OVER THE BARREL: Squeezing oil from sand and rock

Over the past few years, "oil sands", "tar sands", "oil shale" and the like have become increasingly common terms in the energy vernacular, lumped together as unconventional sources of oil. They all refer to generally the same resource; oil that is trapped in sediment that cannot be retrieved by conventional methods, which is to say it does not "flow" from a well. It is estimated that over 66% of the worlds petroleum reserves could lie in these types of deposits. Over the coming years, they will take on more importance as traditional sources of energy continue to be depleted and our appetite for energy leads us to the extraction of resources from previously uneconomical sources.

What are oil sands?

Oil sands, also known as tar sands, are a mixture of clay, sand, water, and bitumen (bahy-too-muh n), which is a thick, tar-like mixture of petroleum hydrocarbons. Deposits of oil sands are found in over 70 countries, but by far the largest sources lie in Canada and Venezuela. Estimates put proven reserves in Canada's Alberta province at 174.0 billion barrels. Compare that to Saudi Arabia's proven reserves at 262.3 billion barrels, and you get a sense of how important a player Canada is becoming in the world oil market. More amazing is the staggering estimates of total oil in place, which are between 1.7 and 2.5 trillion barrels. As technologies improve and even fractions of these unproven reserves become recoverable, Canada may well take over the driver's seat as the main supplier of the world's oil.

PennWell Corporation, Oil & Gas Journal, Vol. 104.47 (December 18, 2006).

How do we get at them?

Currently, only Canada has a large scale commercial tar sands industry. These deposits are typically extracted through open pit mining of deposits near the surface, or in situ (in place) recovery of deposits deeper below the surface. The most prevalent in situ method currently used is Steam Assisted Gravity Drainage (SAGD). To put it simply, steam is pumped into the oil sand deposit which heats the bitumen, making it more viscous and separating it from the sand, allowing it to be pumped to the surface. About 80% of Canada's oil sands lie far enough below the surface that in situ mining is required. Over the past few years, a number of new extraction technologies have been developed, gradually making the process less capital intensive. With crude oil prices at current levels and world supply tightening, it seems likely that these technologies, as well as new advancements, will make tar sands recovery an increasingly attractive financial venture. As mentioned above, the concurrent effect that these technology improvements could have on recoverable reserves may well turn the oil industry on its head.

What about the U.S.?

In the U.S. there are deposits of tar sands and on a larger scale oil shale, which is basically any sedimentary rock which contains solid bituminous materials. With processes along the lines of those used with oil sands, the rock can be heated to extract the petroleum materials in liquid form. There are currently no large-scale commercial oil shale operations in the U.S., primarily because these extraction technologies have been cost prohibitive. Oil shale deposits are concentrated in the Green River Formation of Utah, Colorado and Wyoming. Over 70% of these lands are federally owned and managed. In place estimates range from 1.2 to 1.8 trillion barrels, again a staggering number in terms of potential. Add to that U.S. tar sands resources estimated at between 60 to 80 billion barrels, and it becomes apparent that the future of the oil industry may indeed lie in North America.

The problems

The extraction of these unconventional sources of crude is not without numerous issues. Large amounts of water are necessary for many of the technologies, as well as the use of natural gas that can almost have some processes operating at an energy deficit, which is to say more energy goes in to extracting the oil than comes out as a result. Greenhouse gas emissions from these processes are also an issue. In the U.S., add to these concerns the fact that a large amount of these deposits lie under some beautiful public lands and national parks, and you can see that the viability of the industry, at least in the states, is still in question.

The future

In the coming years Canada will be the guiding light of the oil sands industry. As they improve the technology for extracting these deposits, other countries will be watching closely. In 2006, they exported 1.6 million barrels per day of oil to the U.S., and are expected to expand this total to 3.1 million barrels per day by 2015 With dwindling supply from many conventional oil fields, the U.S. is in the market for new sources. We are hearing more often than not warnings of 80, 90, even 100 dollar oil in our future. At what price level does it become impossible (even with every environmental activist shipped to Utah and lying on the rocks) to stop a government in search of alternatives from cracking the shell on these unconventional resources? We may have already passed it by.

Canadian Association of Petroleum Producers (CAPP), Crude Oil Forecast, Markets and Pipeline Expansions, June 2007

Questions or Comments on Over The Barrel, please contact Steve Platt at 1.877.377.7931 or Stephen.Platt@archerfinancials.com.

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