Laying it on thick

So, you’ve heard about oil sands in a documentary or on the news. You’ve heard, perhaps, in conversation or classroom debates, about its impact on the environment. Perhaps you even know some people who have packed their bags and headed to Alberta to get their own nugget of black gold and share in the wealth. But this Texas, er…Alberta tea doesn’t come up from the ground like a bubbling crude as Jed observed in the famous classic, Beverly Hillbillies.

Instead, it comes in the form of bitumen… gummy, gooey and thicker than molasses in January. To make matters worse, it’s mixed right in with the sand, presenting a grueling challenge for industry. How to separate such an unruly brew from the ground is for another story, but this is a tale about the origins of bitumen’s thick skin and how we toil to tame this intractable taffy of the turf.

Thicker than peanut butter, but not quite as tasty, Athabasca bitumen has a viscosity, or resistance to flow, of more than 500,000 centipoise (cP) at room temperature.

Now, with every story you have some sort of conflict, a rising action, a climax and a conclusion. The conflict here is bitumen’s high viscosity, and the implications it has on this resource’s means of production and impact on the environment.

That’s a heavy story man

A penetrating glimpse inside the molecular structure of bitumen reveals the cause behind its thickness. Are you ready for it? Bitumen is thick because… (insert drum roll)… it is heavy.

You may have heard the term “heavy oil” before, but few people know what this actually means. What makes heavy oil heavy? What makes oil sands heavier than conventional oil or methane?

Essentially, when we say a certain oil is heavy, what we’re really saying is that it is carbon heavy, meaning that type of oil has longer and more complex carbon chains than other types of oil. Light crude oil, such as conventional Alberta crude, contains many small, hydrogen-rich hydrocarbon molecules whereas heavy crude oil contains many large carbon-rich hydrocarbon molecules.

As you can see, the antagonist in this particular story is the carbon molecules.

So, in order to bring bitumen to a viscosity that refiners can actually work with, you have to upgrade the bitumen, which essentially means, getting rid of some of the carbon, resulting in a product that is less thick. In fact, when you consider the extra process bitumen has to go through in order to get rid of all that heavy carbon, you can see where the environmental conflict lies. Additional energy is required to separate bitumen from the sands and upgrade it. As well, heavy crude oil requires more refining to transform it into transportation fuels. And of course, more energy equals more greenhouse gas emissions if the energy being used to power the extraction, upgrading and refining processes is natural gas.

So the rising action in this story has everything to do with the rising demand for cheap energy around the world, the important role of oil sands in meeting that demand and the unrelenting challenge of reducing greenhouse gases. The plot starts to thicken as the bitumen thins because at each stage of carbon removal, the viscosity of the bitumen becomes less and less, making it easier to work with. But the overall energy used becomes more and more. It’s really annoying.

Technology is starting to change all that. Scientists are exploring ways to reduce the energy used in oil sands extraction and upgrading. One approach in the pipes is adding bacteria to bitumen deep underground, converting it into methane, which is easier and less energy intensive to extract. Another in-situ approach of extraction is Toe to Heel Air Injection (THAI) which involves injecting air into the ground, causing combustion. As the bitumen heats it becomes less viscous allowing it to flow towards the well. As it flows it leaves some of the heavy carbon behind in a process called “coking”. Coking usually happens above ground as part of the upgrading process but doing it underground results in a lighter product that can be transported through pipelines, is partially upgraded and results in fewer lifecycle greenhouse gas emissions.

Of course, another approach is to use renewable energy to power any or all of these processes. The challenge here is that renewable energy is not as cheap and bountiful. But as society and governments evolve towards increased sustainability, that could soon change.

Although renewables are rapidly being embraced across the globe, it is important to recognize the degree to which we depend on oil, even as we make the transition to greener alternatives. Sure we can heat our homes with solar and earth energy, and derive electricity from nuclear, wind and hydro, but there remains a conundrum surrounding our cars. Solar, nuclear, wind and hydro-powered cars are still a long way off. Sure we have hybrids, but for the most part they still run on gasoline and electric cars have very limited ranges and low speeds. As well, a lot of electricity used to power them is coal or natural gas fired thermal electricity.

Now, every good story must have at least a few literary devices, and the most delicious of them is irony. We labour to make bitumen and the resulting crude products less viscous right from the extraction phase (especially with in-situ extracting techniques) through to the upgrading and then refining phase. The most premium petroleum products are the highly refined and less viscous transportation fuels such as jet fuel and gasoline. Ironically, lubricating oil, which is a highly refined product, needs to be more viscous so as not to ruin the engine. So after all this work to make it less viscous, additives are put in to make sure it retains its viscosity.

Because the oil sands and its continually evolving technologies are a work in progress, this story is too. There are yet so many variables that could affect the outcome, such as the direction of the economy, incentive to invest in research and development and carbon pricing laws. While the U.S. is introducing a tough stance on carbon emissions through its Green Energy and Security Act, Canada is waiting to see what happens before coming up with anything definitive.

But the rest of the world isn’t holding its breath. Already the wheels are in motion to come up with a global carbon pricing scheme in an effort to reduce world greenhouse gas emissions and to ensure an even playing field for renewable energy to compete in the global energy market. It may be safe to predict that the outcome of the upcoming conference of world leaders in Copenhagen this December could serve as a climax for this story.

Most importantly, however, is the conclusion and that rests in the hands of energy consumers as well. Mitigating climate change is a heavy topic and while many remain thick headed towards a potentially warming planet, many more are working towards a positive conclusion for the planet – one where energy, the economy, the environment and its inhabitants live happily ever after.

Provinces must be at the table

GHG Reductions Initiatives Forum Report 3

“If ever there was a time not to read too much into the polls, that time is now.” So said Ron Stevens, Deputy Premier of Alberta and Minister of International & Intergovernmental Relations, during a speech to a Conference Board forum on greenhouse gases.

He was commenting on recent public opinion surveys which suggest that the economy is Canadians’ “top of mind” issue, but insisted that the environment in general and climate change in particular were still key concerns in Canadians’ psyche.

“They want to see action, especially when it comes to climate change,” he said, adding that Albertans and their provincial government were clearly onside in trying to minimize their oilsands’ carbon footprint without losing the economic drive from the second-largest reserve of crude in the world.

Stevens said he has “never seen a greater need for leadership” by the federal government but that the provinces had to be partners as the debate is moved aggressively ahead in a world in which a continental climate change accord will figure prominently in how energy is provided.

While Ottawa obviously had the lead, he pointed out that the Canadian Constitution requires provincial consent when international agreements affect provinces. The climate change debate was fundamentally about energy and how best to use natural resources, both of which fell squarely within provincial legislative and regulatory jurisdiction.

The Deputy Premier agreed that provincial jurisdiction could be used more effectively in terms of the scope and pace of resource development, building codes, energy efficiency, fuel standards and environmental responsibility, and all provinces have existing frameworks for industrial pollutants. “There is much we can bring to the table.”

He said Alberta has never sought a “free pass” on climate change. “Far from it” It was the first and still only North American jurisdiction with comprehensive GHG emissions caps for large emitters and that its carbon capture and storage (CCS) investment, enshrined in law, was already paying off.

“We intend to do more; we must do more, “Stevens said. “We can’t work in isolation; we need national consensus to bring certainty to our industry and stability to our economy.”

Bodies such as the United Nations and the Intergovernmental Panel on Climate Change had acknowledged CCS to be a major part of the climate change solution and that recent support by President Barack Obama and Prime Minister Stephen Harper was encouraging.

Asked whether interprovincial consensus was possible, he said there had to be “a basket of solutions” because “there is no one solution that fits all.” As for cap-and-trade as an option for Alberta if that was the North American trend, he said it is “one of the tools in the toolbox.”

Leader of the pack

GHG Reductions Initiatives Forum Report 2

Suncor Energy Inc. is the unchallenged pioneer in oilsands development. When it first unveiled plans to tap into northern Alberta’s resource four decades ago, it was derided: world crude prices would come nowhere close to covering extraction and processing costs.

Gordon Lambert, vice-president of sustainable development at Suncor, is a biologist who has been intensely involved in the climate change debate since 1990. He pointed out to an Ottawa forum on greenhouses gases that Suncor now employs some 6,500 people and is a key driver not only of the Alberta economy but also the national one.

That’s why Lambert is optimistic even though oilsands has become an element of the climate change debate.

Stating that energy and climate change have always been inextricably linked, he said there is now a more “mature” approach to tackling the issue, but he still would like to see the critics offer up more answers than questions in this “complex and daunting” dialogue as global energy demand rises inexorably.

“The status quo is simply not on,” he said, adding that policies had to have an integrated approach to energy, climate change and the economy. He sees strong signals from Washington that the new U.S. President, Barack Obama, was preparing to take that on, which meant that Canada needed to “look at policies that cross boundaries.”

Admitting that seeing world crude prices go “south of $40 a barrel” is “very unsettling”, he was nonetheless confident of recovery, noting that the Bruntland Commission stated in its seminal 1987 report, Our Common Future, that the link between the environment and the economy was irreversible.

“You can’t protect environment at the expense of the economy and vice versa; you just can’t separate these things,” he said. “That helps us . . . be more creative.”

The case for a world energy market

Canada’s federal government has stated clearly that developing a Canada/U.S. partnership on energy and the environment is a priority. This idea finds support across the spectrum of opinion in Canada, creating common ground between environmental and energy interests. But what’s in it for the new U.S. administration?

Assuring the U.S. of our reliability as a supplier of energy is good. But this isn’t new and could easily be construed as an attempt by Canada to lock in its market access for natural gas, oil, electricity, and uranium – commodities for which we are already the number one supplier to the U.S. Signalling our willingness to partner on environmental management is also positive, but from a U.S. perspective it adds complexity to an extremely difficult domestic challenge.

Rather than focussing on our bilateral relationship, Canada’s strongest leverage on U.S. policy may in fact come from contributing to a broader international agenda where Canada and U.S. interests converge. Prime Minister Mulroney succeeded well with Presidents Reagan and George H. W. Bush by following such a course. More recently, our military mission in Afghanistan has gained us far more credit in Washington than any other Canadian initiative in the past decade.

Energy creates such multilateral opportunities. Canada can partner with the U.S. in promoting a stable world energy trade, investment and carbon management system that builds on energy markets rather than getting in their way.

The mantra in the U.S. is energy independence. It is a powerful sound byte yet impossible to achieve. North America will be dependent on imported oil as far into the future as we can see. Although the continent is virtually self-sufficient in natural gas, we also have access to world gas markets through liquefied natural gas (LNG) re-gasification capacity equivalent to over 15% of our domestic use. Even ethanol might be better sourced in places like Brazil if the objective were to find the most economic and environmentally preferable supplies. With our effectively functioning markets and flexible pipeline and storage systems, Canada and the U.S. can fulfil their energy needs strategically from either domestic sources or world markets. And of course we will be increasingly tied into a world carbon management system.

Clearly, Canada and the U.S. have a substantial and growing interest in a well-functioning world energy market. There is potential for cooperation in several areas, including energy markets, the yet-to-be defined carbon market, investment rules, northern development and technology. Canada has a great deal to contribute to the conversation if we decide to step up.

Canada has earned its place at this table. We have learned the hard lessons of the National Energy Program – how bad policy can wreak havoc on energy markets and sow interregional discord. We went through the tough political fight over energy in the free trade agreement. Many voices claimed in 1988 that the FTA energy chapter was a sellout of our sovereignty and our energy security. Twenty years on we have enjoyed unprecedented wealth creation and energy stability for producers and customers based on open markets complemented by North American trade and investment rules. We are a free market champion with the scars to prove it.

Meanwhile much of the world has lost faith in markets. The reaction to the recent financial meltdown (markets don’t work, let’s regulate) is piled on top of a longer trend away from open energy markets in non-OECD countries. Price management, state control of investment and energy assets and geopolitical market manipulation have become prevalent. Soon we may add ill-conceived carbon management systems to this witch’s brew.

The recurring natural gas price dispute between Russia and Ukraine, and its impact on European energy security, is a window on a world without solid trade and investment agreements. At a time when we can least afford such instability, the threat of this contagion of national self-interest is clear.

The United States and Canada have a fundamental interest in building a stable world energy market, not Fortress North America. President Obama’s visit to Canada is an ideal opportunity to begin forging an integrated approach that shapes international energy trade and investment rules, and develops mechanisms for cooperation on energy and carbon management that are necessary for those markets to work.

Pierre Alvarez, Chair, Canadian Centre for Energy Information,
Michael Cleland, President & CEO, Canadian Gas Association
Roger Gibbins, President, Canada West Foundation.

This is the first commentary in a three part series on national energy security. The series is based on a paper prepared for the recent North Pacific Energy Security Conference.

 

Recently, the Globe and Mail published an article by Canadian Centre for Energy Information Chair, Pierre Alvarez. The piece is based on a White Paper Mr. Alvarez wrote with Michael Cleland, President of the Canadian Gas Association and Roger Gibbins, President of Canada West Foundation. Another article by the same authors was published in the Edmonton Journal on the day President Obama visited Canada.

Busting the petrobronc

Debt. It’s not necessarily the worst four-letter word. As matter of fact, in today’s corporate climate, it could be called a necessary evil as the cost of capital upgrades and new projects escalates. But in the financial rodeo that’s the petroleum sector these days, many small to medium-size players are having trouble staying in the saddle. The problem, confirmed by the Canadian Association of Petroleum Producers (CAPP), is that access to capital is drying up.

Figuring out exactly how much debt the petroleum sector is problematic in that Statistics Canada data combine the mining sector with oil and gas extraction. Going into 2008, that industry category carried $43.46 billion in debt, a 44% jump from $30.17 billion at the start of 2007.

Greg Stringham, CAPP Vice-President, Markets and Fiscal Policy, expects the majority of that debt had been accumulated by mining companies because balance sheets in the petroleum sector were in “really good shape” when StatsCan was compiling its latest numbers. “The oil and gas industry’s debt was going ‘way down at that point, because they had enough cash flow to be able to pay off their debts.”

Even so, Stringham said he wouldn’t be surprised if the oil and gas sector, with more than $50 billion in capital investment and $100 billion in annual revenues, revenue, was carrying $30 billion in combined debt.

Any increase, he suggested, is unlikely because “really nothing has been raised in the last three months” by the oil and gas industry on capital markets that he says have “dried up completely.”

Hence the postponement of some projects. “Most of the big oil sands projects that already under construction are going all the way through to completion,” Stringham said. “They’re spending based on cash flow and they had financing that was arranged to be able to carry them through. Others, if they’ve got cash flow that’s coming in, they’re spending their cash flow or investing it very prudently.”

However, there’s another tier of smaller companies which reach out each year, mostly to the equity markets, for financing. They’d drill their planned wells and investors would be paid back. But when that dried up, they turned to debt financing only to see that dry up too because of the credit crunch.

Some have even been told by their banks that their long-standing revolving lines of credit aren’t being renewed, which Stringham said is “really going to hurt.” More than a few have retrenched on their spending and some have cancelled spending outright for the foreseeable future.

CAPP represents a broad spectrum of more than 600 companies with the 150 largest accounting for 96% of Canada’s oil and gas production. The ones being hit hardest financially are likely to be the 300 at the smaller end of that spectrum. “It’s a small percentage of production, but a large number of companies that are being affected,” Stringham said.

Given the break-even costs of oilsands development, Stringham said that at $42 a barrel, oilsands developers are probably covering their operating costs but aren’t getting much, if any, return on capital. “The ones that are expanding are the ones that already have the financing arranged for their projects. . . . but also using money that came off the cash flow they had earlier this year, when it was over $100 a barrel.”

Asked what that bodes for the near term, he said most companies are “living within their means, their cash flow” and the outlook obviously depends on how long and how deep the current situation lasts.

“Most of the big oil sands projects are really built on a 30-to-40-year time line and so while they never believed that prices were going to stay at $130-140 a barrel, I don’t think they believe that they’re going to stay at $42 a barrel either.”

Another factor to consider is that some petroleum projects have experienced overruns due to a relatively strong steel market and a tight labour market. “This slowdown is actually helping to bring some of those costs back down,” Stringham said. “Everybody’s just trying to hold on and weather the storm . . . but if it goes on much beyond the next three or four months, I think you’re going to see some more drastic retrenching.”

Flat-Lining and Resurrection

Spending money to make money is a long-held tenet of the petroleum industry. So why has capital reinvestment essentially flat-lined?

That is the question posed by James Kinnear, president and CEO of Calgary-based Pengrowth management Ltd., one of North America’s leading energy income trusts, during an Economic Club of Canada presentation to federal politicians, lobbyists and analysts on Parliament Hill.

Kinnear said the current global slump in crude prices meant “cutbacks, reductions, deferrals and even cancellations of projects,” including in Alberta’s oilsands, where $80-85 a barrel is considered minimal for further development.

The fact that major fields in Saudi Arabia, Mexico, the North Sea and Russia had peaked or are in decline was significant for the future of oil supply. “One of the largest growth areas forecast for the next 5-10 years has been Canada . . . mainly because of the tarsands.” However, he added, high capital and operating costs of new plants was clearly problematic.

“You have to keep re-investing to offset your depletion and your decline,” Kinnear said, citing an International Energy Agency study of 600 fields worldwide, which indicated that reserves were declining by 6.7% annually.

“Once you slow down your re-investment rate, your production actually declines . . . In an 87-billion-barrel-a-day world, that means you have to replace about four to five million barrels a day each and every year just to stay even. . . . More significantly, it’s actually rising as time goes along. New fields that are being developed are more expensive.”

Kinnear expects prices to remain weak in at least the short term, an outlook underscored by OPEC’s recent decision not to cut production as prices swing by as much as 5-10% a day. “For the world’s most actively-traded commodity, that is significant. . . . Whether we believe in peak-oil theory or not, it may not be significant if indeed the lack of new investment in the sector continues.”

Global crude production is generally accepted as having peaked in 2005-2006, underscored by the fact that despite a tripling of world prices over the last 4-5 years, there had been no response on the supply side. ”If the oil doesn’t come out at $90, when does it come out?” Kinnear asked.

Good question. Resurrection clearly is going to take a while.

It’s not easy looking green (especially in redneck country)

According to an Alberta government memo obtained by the Edmonton Journal, Alberta is spending $25 million on a campaign to “reinforce a positive, accurate picture of Alberta.” The problem is that, because of the oilsands, Alberta is viewed as a producer of dirty energy. “We have to produce clean energy – that’s job one,” says Paul Stanway, Communications Director for Premier Stelmach, “but job two is to tell the world we’re producing clean energy.”
The big question is — does the world want to listen?

Links: Original article in the Edmonton Journal