Canada's Oil Dynasty

Last May, I made a pilgrimage to the birthplace of an oil dynasty.

When I mentioned my trip to a friend, he mistakenly thought it would end in Titusville, Pennsylvania, home to the first commercial oil well in the United States. It wasn’t until I started talking about Alberta — more than 2,100 miles further down the road — that he scrunched his brow in confusion.

It’s understandable that most people have a tendency to think of the United States as an oil giant.

And to be fair, we were… up until the 1970s.

But we’ve headed downhill ever since.

Every oil and gas dynasty has humble origins. For Canada, that place is Turner Valley.

What sparked Canada’s oil fever back in 1914 wasn’t oil, but natural gas.

The Dingman discovery well had struck wet natural gas… and was enough to generate a flurry of oil investment activity in the area.

The region became the foundation for Alberta’s oil and gas industry for the next three decades, when Imperial Oil struck light oil at the famous Leduc well outside of Edmonton, 200 miles north of Turner Valley. Less than a year later, the Leduc #3 blow-out had catapulted Alberta onto the world’s oil stage.

Unfortunately, the Canadian oil boom was doomed to the same Peak Oil fate as the United States. During the 1970s, Alberta’s conventional production peaked; Canadian petroleum exports to the United States dropped off 66% to nearly half a million barrels per day by 1976.

But unlike the U.S., Alberta has an ace in the hand — and they’re about to play it.

174 Billion Barrels or Bust

We’re no strangers to the bituminous sands in Northern Alberta, and it’s painfully clear how valuable its production will become over the coming decades.

Let me show you exactly how important…

click image to enlarge

In 2009, Alberta’s conventional crude reserves totaled about 1.5 billion barrels, roughly one-third of Canada’s total.

To put that into perspective, it’s less than half of what’s contained in the now-famous Bakken oil formation.

Last year, Alberta’s conventional production was a little more than 600,000 barrels per day. More than a decade ago, production from the oil sands made up about one-quarter of the country’s total crude production. Today that number has swelled to make up over half of Canadian production.

Going forward, that gap will only continue to widen.

Breaking Down Alberta’s Oil Wealth

Knowing how important the oil sands deposits are to U.S. energy security isn’t enough.

Fact is, most investors can’t get past the glare of the nightmarish surface mining operations that plague environmentalists’ dreams at night.

What they don’t realize is this: Right now, we’re witnessing a fundamental shift in the oil sands industry.

As you know, there are two ways to extract the bitumen: mining or in-situ projects.

The former is easy enough to understand. First, the resource is mined using massive trucks and sent to a crusher. Once there, it’s broken up and the bitumen is separated. Finally, it’s shipped out to be refined and processed.

That’s the nuts and bolts of it, and the reason I won’t go into too much detail is that the true wealth here isn’t from mining…

No matter how you slice it, an overwhelming amount of the deposit is too deep for those gargantuan trucks to haul out — more than 80% of the entire bitumen resource, to be exact.

For that, producers are forced to use other means.

Since the bitumen highly viscous, they utilize the in-situ recovery methods. The current front-runner is the SAGD process, in which two horizontal wells are drilled into the reservoir. The first well injects steam into the ground to heat up the bitumen, which can then be pumped out through the second well.

In-situ recovery methods continue to gain interest — and investor attention…

The billions of dollars pouring into Alberta has created a win-win situation for investors.

Until next time,

Keith Kohl
Editor, Energy and Capital