Congratulations You Struck SandWilliam C. Symonds
When Edythe A. "Dee" Parkinson took over as executive vice-president in charge of Suncor Inc.'s sprawling Alberta mil-sands plant in 1991, many employees expected her to shut it down. High production costs had whittled pretax profit margins to less than $1.50 a barrel, even as an expensive expansion was needed. But the feisty Parkinson hadn't moved all the way from Ontario to northern Alberta--300 miles north of Edmonton--to give up on the world's first big oil-sands operation.
Instead, she introduced technology that slashed production costs by some 30%. That and a more profitable product mix have sent margins soaring to $7.50 a barrel this year, making oil sands more profitable for Suncor than conventional oil production. Emboldened, Parkinson is embarking on a high-tech expansion that could cost up to $600 million.
TOMORROW'S RESOURCE. It's just one example of a sudden surge of renewed interest in developing the world's largest lode of oil sands. Although Alberta's oil sands contain up to a third of the world's known petroleum resources, far more than in Venezuela and elsewhere, prohibitive costs until recently led most people to dismiss the black, tarry, hydrocarbon-bearing sands as tomorrow's energy resource. Indeed, much of the oil sands are still not worth mining. But advances in mining, transportation, and separation have slashed costs so that some 300 billion barrels of oil are considered economically recoverable, now or in the future. "That's changed the investment outlook 180 degrees," says Eric P. Newell, chairman of Syncrude Canada Ltd., a consortium that runs the world's largest oil-sands project a few miles away from Suncor.
The industry's major players--including Amoco Canada Petroleum Co. and Imperial Oil Ltd.--now plan to invest more than $2 billion in expansion over the next five years. If all these projects are completed, they would boost industry production 35%, to almost 550,000 barrels a day, or some 25% of Canada's total crude output. The industry's National Oil Sands Task Force recently predicted that up to $20 billion might be spent on oil sands over the next 25 years, making it the largest industrial development project in Canada.
The investment outlook got a big boost on Nov. 30, when Alberta Premier Ralph Klein unveiled cuts in royalties on oil extracted from lands leased from the province. Producers hope federal tax relief will follow. And if real oil prices rise to $25 a barrel, investment would increase even faster. "Syncrude would become a gold mine," says Gulf Canada Resources CEO J.P. Bryan.
The current revival is a sort of second coming for oil sands. After Suncor opened its plant in 1967, a consortium of big oil companies and the governments of Canada, Alberta, and Ontario built the even bigger Syncrude plant, which started operating in 1978. But most expansion plans were shelved after oil prices collapsed in 1986.
What has revived interest in fresh investment is cheaper production. Since 1982, Syncrude--whose operation is more than twice the size of Suncor's--has slashed its production costs in half, to around $11 a barrel. "By the turn of the century, Syncrude will be producing the stuff for $9 a barrel," predicts Bryan, whose Gulf Canada is a consortium partner. That, he says, "is as competitive as you need to be in North America."
Production costs for conventional oil vary widely. But in western Canada, oil-sand outfits already enjoy a higher return on capital than regular oil production operations. Indeed, Imperial Oil, which is Canada's largest oil company and 70% owned by Exxon Corp., is so devoted to oil sands that it has stopped exploring for conventional oil. Oil sands "are the future of this company," says Howard B. Dingle, Imperial's general manager in charge of them.
TWO TONS, ONE BARREL. Some of the most important improvements to date have come in open-pit mining, the method used by Syncrude and Suncor that accounts for nearly two-thirds of all oil-sands production. The black sand, which in summer emits an overpowering asphalt-like stench, is dug up and taken to a processing plant. There, bitumen--a heavy, molasses-like oil--is separated from the sand and then upgraded into various blends of crude oil (diagram). It takes about two tons of oil sand to produce just one barrel of oil.
Traditionally, Syncrude and Suncor made piles of oil sands, picked them up with a so-called bucketwheel reclaimer, and placed them on long conveyor belts for transport to the processing plant. But the reclaimers and belts often broke down. So Suncor's Parkinson mothballed most of them. Instead, oil sands go straight from the shovels onto the world's largest dump trucks. On-board computers tell the truck drivers where to go and when, eliminating bottlenecks. The trucks carry their loads directly to a machine that crushes lumps of oil sand. From there the sand travels a shorter distance by conveyor belt to the plant. With easier maintenance, Suncor has reduced its mine workforce by 39% and cut costs by almost $4, to $10.50 a barrel.
Syncrude trails Suncor in converting to dump trucks. But it's taking the lead in testing another efficiency booster, "hydro-transport." This involves mixing the crushed sand with hot water in a cyclo-feeder, a sort of giant toilet bowl. It's then shipped via pipeline to the main plant. Thanks to agitation in the pipeline, the bitumen is largely separated by the time it arrives. Syncrude figures hydro-transport will cut the cost of moving oil sand by as much as $1 a barrel and further reduce downtime. Moreover, it should let Syncrude collect sands as far as 25 miles from the plant, up from 6 miles now.
Where oil sands are buried too deep to make open-pit mining practical, producers such as Amoco and Imperial use the "in situ" method, which involves injecting steam into the deposits. After the bitumen separates from the sand over a matter of weeks, it's pumped to the surface along with water and a trace of natural gas. The bitumen is then separated, diluted, and shipped via pipeline to refineries. Imperial figures it must handle 350,000 barrels of water, most of which is recycled, for every 100,000 barrels of bitumen produced.
For this "huff and puff" production method, the key is to get the most bitumen for the least steam. Imperial says its geologists have learned to position the steam-injection wells more efficiently, boosting its recovery rate to 25% of the bitumen from 17%. Amoco thinks it can go well beyond that and recover 50% of the bitumen with the help of horizontal drilling, which lets it drain a field more thoroughly using fewer wells.
Of course, even recovering half of the bitumen wouldn't come close to the performance of open-pit mines, which recover more than 90%. But then, mining with steam is far cheaper. Moreover, steam miners save money another way by not upgrading the bitumen. They simply dilute it and ship it via pipeline for refining in Canada or the U.S. The trade-off is that they can't charge as much because they deliver a lower-quality product.
RISK-FREE EXPLORING. Suncor and Syncrude have proven that it's possible to make a profit from an integrated mining and upgrading operation. Indeed, they're planning more than $1 billion of expansions. But the investment required is so huge--and the payoff so long-term--that no one else is considering building an integrated operation from scratch. Rather, the industry is developing a "small is beautiful" vision. Donald V. Currie, managing director of the Alberta Chamber of Resources, sees a web of "unbundled" operations. One would mine the oil sands and separate the bitumen. Another would ship it by pipeline for refining by someone else.
Producing oil from sand is a lot tougher than just pumping it from the ground. But oil sands enjoy one big advantage: Everyone knows where they are. "Where else can you find a deposit where you don't have to worry about replacing reserves?" asks Gulf's Bryan. In the Alberta oil sands, he notes, "you have no exploration risk." As technological advances continue to lower costs, that argument should make the oil sands even more inviting.
From Black Sand to Petroleum
Canada's Alberta province claims more oil than Saudi Arabia. But it's in oil sand--tar-like bitumen clinging to grains of sand. Here's how one company, Suncor, profitably recovers one barrel of oil from about two tons of sand:
DIG: Mammoth shovels in a vast open-pit mine put chunks of foul-smelling oil sand into the world's largest dump trucks, carrying up to 240 tons each.
CRUSH: The sand is trucked to a crusher and then travels over conveyor belts. In the future, Suncor will mix the sand with water and pipe it.
SEPARATE: The oil sand is fed into rotating drums and mixed with hot water, steam, and caustic soda. The bitumen separates out, while the sand and water go to holding ponds.
UPGRADE: Cokers break down the bitumen, removing carbon and producing hydrocarbon vapors that are "cracked," or broken down, into naphtha, kerosene, and heavy fuel oil.
PUMP: The thick bitumen is diluted with naphtha, a petroleum distillate, then spun in a centrifuge to remove contaminants and pumped to the upgrading plant.