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What's new at the tar sands?

My neighbor has a circular driveway ... he can't get out.
     —Steven Wright

When the New York Times recently reported on falling exports due to rising consumption in the oil producing nations, the paper of record decreed that it is now time for Americans to pin their hopes on Alberta's tar sands. "More likely, experts say, [falling exports] will mean big market shifts, with the number of exporting countries shrinking and unconventional sources like Canadian tar sands becoming more important, especially for the United States." It behooves us to keep track of what's going on at the tar sands in so far as the "official" story now states that well-being of the world's most voracious oil consumer depends on steadily rising synthetic crude output. A close look reveals that all is not well along the Athabasca River.

Statistics Canada released its latest numbers for energy supply and demand on December 20, 2007.

Alberta's oil sands remain an important source of crude oil production. In 2006, they accounted for over 43% of total crude oil and equivalent production, up slightly from 39% in 2005 and well above the proportion of 28% in 2000.

In 2006, the oil sands produced 180,000 cubic metres of oil a day. In 2007, this figure had jumped to an estimated 184,000 cubic metres a day, roughly 44% of Canada's total crude oil production.

The Canadian Association of Petroleum Producers is forecasting oil sands production to surpass 693,000 cubic metres of oil a day, or 82% of total Canadian crude oil production, by 2020. Capital investment, which amounted to $14 billion in 2006, was expected to reach an estimated $16 billion in 2007. [emphasis added]

As a writer about energy issues, the author is usually very careful about the language he uses, reserving the word "jumped" for sudden, often unexpected, large increases. Statistics Canada tells us that tar sands production "jumped" four thousand cubic metres per day in 2007 over 2006. A cubic metre = 6.28994 barrels, so the increase was from 1.132 to 1.157 million barrels per day, a growth rate of only 2.2%. Perhaps the phrases "modest rise" or "lackluster increase" would have been more appropriate.

It is probably unfair to say that that the "jump" works out to $80,000 per barrel, given the capital expenditure increase of $2 billion in 2007, because current production is a result of past investment. Nonetheless, the per-barrel capital expenditure number is striking. It also doesn't matter much these days whether the 2007 expenditures are measured in Canadian dollars or American dollars.

The Ontario-based newspaper The Record reports another disappointing development in Oil Sands prosper at record prices while natural gas takes a back seat (December 27, 2007). The news account also tells us why tar sands production growth is slowing.

Natural gas producers and drillers, whose field activity plummeted this year, probably won't be seeing much relief in 2008, while action in the oil sands is expected to intensify thanks to record-high crude oil prices...

[Don] Herring's [president of the Canadian Association of Oilwell Drilling Contractors] group predicts a huge drop in drilling in 2008. The industry drilled 6,000 fewer wells this year than it did in 2006 and next year it expects to see that figure drop by about another 2,560 -- a 38 per cent drop within two years. The Petroleum Services Association of Canada also released dismal predictions for 2008. That group forecasts drilling to go down by 17 per cent between 2007 and 2008...

It has been a different story in Alberta's oil sands where businesses there have been reaping the benefits of record-high crude oil prices... In November, the National Energy Board [NEB] said it expected oil sands production to grow to 2.8 million barrels a day by 2015 -- 200,000 barrels less than it predicted a year earlier. The predicted shortfall is due to escalating costs on a number of oils ands megaprojects.

"The oil sands growth has continued, but it's been moderated. We are seeing more phasing than we had expected,'' said Pierre Alvarez, president of the Canadian Association of Petroleum Producers. "The growth continues to be in the oil sands, which is good because when you look at the global world oil supply, which is growing increasingly under the control of a smaller number of state-owned companies... North America needs to have replacement for those barrels and clearly the oil sands can play an important part of that,'' he said. [emphasis added]

Note: In fact, the NEB assessed three scenarios under which oil sands production will increase anywhere from 2.6 to 4.9 million barrels a day by 2020.

The steep drop-off in drilling for natural gas is due to low prices in North America, which are quoted at $6.50 per thousand cubic feet for 2007 in The Record story, accompanied by inflation in the value of the "loonie" (slang for Canadian dollar), which lowered profit margins on U.S. exports. Herring called 2007 an "unpleasant and difficult'' year. 2008 promises more of the same.

Tar Sands Gas Consumption The odd thing about The Record's report is they make no connection between production in the oil sands and the availability of Canadian natural gas. Both mining and in situ production using steam-assisted gravity drainage (SAGD, "sag-D") require substantial natural gas inputs (graph left from the NEB's Canada's Oil Sands: Opportunities and Challenges to 2015). See Oh! Canada--Natural Gas and the Future of Tar Sands Production by the author for further details (The Oil Drum, June 20, 2006). Natural gas consumption at the oil sands exceeds 2 billion cubic feet per day by 2015. Statistics Canada provides an update for natural gas production.

Natural gas production increased 0.4% in 2006 from 2005. Record gas drilling activity in the first half of 2006 was offset by a reduction in wells drilled in the last half of the year, resulting in an annual total slightly [above] 2005 levels. [Note: original text appears to contain a mistake, saying "slightly below 2005 levels"]

It gets worse—the drilling slowdown is a disaster for Canadian natural gas production. The NEB's Short term decrease seen for Canadian natural gas deliverability (October 10, 2007) tells the story.

Deliverability of Canadian natural gas will decline by seven to 15 per cent during 2007-2009, says a National Energy Board (NEB) report released today. The report, Short-term Canadian Natural Gas Deliverability 2007-2009, says gas deliverability will decrease from 483 million cubic metres per day or 17.1 billion cubic feet per day (Bcf/d) at the end of 2006, to a lower between 410 and 449 million [cubic metres] in 2009 (14.5 to 15.8 Bcf/d).

"The drilling pace that sustained Canadian natural gas deliverability is gone, for the moment," said National Energy Board Chair Gaétan Caron.

Most of Canada's natural gas resource lies in the Western Canada Sedimentary Basin (WCSB). In recent years, the average production from new wells in the WCSB has decreased gradually as the basin matures. High levels of new drilling and exploration activity driven by high demand and prices for natural gas helped maintain the overall production levels of natural gas, despite rising costs for drilling and exploration. [emphasis added]

Canadian Marketable Natural Gas The NEB's forecast (graph left) officially confirms the insights of Dave Hughes, now retired from the Geological Survey of Canada and a former member of the Canadian Gas Potential Committee. Hughes' presentation at ASPO-USA's Houston conference describes Canada's "exploration treadmill" in which more and more drilling has found less and less gas (see the slides on pp. 9-13). As in any Red Queen problem, you must run faster and faster just to stay in place. If gas drilling decreases, production levels will eventually plummet as existing gas wells become depleted. Once gas production takes a tumble, it is likely that output will never again reach the bumpy plateau level of about 17 billion cubic feet/day that was sustained from 2003 until the beginning of 2007.

Lower natural gas production over time in the WCSB will constrain production at the oil sands unless Canada decreases exports to the United States, thus freeing up more gas for mining and SAGD extraction. The NEB's announcement reveals just how absurd the situation has become. "Another contributing factor [to lowered drilling rates] is investment in oil and oil sands development, which competes for investment capital with natural gas drilling."

Increased investment in the tar sands is hampering investment in the natural gas upon which production at the tar sands depends! To make matters worse, decreased exports to the United States would result in less revenue available for natural gas drilling, which would lead to lower production rates ... and so on.

Additional natural gas for powering tar sands production in the future could arrive via the proposed MacKenzie pipeline, which would carry the gas to Alberta from the Northwest Territories.

The Mackenzie line could deliver as much as 1.9 billion cubic feet of gas a day from fields in the Mackenzie Delta, on the Beaufort Sea north of the Arctic Circle, to southern markets in Alberta, the rest of Canada and the United States...

Estimated costs for the line have more than doubled since 2004, when its backers assumed it could be built for C$7.5 billion. At C$16.2 billion, Imperial has said the line may be too expensive to be profitable and has looked for government concessions that could reduce risk and financing costs and boost returns.

The contentious environmental assessment for the pipeline has been ongoing for over four years now. Combined with the soaring cost estimates, the environmental concerns make the MacKenzie more like a pipe dream as things stand now.

Production growth at the tar sands slowed considerably in 2007. It is hard to avoid the conclusion that natural gas availability at the tar sands is a disaster waiting to happen. Investment continues to pour in, but it seems that few analysts or reporters have taken a hard look at future tar sands production in light of declining natural gas production in the WCBS. Alternative energy sources such a nuclear or bitumen gasification are a long way off. Look for this emerging story to appear in press accounts within the next few years. Production of synthetic crude at the tar sands is not likely to provide the much longed for salvation that will keep American drivers on the road.

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