Canada’s Oil Sands

Advancing activity in the west

By all accounts, Canada’s oil sands have contributed to the growth of the national economy, currently producing about one million barrels of oil per day, and providing many in the west with employment. Though many environmental groups say that all of that production, and growth, comes at the expense of Canada’s environmental future, it is important to recognize the positive contribution the oil sands provide—especially post-recession.

When we spoke to Chad Dust, Executive Vice-President of Finance and Business Development of junior developer Alberta Oilsands Inc. (AOS) in the fall of 2008, it was clear that Alberta’s oil sands provide the lifeblood of the west. Dust told us that the oil sands in Alberta “are a massive resource, and entities all over the world have come to Canada and spent millions trying to buy land and develop the region.” Indeed, Canada’s oil sand deposits contain upwards of 173 billion barrels of economically viable oil, their size second only to Saudi Arabia.

Companies flock to the region to exploit oil reserves, and by 2020, the country should see production grow to almost four million barrels per day. According to the Canadian Association of Petroleum Producers (CAPP): “There is the potential for over 100 years of production.”

A powerful resource

In Alberta alone, there are three deposits of oil sands. The largest is near Fort McMurray, and there are two others close to Peace River and Cold Lake—together there are now more than 20 active mining and in-situ oil sands projects in these areas—and investment keeps on coming. Oil sands are on Canadian soil, and owned by Canadians through the government, so there is every reason for Canada to invest in its own resource.

According to the Canadian Manufacturers and Exporters (CME), national oil sands development will create more than $1 trillion of economic value over the next decade. Governments across the country are rallying to increase development, recognizing that the opportunity for investment has never been greater.

Ontario’s Minister of Economic Development and Trade Sandra Pupatello has recently been quoted supporting development, and Canada’s economy, saying that the Ontario Ministry “continues to support Ontario businesses in their bid to expand and be more competitive [in oil], and we are working together with Alberta to strengthen our mutual economies.”

The green issue

The current landscape for development in Alberta’s oil sands is a relatively safe one, however, companies hoping to increase development over the next few years must continually be aware and be flexible as they navigate increased regulation. Despite negative press, the smallest through to the biggest oil companies are working to improve environmental conditions—especially those in Canada’s backyard.

On April 5, Imperial Petroleum announced the formation of a new company called Arrakis Oil Recovery LLC for the development of a new oil sands recovery process to recover bitumen from tar and oil sands. The company said it will own 33.3 per cent interest in the new enterprise along with two other partners. But the real story here is the technology that will be used—which is meant to reduce environmental risk. The process is a non-thermal, mechanical land chemical closed-loop process to recover bitumen, and the chemical used in the process is non-toxic and biodegradable.

President Jeffrey T. Wilson of Imperial was quoted in a statement saying that the company believes that the “technology developed and licensed to Arrakis is the most advanced, cost-effective and environmentally friendly processing technology available for recovering bitumen from tar and oil sands. The process operates without hot water or steam and without any solvents, either hydrocarbon or otherwise, so there are no emissions issues. The process produces a clean sand residue while separating the bitumen in an eco-friendly manner.” He added that not only is the risk to the environment minimized, but operating costs are reduced—representing a win-win for the company and the areas they plan to operate in. Wilson added that the process has already been pilot tested by the company’s research facilities and that Imperial believes they “are very fortunate to have the opportunity to bring this revolutionary technology to the marketplace.”

Imperial’s commitment to development, and the environment, shows a new strategy to help grow the oil sands industry—with Canada’s future in mind.

Developing safely

With the public eyes on environmental risk, there is no reason for developers not to make sure that technology, processes, and development move forward, and improve so that ultimately the economic benefits of such a large resource can continue to be realized.

Just two weeks ago, Royal Dutch Shell defended its decision to expand investment in the Athabasca oil sands, after controversy arose over how much disclosure would be required with regards to the increased development. According to reports, Shell recommended shareholders vote against a resolution that would see increased disclosure about its activities in the oil sands. The campaigner in the dispute demanded that Shell and BP disclose oil price assumptions, demand, environmental legislation, and legal and reputational risks—and fundamentally argued that investing in the oil sands is environmentally damaging. However, both Shell and BP have said that any kind of development or increased activity is closely monitored, and Shell insisted that increased disclosure would only delay production and “duplicate efforts.” The company has said it has already considered environmental and eocnomic factors—as any company in the oil sands is expected to do. Shareholders were due to vote on the resolution on April 15.

In a statement, Shell said that “except for limited commercially sensitive information, all the information requested about oil sands has already been disclosed during the last few years, including the publication of the oil sands report last month.” Shell’s numbers look good for production over the next two years: 2.5 per cent of the company’s production comes from Athabasca, and that will increase to 4 per cent and operations increase.

Back in the black

Negative press is certainly not diminishing the level of production and economic stability in the oil sands. Alberta saw a flurry of M&A activity through the recession, and there is no reason to suspect that that won’t continue. Since only February, the amount of M&As and JVs have been notable.

In addition to the Imperial deal, Flint Energy Services bought Paintearth Energy Services issues shares for about $7.3 million two weeks ago. Tudor conducted a reverse take-over on April 1, where the company entered into a binding letter agreement with Marzcorp whereby gets all outstanding Marzcorp shares.
Niko acquired Voyager Energy in March, and PetroBakken acquired Rondo the same month.

International investment is only going to pick up. Although it will take until 2018 for China’s state-owned energy organizations to see production from the oil sands (as current infrastructure doesn’t support logistics yet), reports are surfacing saying that China is prepared to spend billions to make development happen. Sinopec announed recently that it would buy a nine per cent stake in Syncrude (the world’s largest oil sands project) for US$4.65 billion. This would represent China’s largest investment thus far in the oil sands. Economists speculate that China’s early investment to secure oil is a strategic move, and will enable the country to take advantage of longer-term contracts securing resources. PetroChina also invested in projects run by Athabasca Oil Sands Corp., and Sinopec previously acquired a 40 per cent interest in Total E&P Canada’s Northern Lights project in 2008. This pattern will only continue into the decade.

As demand increases, there will be more opportunity to develop and invest in the oil sands—and Canadian players are acutely aware of this. Clearly, the opportunities are abundant within the Athabasca region, and though regulation may slow things down, it’s in Canada’s best interest economically to proceed. As stated by CAPP: “Canada’s energy future lies in the oil sands. Our country possesses approximately 175 billion barrels of oil that can be recovered with today’s technology. Of that number, 170 billion are located in the oil sands.”

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