Canadian Tar Sands: The Good, The Bad, And The Ugly

Dr. Joe Duarte
Rigzone
3/28/2006

Peak Oil: A Shattered Myth?

Some are saying that peak oil is a myth since there is plenty of low grade oil to still be recovered around the world. The question is whether it's worth the price being paid to mine the stuff, and whether the problems spawned by its extraction will be worth it in the long run.

The Wall Street Journal suggests that peak oil is not truly happening. "The surging interest in Canadian oil sands is stark evidence that the world isn't about to run out of oil. Instead, it is running low on readily accessible light, sweet crude -- oil that flows like water, has few impurities and can be easily turned into gasoline. As the good stuff gets scarce, Big Oil is turning its attention and pouring money into extra-heavy crude, such as the giant deposits near Fort McMurray and another similar one in Venezuela."

We were proponents of the same concept since we wrote "Successful Energy Sector Investing," in 2001. But five years later, a great deal has happened that has led us to a new perspective, that of joining the camp that believes that oil is perhaps at the start of its final stage as the primary fuel on planet Earth.

And while it could still be decades before we know who's right and who's wrong, the real story is being written now, in the forests of Canada and in the Orinoco Basin in Venezuela, two ecologically sensitive areas of the world.

The New Top Ten

According to the Journal, there is an oil sand deposit the size of Florida under an "ancient" forest in Northern Canada. And France's Total is likely to begin extraction of the tar sand "sludge" by May 2006.

The net effect is that "Heavy-duty oil-extraction projects like these are turning Fort McMurray into the first great oil boom town of the 21st century."

In fact, due to high oil prices, major oil companies have finally been moved to spend money going after low grade oil reserves, and are expected to spend some "$70 billion" to do so.

There is so much low grade oil around, that countries with large reserves, such as Canada and Venezuela, have been vaulted to the top of the reserve list, if the sludgy stuff is included in the estimates.

For example, according to the Journal, if you include the tar sands and other low grade oil deposits: "has vaulted Venezuela and Canada to first and third in global reserves rankings, although Venezuela's holdings in extra-heavy crude are a rough guess. Saudi Arabia is No. 2. Not including the oil sands, Canada would fall to No. 22."

In other words, the oil reserve map has been redrawn, and a whole new ball game is unfolding.

The Dark Side

If this seems to good to be true, as you prepare to pay $3 per gallon to drive your car this summer, as could well happen if current price trends remain intact, there is an even darker side to the use of low grade oil.

According to the Journal: "heavy oil has big economic and environmental drawbacks. It costs more to produce and takes more energy to turn into gasoline than traditional light oil. Recovering and processing Fort McMurray's heavy crude releases up to three times as much greenhouse gas as producing conventional crude. And upgrading it into refined products, such as gasoline or diesel, will require a gigantic investment to retool global refineries."

The extraction process is so labor intensive and requires so much heat, in order to extract the oil from the tar sand that "Total briefly floated the idea of building a nuclear-power plant" in Fort Mc Murray.

In other words, just because new oil is likely to be more plentiful, processing costs will likely keep prices higher than in the past, and the toll on the environment won't be fully known for years to decades.

Indeed, some effects are already visible as "Canada, which exports more oil to the U.S. than any other country, already is having trouble meeting its pledge to cut CO2 emissions largely because of its mushrooming heavy-oil production. By 2015, Canada's Fort McMurray region, population 61,000, is expected to emit more greenhouse gases than Denmark, a country of 5.4 million people."

Even more alarming is this: "In northern Alberta, the oil-sands boom is remaking the landscape. The mining operations have clear-cut thousands of acres of trees and dug 200-foot-deep pits. The region is dotted with large man-made lakes filled with leftover waste from the mining operations. To chase off migratory birds, propane cannons go off at random intervals and scarecrows stand guard on floating barrels."

Conclusion

There is something new in the air, at least for the mainstream media. Aside from what is likely to be the new buzzword in the oil market, tar sands, it's also heat, and pollution.

The exploration and extraction for oil in Canada, and likely elsewhere, will have significant repercussions, which may not be known or at least acknowledged for several years or decades.

At some point an environmental disaster will unfortunately, but likely occur, which will raise red flags and bring political drama to the situation.

Already the battle lines have been drawn. [Alberta's energy minister, Greg Melchin, says oil-sands development creates a minimal environmental disturbance that is outweighed by the opportunities and jobs created. "It's worth it. There is a cost to it, but the benefits are substantially greater," he said.]

Meanwhile [Environmental groups are increasingly critical of the government's reluctance to regulate the oil sands. "The pace of development is outstripping our ability to manage the environmental issue," says Mr. Raynolds of the Pembina Institute. "Our unwritten energy policy is dig it up and sell it as fast as possible."]

But far beyond the near term, it is unlikely that the tar sand phenomenon will permanently fix what has become increasingly obvious to anyone who cares to have their eyes open about the world's energy situation.

The price of oil is unlikely to fall significantly anytime soon, due to higher extraction and security costs, limited refinery capacity, and the writing on the wall, the easy oil has been found and the hard to find stuff is now on its way to being used up.