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Vol. 11, No. 29 Week of July 16, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

A sticky time for Alberta oil sands

Bodman visits Alberta amid growing debate over frantic pace of expansion; two former political leaders call for reality check

Gary Park

For Petroleum News

When former Alberta Premier Peter Lougheed speaks, he is guaranteed an audience.

When former U.S. Vice President Al Gore speaks, the same applies.

When the two of them, coming as they do from opposite ends of the political spectrum, raised qualms earlier in July about the pace of development in the Alberta oil sands they rattled those who believe output from the sector will triple to 3 million barrels per day by 2015 and could reach 4.7 million bpd in 2020.

And among those paying attention will almost certainly be U.S. Energy Secretary Samuel Bodman who made a July 12-14 visit to Alberta to learn firsthand the scope of oil sands expansion and the role the vast resource might play in helping President George W. Bush achieve his goal of drastically reducing oil imports from the Middle East.

Bodman was due for a lively sales pitch from Alberta government and industry leaders about the unlimited potential of the oil sands to provide the U.S. with a secure, long-term source of energy.

The ground work was laid earlier in July when Alberta Premier Ralph Klein told Vice President Dick Cheney in the West Wing of the White House that he could exploit the oil sands in the November mid-term congressional elections.

Canada’s Prime Minister Stephen Harper, in his first official visit to Washington on July 6, added to the full-court press by discussing with Bush the critical role the oil sands could play in U.S. energy security.

The two leaders agreed to explore regulatory cooperation to increase production while placing an emphasis on the “environment, climate change and air quality.”

Lougheed calls for moratorium

But Bodman also arrived in the thick of a heated debate erupting in Alberta as critics of the economic and environmental impacts of converting sticky bitumen into synthetic crude start to gain attention.

Their cause has received momentum from an unlikely quarter.

Lougheed, who was premier from 1971 to 1979 and was a driving force in ensuring the provincial government facilitated the pioneering oil sands ventures by Suncor Energy and Syncrude Canada, is everything an elder statesman should be — intelligent, measured in what he says and respected.

Thus he has shaken Alberta to the core of its economic future by giving interviews and speeches that call for a moratorium on new projects (excluding those that have received regulatory approvals), giving citizens time to rethink where the frenzied development is headed and the government a chance to establish criteria to determine which projects can meet the new standards.

Those standards would likely include preferential treatment of operations that use less or no natural gas to generate power for the extraction and processing of bitumen, along with methods for capturing and storing carbon, which is a byproduct of oil sands operations and a major contributor to greenhouse gases.

Lougheed’s concerns have been fueled by a recent trip he made to northern Alberta, where the regional government argues it is unable to pay for the infrastructure needed to meet the demands of existing oil sands ventures, let alone more than C$100 billion that are scheduled over the next decade.

The oil sands capital of Fort McMurray has seen its population more than double to 75,000 over the last nine years and already faces a shortage of 3,000 homes as its numbers grow by 10 percent a year.

Lougheed startled many long-time observers by suggesting the oil companies, enriched by profits from the oil sands, should pay for some of the upgrading they benefit from.

Whether by accident or design, he has chosen a pivotal moment in Alberta’s history to take his stand, with Klein stepping down later this year after 14 years as leader, putting the heat on the candidates for premier to answer their predecessor’s concerns.

Gore film critical of oil sands

Gore entered the picture with his film about climate change, “An Inconvenient Truth,” which has stirred passions in Alberta by characterizing oil sands production as a huge waste of natural gas and a major environmental culprit.

He plunged deeper into the controversy by telling Rolling Stone magazine that four metric tons of landscape is torn up for every barrel of oil squeezed out of the oil sands.

“It is truly nuts,” Gore said. “But, you know, junkies find veins in their toes. It seems reasonable to them, because they have lost sight of the rest of their lives.”

Klein, known for his short fuse, brushed Gore off as someone from the “far left.”

“I don’t know what he proposes the world run on ... maybe hot air,” he said.

But Klein is no longer assured of unwavering support for his government’s oil sands objectives.

Brian Mason, leader of the opposition New Democratic Party, wants a commission established to lay the groundwork for a “long-term development strategy” that puts an equal emphasis on prosperity and the environment.

Even some of Klein’s cabinet ministers are quietly acknowledging the need to review aspects of oil sands operations, notably the consumption of fresh water.

One cubic meter (6.29 barrels) mined from the sands requires 2 to 4.5 cubic meters of water in a province with a long history of drought.

If all of the approved oil sands projects proceed they will need twice as much water as the City of Calgary with 1 million people.

University of Alberta ecologist David Schindler has argued that “water is used lavishly in the extraction and refining of both conventional oil and synthetic crude. There are compelling reasons why this must cease.”

But so far the government has confined its water conservation measures to enhanced recovery schemes.

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Shares dip as costs escalate

Shares of leading oil sands players have taken a hit in the latest shake-up resulting from capital cost overruns.

Amir Arif, an analyst with Friedman Billings Ramsey, triggered a 2 percent drop in Suncor Energy shares July 10 by suggesting that investors “should be taking profits” because the risk of falling short-term oil prices along with cost inflation “mutes our near-term enthusiasm” for the oil sands.

Shares of Shell Canada and Western Oil Sands, partners in the Athabasca project, were trimmed a few days earlier when they disclosed that pressures on labor, equipment and materials could delay their expansions plans.

Western, a 20 percent partner, set off alarm bells when it estimated the first expansion phase, to boost production by 100,000 barrels per day to 255,000 bpd, could climb by 50 percent to C$11 billion, setting the stage for the full three-stage venture to rise from C$13.5 billion to above C$20 billion.

Shell has ordered project reviews

Shell, the 60 percent operator, although not ready to confirm that prediction, said it has ordered internal and external project reviews that would lead to a more detailed update by the end of July.

Brian Straub, Shell’s senior vice president for oil sands, said the company wants to assure itself that “we can execute successfully ... right now our focus is on mitigating the costs and risks.”

Suncor has just embarked on regulatory hearings aimed at increasing production from 260,000 bpd to 350,000 bpd by 2008 as part of an overall goal of reaching 500,000-550,000 bpd by 2010-12.

It was not overly troubled by the Friedman Billings Ramsey downgrade to “market perform” from “outperform,” describing the move as only modest and insisting it has learned enough from previous cost overruns to have confidence in its plan and its ability to deliver.

Front-end engineering continues

Shell and Western said the front-end engineering work for their expansion will continue, but a final decision to proceed with construction will not be made until the fourth quarter.

Western, which said it wanted to make the market aware of the potential for a cost overrun, said a year-long review of the 100,000 bpd expansion showed “very significant upward pressures on capital costs.”

Based on that it now anticipates capital spending will run to C$300 per annual barrel of production, up from the previous C$200.

Will Roach, chief executive officer at UTS Energy, a partner with Petro-Canada and Teck Cominco in the Fort Hills project, agreed that the whole industry is facing cost pressures, but the projects are “so long and with such large resources they can withstand fairly substantial capital intensity at the beginning.”

However, some analysts believe producers will have to either defer work or take a chance that oil prices will remain high, justifying higher capital costs in the oil sands.

Some are also urging companies to pool their efforts in a bid to curb overruns, following the lead of Canadian Natural Resources, which negotiated fixed price deals with contractors covering C$5.6 billion of the C$6.8 billion budgeted for the initial 110,000 bpd phase of the Horizon project.

—Gary Park