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Oil
Sands: Questions Over Rising Costs
by David Shvartsman
Finance Trends Matter
October 31, 2006
I wanted to talk
about energy from oil sands today, in response to a couple of recent
articles on the subject. Mainly what I and an increasing number of
people want to know is, will oil sands prove a sensible solution for our
energy needs?
First, a little background on oil sands. Here's a brief summary taken
from an earlier post on Alberta's oil
sands boom:
The oil sands, or tar
sands (depending on your point
of view), have always been something of a difficult resource base to
exploit. Extracting the heavy oil from thick mats of clay and sand is an
energy intensive and land disrupting process. The tar sands deposits are
actually mined open pit style or extracted by steam injection, a method
which requires large amounts of water and energy.
Add the spectre of sizeable greenhouse gas
emissions and it's easy to see that this activity will draw protests on
multiple fronts. But even without outside protest, the companies
involved in producing energy from the tar sands are encountering
difficulties with higher than expected costs. These companies were
probably not working from a base of overly-sunny expectations; everyone
has known for quite some time that the tar sands projects were
economical only during times of high crude oil prices.
What drove people to develop this resource
was its sheer size and the prospect of extracting hydrocarbons in a
politically stable, mining friendly environment. Alberta's tar sands are
estimated to contain 175 billion barrels of oil (proven reserves) and
this is where Western development has been concentrated.
A recent Financial Times article, "Optimists
hope oil sands deliver", revisted the theme of project
complications for Canadian oil sands producers. Petro-Canada's Mackay
River project was cited as a prime example of a field hit by soaring
development costs. The piece also sounded a skeptical note on oil sands
production; it was noted that two tons of oilsands yield just 1.25
barrels of bitumen and a single barrel of crude. In light of the high
environmental impact the oil sands projects carry, this is no small
point.
Shrewd observers have also pointed out that vast amounts of energy and
water are needed to develop the resource. CNNMoney.com makes exactly
this point in, "Curing
oil sands fever".
Experts say most of the natural gas Canada
currently exports to the United States will be eaten up by the oil sands
projects. To fuel further expansion, they say, Canada will have to
import natural gas from Alaska. Some have even suggested going nuclear,
although that idea has gained little traction so far.
Another constraint is water. Both
extracting methods use huge amounts, up to two barrels for every barrel
of oil produced.
Even with production running at one million
barrels a year, concerns are already being raised over the drawdown from
the major rivers that flow through the region.
The heavy use of natural gas in oil sands production may, at some point,
be supplanted by near-site nuclear power or some form of renewable
energy, but such plans remain speculative for now. What would be
interesting, and not a bit ironic, is the possibility of the oil sands
producers coming to the forefront in adopting these technologies in an
effort to mitigate their high reliance on hydrocarbon energy.
Depletion of water resources is another matter entirely, and one that
will have to be addressed through smarter planning and increased use of
conservation measures (such as water recycling).
Still, many investors are serious when they say the oil sands could
become a bonanza in terms of real energy supply, as well as returns. Jim
Rogers, T. Boone Pickens, and Newmont Mining's Pierre Lassonde and
Seymour Schulich are some of the astute investors who have invested in
the oil sands companies and proclaimed their potential. Will they turn
out to be right over the longer term or will rising costs and project
difficulties eat away at their investment returns?
One last point. In the most recent issue of Barron's,
Andrew Bary notes that output from the oil sands could rise, from the
current figure of 1 million barrels a day, to 4 million barrels a day by
2020. He also points out that energy companies will spend an estimated
$100 billion dollars to further develop the Alberta oil sands region
over the next decade.
Here's a question for knowledgeable readers. What could be done with
that $100 billion dollars if applied to the development or improvement
of existing renewable/sustainable energy technologies?
Now I'm not speaking of pie-in-the-sky developments or the currently
unfeasible notion of a "hydrogen economy"; I'm asking about
real technologies and proven advances that could be brought to market
through a similar sized investment.
Given the new ways in which scientists and entrepreneurs can share
information and collaborate on projects, and the public's current
awareness of issues related to energy reliance and global warming, I
have say I'm optimistic regarding future advances in this field. By
adopting and improving new and existing renewable energy technologies,
we just might be able to lessen our reliance on dwindling hydrocarbon
supplies.
© 2006 David Shvartsman
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CONTACT
INFORMATION
David
Shvartsman
Finance Trends Matter
Chicago, IL USA
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