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Digging Deep

Sept. 20 issue - Its approach echoes across the desolate plains of northern Alberta like the Tyrannosaurus rex that ruled here 265 million years ago. But even a three-story carnivore would have been no match for the Caterpillar 797 dump trucks that dominate the area now. Each of these metal behemoths rides on four-meter tires and carries 363 metric tons of oil-soaked tar sands, scooped out by gigantic shovels nearby. Owned by Shell, the machines are transforming this barren landscape—and the way oil companies think about fossil fuels.

For years, most such firms ignored the kind of oil that soaks these sandy steppes, dismissing it as too difficult and costly to get out of the ground. But the business is changing rapidly. Today, established fields in the Lower 48 United States yield less than half what they did at the peak in the 1970s. Some experts believe supplies from the oil-rich Middle East may begin to decline sometime in the next decade. Yet industrialized nations show no signs of slowing down consumption. Indeed, most analysts predict China's hunger for oil will soon surpass that of even SUV-choked America.

With oil prices high and demand outstripping supply, companies are increasingly venturing into rugged areas that only a few years ago they would've scoffed at. "High oil prices are here to stay," says former Venezuelan Oil minister Humberto Calderon. "The world has to be prepared." That means exploiting reserves of oil that have until now been uneconomical.

Geologists are venturing into the remote, icebound waters off the coast of Norway. At the massive Kazakh oilfield of Kashagan, oil companies have constructed two islands to stabilize their equipment and drill in freezing temperatures without endangering the local environment. In Chad, similar firms have begun to construct a massive infrastructure that includes roads, pipelines, housing and the drilling machines required to extract deposits. All these projects are expensive and seemed impractical only a few years ago. Now, regardless of what oil prices do in the coming weeks and months, many experts believe that such investments will eventually pay off.

Today's prices only make the investment easier to sell—crude futures recently topped $49 a barrel, more than four times the price in 1998. That kind of price jump makes all the difference in places like Alberta, where the cost of extraction is 10 times as high as in some Middle Eastern countries. Although Alberta is on a par with Saudi Arabian oilfields in terms of the sheer amount of oil trapped in the ground, nature has made that oil much less accessible. Both sets of deposits were formed over millions of years, as organisms fell to the bottom of nutrient-rich seas and were buried, before they could decay, under a sheen of sediment. Then heat and pressure slowly baked the mass of energy-rich material into oil. But whereas rock formed a protective layer over the fields of the Persian Gulf and Texas, the Alberta oil leached out, mingling with sand, rock and other materials on the surface. Separating it out is difficult and expensive—in Kuwait, it costs a mere $2 to get a barrel of oil out of the ground. It costs Shell $15 to produce a barrel from the tar sands of Alberta—which is why the reserves sat largely untapped throughout the 1980s and 1990s. "The prime driver of what's being extracted is the cost per barrel," says John Gibson, president and CEO of Halliburton's Energy Services Group. "When the price of oil is back down in the 20s and high teens, there's a lot of risk."

Twenty years ago you couldn't build tires large enough to support the 182-metric-ton payloads that Shell's trucks now haul across Alberta. The technology to separate out the oil was not nearly as energy efficient, either. Now the trucks dump the sand into huge crushers, which grind it down to fine oil-coated grains. Conveyor belts carry the result into huge vats and mix the sand with hot water, then spin it in centrifuges to separate out the oil. "In the last decade, our process has become 40 percent less energy intensive because of technology," says Neil Camarta, senior vice president of oil sales for Shell Canada, which began operations in Alberta last year.

Venezuela's previously untouched fields of oil sludge—oil so dense as to be almost useless without special treatment—are also getting a hard look. New computer technology allows engineers to map these underground oil deposits by taking seismic images; they can then use joysticks to adjust the angle of drilling and drive wells nearly horizontally. Even so, it costs $10 more to remove the oil from the gooey tar.

Other advances in technology are reaching into even more remote and inaccessible places. Deep-water oil, where reserves are sunk more than 7,000 meters below the surface, is a newly hot contender for extraction. High-speed computers monitor the treacherous currents swirling around floating oil rigs, and adjust drills continuously to make sure they remain on course. Engineers have driven down the cost of offshore oil to between $15 and $20 per barrel. "If it weren't for advances, the cost could easily be $100," Gibson says. Shell, Texaco and BP among others are currently exploring deep in the Gulf of Mexico, Brazil's Atlantic coast and the west coast of Africa. There might be 100 other offshore deposits worth checking out as well, says Gibson.

"If the perception takes hold that we're going to have $40 oil year after year after year, then you would see even more activity in exploration and production in remote places far from developed infrastructure," says Robert Ebel, chairman of the energy program at the Center for Strategic and International Studies in Washington. If so, tomorrow's oil tycoons could rise from the ranks of Native American landowners in Alberta and tribesmen in the African bush. For most of us, the changes means that the price of gas may continue to rise, but the pumps won't run out any time soon.

With Phil Gunson in Caracas and Frank Brown in Moscow

© 2004 Newsweek, Inc.

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