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Jan-2009

Oil sands 
industry status

The steady progress made in the oil sands industry up to Q3 2008 will eventually resume. For now, an examination of the favourable market conditions and upgrading scenarios that are required for future profitability are presented

Tony Pavone
SRI Consulting
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Article Summary
As of year-end 2008, global crude oil supply and demand were in tight balance, resulting in the rapid increases in crude oil prices and price volatility between 2007 and 2008. As marker crude West Texas Intermediate (WTI) exceeded $145/bbl in mid-2008, the world began to see a moderation of demand growth caused by high prices. Crude oil demand actually decreased in the US, Western Europe and Southeast Asia, while demand growth moderated in the fast economic growth BRIC (Brazil, Russia, India and China) countries. Global crude oil demand growth of 2% per year, which had characterised 2000–2006, was cut nearly in half by 2008 by the cumulative impacts of higher petroleum prices, lower global GDP, and mandated production and use of biofuels. According to the US Department of Energy (DOE): “The combination of rising global demand, fairly normal seasonal inventory patterns, slow gains in non-OPEC supply, and low levels of available surplus production capacity is providing firm support for prices.”

Note that claims in some quarters that high oil prices were being driven by futures market speculation (dry barrel participants), profiteering by oil companies and the withholding of supply by OPEC are conspicuously absent from this government assessment. During the 2007–2008 period, geo-political concerns over some major oil supplier output (Nigeria, Iraq and Venezuela) have contributed to oil price volatility.

Over the longer term, primary global energy demand is expected to increase by 50–60% by the year 2030, driven primarily by population growth and the desire for better living standards. The US National Petroleum Council, an organisation of US oil companies reporting to the US president, acknowledges that conventional oil and gas alone are unlikely to satisfy this demand growth in its seminal 2007 report, and called on the development of supplemental energy sources such as clean coal, biofuels, alternative renewal energy, nuclear, and non-conventional fossil fuels.

Global crude oil producers

Russia, Saudi Arabia and the US are the largest producers of crude oil in 2008. The greatest concentration of production (both oil and gas) is in the Middle East. Shown in Figure 1 are the top ten producer countries.

Global proven crude 
oil reserves
Since the discovery of crude oil in the late 19th century, the world has consumed approximately 1.0 trillion barrels of crude oil. There are sufficient quantities (1.0 trillion barrels) of proven conventional crude oil reserves (determined by drilling) to meet today’s global demand for another 25 years. There are expected to be another 2–3 trillion barrels of unproven conventional crude oil reserves, such as the heavy Venezuelan and Canadian crudes, and shale oil, which are together much more costly to produce than conventional oil. So although the world may not be approaching “peak oil”, it is much 
more likely to be approaching “peak 
cheap oil”. 

Canadian tar sands, Venezuelan tar sands, oil shale, deep offshore oil, sub-salt oil, GTL (gas to liquid fuels), BTL (biomass to liquid fuels) and CTL (coal to liquid fuels) chemistry are expected to represent cumulatively at least 3.0 trillion barrels of higher cost crude 
oil resources.

What the world seems to be running out of is light, sweet crude oil that can be produced at both low costs and at low business risk. Much of the conventional crude resource oil is located in politically unstable countries (Russia, Middle East and West Africa), which adds a price premium to the cost of production. Figure 2 presents the conventional proven crude oil base of the major producers by country 
of origin.

In this crude oil supply constrained environment, producing oil from Canadian tar sands is one of several sources of the world’s next-generation energy supply base, especially for transportation fuels. Canadian tar sands have approximately 175 billion barrels of proven oil reserves (estimated via drilling) and 1.5–2.5 trillion barrels of unproven reserves (estimated via computer modelling).

Heavy vs light crude oil
The distribution of conventional crude oil versus the bitumen contained in Canadian tar sands for major oil-producing countries is shown in Figure 3. Most of the crude oil found in the Middle East and Western Hemisphere is conventional, while most of the 
bitumen is concentrated in Russia, Canada and Venezuela.

The DOE has prepared a segmented forecast of global petroleum production from non-conventional liquid fuels, as shown in Table 1.

Of these non-conventional petroleum sources, Canadian oil sands are forecast to have the greatest volume impact, with a forecast production rate of 2.9 MM bbl/d in 2030 under modest oil price assumptions, or 4.9 MM bbl/d under a high oil price scenario. Looking at other sources of non-conventional oil (synthetic and renewable fuels), none has the potential impact of oil sands on substantially increasing the world’s supply of fuel.

Current Alberta tar 
sands capacity
According to the Canadian Association of Petroleum Producers, actual production in 2007 for tar sands-derived crude oil had increased to 1.1 MM bpd. Besides this producer organisation, Alberta’s Energy Resources Conservation Board has produced its own assessment of provincial tar sands current and forecast capacity. Their claim is that 2007 production of 1.32 MM bpd 
will more than double by 2017 to 3.23 MM bpd.

Due to the increasing capital cost to develop tar sands projects, a number of projects have attracted additional equity participation by firms not currently involved in Canadian tar sands. Occidental Petroleum has bought a 15% interest in Total’s Joslyn project.

Over the period between 1999 and 2006, it is interesting to note that most of the growth in tar sands capacity has been in steam injection as opposed to surface mining. Once bitumen is produced, it has to be pipelined to market. Since bitumen is too thick and viscous to be pipelined, it can either be diluted with lighter material (naphtha, kerosene or middle distillates) or upgraded. Upgrading involves chemically converting bitumen into pumpable synthetic crude oil via either carbon rejection (coking) or hydrogen addition (hydrocracking).
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