oilsands Canada*

August 9, 2001

Americas

Alberta's Mythic 'Oil Sands'

Keep a Death Grip on Crude

By TAMSIN CARLISLE

Staff Reporter of THE WALL STREET JOURNAL

CALGARY, Alberta -- An unwieldy Canadian oil resource is suddenly in hot demand to help satisfy U.S. energy needs.

Joining Canada's biggest oil companies in a rush to develop Alberta's "oil sands" are some U.S. concerns anxious to help tap what energy researchers say is the world's largest known oil resource. The snag is that the oil is a black goo that must be steamed out of the ground or mined in giant open pits. It is tough to transport and tough to process into a useful liquid fuel.

Even so, oil companies are flocking to Alberta's northern frontier to exploit three large deposits of oil sands, also known as tar sands. In all, they contain 1.7 trillion barrels of oil, including about 200 billion barrels recoverable with current technology, according to the Petroleum Communication Foundation, a research group based here.

More than 17 oil-sands projects are expected to add 1.8 million barrels a day of new Canadian oil production by 2010, compared with 2.2 million barrels a day from the whole of Canada last year, including about 600,000 barrels a day produced from oil sands. Most of the new oil will be available for export to the U.S. Pipelines, power plants and refining facilities are also in the works.

The U.S. national energy policy report issued in May by Vice President Dick Cheney and a cabinet-level task force drew attention to Canada's oil sands, noting that "their continued development can be a pillar of sustained North American energy and economic security."

More than 30 energy companies have proposed spending a total of 42 billion Canadian dollars (US$27.4 billion) in northern Alberta by 2010, on top of C$10.7 billion invested in oil sands development in the past five years. Regulators and company boards have already approved C$14 billion of new spending, says Bill Almdale, regional coordinator of Athabasca Oilsands Developers, a Fort McMurray, Alberta, industry group.

But the development rush is threatening to overwhelm provincial energy regulators and is alarming some environmentalists. In June, Koch Industries Inc., Wichita, Kan., and UTS Energy Corp., Toronto, filed 4,000 pages of documentation with Alberta regulators on a proposed C$2 billion oil-sands project.

European explorers stumbled across Alberta's largest oil deposit, near Fort McMurray, in the 18th century. Long before that, Indians daubed birch-bark canoes with a mixture of spruce gum and the tar that oozed from the banks of a local river. Now, oil companies employ thousands of workers and giant tungsten-reinforced shovels to scoop grit-laden tar into trucks as big as houses. Cleaned of sand, the tar becomes Canada's main source of synthetic crude oil -- a commodity analysts reckon will constitute nearly half of western Canada's crude-oil exports to the U.S. within 10 years.

FirstEnergy Capital Corp., a Calgary investment firm specializing in energy, projects that by 2010 western Canada's synthetic crude output will nearly quadruple from last year, to 1.3 million barrels a day, and that additional tar production from oil sands will rise to 800,000 barrels a day from 275,000 last year.

Canadian Association of Petroleum Producers Vice President Greg Stringham predicts that Canada will overtake Saudi Arabia as the top exporter of crude oil to the U.S. by 2005. U.S. government data show that Canada's exports of more than 1.8 million barrels a day of crude oil and refined petroleum products to its southern neighbor already make it the top overall supplier of foreign oil to the U.S., providing about 15% of U.S. oil imports.

American analysts think Canada's oil sands will help put the U.S. on a more secure energy footing. "It's very positive from the U.S. point of view, because the oil is in friendly hands," says George Littell, a founding partner of Houston energy consulting firm Groppe, Long and Littell. U.S. access to Canadian oil and natural gas is protected under the North American Free Trade Agreement.

But the massive oil projects still face serious obstacles. Analysts warn that cost overruns due to labor and equipment shortages may yet derail some projects. In July, Suncor Energy Inc., Calgary, increased its cost projection for an oil-sands expansion it will complete this year to C$3.25 billion from C$2 billion originally. Shell Canada Ltd., Calgary, a unit of Royal Dutch/Shell Group, has warned of cost overruns of up to 15% on a new, C$5.1 billion oil-sands project it is developing with partners -- though Wednesday the group proposed an additional C$2 billion oil-sands project.

Write to Tamsin Carlisle at tamsin.carlisle@wsj.com1

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