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Options exhausted, oil firms turn to tar

FORT McMURRAY, Alberta - North America's crude oil resources have been so thoroughly explored and developed that experts believe that there is hardly any left to find, except perhaps in the deep waters of the Gulf of Mexico. In the rest of the world, most of the best places to drill for new oil are off limits to the Western energy industry for political reasons, and existing fields are already pumping every barrel they can.

So, with roaring global demand driving energy prices up to record levels and fresh supplies of crude oil hard to find, Suncor and more than a dozen other energy companies, including Exxon Mobil, ChevronTexaco and Royal Dutch/Shell, are pursuing projects here in Fort McMurray, a city of 50,000 where the temperature can dip to 40 degrees Fahrenheit below zero, or minus 40 degrees Celsius, in the winter.

The geologists, roughnecks and recently minted MBAs being ferried north from Calgary each morning by the Suncor jet are all focused on one objective: an unconventional approach to producing oil by sucking the viscous tar out of the sandy soil in this area.

It is not easy and it is not cheap, and through most of the 1980s and 1990s, it was not attractive to pursue, because there was plenty of crude oil available from more convenient sources and the market price was too low to reward large-scale tar sands development.

The flow of oil extracted from Alberta's tar sands, also called oil sands, surpassed one million barrels a day at the end of 2003, and it is expected to double to two million barrels by 2010, matching the output of significant members of the Organization of Petroleum Exporting Countries like Libya and Indonesia.

The frenzy of tar-sands development in Alberta highlights an uncomfortable fact about the search for unconventional sources of oil to replace dwindling conventional supplies. It depends on petroleum prices staying high for decades to come.

Energy economists in Calgary, the freewheeling commercial capital of this sparsely populated but energy-rich province of three million, say that most tar sands projects are viable only when oil is selling for more than $30 a barrel.

It often costs as much as $15 a barrel to get bitumen, a thick, sticky form of crude oil, out of the sands, compared with recovery costs as low as $2 a barrel for crude oil in parts of the Middle East. Refining the bitumen also costs much more than refining light crude.

Many energy companies ignored the sands when light crude was fetching just $10 a barrel in the late 1990s, but no longer.

"The attractiveness for a country like the U.S. is that we're right next door, politically stable and friendly to private enterprise," said Peter Tertzakian, chief energy economist at ARC Financial, a Calgary investment firm. "The downside is that it's costly to produce, and open to criticism from environmentalists, who view the oil sands as a great polluter."

Anywhere in the world, of course, it takes energy to produce energy. But tar-sands operations are especially voracious, consuming about 1,000 cubic feet, or about 28 cubic meters, of natural gas to convert a barrel of bitumen into the light crude that refiners want. The process gives off significant emissions of global-warming gases. Since Canada endorsed the Kyoto Protocol in 2002, committing it to reduce such emissions, energy companies here have taken steps to mitigate the impact. But environmentalist critics say such efforts are little more than window dressing and do nothing to relieve North America's dependence on oil.

Environmentalists are not the only tar sands skeptics. Some of the major oil companies, like BP, have steered clear. Yet many in the oil industry are betting that the tar sands moment really has arrived this time.

According to the Athabasca Regional Issues Working Group, an organization representing energy companies, some 28 billion Canadian dollars, or $21 billion, in oil-sands investments are planned over the next decade.

By next year, the sands are expected to account for half of Canada's crude oil output and about 10 percent of overall oil production in North America. Statisticians at the U.S. Department of Energy last year included oil sands in their estimates of Canada's oil reserves, raising them more than thirtyfold at a stroke, to 180 billion barrels from 4.9 billion.

That vaulted Canada to second in the world rankings, behind Saudi Arabia.

3 percent in the second quarter, The Associated Press reported from Ottawa. Gross domestic product expanded 1.1 percent in the April-June period from the preceding three months, with exports rising at an annualized rate of 21.6 percent, or a quarterly gain of 5.0 percent, the fastest rate since the first quarter of 1977, Statistics Canada said.

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