Most of us had assumed that the fall in the oil price last year meant the end of oil from Tar Sands projects but it would seem not a bit of it. In what could be seen as vindication of the oil industry’s long term capital investment program, the oil price has recovered and maintained the financial viability of extracting oil from tar sands. Athabasca Oil Sands, a private Calgary based group, estimates that two of it’s projects, Mackay River and Dover are viable at an oil price of $50-60 per barrel. Meanwhile Imperial Oil, in which Exxon owns a majority stake, estimates that the cost of developing their Kearl project fell by as much as C$1 billion during the year it was delayed by the low oil price. Falling costs could bring other projects back into contention, too. Just a year ago an oil price of around $80 a barrel was needed to justify new developments. Now that price has dropped to around $60, says Suncor, another developer. Steel, cement and labor have all gotten cheaper according to an Economist report. Not only have prices dropped, but mill lead times have improved, at least for those with the strategic sourcing capabilities to capture the cost savings while they are still available.
The improved economics explains a flurry of activity by Chinese oil companies ever on the look out for a bargain. PetroChina has agreed to pay C$1.9bn (US$1.7bn) for a 60% majority stake in two the oil sands projects in northern Alberta owned by Athabasca Oil Sands mentioned above. Total, the French group, sold a 10% stake in Northern Lights oil sands this year to Sinopec. And China Investment Corporation’s C$1bn 17% interest in Teck Resources includes a minority stake in the Fort Hills oil sands project. Although the western oil majors are wary of state enterprises from Russia, China and India they are even looking at bidding on Venezuela’s Orinoco Basin Bitumen reserves, in spite of the history of confiscation without compensation Hugo Chavez’s government has displayed in the past.
But where the domestic oil firms are selling stakes to overseas investors they are pouring money into refining capacity both north and south of the Canadian border to handle the heavy sour crude produced from tar sands. Environmental groups track refinery upgrades and new builds, and understandably have a jaundiced view of the oil companies’ assertions that they are merely upgrading an existing refinery in order to improve efficiency or reduce existing emissions. Some refiners are quite clear that they are building new or making major upgrades due to the need to handle more sour crude in the future. Others are probably upgrading plants with the flexibility to handle such crude if they need to in the future. Either way, dozens of plants are either under construction or in planning stages.
Crude from tar sands and bitumen is much thicker than conventional crude. It requires more energy to refine and according to one environmental group, the oil contains 11 times more sulfur and nickel, six times more nitrogen and five times more lead than conventional oil, making the refining process more complex and corrosive for plant and equipment. Hydrochloric acid formed from inorganic salts and sulfuric acid form hydrogen sulfide which causes specific corrosion problems even with conventional middle eastern heavy crudes. The tar sands are twice as problematic and require the selection of high nickel/chrome/molybdenum stainless steels for heat exchangers, condensers and the refining columns. This adds to both the up front capital cost and the ongoing maintenance demands but is vital if safety standards are to be maintained.
In spite of the economic down turn and drop in the oil price, activity is still brisk, if less than this time last year. By one count, 13 tar sands projects that were on the books a year ago have been delayed or canceled. Between 2008 and 2010, developers were expected to spend C$128 billion on tar sands projects. Now the outlay will be around C$80 billion, according to the Oil Sands Developers Group (OSDG), an industry body. Forecasts of oil production from the tar sands have also taken a hit. Just a couple of years ago, the Canadian Association of Petroleum Producers predicted output would reach 4m barrels a day (b/d) by 2020. Now it says 3.3m b/d by 2025.
But that is still more than double current production and Cambridge Energy Research Associates, a consultancy, says Canada’s share of the American oil market could grow to 37% by 2035 from 19% last year. Output from the tar sands could reach 6.3m b/d by then, the consultancy believes.
Regardless of which projection proves the most accurate, the investments being made by the oil companies in refining capacity at least underline their belief that the need will be there for the refining of heavy crude in the next decade. Good work for contractors and suppliers even if prices are down from last year’s peak.