By Marianne Lavelle

08-10-03 When George Washington was president, explorers and fur traders venturing into the wilds of western Canada noticed Indians sealing the seams of their canoes with a thick, black muck that smelled like coal and oozed out of the ground along the riverbanks. Speculators tried drilling for oil there in the early 1900s, but all they hit were deeper and wider veins of the dark grit they called "tar sands." Over decades of painful trial and error, the oil industry learned that only tremendous amounts of labour, heat, and water could unlock the fuel embedded in these massive underground pools.
Today, the oil sands of the province of Alberta are considered one of the most promising stockpiles of crude on the planet. Based on a new assessment that counts oil sands as a resource on a par with conventional oil -- thanks to new technologies and industry lobbying -- Canada leapt from No. 20 to No. 2 in the ranking of world oil reserves. And with OPEC's recent cut in production, many in the world's largest oil-consuming nation, the United States, are eager to tap into additional supplies from a friendly neighbour.

But don't count on Alberta replacing the Middle East as the world's leading petroleum provider anytime soon. Although major improvements have been made in technology, these "unconventional oil" operations remain expensive and highly polluting. Influential industry consultant Daniel Yergin may be heralding Canada for producing "the first major increase in world oil reserves since the mid-1980s," but the challenge -- as always -- is getting the black gold out of the ground.
"It's like a beach sand that's laden with oil," says John Rogers, vice president for investor relations at Calgary-based Suncor, which pioneered oil sands operations in Alberta. This "beach" covers an area roughly the size of Utah, located about 500 miles north of the US border.
"It's the largest oil basin in the world next to the largest oil market in the world," Rogers says.

Since 1967, his companyhas been producing oil in the heart of the sands, the town of Fort McMurray, in a process similar to strip mining. Huge electric shovels excavate the sand and load it into 200-to-400-ton trucks. Suncor and the other Alberta producers -- Syncrude of Fort McMurray and Canadian Natural Resources Limited of Calgary as well as multinationals like Shell -- dig enough oil sand every two days to fill Yankee Stadium. The rigs rumble on 10-foot-tall wheels to upgrading plants, where the sands are mixed with hot water to extract the bitumen -- a thick, sticky form of crude oil. It is then treated with chemicals to remove minerals and water.
But the oil companies estimate that 80 % of the sands are too deep to be mined. Enter in situ processing. By injecting steam into oil sands underground, producers loosen the bitumen and suck it out of the sands. Toronto-based Imperial Oil, 70 % owned by Exxon, pioneered the process known colloquially as "huff and puff" in its mega project near the town of Cold Lake. Now numerous firms are using a refined version of the process, "steam-assisted gravity drainage," which injects steam and extracts bitumen through two separate wells.

As the industry was perfecting these technologies, Alberta decided to encourage oil sands development by allowing companies to escape taxes on oil sands royalties until they recouped their costs. Since that change in the law in 1995, more than $ 65 bn in new ventures have been announced.
But oil sands operations, which have dug huge chunks of earth out of the pine forests of Alberta, have been dogged by environmental criticism. The industry boasts that its state-of-the-art underground process, unlike truck-and-shovel mining, leaves the land largely undisturbed. Nor is there need for the giant tailing ponds where producers store water, clay, and sand waste left over from mining; one notorious Syncrude waste pond is 10 square miles. But the in situ process is hardly benign.

In a province that has been wracked with drought and wildfire in recent yearsand that still relies on farming and fishing, residents voice concerns over the huge amounts of water used to extract oil sands. Although producers recycle much of their water, about one barrel of water is lost for every barrel of oil culled, according to the Pembina Institute, a Canadian environmental group.
Also, it takes fuel to get fuel out of the oil sands. Turning water to steam consumes extraordinary amounts of natural gas -- in short supply in both Canada and the United States. Canada has long planned a pipeline to bring natural gas south from the Mackenzie Delta, adjacent to Alaska; analysts figure the oil sands operations will gobble up 100 % of that new gas. (Canada's nuclear industry suggested that a new atomic power plant could supply the necessary energy, but this idea has met a cool reception.)

Because of the large volumes of natural gas consumed, carbon dioxide emissions are at least five times as high from oil sands as from conventional oil production, according to the Canada National Energy Board. This raises hackles in Canada, which has signed on to the Kyoto Protocol to reduce greenhouse gases (a constant source of tension between Ottawa and the more conservative Alberta government). Even though the Canadian government has agreed to concessions regarding its oil operations, many producers complain Kyoto will eventually drive up the costs of the oil sands initiatives.
And costs are skyrocketing already, mainly because it takes lots of good, trained workers to build and operate an oil sands site. Firms are competing desperately for skilled labourers from the relatively limited pool of hearty souls who populate, or are willing to relocate to, a remote locale with severe winters.

The dearth of good help means good pay. Average family income here is $ 60,000, about $ 15,000 higher than in the rest of the province, with 40 % of households making more than $ 74,000. Shell Canada opened its Athabasca Oil Sands Project in June at a cost of $ 4.2 bn, 50 % over budget, mostly because of increased labour costs. Likewise, a $ 2.5 bn Suncor expansion completed in 2002 came in 70 % over budget. In January, Calgary-based TrueNorth, owned by Wichita, Kansas-based Koch Industries, abandoned a planned $ 2.3 bn enterprise; it blamed the future costs of meeting the Kyoto Protocol, but labour costs actually had already caused a $ 650 mm overrun.
Add to the worker shortage the fact that high natural gas prices, like those seen earlier this year across North America, push up costs. At its best, the Canadian Association of Petroleum Producers says the oil sands companies can produce at a cost of $ 7 or $ 8 a barrel. Compare that with Saudi Arabia, where oil gushes to the surface for only $ 1 to $ 2 per barrel. It's a big disadvantage as Canada and Saudi Arabia vie for the No. 1 spot among the sources of US oil imports. Saudi Arabia pumps 8.5 mm bpd of oil. Canada's daily tally via oil sands this year is expected to reach 1 mm barrels, closing in on the 1.4 mm barrels that Canada gleans from old-fashioned wells.

But Canada's oil well production is declining, and it's not clear that oil sands production will grow fast enough to make up for that loss. Robert Ebel, chair of the energy program at the Centre for Strategic and International Studies, says the United States will be happy to gain perhaps a few extra barrels out of the new projects.
"But I don't think the oil sands will be a major player in the oil market this decade."
Still, Steven Paget, analyst at FirstEnergy Capital investment banking firm of Calgary, says there's plenty of reason to be optimistic. Certainly, there have been cost overruns and plans shelved, but "a lot of it is fine-tuning of operations as they learn how to make these massively complex systems work. That will reduce costs, as will their continued efforts to reduce energy usage," Paget says.
"It's a great resource that could continue growing for the next 25 years right next door." FirstEnergy predicts that oil sands will add an additional 1 mm bpd to Canadian oil production by 2015. Not exactly enough to displace the 5 mm bpd that the United States imports from OPEC, but Paget is quick to say: "We're bulls; we're not tigers."