Friday, July 16, 2010

Oil sands cannot save us from peak oil

It’s quite nearly universally accepted that the easy-to-reach, cheap oil has been extracted – but is this also the case with Canada’s much-touted oil sands?

The startling suggestion has been made by economist and author Jeff Rubin, blogging on the Globe and Mail business pages. He writes that the price of oil must rise in order for Albertan oil to be economically sustainable, as future expansion will be chasing supplies buried deeper underground and further from the available water supply.

Which comes as quite a shock to people listening to the Canadian government, whose prime minister Stephen Harper famously touted the nation as an emerging "energy superpower" back in July 2006. As Canadian Press reported at the time:

British investors, Harper told his well-heeled audience in London, "have recognized the emergence of Canada's global energy powerhouse. Or as we put it, the emerging energy superpower our government intends to build.

"This is no exaggeration."

As evidence, Harper said Canada is the world's third largest producer of gas, seventh in oil production, the biggest hydro-electric generator and the biggest supplier of uranium. Alberta's tar sands are second only to Saudi Arabia as the world's largest oil reserve.

It is widely reported that the 174 billion barrels of Canadian oil reserves are second only to Saudi Arabia, but the glaring differences between free flowing conventional Middle Eastern oil and the “energy- and capital- and time-intensive” oil sands are not so widely appreciated. Consequently, dizzy official forecasts of 4.5 million barrels-per-day oil sands output by 2030 have been constantly downgraded over the past few years.

The problem is that it’s just so expensive to get at. Oil production in the region requires vast amounts of energy and water – supposedly the region’s supply of natural gas and river water can be tapped for this, but the further away the oil deposits lie from these resources, the greater the expense.

Which Jeff Rubin picks up on in his July 14 Globe & Mail column, Oil must rise to make oil sands economical:

Even without a cost for carbon emissions or water pollution, the economics of the requisite production increases just won’t fly. Not when the cost curve lying between today’s production of a little over one and a quarter million barrels a day and tomorrow’s target of three million barrels a day is steeply ascending, driven by the need to pursue ever-deeper bitumen deposits even further away from available water sources like the already heavily tapped Athabasca River.

As energy guru Matthew Simmons once wryly observed, “In oil exploration, you don’t leave the easiest for the last.” It’s not a coincidence that two of the largest and oldest producers, Syncrude and Suncor, are located almost kitty-corner from each other across the banks of the Athabasca.

Rubin, author of 2009 peak oil book Why Your World Is About To Get A Whole Lot Smaller, makes the observation that the oil sands are not a new discovery – “As early as 1920, there was a pilot plant that first extracted oil from the bitumen” – but rather have only recently been considered commercially viable. What makes it so is the price of oil. And when this plunged from $147 to $40 per barrel in 2008, “some $50-billion of capital spending was cancelled overnight.”

And as the Globe and Mailreported in April 2010: “According to the Canadian Association of Petroleum Producers, the volume of oil previously expected by 2011. . . will now not likely flow until 2018 or later.”

A 2007 Money Week article, written by Byron King, Are Canadian tar sands the answer to our oil needs?, considers the “time, energy, capital, and other inputs to achieve deliverability” of this oil. This quotes the views of David Hughes, of the Geological Survey of Canada:

Production of “oil” from the tar sands is a very energy-intensive process. Production estimates for 2025 are that the energy input will require between 1.6-2.3 billion cubic feet (bcf) of natural gas per day, approximately equal to the planned maximum capacity of the proposed Mackenzie Valley gas pipeline (1.9 bcf/d) out of northern Canada, or about one-fifth of anticipated daily Canadian gas production.

Pipelines or no, the energy requirements of the projects planned for tar sands development already exceed the amount of available natural gas from the entire Mackenzie River project. Virtually all estimates for natural gas usage in tar sands operations by 2015, just 10 years hence, exceed the projections for available amounts of natural gas. Something has got to give.

Even under the best and most optimistic of scenarios, Canadian tar sands might yield about 3 million barrels per day (bpd) of product by 2025, or about 2.5% of forecast world demand of 120 million bpd by the International Energy Agency (IEA).

Projecting Canada’s future oil output is not a simple matter of totting up its oil reserves – with the 174 billion barrels quoted above being at the conservative end of a range of press frenzy – as it will hinge on a range of other factors, including investment, availability of water, suppiles of natural gas, and the actual price of oil, which will make the whole thing economical or otherwise. In April, Reuteurs reported that Shell's chief executive, Peter Voser, confirmed the company "has no near-term plans to expand its oil sands project,"due to cost considerations - along with rivals Imperial Oil Ltd, Total SA, Suncor Energy Inc.

Oil production outside of Opec is widely believed to have peaked and be in decline, and future Western production must focus on unconventional sources such as deepwater and oil sands/shale oil. But these are in a perilous state right now, or at least, show no liklihood of living up to the hype. Market uncertainties, including the fluctuating price of oil, the possibility of government legislation (from carbon taxes to deepwater moratoriums) and even the availability and price of credit all come into play. Such ventures into unconventional oil are expensive, risky undertakings that involve significant lead times.

According to the latest from the US Energy Information Administration, Canada "remained the largest exporter of total petroleum in April, exporting 2.486 million barrels per day to the United States." The issue here is the liklihood of ramping up this production. This seems unlikely, considering that output is already falling behind what was projected. This leaves the US, and the rest of the world, as reliant on Opec oil as ever before - according to Bloomberg, Opec's spare production capacity is constantly shrinking "as supplies from outside the group fail to keep up with demand, according to the IEA," which points to pricing volatility.

It is common for peak oil deniers to point to the vast reserves currently buried within the Earth, and suggest these will be exploited when the market deems them viable – which is true, of course, but this carries an implication of a smooth transition. The oil market over the past few years has shown extreme price volatility, market uncertainty and cycles of boom and bust. This is not a good environment for oil companies to be seeking investment for deepwater and oil sands undertakings.

Manufacturing cools in JuneInterview with Jeff Rubin, part 2

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