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January 23, 2001

 Canada Is Unlocking Petroleum From Sand

By JAMES BROOKE


FORT McMURRAY, Alberta Ten building cranes looming over North America's largest energy construction project here are the visible peaks of a $22 billion mountain range of oil investments that are quietly transforming this patch of Canadian wilderness into what may soon be the continent's leading oil producing area north of the Gulf of Mexico. 

Within five years, oil flowing south from Alberta's oil sands is expected to surpass the current output of one million barrels a day from Alaska's North Slope. By the end of the decade, two million barrels a day, the current production of Nigeria, is to be pumped from here into a North American pipeline network that stretches from Portland, Ore., to Portland, Me., helping feed a market in the United States that now consumes about 20 million barrels of oil a day. 

"By 2010, 75 percent of oil sands production will go down to the United States," predicted William Almdal, regional coordinator for Athabasca Oil Sands Developers, a private planning group here. After many lean years, Mr. Almdal says, the strong oil prices of the last 18 months have unleashed such a torrent of investment that today's biggest development obstacle is not a lack of money or overcoming objections from environmental groups but a growing shortage of skilled labor. 

While debate in the United States swirls over President George W. Bush's support for opening the Arctic National Wildlife Refuge in Alaska to oil drilling, little attention has been paid to Alberta's oil sands, which have recoverable reserves 40 times as large as the estimated reserves of the Alaska refuge. Although oil has been produced here for three decades, companies have barely scratched the surface, extracting less than 1 percent of reserves. 

Almost ever since 18th-century fur traders watched Indians caulk their canoes with bitumen, a form of heavy oil oozing from the banks of the Athabasca River, dreamers and developers have debated how to exploit the massive deposits of sands here impregnated with oil. According to Canada's National Energy Board, there are at least 300 billion barrels of recoverable oil within a 250-mile radius of this northern city, about 15 percent more than the proven reserves of Saudi Arabia. 

For years, mining Canada's oil sands was dismissed as a costly, roundabout way to produce oil. Multibillion-dollar "energy independence" fiascos like the failed effort, subsidized by the United States government, in the early 1980's to mine Colorado's oil shale deposits soured investors on most "synthetic oil" projects, or oil not from wells. 

But now, Canada long the largest foreign supplier of natural gas and electricity to the United States is becoming important in oil as well. During the first 10 months of 2000, Canada edged out Saudi Arabia as America's largest outside source of oil and petroleum products. 

For the United States, where domestic production has dropped by 40 percent since 1970, increased Canadian oil production means increased energy security; trade treaties lock Canada and United States into a continental energy market. Last year, the United States imported foreign oil to meet 57 percent of its needs, up from 37 percent in 1975. 

With Canada in the midst of an energy boom involving natural gas, oil and hydroelectric power produced to feed the growing appetite in the United States, mining shovels here in northern Alberta are digging at a faster pace into oil-soaked sand and loading it onto huge trucks. After passing through crushers, the sand is mixed with hot water and moved by slurry pipeline to a plant where the bitumen is extracted. 

The basic separation process dates back to 1920, when Karl A. Clark, an Alberta scientist, shoveled oil sand into his family washing machine, where it was mixed with hot water and caustic soda, causing the bitumen to float to the surface. 

In recent years, investors' negative views about oil from tar sands have largely faded as technological improvements have pushed production costs down sharply. When the construction cranes come down next summer from the upgrading units of the Millennium Project of Suncor Energy, costs will be around $9 a barrel, roughly one quarter of 1970's levels, according to Rick George, Suncor's hard-driving, Colorado- raised chief executive. Mr. George has set a goal of $5.50 a barrel, aiming to make his company the lowest-cost oil producer in North America. 

While prices vary by quality, a barrel or 42 gallons of crude oil sells today on average for about $30. 

Planning to nearly quadruple production to about 425,000 barrels a day by 2008, Suncor is in the midst of a $2.3 billion investment program $1.85 billion for Millennium and $500 million for Firebag, a project that involves injecting steam into deep sand deposits to produce oil. 

Next door, Syncrude Canada plans to spend $5.3 billion over 10 years to retain its position as the world's largest oil sands producer. By 2008, the Syncrude Project, a Canadian-American joint venture, expects to produce 465,000 barrels a day, more than double its 2000 levels. 

Although past oil price plunges caused companies here to shelve some earlier plans, companies now say they can make a profit even if oil prices return to the low teens. 

"In the mid-1980's, when crude oil prices hit the tank, we focused on producing oil at lower costs," said Jim E. Carter, president and chief operating officer of Syncrude Canada. "We can make money at $10 a barrel." 

Money is being saved by using gigantic trucks in mining operations, by moving half-processed oil sand to upgrading plants in heated slurry pipes, and by using steam injection to extract oil from deposits too deep for open pit mines. 

"The economics of Alberta's oil sands are looking pretty robust," Martin Meyers, global oil research director for the consulting firm Cambridge Energy Research Associates, said in a telephone interview from its Massachusetts headquarters. "Over time, that resource base is just guaranteed to attract development dollars." 

With much of North America's low-hanging energy fruit already culled, mining existing oil sand deposits is now less expensive than searching for new oil fields and pumping it from deep-water platforms off the coasts of Newfoundland or Louisiana. 

"There is no exploration risk," said Gerald J. Kepes, a managing director of the Petroleum Finance Company, a consulting firm based in Washington. "These are basically mining operations." 

While high prices have helped get many projects off the ground lately, the labor shortage and the uneven record of the new technology of steam injection have caused some companies to hold back. Of the $22 billion announced for 58 projects through 2010, about $10 billion still lacks final approval from company directors. 

Companies have also announced investments of $1.2 billion to improve pipelines leading south to central Alberta refineries and to United States markets. 

With easy American market access, guaranteed delivery by pipeline and minimal exploration costs, the roster of multinationals investing here includes Gulf Oil, Exxon Mobil, the Royal Dutch/Shell Group and Chevron. During last summer's World Petroleum Congress in Calgary, one of the most popular field trips for visiting oil executives was a tour of the tar sands around here. 

Mobil Oil Canada, a subsidiary of Exxon Mobil, has already begun work on a nearby $2 billion project that hopes to produce 160,000 barrels a day, starting in 2006. A consortium of Shell Canada, Chevron Canada Resources and Western Oil Sands is planning to invest $3 billion in another project. By the end of the decade, production is supposed to hit 155,000 barrels a day. 

In another major venture, True- North Energy, a Canadian unit of Koch Industries, is investing $1.3 billion to produce 190,000 barrels a day by 2008. 

And about 35 miles south of here, Gulf Canada Resources is operating a pilot project for oil sands extraction using steam. Next year, a decision is to be made whether to invest $600 million to produce 25,000 barrels a day by the end of the decade. 

While 80 percent of the announced investments are for the Athabasca Deposit, a region that immediately surrounds this city of 42,000 people, investments worth $3.3 billion have also been announced for 19 projects at the Cold Lake Deposit, about 100 miles south. 

Over all, oil sands production is scheduled to triple during this decade. With conventional production from western Canadian oil wells expected to keep falling, the contribution of Alberta's oil sands is to jump from about a third of Canada's oil today to about half in 2007. 

While the oil companies are racing ahead, though, Alberta's oil sands have also drawn the attention of environmental groups. 

Last March, five protesters from Greenpeace locked themselves to a 400-ton piece of refining equipment that Suncor was planning to move from Edmonton, Alberta's provincial capital, to the Millennium Project. Beaten by subfreezing temperatures, the protesters eventually relented, but not before they had unfurled a banner accusing the oil companies of being "Climate Villains." 

Greenpeace is calling for "a halt to the expansion of all tar sands projects," Cim Nunn, a spokesman for Greenpeace Canada, said from Toronto. "If these projects are allowed to proceed, over the next 10 years greenhouse gas emissions from tar sands will make up 25 percent for all of Canada. We urge that those investments be sunk into renewable energy sources." 

The environmentalist critique is twofold. First, they say, the energy- intensive mining process here spews vast volumes of carbon dioxide and sulphur dioxide into the atmosphere, contributing to gases that scientists say play a big role in global warming. Syncrude, for example, maintains an industrial power plant here capable of providing enough electricity for a city of 400,000 people. 

Second, the environmentalists argue, the $22 billion invested here represents an enormous step in the wrong direction, prolonging North America's addiction to oil. 

On the first point, oil company executives say that they believe they share common ground with their environmental critics. 

By cutting energy used in production, they cut costs. From 1990 to 2008, measured per barrel, energy use in mining and refining is to be cut 35 percent and carbon dioxide cut 45 percent, according to a study by Athabasca Oil Sands Developers, the industry-supported group. From 1995 to 2008, sulphur dioxide emissions will be cut in half, the group calculated, despite a tripling of output. 

While Suncor is investing millions of dollars in researching future energy alternatives, the serious billions are still devoted to oil. Over the next 20 years, world oil consumption is expected to increase 50 percent, to about 115 million barrels a day. 

"We don't know if oil is going to be in vogue 50 years down the road," said Mr. Carter, the Syncrude president. "For Canada's benefit, we should develop it now. If it is replaced with something else in 50 years, this would be just dirt in the ground."