Total's first foray into heavy oil was in Venezuela's Orinoco belt. In 1997, the company's giant $4.2 billion Sincor project there began producing market-grade crude. Sincor, which Total owns with Norway's Statoil and Petróleos de Venezuela, now produces 180,000 barrels of oil a day.

The same year, Total opened an office in Calgary to determine if a similar investment was warranted near Fort McMurray. It was soon clear to Total engineers brought in from Sincor that Canadian oil sands were more technically difficult than Venezuela's heavy-oil belt.

The key difference: The heavy oil in Venezuela was quite warm and flowed easily, albeit slowly, while in Canada the oil-sand mixture had the look and consistency of tar-like Play-Doh. But Canada was attractive because it offered a haven from politically unstable oil hot spots.



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