In 1998 Scientific American brought to the world's attention, for the first time in a prominent way, the promise of Canada's oilsands situated in the Province of Alberta. The magazine announced to the world what Canadian oil and gas companies had known for decades: the Alberta oilsands hold a tremendous amount of producible oil. It is estimated that Canada has about 175 billion barrels of oil that can be recovered with today's technology. That represents the third largest oil reserves in the world after Venezuela and Saudi Arabia (rankings as of January 2011). Over 97 per cent of these reserves are located in the Alberta oilsands with the majority of the remaining deposits being located in Saskatchewan. This underscores the importance of the oilsands resource in both Canada and in the world.
The opportunity
The Alberta oilsands constitute the world's largest formation of bitumen. With an estimated total potential oil reserve value of 315 billion barrels there remains a substantial opportunity for development of the three major Alberta oilsands deposits found in the Athabasca, Cold Lake and Peace River regions of Alberta. These resources represent significant long-term oil production within a politically stable country currently linked through existing infrastructure to markets in the United States. The growth of oilsands development has also prompted new proposals to expand the existing TransMountain (TMX) pipeline and to build the proposed Northern Gateway pipeline in order to facilitate the export of oil to Asia from Canada's west coast.
In 2010, Canada was the number one exporter of oil to the US supplying an average 1.9 million barrels a day, compared with 1.2 million from Mexico and 1.1 million from Saudi Arabia. Oil production from the oilsands is expected to more than double in the next 10 years, making Alberta one of the few places in the world where oil production is increasing. Along with this growth opportunity, however, there are also environmental and social challenges that will have to be faced and overcome.
Although renewable or "green energy" is increasingly important, it is still in its early stages of development and is, in the short and medium term, likely to be only a small contributor to the world's overall energy portfolio. To date, liquid fuels required for transportation have been difficult to replace with alternative forms of energy so that liquid hydrocarbon fuels for transportation will be required for the foreseeable future. The oilsands represent a secure source of oil, developed within a strong and transparent regulated framework that can serve as a bridge to the future use of renewable energy resources.
The challenges
Although the oilsands have been known to exist in the Athabasca area of Alberta for over 200 years, it is only in the past decade that there has been a convergence of economic and technological factors that have allowed for the production and upgrading of bitumen into synthetic oil on a sustainable commercial scale. The oilsands developed slowly for many decades, outside of public scrutiny: however, now international attention is focused not only on their great promise but also on their challenges, which will be reviewed below:
Challenge No 1: Recovery
Oilsands are made up of sand, water, clay and bitumen, a mixture that is too heavy or thick to flow or be pumped, and therefore has to be either extracted and treated or heated and diluted to produce a useful product. Depending upon the depth of the deposit, bitumen is produced either through surface mining or an underground method known as in situ development. Compared to traditional oil recovery methods, the oilsands represent a more technically complex and expensive endeavour. While higher oil prices have boosted revenues, operating costs have also increased.
Challenge No 2: Royalties
The bitumen in Alberta is owned by the Provincial Government for the benefit of the Province's citizens. The royalty amount is established not only based on the world price of oil but also on the project's status vis-à-vis "payout". The term "payout" refers to the point where the oilsands developer has earned enough revenue to recover all of the allowed costs for the project plus a pre-determined return on investment. The concept of having a lower royalty rate for projects that have not reached payout – as well as a higher royalty for projects that have reached payout – recognises that oilsands projects are expensive and should not be unreasonably burdened with a high royalty while they are getting started. The other factor used in calculating the royalty amount is the world oil price as measured by the price of West Texas Intermediate (WTI) oil quoted in US dollars.
A sliding royalty amount of 1 per cent to 9 per cent is assessed on gross revenues from oilsands projects that have not yet reached payout. This base royalty starts at 1 per cent and increases for every dollar that the world price of oil exceeds $55 per barrel up to a maximum royalty of 9 per cent when oil is priced at $120 or higher. For post-payout projects, the net royalty starts at 25 per cent and increases for every dollar that oil is priced above $55 to a maximum royalty amount of 40 per cent when the world oil price reaches $120 or higher.
Challenge No 3: Infrastructure
As oilsands production increases, demand for transportation of the crude oil to key markets must also be considered. Oil pipeline capacity out of Western Canada is currently close to full utilisation. Additional pipeline capacity will be required and, in response, plans are being presented to expand existing capacity and to create new pipelines. These proposals all face routing, environmental impact and other challenges. This likely means that, in many cases, the regulatory review process will be extensive and lengthy. Knowing the methods and availability of transportation is an important aspect of an oilsands project.
Natural gas requirements for oilsands operations are projected to increase substantially from 0.7 billion cubic feet per day in 2005 to 2.1 billion cubic feet per day in 2015. Lower natural gas prices are currently spurring the oilsands industry to progress with current plans while investigating more efficient and less carbon intensive measures such as vapour extraction.
Challenge No 4: Environmental
The development of the oilsands has not been without controversy. Environmental groups have campaigned against oilsands development on many fronts expressing concerns including:
- the destruction of the boreal forest
- the generation of greenhouse gases
- the cost and need to remediate mined areas
- the reclamation of tailings ponds
- the industrial use of water
- the environmental and health impacts of water and air emissions.
For many years the industry did not respond well to these concerns and failed to act in a cooperative and coordinated manner to address them effectively. However, the oilsands industry has, in the past few years, become more responsive to the environmental concerns and has been working cooperatively as well as with government to demonstrate that it is acting to deal responsibly with those concerns.
In 2010 the Royal Society of Canada undertook an independent review of the environmental impacts of the oilsands that cut through much of the rhetoric on both sides of the issue. Through its peerreviewed study the expert panel concluded that, although much should be done to improve operations at oilsands facilities, development of the oilsands did not deserve the destructive reputation that had been advanced by many environmental groups and criticised them and the media for sensationalising the extent of industry impacts. Most importantly the study found "no credible evidence" of elevated cancer rates due to oilsands operations.
Although many of the findings were either neutral or positive regarding many important aspects of oilsands development, the report was critical of some issues, including:
- the slow pace of mine reclamation
- the nature and accuracy of aquatic monitoring in the region
- the improved but still insufficient progress in tailings management
- the difficulty for Canada to meet its international commitments for overall GHG emissions reductions despite progress in reducing GHG emissions because of growing bitumen production.
Nevertheless, with respect to emissions in general, and greenhouse gases in particular, there have been improvements. The oilsands industry has been actively addressing emissions by using improved technology such as low nitrogen oxides burners, sour water treaters and flue gas desulphurisation. Overall there have been significant reductions in greenhouse gas emissions even though there has been an increase in production over the last ten years due to investment by oilsands operators in new technologies.
The current environmental emphasis is on building a credible monitoring system for oilsands operations, to ensure that there is accurate data to inform planning decisions. The need to improve monitoring was forcefully argued in the Royal Society report and both the Federal and Provincial governments have taken steps to improve monitoring and environmental oversight. In March 2010 the Federal Government announced its new monitoring plan for the Athabasca oilsands area which will include more frequent and widespread sampling and will form a part of a broader system that will also monitor air quality and the impact of development on the region's wildlife. The cost of the new program is estimated C$20 million (US$20.4 million) a year and will be paid for by the oil industry.
Challenge No 5: First Nations
Aboriginal peoples in Canada comprise the First Nations, Inuit and Métis. Many of the oilsands reserves exist on or near lands which have been traditionally used by First Nations. The Canadian government currently does not have an express regulatory process specifically designed to address oilsands mining activities that have an impact on lands traditionally used by First Nations. While the Province of Alberta has a comprehensive regulatory structure to address oilsands mining the regime does not expressly apply to the use of traditional lands for oilsands activities. As a result, the issue of First Nation rights has been resolved through negotiated agreements with the First Nations. These agreements are often complex, covering issues such as local benefits, compensation for land use, development of local skills and capacity, sharing business opportunities, and the mitigation of social impacts associated with a project. Companies developing and investing in oilsands projects should be aware that negotiations with First Nations entities will be an issue in developing the project.
Foreign investment
The magnitude of the oilsands resource, its location in a secure, stable country, the promise of long term supply, a well-defined regulatory environment, fair royalties, and the potential for a strong return on investment have all resulted in increased domestic and foreign investment in the oilsands industry. This confers considerable benefits as mines, SAGD facilities and the supporting infrastructure are all capitalintensive undertakings. Foreign investment is important to the development of the oilsands and will continue to be welcome.
Under the provisions of the Investment Canada Act, the Federal government reviews foreign takeovers worth more than $600 million to ensure they represent a "net benefit to Canada" and meet a national security test that requires input from departments responsible for Canadian security. The Act also has guidelines relating to state-owned enterprises looking to invest in Canada. When assessing whether an acquisition is of net benefit to Canada, the Minister will, among other things, examine the corporate governance and reporting structure of the non-Canadian company to determine whether it adheres to Canadian standards of corporate governance including, for example:
- commitments to transparency and disclosure
- independent members of the board of directors
- independent audit committees
- equitable treatment of shareholders.
That examination also reviews how and the extent to which the non-Canadian company is owned or controlled by a foreign state. To date, all oilsands investments by foreign companies have been approved under the existing guidelines.
Canadian and foreign companies are increasingly combining through formal partnerships, strategic alliances and joint ventures to contribute the technology, expertise and capital necessary to execute a successful oilsands project. Ernst & Young recently reviewed the level of foreign investment in unconventional oil and gas assets in Canada, including oilsands, and concluded that during 2010 "... the number of inbound oilsands-focused transactions from Asia tripled, as countries like China, Japan, Thailand and South Korea actively sought to secure natural resources around the world and completed several major deals in Western Canada." In total, Asian investment accounted for US$9.2 billion during 2010 – compared to US$5.9 billion in 2009 and almost nothing in 2008.
This increasing investment from Asia comes on the heels of significant and continuing investment from the United States by companies such as ExxonMobil, ConocoPhillips, Chevron and Devon as well as investment from European-based companies such as Total and Statoil.
Continuing oil sand investment is evident from the number of significant oilsands and associated investments made in 2010, including:
- the acquisition by Sinopec International Petroleum Exploration and Production Company of ConocoPhillips' 9.03 per cent interest in Syncrude Canada Ltd.'s oilsands operation for US$4.65 billion
- the purchase by Thailand's PTT Exploration and Production Company of 40 per cent of the Kai Kos Dehseh oilsands project from Statoil ASA for US$2.28 billion
- the investment by the China Investment Corporation, a Chinese sovereign wealth fund, of C$1.25 billion into the Penn West Trust to develop Penn West's Peace River oilsands assets
- a new joint venture between Suncor Energy Inc. and Total S.A., which reportedly will result in Total spending $20 billion on Canadian oilsands projects by 2020.
China in particular appears to be investing significantly in oilsands. In addition to the transactions undertaken in 2010 outlined above, PetroChina invested $1.9 billion in 2009 in oilsands developer Athabasca oilsands Corporation, Sinopec owns a 50 per cent interest in the Northern Lights oilsands project in conjunction with Total and the China National Offshore Oil Corporation (CNOOC) originally purchased a 16.7 per cent interest in MEG Energy, a small but growing oilsands developer that plans to eventually produce up to 500,000 barrels per day.
Conclusion
Oilsands development can and will play a critical role in the future global energy supply. Although the increase of renewable energy is important, it is still in its early stages of development and, in the short and medium term, it is likely to be only a small energy contributor. Liquid fuels made from oil are required for transportation and they have been difficult to replace with alternative forms of energy and they will be required for the foreseeable future. As a result, oil from the oilsands will play an important role to bridge the world from current technology and economy to the future.
The responsible production of bitumen from the Athabasca oilsands region will go a substantial way to meeting the need for safe and responsibly developed oil. Oilsands production in Canada is undertaken in a secure political environment and is regulated by both federal and provincial bodies whose mandates are to act in the public interest. In addition, the development of the oilsands is being monitored by a society that has respect for the social and cultural values of the local community as well as for the environment.
The government is responding to public concern about the impacts of oilsands development with new laws, policies and monitoring systems to protect the environment and maintain energy and economic security. The industry is also responding with cooperative approaches and new technologies to reduce impacts on air, land and water.
As a result, the oilsands will continue to be an attractive investment opportunity for domestic and foreign investors. However, investors should be aware of the various business, environmental and regulatory issues involved.
Extraction Technology
Depending upon the depth of the oilsands deposit, bitumen is produced either through surface "open-pit" mining – where the deposit is located near the surface and there is limited overburden to remove – or using an underground method known as "in place" or in situ development where the deposits are deeper.
Currently most of production from the oilsands is from surface open pit mines which use trucks and shovels to recover and move bitumen ore for processing. The mining operations use huge shovels to load trucks capable of hauling up to 360 tonnes of mixed sand and bitumen. This mix is taken to a crusher, which breaks up the ore so that it can be transported to an extraction plant. During extraction, the bitumen is separated from water, sand and other materials in preparation for upgrading. Upgrading is the final stage of the process where bitumen is converted into refineryready synthetic crude oil and, in some cases, other petroleum products like diesel.
The predominance of mining for bitumen will change as 80 per cent of Alberta's bitumen deposits are too deep underground to be reached by open pit mining. In situ recovery is better suited for the production of these deeper bitumen deposits. Cyclic steam stimulation (CSS) and steam assisted gravity drainage (SAGD) are the two predominant commercial methods of in situ bitumen production. Of the two methods, SAGD is the one that is most used in the rapidly developing Athabasca oilsands.
In the SAGD process, two parallel (top and bottom) horizontal wells (called "well pairs") are drilled into the bitumen reservoir from well pads at the surface. One well is drilled near the top of the bitumen reservoir and the other is drilled near its bottom. Steam is generated at a field plant and it is injected into the reservoir through the top well (the "injection well"). Over time a steam chamber is formed underground within the bitumen zone and maintained by the addition of stream. Within that steam chamber the bitumen is heated so that it separates from the surrounding sand and can move. The mobilised bitumen can then flow via gravity toward the bottom of the reservoir where it is captured in the lower well pair (the "producing well") and pumped to the surface.
Regulation of the oilsands
Under Canadian law both the Federal and Provincial governments may exert jurisdiction over specific aspects of oilsands development. The Province has responsibility for resource conservation and development, the licensing of energy development projects, water and air issues, and socio-economic concerns. The Federal government has broad authority over interprovincial and international trade, including the import and export of natural resources, and narrower areas of jurisdiction and responsibility over matters such as fish, navigable waters, migratory birds, Aboriginal peoples and lands reserved for aboriginal pursuits. As a result, there are a series of regulatory requirements imposed by both levels of government that often must be met before an oilsands project may be approved.
If a project application requires a Federal decision or impacts an area of Federal jurisdiction, then a joint review may be required involving both Federal and Provincial government departments and representation. A joint review could result in a public hearing before a Federal/Provincial Joint Review Panel. Where there is no Federal concern, then the process is administered in Alberta by the Alberta Energy Resources Conservation Board (ERCB) and Alberta Environment (AENV), a process which may also entail a public hearing.
If a company wishes to proceed with an oilsands application it is required by AENV to prepare a draft development proposal, known as a Public Disclosure Document. Starting with public disclosure, the regulatory review process involves direct stakeholder engagement at several points throughout the review process which allows individuals or groups to influence the scope of the review and the issues to be examined, to provide comments, and ultimately to seek to support or oppose a project through a public hearing.
As a part of the public disclosure, the ERCB requires that a project proponent consult with stakeholders who could be directly and adversely affected by the proposed development in order to identify and attempt to address any issues of concern. After the consultation is complete a public notice of the proposed application is issued that expressly gives stakeholders the opportunity to file either objections to the ERCB or a statement of concern to AENV. The issues identified through this process help define the terms of reference for an environmental impact assessment and the objections received are evaluated to determine if a public hearing is necessary.
Project applications must also meet a thorough set of information requirements and undertake specified environmental impact and socio-economic assessments, often involving a joint process that can include consultation with several provincial and federal government departments, before they are considered for review.
An integrated application outlining the scope, nature, schedule, challenges and benefits of the project as well as the results and mitigation measures suggested by the environmental impact assessment and socio-economic assessment is prepared and submitted to the ERCB and the AENV for review.
When all of the required information is received the proposed project application is reviewed by the provincial government. Generally, where new, local or project specific concerns are identified, an application may be required to proceed to a public hearing. Currently, most mine applications have involved public hearings whereas most in situ projects have not, a fact that likely reflects the greater size and the significant nature of surface impacts created by mines.
A public hearing held before the ERCB is an expert tribunal. The hearing itself involves a formal process, which in some ways is similar to a trial, where evidence is taken under oath to help inform the tribunal of the benefits or potential adverse impacts that may be associated with the proposed project. The project proponent and the public can both attend and provide evidence.
The ERCB tribunal must weigh the evidence relating to the social, environmental, and developmental benefits and problems created by the proposed project and ultimately decide whether a project is in the public interest. If the ERCB finds the project to be within the public interest, it will recommended – with our without conditions to the Government for approval.
The Government will review the recommendation of the ERCB and has the ability to approve or disallow the project. If approved, the ERCB and AENV can then issue the specific permits necessary for the project's commencement. Even after the approval, there are extensive environmental monitoring and reporting requirements required by governments. Several joint stakeholder and industry groups monitor and report on cumulative environmental effects throughout the project life and through reclamation, when the land is returned to a natural state.
Refuting the "dirty oil" Label
Some environmental groups that see grave danger in developing the oilsands have popularised the label "dirty oil". The label comes from the assertion that oilsands production results in substantially more GHG's than normal oil operations. A "wells-to-wheels" study of greenhouse gas emissions from fuels made with Alberta oilsands crude, however, shows that they are not as "dirty" as this label might suggest.
IHS Cambridge Energy Research Associates (CERA) released a report entitled Oil Sands, Greenhouse Gases, and the US Oil Supply that reviewed 13 primary studies and estimates of GHG emissions from fuels produced from the oilsands on a lifecycle basis. The CERA report provides a range of 5 per cent to 15 per cent in increased emissions for oilsands versus the US average crude oil baseline on a lifecycle (or well-to-wheels) basis.
CERA states furthermore that oilsands products imported to the United States result in GHG emissions that are, on average, only 6 per cent higher than the average crude consumed in the country. Their analysis was drawn from the results of 13 publicly available studies from government, academic, and industry sources.
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