Things were much different when I made my 40-hour trek to Alberta’s oil sands.
At the time, oil prices were passing $70/bbl and on their way to $100 a barrel. I absolutely had to see the massive oil sands operations in Fort McMurray.
Can you blame me?
Production from the oil sands is one of the reasons why Canada remains the largest source of oil for the U.S. The sky was the limit for Alberta as oil made its run to $147 per barrel. And it wasn’t just the U.S. that had its sights set on oil sands production. I distinctly remember how all the signs in our hotel were written in both English and Chinese.
What a difference a year can make. As I’m sure you know, Alberta was hit extremely hard when oil prices collapsed to $30 per barrel in late 2008. Once oil prices fell below $40 per barrel, I was told time and again it was the end for Canada’s oil sands.
I didn’t buy it.
The fact is they’ve been producing oil there for decades. I knew if these companies were able to keep running when oil was much cheaper during the early 1980s, they would survive 2008’s price shock.
Sure enough, oil prices managed to rebound in 2009. Now we’re back at $70/bbl oil, and I think we’re about to see another revival in oil sands production. However, this revival won’t be focused on the massive mining operations that give the oil sands their dirty reputation. Furthermore, the next generation of the oil sands could make investors a small fortune.
I’ll get to that in just a moment.
Canada’s Alberta Oil Sands
It’s no secret Alberta has had its fair share of trouble. When Alberta announced its 20% royalty hike a few years ago, companies started to look for better opportunities elsewhere. With the huge potential of the Bakken play in southeastern Saskatchewan, companies soon flocked to Alberta’s neighboring province.
Recently, Alberta fought back, revising its royalty program (for the fifth time since 2007) in order to boost drilling activity. The Alberta government recently extended two drilling incentive programs to March 2011.
That’s a start. But let’s get back to the oil sands. . .
A few weeks ago, I found myself in a heated debate over the future of the oil sands. And one thing soon became clear to me: this gentleman knew absolutely nothing about where oil sands production was headed. All he could focus on was how the dirty tar sands were plaguing the environment. Hence, the oil sands were an abomination that must be stopped.
To a certain extent, he was right. The massive surface mining operations involve an energy-intensive process that leaves a huge environmental footprint. Granted, he wasn’t aware of the reclamation projects underway.
The problem, however, was that he knew practically nothing about oil sands extraction. If he were a little better informed, then he might have been able to see the oil sands in a different light.
For starters, only about 20% of the entire oil sands resource is too deep to be mined. And that, dear reader, is the key to realizing its potential.
You see, the next generation in oil sands extraction is not with those surface mining pits, but rather using in-situ methods like SAGD (Steam Assisted Gravity Drainage). In SAGD, steam is injected into a deposit in order to heat up the thick bitumen. Lowering the bitumen’s viscosity will allow it to flow towards producing wells.
I wouldn’t be so quick to lump these in-situ methods in with those devastating surface mining operations. In fact, in-situ operations leave approximately the same environmental footprint as conventional operations (not to mention they use 20% less water than the mining projects).
Now, that’s not to say there aren’t still obstacles to overcome. The SAGD method, for example, emits more greenhouse gases per barrel than mining and is still an energy-intensive project.
Naturally, there are more in-situ methods being developed for commercial production. Petrobank’s THAI process immediately comes to mind, which involves a fire flood underground and upgrading the bitumen underground. The THAI process is projected to recover between 70-80% of the oil-in-place, compared to the 20-50% recovery from current in-situ methods. Furthermore, the THAI process uses a negligible amount of natural gas and water.
Considering 97% of Canada’s oil reserves come from the oil sands, I think it’s safe to assume development will continue. Unless, of course, you’d like to see our dependence on OPEC oil rise.
Need more proof of an oil sands revival?
Look no further than Section 526. . .
Section 526
Section 526 of the Energy Independence and Security Act of 2007 had some strong implications for the Canadian oil sands. Section 526 targeted unconventional petroleum sources with greenhouse gas emissions greater than conventional sources. In other words, Section 526 prohibits the government from purchasing fuels with a higher carbon intensity than gasoline.
On June 17, the U.S. Senate Energy and Natural Resources Committee voted for a bill that could put the oil sands back in our good graces. One amendment passed by a voice vote stated U.S. refiners would not be in violation of Section 526 by buying crude oil produced from Canadian oil sands.
With oil prices on their way to $80 per barrel, any weakening of Section 526 will undoubtedly boost oil sands activity. And I expect those smaller companies developing new in-situ recovery methods will come out on top in the next round of oil sands’ profits.
Until next time,
Keith Kohl
Editor’s Note: I guarantee you the investors who will make a fortune in the next oil sands revival aren’t sitting on their thumbs waiting for opportunities to come to them. My readers at the $20 Trillion Report just banked a solid 20% from one of those small in-situ companies. And truth be told, they’re just getting started. Perhaps it’s time you joined them. Simply click here to learn more.
