New Oil Sands Advances Portend Possible Imports Shift

ConocoPhillips' Surmount project, the latest in huge expansion of Alberta's synthetic crude supply picture; producers there hope to help ease U.S. dependence on oil imports from politically unstable regions.

ConocoPhillips expects that its ongoing campaign to rid itself of lower-margin assets will total about US$3.5 billion by year's end, and it's planning another $1 billion in sell-offs for next year.

The company, formed last year in the $15.2 billion merger between Conoco Inc. and Phillips Petroleum, hopes to ditch much of the sizeable combined debt load that came with the merger. Meanwhile, though currently the nation's largest refiner, ConocoPhillips (CP) is moving deliberately toward expanding its role in oil and gas exploration and production, its predecessors' original core competency. The company has extensive E&P assets around the world, but its Western Hemisphere holdings rank among the highest on its list, with extensive producing properties on Alaska's North Slope and in the lower 48 states, and major participation in both crude oil and Orinoco Tar Belt bitumen production and upgrading in Venezuela. Much of the Venezuelan bitumen is blended and shipped to CP's southern U.S. refineries.

However, CP also is among a few well-heeled U.S. majors and large independents who are making significant investments in what is becoming a chief source of this country's petroleum and products imports--Western Canada's vast oil sands and heavy oil reserves, which make up a majority of its total oil production. Upgraded into synthetic crude oil, Canadian oil sands bitumen is a definite boon to this country in the form of a politically stable import source. In fact, unconventional oil sources seem to be overtaking traditional ones as a part of the U.S. import mix these days.

The volume of molasses-thick bitumen reserves in Alberta is exceptional. The province's energy ministry estimates that using existing technology, Alberta ultimately could produce a total of up to 175 billion bbls. of bitumen. With rapidly emerging technologies, they add, that could be nearly doubled to some 315 billion bbls. With reserves like that, Canada stands to rival any Middle Eastern country--or any OPEC country, for that matter--with its potential to deliver uninterrupted oil to U.S. refineries, provided world oil prices stay high and the price differential between conventional crude and the cheaper synthetic oil remains ample.

In recent times, Canada's crude oil and products exports to the U.S. have surpassed even those from Saudi Arabia. It started in 2002, and it's continuing through 2003. According to American Petroleum Institute (API) figures, from January through August of this year, estimated Canadian monthly crude oil and products imports averaged 2.019 million b/d. That compares with a monthly average of 1.873 million b/d of light crude and products from Saudi Arabia during the same period (Mexico, which produces a heavy crude oil, was a close third with 1.588 million b/d, and Venezuela, another major producer of heavy oil and upgraded bitumen, averaged 1.264 million b/d).

But back to ConocoPhillips. Earlier this month, the company's board approved its participation in the $1.1 billion Surmount oil sands project, located about 37 miles (60 km) southeast of Fort McMurray, Alberta. Estimated recoverable bitumen reserves at Surmount are some 5 billion bbls.

With a 43.5% stake, CP will be operator by dint of its acquisition in 2001 of Gulf Canada Resources, which held the Surmount leases for several years and had begun a pilot project. The other Surmount partners are Oklahoma City-based Devon Energy and the French company TotalFinaElf, with 43.5% and 13% interest, respectively.

As planned, facilities construction will begin early next year, with production starting in 2006 at a modest 27,000 b/d of oil sands bitumen, with phase-ups to more than 100,000 b/d by 2012. Neither Devon nor TotalFinaElf have approved their participation, though both are expected to okay funding through the 27,000-b/d stage.

The Surmount project is only one--and a smaller one, at that--of a host of both old and new oil sands extraction/upgrading ventures in Canada's Athabasca oil sands region, which covers much of northeastern Alberta. Canadian companies like Suncor, Imperial Oil, EnCana, Nexen, Canadian Natural Resources, and Petro-Canada, among others, dominate the area's tar sands and heavy oil development. And Canadian subsidiaries of other major companies like Shell and ChevronTexaco also are heavily involved. However, several multi-company ventures have a number of Canadian units of U.S. companies as participants. Syncrude Canada, for example, the world's largest oil sands producer, includes CP among its joint-venture partners. Also, in addition to participation at Surmount, Devon has a separate, smaller oil sands development in the area.

And combined, all participants' capital outlays are staggering in size. According to the Alberta energy ministry, from 1996 to 2012, total oil sands industry investment in new and sustaining projects could reach some US$71.8 billion (C$93.5 billion). As of last month (October 2003), the spending already had totaled some $17.3 billion (C$22.5 billion).

Initially, oil sands were mined from the surface and fed into washing/agitation process to separate the bitumen from the tailings. First practiced in the 1960s, oil sands mining/extraction methods have since been streamlined and improved, making them much less capital-intensive. After extraction, the bitumen is diluted with lighter liquids (usually gas condensate) for pipeline transmission to special upgrading facilities. From there, it moves to refineries both in Canada and in the western tier of U.S. states.

More recently, however, the bitumen has been extracted in situ using thermal recovery methods, first with vertical steam injection/production wells and, more recently, with variations of the steam-assisted gravity drainage (SAGD) process. This technology advance has done wonders for the industry, since the cost is much lower than mining and allows companies to reach deeply seated oil sands deposits.

The SAGD process employs horizontal wells, one above the other, with the upper well injecting steam to heat the bitumen, allowing it to drain into the lower, producing well. The SAGD process reportedly will be used at the Surmount project. Even more recently, however, companies have begun to experiment with what's generally known as the Vapex process, in which solvent is heated with steam and injected into the oil sands to dilute the bitumen for drainage into production wells. Devon Energy, in fact, is exploring the use of vaporized solvent as an alternative to steam.

Downstream, companies build upgraders to process the bitumen into synthetic crude. Some are placed near mines and SAGD operations while others are being built in southern Alberta and Saskatchewan so that the syncrude can be moved more quickly into pipelines to local or northern tier refineries. But refineries in the U.S. northern tier and Gulf Coast states already are running at capacity, and many other U.S. plants would need sizeable investments in new coking equipment, which takes several years to install, to make them capable of processing the growing supply of bitumen-based syncrude.

So, Canada's oil sands bitumen producers are investigating a stopgap measure that might allow U.S. refiners to process their product more quickly as they add the needed coking equipment.

Just this past week, Real Cusson, vice president of Canadian Natural Resources, announced that Canadian producers are experimenting with a half-and-half blend of bitumen and synthetic crude itself. Cusson said this blend, which they call "synbit," has properties similar to medium sour crude oil imported from Saudi Arabia and Venezuela, much of which U.S. Middle Western refineries process into gasoline and other products.

"We have to move our oil to existing refineries and we'll do so by giving them feedstock they can process without massive upgrading of their refineries, and priced appropriately," Cusson told Reuters News Service. "As long as (a refiner) gets the same value out of that barrel of oil as he does from a foreign barrel, then we believe he will prefer the more reliable Canadian barrel because the supply route is a whole lot shorter."

Northern tier refiners already are testing the synbit, he said, which can be blended easily in Alberta and piped to the U.S. And while the formula is still being tinkered with, Canadian producers believe it will be ideal not only for Midwest plants, but for southern and West Coast refineries, as well.

So, there are more and more indications that synthetic crude made from oil sands bitumen could be a very viable means by which the U.S. could disengage itself from dependence on OPEC imports, particularly those from areas with political problems like the Middle East, West Africa, and South and Central America.