The Oil Rush
How high-tech prospectors are trying to squeeze fuel--and fat profits--out of the earth while transforming the petroleum market
Its oil sands give Canada greater oil reserves than any nation but Saudi Arabia. No one expects oil sands to reduce the political clout of the Middle East, when governments like Iran and Saudi Arabia can produce huge quantities of oil cheaply and manipulate a tight world market. Yet Canada's growing petropolitical importance became apparent when China moved last year to grab a slice of the oil sands business.
Treasure in Sand
Despite all the excitement, it's no easy thing to get the oil locked in Canada's oil sands to market. Attracting workers to Alberta's far frozen north is a major obstacle. In the nearest town, Fort McMurray, housing is scarce, and "people are living in illegal basement apartments, renting couches at $500 a month," says Steven Paget, an analyst at FirstEnergy Capital Research in Calgary. Canadian Natural Resources Ltd. aims to more than quadruple its workforce, to 6,500, by next year to tackle the huge $10.8 billion construction job underway at its massive Horizon project, which is slated to begin producing oil in 2008. Edmonton is a six-hour drive, so Calgary-based CNRL shortened the commute by opening its own airstrip in September. The company flies workers in and out. They work 10 days on, four days off. The financial lure is strong: Skilled workers command an average salary of $100,000 a year.
Getting the oil that's trapped in the sands is no easy deal, either. First, bitumen, the thick, sticky form of crude found in the earth here, must be extracted from a complex mix of sand, water, and clay. The heavy syrup is either drawn out with heat or mined with machinery and then heated to transform it into usable oil. The production cost per barrel, $10 to $20, makes it competitive with conventional oil in the United States.
The oil sands didn't yield their treasure overnight. Suncor Energy of Calgary, the first company to begin such operations, in 1967, embarked on a major expansion in 1998, when the worldwide price of oil had plummeted to around $10 per barrel and the cost of producing from oil sands was still well over $20 per barrel. "It did take a lot of nerve," Chief Executive Officer Rick George recalls. The company continues to absorb risks. Early last year, a major fire cut Suncor's daily output for 2005 by 22 percent. Even so--in a measure of just how profitable this business is--Suncor saw a 14 percent increase in net income.
Exploiting oil sands clearly makes economic sense, but the cost is high. Houston investment banker Matthew Simmons winces at the water loss (about a barrel for every barrel of oil produced) and the huge volumes of natural gas burned to separate oil from sand. "I call it making gold into lead," Simmons says.
The industry is well aware of the energy issues--indeed, nuclear power plants have been proposed to fuel operations--but FirstEnergy Capital's Paget thinks companies will invest in technology that creates natural gas out of the bitumen. Gasification would add another expensive step, but it may be affordable if energy prices stay high.
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