Part two of review of Canada's conventional and unconventional oil production capacity

Reprinted from ASPO-USA's weekly newsletter

It's unanimous among energy analysts: Canadian oil sands production will expand greatly in the coming years. Typical is Cambridge Energy Research Associates (CERA) saying that capacity will double between 2006 and 2010 to add as much capacity in 5 years as was developed during 27 years of operations.

Furthermore, expansion would continue at this breakneck pace. CERA places capacity at 1.18 million b/d in 2005 and projects capacities of 2.30 million b/d in 2010, 2.7 million b/d in 2012, and 4.8 million b/d in 2020. There are compelling reasons to be skeptical about such projections. We need to step back, do a sanity check, and get real.

Oil Sands History
The accompanying graph illustrates the growth of oil sands production through 2005, with CERA's projections through 2020. Commercial oil sands operations began in 1978 following decades of experimental projects. The collapse of oil prices in 1986 slowed development briefly, but the industry recognized that the world's oversupply of oil would be temporary, and that production of Canada's conventional oil was declining. Despite low oil prices, synthetic crude production from oil sands crept up to 350,000 b/d by 1990.

During 1990-95, production continued to creep upward. This is when industry applied steam-assisted gravity drainage (SAGD) to recover extra-heavy oil and bitumen from formations too deep for strip mining. Expansions to strip mining and SAGD powered major growth after 1996, more than doubling production by 2004.

Energy-Intensive Industry
The critical impediment to freewheeling expansion is the extreme energy requirements to synthesize refinable crude oil from subsurface formations that are saturated with bitumen or degraded oil. Man must supply the energy that Nature failed to provide for "cooking" bitumen into crude oil. The energy either comes from burning coke (processed from the bitumen itself) or increasingly, by burning natural gas.

In typical strip-mining, bitumen-soaked sand and rock is trucked to a processing plant that sprawls across 4 or 5 square miles. Great quantities of water, heated to nearly boiling, are mechanically mixed with pulverized rock and chemicals, forming frothy slurry from which the raw oil product is skimmed. Much of the water is recycled, but water with excessive solids is dumped into a tailings pond of, say, 10 square miles.

In SAGD recovery, high-pressure steam is injected into horizontal wellbores that transfer heat into the subsurface. Heat reduces the viscosity of the hydrocarbon, allowing it to drain by gravity into producing wells. From there, electric submersible pumps push the oil/water emulsion to the surface.

Natural Gas Limits Oil Sands Expansion
The enormous heat demand for steam production is supplied by natural gas. Downhole pumps are powered by electricity generated by burning natural gas. The industry does not openly discuss the fuel requirement for SAGD, but SAGD's inventor estimates that extracting one barrel of bitumen from the highestquality formations requires the heat from 1,000 cubic feet of as. *

Bitumen or extra-heavy oil cannot be processed in conventional refineries, but undergoes special processing called "upgrading" that breaks apart huge hydrocarbon molecules to the size range of conventional crude oil. Upgrading also removes impurities containing sulfur, nitrogen, and heavy metals.

Upgraders utilize various processes, but all require the brute force of heat. The heat demand for upgrading requires at least 1,000 cubic feet of gas per barrel of bitumen. Thus the total heat requirement to produce one barrel of synthetic crude oil by SAGD is 2,000 cubic feet of gas; producing one billion barrels of crude requires two trillion cubic feet of gas. Put another way, if Canada increases synthetic crude production by one million b/d, gas consumption would increase by at least two billion cubic feet per day, or 12% of Canadian gas production in 2005.

Natural gas supply is the most serious bottleneck to oil sands expansion. Canadian production of natural gas may have peaked in 2002-2004. Despite record gas prices and record drilling rates, gas production dropped 14% from 2004 to 2005. Gas production had grown 130% during 1986 through 2002.

Production slipped 2% unnoticeably by 2004, but then dropped inexplicably in 2005.

Canada possesses significant, but not world class, undeveloped natural gas resources in ice-choked waters of the Arctic. The resources need advanced designs for production infrastructure and pipelines before the gas can fuel oil sands expansion. However, little gas would remain for Canada's southern markets to heat homes and businesses and generate electricity.

Hypocrisy About Kyoto
Unless Canada expands gas supply significantly, the oil sands industry must burn increasing quantities of coke, i.e., carbon. Coking is an integral process in oil sands operations. Bitumen and extra-heavy oil have high carbon-to-hydrogen ratios compared to conventional crude oil. Coking breaks up big hydrocarbon molecules and chemically removes carbon. Thus, great quantities of coke are produced, which is used to fuel a multitude of oil sands operations.

Burning coke pours carbon dioxide (CO2) into the atmosphere. This exacerbates the hopeless demand confronting Canada to reduce CO2 emissions. Signing the Kyoto Protocol committed Canada to drop emissions 6% below 1990 levels by 2012. As of 2005, Canada's emissions were 25% above the compliance level for 2012. With unprecedented expansion projected for a carbon-intensive industry, Canada's CO2 emissions will only increase.

An Alternative Projection
Additional bottlenecks to the projected expansions will be upgrading and coking capacity to process the increasing volumes of raw hydrocarbon. These plants must now be constructed near the mines and SAGD. Bitumen is semi-solid and will not flow in pipelines. Producers dilute bitumen with naphtha, a solvent, thus allowing bitumen to be pipelined to distant upgraders. Naphtha supply is extremely tight; necessitating that future upgrade capacity is constructed on site as part of mining and SAGD operations.

A more sane projection would be to continue the growth of 600,000 b/d achieved during 1995-2005, but it would be a tough act to follow. Oil sands production would thus reach 1.7 million b/d by 2015, about half of CERA's projection.

References * "Application of SAGD, Related Processes Growing in Canada," Oil and Gas Journal, May 14, 2001

1. "Worldwide Liquids Capacity Outlook to 2010," Cambridge Energy Research Associates, 2005
2. "20th Century Petroleum Statistics," DeGolyer and MacNaughton, 2000
3. Special Report, several articles updating Canadian oil sands, Oil and Gas Journal, June 28, 1999
4. "Heavy Oil Upgrading Enhances Profit Streams," The American Oil and Gas Reporter, January 2006
5. "New Technique Defines Limits of Upgrading Heavy Oils, Bitumens," Oil and Gas Journal, January 7, 2002
6. "Syncrude on Schedule for Start-up in mid-1978," Oil and Gas Journal, November 14, 1977

Tom Standing began his career as a chemical engineer in refinery operations. He later shifted careers as a civil engineer for the San Francisco water system. He is self-taught in the sciences of petroleum production, geology, and geochemistry and has studied the production histories of hundreds of oil fields.

KEYWORDS: TAR,SANDS,OIL,CANADA,ASPO,CERA,PROJECTIONS,PEAK,NATURAL GAS,ENERGY,SYNCRUDE
ABSTRACT: Part two of Tom Standings review of Canada's conventional and unconventional oil production capacity.