Royal Dutch Shell Group .com

THE LONDON TIMES: Can Shell's Canadian sands yield more oil than the Saudi deserts?: “Transforming black sand into oil is costly and dirty, but there is plenty of it about” ( 5 March 05


By Carl Mortished

March 05, 2005


Transforming black sand into oil is costly and dirty, but there is plenty of it about


LIKE some creature from a Jurassic swamp, the Bucyrus shovel, seven storeys tall, lunges forward and takes a huge mouthful — 100 tonnes of sand, bitumen and rubble — swings about and drops its load into the back of a truck. Four scoops is a full load and the truck speeds off with its cargo of valuable muck, destined to become fuel for petrol pumps across North America.


Shell’s Muskeg River Mine in the Canadian province of Alberta boasts the biggest boys’ toys in the world and they are currently operating at full throttle. The deep winter freeze is good, creating a hard surface for the truck’s giant wheels, each weighing almost 5 tons. But it is the high price of oil that is keeping the mine frantic, digging enough bitumen-soaked sand to convert into 200,000 barrels per day (bpd) of synthetic crude oil.


Neil Camarta, the head of the Athabasca Oil Sands Project is delighted about the sudden surge in the daily production rate above its 155,000 bpd capacity. It is reassuring after a weak performance in the final quarter’s average in 2004, when a fire at the Edmonton plant, which converts bitumen into crude oil, set back temporarily Shell’s ambitions to make black gold from sand.


Shell’s ambitions are as big as the giant trucks and shovels in the Muskeg River Mine. The oil company has invested C$6 billion (£2.5 billion) in Alberta to extract an energy resource that was festering in its bottom drawer, unused for 40 years. Shell was granted lease 13 on the shores of the Athabasca River in the late 1950s, but for decades no one was interested in oil sands — the sticky sulphurous bitumen is dirty and costly to extract. The permit was due to expire in


1998, but Shell begged Alberta’s energy minister for an extension and got five years. In 1999, the sub-$15 oil price did not cover the then C$30 per barrel cost of mining and processing bitumen. But Camarta managed to convince his colleagues that there was a future in the vast tar deposits, enough of a future to invest C$6 billion, just to get started.


“Altogether, we have 10 billion barrels of oil in place, with 6 billion recoverable,” Camarta says. “That would give us 30 years’ production at 500,000 barrels per day.” To get there, Shell needs to invest a further C$12 billion in three phases over the next decade.


Even Shell’s vast resource is a fraction of the size of the total energy reservoir lying just a few metres below the scrubby trees and muskeg, a sort of frozen swamp that stretches north to the Arctic Circle. The Athabasca oil sands are the largest known petroleum deposit on the planet and Camarta reckons they could be producing 3 million barrels per day within ten to 15 years, more than leading Opec producers, such as Kuwait, Nigeria and Venezuela.


Alberta is dinosaur country, a playground for palaeontologists, and the oil sands do give up the occasional fossil, says Camarta. The bitumen originally formed as crude oil, algae and microscopic creatures cooked over hundreds of millions of years in rocks under huge pressure. But 50 million years ago the oil migrated to sandstone near the surface where bacteria nibbled away at the lighter oil, reducing it to bitumen.


What the bacteria left behind is still of dinosaur dimensions. The Alberta Energy and Utilities Board reckons that there are about 1.5 trillion barrels of bitumen in the Athabasca deposit and two smaller sites at Cold Lake and Peace River, a total resource that is double the proven oil reserves of the Middle East.


Not all the bitumen is accessible and, given existing technology, the government reckons only 300 billion barrels is currently available for extraction, but it is a figure that still exceeds the proven reserves of Saudi Arabia. “Enough to keep North America going for 40 years,” says Camarta.


Enough to excite investors. Improving prospects for oil sands have energised the share prices of Canadian companies with oil sands operations, including Suncor and Syncrude, which together are producing some 500,000 barrels. Since January, stock in Shell Canada, the 80 per cent-owned subsidiary of the Anglo-Dutch multinational, has risen 18 per cent, and this week Petro-Canada bid C$300 million for 60 per cent of UTS Energy and took on a C$2.9 billion commitment to develop Fort Hills, an oil sands project on the Athabasca River, north of Shell’s licence.


Lured by the smell of bitumen and desperate for new sources of energy, China’s state oil company is sifting the sands.


A rumoured investment by the Chinese in a C$2.5 billion pipeline from Edmonton to Prince Rupert on the Pacific Coast prompted cries of alarm from Canada’s southern neighbour, where energy policy planners saw Alberta’s precious resource being diverted to Asia.


More investment is needed, says Camarta. Some C$60 billion will be needed to bring output up to 3 million barrels per day.


Oil sands are the biggest projects in the world, capital- intensive, energy-intensive and carbon-intensive, the latter two being a source of continuing controversy for Shell.


Hot water is used to strip the bitumen from the sand and for every 100 barrels produced from Shell’s Athabasca project, 15 barrels are consumed in gas. Environmentalists question whether burning a clean fuel to transform a dirty fuel makes sense.


The answer is that it makes sense when the price of a barrel of US light crude is more than $50 and politicians are sweating with energy insecurity. Shell has cut back the cost of producing a barrel of synthetic crude to C$18 and its upgrader plant in Edmonton transforms carbon-heavy bitumen into a light, sulphur-free crude that sells at a $2 premium to the US crude benchmark price.


Costs are still a problem and Camarta is fretting about the shortage of skilled labour. Shell has been scouting Venezuela for welders to work on its expansion projects. However, the Athabasca oil sands have one final trump card. “There is no exploration cost,” Camarta says. “We know the oil’s there.”

Click here to return to Royal Dutch Shell Group .com