Cost of Bitumin from Canadian Oil Sands Skyrocketing

Canadian Oil Sands Developments: Will Cost Hyper-inflation Curb Attractiveness?
Press release, Woods Mackenzie, March 2007

In its latest analysis of Canada's oil sands assets, Wood Mackenzie finds that capital costs per peak flowing barrel have increased by some 55% since the beginning of 2005, putting pressure on returns on investment in an area where project economics are already considered relatively marginal.

Conor Bint, Upstream Research Analyst for Wood Makenzie said; "Marginal economics have always been a concern for companies operating in the oil sands, breakeven prices are high and rates of return relatively low in comparison with conventional projects, particularly for mining projects." Wood Mackenzie estimates that mining projects have an average breakeven price of US$28/bbl and IRR of just 16%. Rates of return are more favourable at the less capital intensive in-situ projects, averaging around 22%. ...

Between now and 2015, Wood Mackenzie expects some Cdn$125 billion to be spent in the oil sands sector, representing a 42% increase on its early 2006 forecast for the same period (Cdn$88 billion). Wood Mackenzie's analysis finds that the significant increase in costs is largely due to labour shortages and increased material costs, which have created a hyper-inflationary environment within the oil and gas industry in Alberta. ...

The report concludes that costs are set to continue increasing, which leads to the question of how long the current pace of development can be sustained. Bint said; "Companies in the oil sands will have to control capital expenditures going forward to ensure that project breakeven prices do not exceed current levels in order to remain profitable." ...

Wood Mackenzie's report states that Canada's proven oil reserves are second only to Saudi Arabia, at around 179 billion barrels. Of this, around 97% or 174 billion barrels is attributed to oil sands. Currently, output from oil sands stands at around 1 million barrels a day, accounting for approximately 35% of total Canadian production. However, based on projects that Wood Mackenzie considers commercial, this is forecast to increase to around 4 million barrels per day or 89% of total Canadian production in 2020.

The bitumen that is produced from the oil sands has a more complex molecular structure than crude oil. It contains too much carbon and too little hydrogen, and must go through a costly upgrading process. The end product is so-called synthetic oil that can be moved through pipelines and refined into gasoline and other products.

In a separate study entitled Unconventionals - The Hidden Opportunity Wood Mackenzie's examines the location, size and key issues associated with developing Unconventional Hydrocarbons around the world. The study signals increasing reliance on hard-to-develop sources of energy such as the Canadian oil sands and Venezuela’s Orinoco tar belt. Looking to the future, they say that by 2025 unconventional oil is expected to supply more than 20% of global demand.

The are are environmental concerns, and high water and natural gas use associated with these operations. The oil companies work under strict environmental guidelines requiring that they run relatively eco-friendly operations and reclaim land as they finish mining. There is now talk of building nuclear power plants to supply the energy needs of the oil sands.  The U.S. favors an energy policy that obtains more oil from friendly Canada rather than from volatile parts of the world. According to this report Canada - which in 2005 replaced Saudi Arabia as the single-largest supplier of energy to the U.S. - will continue that position over at least the next two decades, thanks to the multi-billion dollar oil sands developments in Alberta.   

Comments

[Brian Wang]

Labor shortages and material costs are solvable problems. Did SAP software stop growing when they had consultants costing $200/hour ? Did the internet stop growing when wages were over $100/hour for some jobs? A temporary slow down and then an adjustment.

New workers will be brought in and trained. New automation will be introduced. Alternative materials and processes will be created.

[amazingdrx]

Nuclear tar sand processing? I have advocated wind powered processing for years.

Canada has the wind resources to do it fairly near the tar sands. Electric plasma drills would liquify and separate the crude and send it up the drill pipe.

Hydrogen from electrolysis could complete the refining. This would cut water, natural gas, mining labor, and land remediation way down. The residue from the process would stay underground.

[Paul Dietz]

Nuclear tar sand processing? I have advocated wind powered processing for years.

Heat from nuclear reactors will be much cheaper, per BTU, than electric heat from wind turbines. Remember, your typical nuclear reactor discards 2/3 of the heat energy produced in the core when making electricity, but if the heat is used directly this loss is avoided.

[Brian Wang]

1 million barrels per day at just over US$60 per barrel that is USD22 billion per year.

The high costs are high salaries for the workers. It is high rents charged by people renting out property and equipment.

The population of Alberta is 3.4 million people now just over 10% of canada's population and heading to 11%.
http://www.finance.gov.ab.ca/aboutalberta/population_reports/2005_4thquarter.pdf
The population will probably continue to grow at 2-3% per year. In bound migration of 80,000 people per year or more. Say 4.7 million people in 2020.

The oil revenue per person now in Alberta is USD6400.
If it goes to 4 million barrels by 2020 and oil prices are the same, then that is USD18,690 of oil revenue per person.
Some goes to the rest of Canada. Some goes to profits to the multi-nationals. But a lot of it stays in the province. Money goes to refineries, upgraders, pipeline distribution most of those in province.

The $15 billion per year for development ($125 billion/8 years from now to 2015) also gets spent in province.

An almost $90 billion/year in revenue pie to split in 2020 just to figure out how to get more workers in and manage cost containment. No risk to look for oil and not find it. The oil is just sitting there. No political risk. The gov't of Alberta and Canada love the oilsands and will do what it takes to keep it flowing and moving. Most of the people have their jobs directly or indirectly related to supporting the oil biz. They know it keeps taxes low and property values high. I lived in Calgary, Alberta for over 4 years and did an MBA at the University of Calgary and I still have many friends who live there. If nuclear reactors need to be made to keep the gravy train rolling there is ZERO chance that they will not be built. Alberta has a lot of wind power too, because they have oil money all over.

As bumper stickers on the cars all over Alberta read between oil booms.

Please god, give us another oil boom and I promise I won't p*@# it away again this time.

[Brian Wang]

There is also incredible incentive to figure out how to break the bottlenecks in oilsand development. Just getting to 4 million bpd will not be where it stops. Figuring out how to tap the whole 2 trillion barrels at as fast a rate of the world and US economy needs would be a priority. Especially if any of the peak oil suspicions pan out. Then what is at stake is the US 13 trillion dollar economy now or 20 trillion in 2020, plus china and the world.

If they can tap the full amount of oil (2.4 trillion barrels), then that would be 40 million bpd for 164 years. A tough problem to be sure but to get at an extra 2.2 trillion barrels beyond current reserve calc of 178 billion barrels @USD100 per barrel that would be worth 220 trillion.

Hard to develop vs $220 trillion ?
Hmm which will win?

[Robert McLeod]

Take it from someone who lives in Edmonton: the conservative government here has been in power so long they've become tremendously lazy about managing the province. There's still just a two-lane undivided highway up to Fort McMurray. No rail line for heavy equipment has predictable results -- it's the most dangerous highway in Canada. The infrastructure (like roads and public buildings) is decaying as it wasn't maintained the past fifteen years and now the government is paying a premium for labour _and_ making the labour shortage worse as a result. They're trying to play catch-up and hence their bidding up the price of labour for all the companies in the area. Of course the government is doing nothing to curb inflation either.

I wouldn't hold my breath on nuclear power up there unless there is a terminal natural gas shortage. Nuclear requires a lot more expertise than any other heavy industry and it's not something you can grow quickly. Just try and convince physicists to go live in Fort McMurray. Even if it was economical, they would rather burn coal since there's a strong luddite influence.

[Mit]

I think that the notion of using Nuclear power where you don't have a use for all that you can generate all the time is crazy so I welcome alternative applications of the direct product of fission (that being heat).

I think the figure of %89 percent ignores how much even ONE percent of potential, much less OVER TEN is.

Also somewhat concealed is the fact that, if free from the constraints of electric consumption and marketability, the scale of the plant can be more rational.

Finally if you don't have to condense the steam you don't have a problem of needing chillers.

I am curious how much of the heat we use for other then electric generation comes from fission. It's probably less then what is used percentage wise for it!

Wind power similarly is neither heat nor electricity and reaches it's best use when directly applied to grinding grain, pumping water, etc.

I did see Senator Mccain this morning attack as Pork a million spent on Tidal energy harvesting research. What's up with that?

As far as the main point perhaps of this story though we should instead of wasting money upgrading what's mined to bitumin while we stockpile any actual oil it should be swapped with what's already upgraded. That emphasizes the fact that doing nothing has the least short term capital cost unless of course leaving the ground energy rich requires more years of capital maintenance expense (aka property tax).

The solution is to trade these resources in part, but the larger part being cash, for actual oil. Any money spent synthesizing oil while sweet crude is barely under sand and costs next to nothing to deliver anywhere is wasteful. What is the benefit of the waste? Why is there not more effort to mediate a rational prioritisation of utilisation of petroleum?

Building a nuclear power plant would be to subsidize the cost of selling oil later, for more money, for foreign nations. A subsidy they might not want, but we will still end up suffering.

[Ender]

Brian Wang - "If nuclear reactors need to be made to keep the gravy train rolling there is ZERO chance that they will not be built. Alberta has a lot of wind power too, because they have oil money all over."

As you know I am not a huge fan of nuclear power however I do not see why this would even be near to the best option. I can see why it will continue however if you are going to have NP with the attendant difficulties, building a reactor in Alberta is going to be extremely difficult apart from the fact that exploiting this resource will release all the carbon in the 12 trillion barrels. We have enough problems with global warming now let alone if this resource is fully exploited.

Setting aside my objections to NP why do this:

NP heat + water -> steam -> release hydrocarbons from oil sands -> refine product to oil -> refine product to petroleum -> fill IC car -> drive car (release CO2)

When you can do this:
NP heat + water -> steam -> electricity -> charge battery -> drive electric car.

Apart from the not releasing CO2 at any stage it also means that you can build the nuclear plant close to home where it is vastly cheaper to build, quite apart from the fact that a reactor has never been built optimised for in-situ mining of oil sands.

[Brian Wang]

Ender,

So people should make the batteries and a lot of electic cars and PHEV. 600 million cars and trucks now. less than 1 million hybrids. 65 million new cars and trucks each year. So over 1 billion cars and trucks in 2020. How many will be PHEV or EV ?

When you can do this:
NP heat + water -> steam -> electricity -> charge battery -> drive electric car.

Build it and convert the new cars and the old cars. When do you think it will be done and who will do it? I think it takes 40 years, unless the technology which I cover on my website..molecular nanotechnology/exponential manufacturing happens.
But making the NP to supply the electricity cleanly would go faster.

Alberta, who have the oilsands, benefit by getting more oil out. Why do you think making nuclear reactors would be difficult? Canada already has nuclear reactors in Ontario. Buying nuclear reactors from Ontario would be good provincial politics.

Energy Alberta Corporation, Atomic Energy Canada and Canada's Natural Resources Minister Gary Lunn are the ones who are pushing the Nuclear power plant project forward.

I also "hope" that the oilsands will not be fully exploited or that it can be cleaned up.

[Ender]

Brian - "Energy Alberta Corporation, Atomic Energy Canada and Canada's Natural Resources Minister Gary Lunn are the ones who are pushing the Nuclear power plant project forward.

I also "hope" that the oilsands will not be fully exploited or that it can be cleaned up. "

You have to admit that there is no reactor presently that is designed for extracting oil. For this plan to work a reactor will have to be modified, built and tested before anyone would commit to more than one. The title of this post is oil sands costs skyrocketing - how much further would financing the development of a new type of reactor, testing it, modifying it and then rolling out the new design increase the cost of the oil. This new design would also only be applicable to mining oil sands so there would be no other uses for it to recoup costs.

20 years could pass before a working reactors were rolled out past pilot stage. The half life of the car fleet is about that time. Given the political will half of the present car fleet could be PHEVs or BEVs by then and running on 'normal' nuclear power if that is what you want. I would prefer that they were running on renewables however I am not going to repeat our discussion on the merits of NP.

The plan to use nuclear power to exploit the oil sands seems to be more greedy people wanting to keep the money flowing rather than any concern for the Earths future energy supplies. I mean we have not even started on where is the water going to come from or how the tailings are going to be cleaned up.

I share your hope that the oil sands are not fully exploited and we can clean up the mess we have already created.

[amazingdrx]

good point ender. Nukes take too long to safety test and construct.

Wind and electric plasma drilling? fire it up now!

[Nucbuddy]

Ender wrote: You have to admit that there is no reactor presently that is designed for extracting oil.

How did you reach the conclusion that present steam-turbine reactors would need to be specially re-designed for oil-extraction? They already produce steam, which is sent to condensers that are cooled by cooling water that creates further steam in cooling towers like these:

nucleartourist.com/systems/ct.htm

What is being proposed is to use that steam that otherwise simply convects into the atmosphere.

cns-snc.ca/events/CCEO/nuclearenergyindustry.pdf

A new Steam Assisted Gravity Drainage (SAGD) process has been developed and demonstrated in Canada during the last decade. It is compatible with the steam conditions from CANDU reactors would release about 0.10 tonnes/barrel for extraction and upgrading of bitumen from much deeper deposits. [...] Several studies of the potential for use of nuclear energy for extraction of tar sands oil have been undertaken. The latest Canadian study, completed in 1994, considers the application of a CANDU 3 reactor using the new SAGD extraction process. This now proven in situ process does not require the high pressure steam required in the processes reviewed in earlier studies. It is thus suitable for the steam conditions typically output by CANDU reactors. [...] A single large dedicated CANDU 9 reactor could supply the steam and electricity to extract and upgrade about 600 million barrels of bitumen over a period of 30 years.

As noted in the link in the original post, the oil-sands reactors are expected to be up and running by 2016.

planetark.org/dailynewsstory.cfm/newsid/40669/story.htm

"One reactor (would be) in 2016 and the second one would be in 2017 ... We're taking it to where we feel there's less resistance (from the public)," corporation director Wayne Henuset told Reuters.

[amazingdrx]

Sorry wrong again Paul.

Nukes are not cheaper per BTU or kwh. Using electric plasma drilling eliminates several steps in this process, blowing any scheme using nukes to produce steam away as far as efficiency.

Water and land use costs top every other cost in this process.

The waste heat from refining the very hot liquid crude coming up the pipe will be easy to recover to harvest nearly all the power from the wind electric machines.

Combining drilling and refining is the secret. Then waste heat can be reused with wind electric powered heat pumps in the refinery.

[Kit P.]

Here is idea that should make everyone happy. Build multiple reactors and wind farms. The is no shortage of energy demand.

[Brian]

It makes perfect sense for Albertans to exploiting the oilsands. Amazingdrx/ender your statements that "but nuke plants won't work for oil extraction or too long to build". Shows that because you don't understand how it would work is somehow relavant to the serious planning and design work that specialist people have put into these plans. They are motivated and obligated to figure out how to make this more profitable. They are already making multiple billions on this.

They are going to buy off-the shelf CANDU reactors. They will take the power and heat from them. The oil extraction process requires those things. They have plenty of engineers to make it work. I am sure that highly detailed project plans have been created to come to the 2016-2017 target dates.

If you understand economics and the basis of capitalism, everyone works to their own self interest. Any realistic proposed solutions needs to take those realities into account.

Trying to get the suppliers of oil to cut back is stupid and a waste of time. Try and get microsoft to cut back production of windows. You have to get the switch over and build up the suppliers of something else and if you want to reduce demand (conserve/efficiency), there has to be more down to promote those efforts. It is not as simple as saying gee I wish we had a 50% mix of PHEV and EV or amazingdrx fairy tales. It is about effecting the detailed choices for each consumer so that the environmentally better choice is also the favored consumer choice.

So first step to making a difference or better arguments: learn the basics of business, econonmics and marketing and examine the specific situations that you want to influence opinion upon.

Why don't Albertans stop develop oilsands? = Why does not microsoft stop making windows ? = You don't know what you are talking about.

the engineers and businessmen who developed the nuclear power plant plan and have it in process for approval/can't get it built or should change the oil extraction process to XYZ based on blog posts from people who do not understand the details of the business or technology = Microsoft should change windows to run on a Linux Kernel = you don't know what you are talking about

[Brian]

Alternative oilsand methods being introduced. Buring some bitumen to get oil out of the rest:

http://www.canadianbusiness.com/markets/headline_news/article.jsp?content=b030794A

http://www.canada.com/nationalpost/financialpost/story.html?id=d9412f2f-63f5-4070-a6b3-e97b15dce377&k=36234

The upgrader will use the hot water from the produced bitumen, and the separated largest particles of the bitumen, asphaltenes, to fuel operations. Once the process has passed the start-up phase, the upgraded bitumen will be able to flow through pipelines without costly diluent.

"That obviously has quite a significant impact on operating cost, that and the fact that we will be displacing natural gas over time," Tuer said. "Those two factors will have quite an impact on operating costs."

=== Money motivates solutions. Maybe no nukes because they have something else cheaper. Not necessarily cleaner, but more profitable.

Work on improving the demand side of the equation faster and alternatives for supply. Hoping that oilsands are going to bottleneck will get nowhere.

[Harvey D.]

Extracting oil from tar sands requires a lot of energy + fresh water and produces huge amounts of toxic tailings + GHG + complex pollution.

Upgrading + transporting + consuming this oil in our low efficiency ICE vehicles produce even more GHG and pollution.

Using 3 or 4 nuclear reactors instead of coal fired generating plants (cheap NG is running out) to generate the energy required would create less GHG and reduce the pollution footprint.

If PHEVs and BEVs arrive and large numbers sooner than expected, tar sands activities could (and should)be reduced and excess power from the Alberta Nukes could be sold to power companies... This could extend the reactors usefull life to 40+ years.

Water supply + tailings + pollution control is much more difficult to deal with than power generation.

[Doug]

Nation/City/Price in USD Regular/Gallon
Hong Kong WanChai $7.93
Canada Toronto $7.05
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Norway Oslo $6.27
Italy Milan $5.96
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Ireland Dublin $4.78
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Spain Madrid $4.55
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Romania Bucharest $4.09
Andorra $4.08
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Kuwait Kuwait City $0.78
Egypt Cairo $0.65
Nigeria Lagos $0.38
Venezuela Caracas $0.12

Canadians Pay the most for gas.....FACT!

[Cory]

I have always known that Canadians pay the most for gas......we pay the most for eveything. Not to mention TAX!

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