The Canadian oil sands
Oil sands production now accounts for around half of total Canadian output, but its importance is likely to grow rapidly as conventional oil production continues to decline. By 2015 oil sands could account for as much as 75% of the country’s oil if production grows from a current 1 mbpd to 2.7 mbpd, as forecast by the Canadian Association of Petroleum Producers (CAPP); fifteen years later, oils sands production could be as high as 5 mbpd.
However, the oil sands industry is hitting a number of bottlenecks that could slow down the rate at which production is expanded. Shortages of skilled labour and construction materials have already slowed development at some new fields and led to large cost over-runs. Depleted supplies of condensates — used to blend with the bitumen in order to make it transportable through pipelines — will threaten the rate at which bitumen can be produced unless alternatives can be found, while soaring natural gas prices are pushing up operating costs. Moreover, when the Kyoto protocol comes into force in 2008 the high rate of carbon emissions from oil sands production will burden the industry with extra compliance costs. The rate at which oil sands production increases will thus depend on how successfully the industry overcomes these obstacles as well as on a long period of high oil prices that would offset higher operating — and particularly energy — costs.
Summary
Oil sands production is continuing to grow, albeit less rapidly than has been predicted, and output is widely expected to double to 2 mbpd over the next 5 to 7 years. Returns have been less healthy than expected due to rising energy prices and shortages of materials and skilled labour that are driving up operating costs, yet investment remains healthy as companies look ahead to an era of high oil prices. Increasing production will need more pipeline capacity to carry the extra oil to new markets in the US and — potentially — in Asia, where Chinese refiners are showing interest in Canadian crude supplies. However, future production could be capped by shortages of suitable diluents to blend into the viscous bitumen and make it marketable. Canadian condensate supplies are tightening and the planned move towards blending synthetic crude with the bitumen to make a new medium-type crude will leave producers vulnerable if upgrading units shut down.
Oil shales have been hailed recently as the US’ answer to Canada’s oil sands. However, there is unlikely to be any substantial contribution to oil supplies from this source for at least ten years, even if oil prices remain at high levels. Although the US’ shale deposits contain trillions of barrels of oil, the technology required to extract the liquids and make them into a marketable crude is still in the early stages of development and a commercial scale plant is unlikely to be operational until the end of this decade. Many technical and environmental obstacles remain and may put back the date at which oil shale development becomes an economically feasible proposition. Shell, whose in-situ extraction process looks the most promising thus far, predicts that production will at best reach 1 mbpd by 2015, with operating costs likely to lie in the range $25 to $30/bbl. The Rand Corporation is even more cautious, with a forecast of 1 mbpd of production sometime between 2020 and 2025. These numbers must remain largely speculative, however, until a commercial-sized plant has been built and tested.