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No easy fix for our Saudi oil habit

If production in the desert kingdom has in fact peaked, as some experts say, the alternatives aren't easy, if they exist at all.

Around the clock, every day of the week, the world’s biggest machines strip-mine a 1,100-square-mile section of the northern Canadian plains for oil.

They aren’t drilling, for this oil is way too thick to flow gently from the ground like Arabian Light in Kuwait or West Texas Intermediate. Instead, it is gouged from Alberta's tarry sands with tractors, transported by 300-ton trucks, steam-heated at high temperatures in giant vats until it melts into a liquid thin enough to be refined, then sent by pipeline for the trip south to Calgary and beyond.

Expensive to acquire, hard to refine and tricky to transport, the transformation of this sticky gunk into diesel fuel, kerosene, petroleum coke and fertilizer feedstock sounds like a science-fair project. Yet the oil sands around Fort McMurray in Alberta are actually a rich source of energy, and the principal source of income for Suncor Energy, a $13-billion Alberta company whose shares hit a historic high last week on record earnings.

But are they the great black hope of Western Hemisphere oil independence, as many advocates seem to think?

Autos powered by 'wishful thinking'?
In response to my column last week, "Is Saudi Arabia running out of oil?," which raised the possibility that Saudi Arabian oil production has peaked, I received dozens of e-mails from readers who said the oil sands in Canada and Venezuela were key to the West’s independence from the Middle East supply. They were joined by scores of letters from petroleum engineers and others who said alternately that the Saudi peak-oil thesis was right on or way off; that oil would never be depleted because it was constantly replenished in a geological process deep beneath the Earth’s crust; that postwar drilling in Iraq would uncover reserves that rivaled Saudi Arabia; that more U.S. drilling was the answer to our independence from the Saudis; or that conservation was the answer.

After considering all the suggestions, however, it seems there are no feasible near-term alternatives to Saudi oil yet unless your car happens to run on wishful thinking. Let’s take a look at the possibilities.

A grainy picture of oil sands
Suncor is the third-largest energy company in Canada, but after all the mess and expense of extraction and refinement, the oil sand pits along the Athabasca River produce just 260,000 barrels of oil a day at present -- about a third of the daily production of Qatar, the smallest OPEC country. If Suncor meets goals it has communicated to investors, it would double that production level in the next decade and sustain it for 50 years. Yet it would still be just a fraction of the 6 million barrels of light oil that the Saudis produce today.

Suncor began production in 1967 and has produced the equivalent of 1 billion barrels since, in tandem with its Fort McMurray neighbor, Syncrude Canada. Last week, Suncor announced that its second-quarter profit had jumped 75% on the strength of both higher output and higher prices, as well as some unexpected gains from its smaller natural-gas business. The biggest problem for Suncor is that a tremendous amount of natural gas and water is required to make oil sand extraction technology work, and both are increasingly expensive and in short supply even though natural gas, at least, is a byproduct of the sands-mining process.

While Suncor looks like a reasonable investment as it progresses in its exploitation of about 200 billion barrels of recoverable reserves, its chief executive is not in any position to replace King Fahd in the affections of your basic SUV driver. Alternative legitimate investments in oil sands are the Canadian Oil Sands Trust which pays a $2 per unit annual dividend, and Western Oil Sands.

Oil as a renewable resource?
Scientific orthodoxy holds that petroleum is the result of many millions of years of hard rock pressure on the remains of decayed dinosaurs and other organic material. But in the 1950s, some renegade Russian scientists developed an “abiotic” theory that suggested oil is inorganic and has no dead animal or plant origins. The theory, elaborated upon and popularized by the late Cornell University astronomy professor Thomas Gold in scientific papers and his intriguing book, “The Deep Hot Biosphere,” proposes that crude oil forms in a set of natural and ongoing geologic interactions five to 15 miles below Earth’s surface.

The theory holds that methane-based gases rise from the mantle and then condense into heavy hydrocarbons as they hit high temperature zones near the crust. This methane dew, according to the theory, is what we call crude oil; meanwhile, methane-based gas that escapes the condensation process and rises through rock fissures into big gaps above are what we call natural gas. In tectonically stable zones, the theory suggests that crude oil sits calmly in reservoirs. In areas of more tectonic movement, the oil and gas oxidize and escape through volcanoes as carbon dioxide and steam. In some places, the pools of hydrocarbons seep to the surface to create the vast oil sand deposits of Canada and Venezuela. From time to time, the theory proposes, this deep oil surfaces to refill reservoirs of oil thought to be previously depleted.

This is a fascinating idea, but needless to say I am not qualified to debate its merits. (See Fine Print for links to scientific papers.) From a practical standpoint, however, one wonders why the deep-earth methane gushers have not yet replenished the many oil reservoirs around the world that have emptied out. Maybe it will take much more geologic time for that to happen, but unless you’re willing to wait 10 million years it seems like you still need to fill your Ford at the Texaco station with good old liquefied dinosaurs.

Iraq to the rescue?
Several readers complained that I left out Iraq from my analysis of the Saudi oil depletion thesis because I was in on the global American imperial conspiracy to legitimize the Halliburton takeover of the Iraqi oil fields. All I can say is that any real conspirators who include a journalist on their team ought to have their secret decoder ring taken away.

Iraq does have the second-largest proven reserves of oil in the world, after Saudi Arabia -- about 115 billion barrels. The difference is that while the Saudi fields were developed on the gold standard, the Iraq fields were developed on the Rube Goldberg standard. There are two main fields: Kirkuk in the north, discovered in 1927, and Rumailah in the south, discovered in 1951. There are several other fields, one of a decent size east of Baghdad, and several others much smaller. Collectively, peak production has been estimated at 3 million barrels a day once upon a time, but most experts say that’s pushing it. Much of the country’s oil-producing capacity was impaired in the prolonged Iran-Iraq war of the 1970s, and it was clobbered again in the Persian Gulf War of 1991.

In 2002, the Council on Foreign Relations and Rice University's James A. Baker III Institute for Public Policy studied Iraq’s oil business as a prelude to war. The report said its infrastructure was held together with “band-aids,” and would require massive reconstruction over many years -- potentially totaling $5 billion at first, then $3 billion a year subsequently. Another study by the Middle East Economic Survey determined that years of poor oil-reserve management, corrosion problems at facilities, deterioration of water-injection facilities and the lack of spare parts would contain Iraq production to a maximum of 4 million barrels a day in three years after $3.5 billion was spent. Meanwhile, the International Energy Agency estimated it would cost $5 billion to boost Iraq output to 3.7 million barrels a day by 2010 and $42 billion to lift capacity to 8 million barrels a day by 2030.

Matthew Simmons, the energy analyst and investment banker who has developed the Saudi oilfield-depletion theory, has a less sanguine view. He says it would amount to “criminal behavior” to produce the Iraqi fields as hard as they were in the 1990s because evidence suggests they are on the verge of collapse and simply need to be rested -- much like an overplowed bean field. He says browbeaten administrators in the Saddam era apparently abused the fields by pumping them too fast -- dissipating the all-important reservoir pressure that helps the oil flow.

Meanwhile, many oil optimists point out that the western desert of Iraq is largely unexplored and could hold as much as 100 billion barrels of oil. But Simmons and others pooh-pooh that hype, noting that there are thousands of square miles of desert in the Middle East that have been intensely explored for a century with no luck -- including most of Jordan and Syria to the west and north of Iraq, not to mention the southern part of the Arabian Peninsula.

In short, don’t count on Iraq coming online with spare capacity anytime soon.

Conservation, the industrial complex and you
Go ahead, turn out the lights in your house when you’re not using them if it makes you feel better. And use more energy-efficient bulbs. And drive a Prius instead of a Pontiac. And eat beets instead of beef. But it still won’t make much of a dent in U.S. energy needs, most of which is used in heavy industrial and agricultural applications, not to mention air conditioning. If you really want to have an impact, build your next house without a forced-air heater or air conditioning, move as close to your work as possible so you don’t have to sit in traffic, and if you’re a factory owner, use gas instead of electricity to run your power plant.

A study not too long ago showed that if we replaced 1 million gas-guzzlers on the road with 1 million cars that got 80 miles to the gallon, we’d save 45,000 barrels of oil a day -- about the amount pumped out by 10 of the 52,000 wells in the Gulf of Mexico. In other words, nice, but a drop in the bucket.

There are no easy answers. We are addicted to oil, and there is no legitimate methadone program other than returning to a pre-industrial era. About the best the country can do, in addition to conservation, is continue to drill intensely at home to make up for waning production elsewhere. Here’s a list of U.S. drillers, oilfield service providers and refiners favored by the MSN Money StockScouter system.


Fine Print
To learn more about the commercial development of the Canadian oil sands, visit the Suncor Energy home page or the Syncrude home page. To learn more about the Canadian Oil Sands trust, visit this page. . . . To learn more about the abiotic theory of petroleum evolution, check out this paper by the late Cornell astronomy professor Thomas Gold or buy his book, “The Deep Hot Biosphere.” . . . To learn more about Iraq energy production, visit this Department of Energy page and check out this Council of Foreign Relations paper. . . . To learn more about oil issues from an economic perspective, check out the Middle East Economic Survey newsletter and the Oil & Gas Journal. . . . To learn more about Hubbert’s Peak, the theory of world oilfield depletion, visit this page at Princeton run by Professor Kenneth S. Deffeyes. . . . Personally, my own modest stand against higher energy use is to work two miles from home and commute either by bicycle or motorcycle. Here’s a list of used motorcycles for sale in the United States. For what it’s worth, here are my own bikes of choice: Ducati and Cervelo.

Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; put COMMENT in the subject line. At the time of publication, Markman had positions in Suncor, Valero, Cabot Oil and Gas, and Chesapeake.

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