In February, 2010, Nick Olds of ConocoPhillips visited The University of Texas at Austin to talk to us about the oil that is being extracted from the oil sands in Alberta, Canada. Nick is the Senior Vice President, Oil Sands, for ConocoPhillips Canada.
In addition to providing us with access to his slides from the talk, he has graciously agreed to answer some of my questions:
How much oil is currently being produced from oil sands in Alberta? Can you give me a sense of the total available reserves from oil sands in Canada? Are there other areas in the world that have significant unexploited oil sands?
The oil sands are an enormous resource. Most of the oil sands of Canada are located in three major deposits in northern Alberta. These are the Athabasca-Wabiskaw oil sands, the Cold Lake deposits and the Peace River deposits of Alberta. Between these three resources, there is approximately 1.75 trillion barrels of bitumen in place. The Alberta oil sand deposits contain at least 85% of the world’s reserves of natural bitumen (representing 40% of the combined crude bitumen and extra-heavy crude oil reserves in the world). That’s a lot of oil, and probably the largest hydrocarbon deposit we know about.
There are several other similar deposits in North America and Venezuela. In addition to the Alberta oil sands, there are major oil sands deposits on Melville Island in the Canadian Arctic islands which are unlikely to see commercial production in the foreseeable future. In the United States, oil sands resources are primarily concentrated in eastern Utah. These comprise a total of 32 billion barrels of oil (known and potential) in eight major deposits in Utah. Oil is not currently produced from oil sands on a significant commercial level in the United States.
There are also deposits farther south. The Orinoco oil deposit located in eastern Venezuela, north of the Orinoco River, vies with the Canadian oil sands for the largest known accumulation of bitumen in the world.
In your presentation you describe two basic technological processes for extracting oil sands: mining-like operations that dig up the oil sands and technologies like steam assisted gravity drainage (SAGD) that heat the oil sands in situ and then extract them through a production well. It is my understanding that ConocoPhillips recently shifted its focus to SAGD. Was this decision related to costs? Environmental impacts? Do you see any new technologies in the future that will make oil sands even more attractive from an economic or technological perspective?
Our oil sands portfolio has always been heavily weighted towards SAGD rather than mining, largely because our oil sands deposits are very deep. We had a small interest in a mining company until earlier this year that we divested because it made business sense to do so. It also enabled us to focus our attention on the rest of our portfolio, which will be developed using in-situ technology. Currently SAGD is the only commercially viable method of in-situ production.
On the surface SAGD recovery looks much like conventional oil recovery, but what happens below the surface is quite different.
The concept of using steam to assist with heavy oil recovery is not new. As an example, steam floods have been used as an enhanced recovery method in California since the 1960s. What is new is that the SAGD process uses gravity and the pressure of the steam to drain the oil and there’s a complex water treatment and water recycling process that occurs. We target to recycle 90% of the water to make more steam to put back in the ground.
There is definitely a large opportunity for technological advancement for SAGD. We are planning to spend over $300 million over the next five years to progress heavy oil technology, a large portion of which will be dedicated to our oil sands business. Our technology program is focused on reducing environmental impacts while improving economics. One of the technologies we’re testing right now is insulated tubing. Insulated tubing reduces heat loss, and therefore reduces greenhouse gas emissions and water use because less steam needs to be generated per barrel of oil. That’s one example of many different technologies we’re looking at for application to current and future projects.
My understanding is that it is easier to both increase and decrease the production of oil from oil sands, at least in comparison to the production of conventional oil that is produced in the Gulf. Is this correct? For example, how quickly was production increased in the 2006-2008 period when oil prices were rising, and to what extent was production decreased when oil prices collapsed at the end of 2008?
SAGD is a complex process. It is not easy to increase or decrease the production of oil sands from a SAGD facility, especially in comparison to conventional oil development.
In the SAGD process, we drill two horizontal wells into the ground one on top of the other and then pump steam into the top well. The steam rises and heats up the oil to a point where it can flow into the bottom well as an oil and hot water mixture. We then produce the oil and water mixture to the surface. This sounds like a quick process, but it can take months for the steam to heat up the oil to the temperature needed for it to flow. For example, in our Surmont Phase 1 facility, we first injected steam into the ground in July 2007 and we saw our first oil production in October of that year. It took about three months for us to get from first steam to first production.
Because of front end costs involved in developing and operating a SAGD project, you need to invest a lot of money for many years before you even start to get the bitumen out of the ground. It can take about 10 years to get a SAGD project from conception to operation. Shutting down or slowing down production at a SAGD facility would mean potentially losing the initial financial and operational investment of the steam and heat that is already underground.
As well, there are operational and safety risks to keep in mind. The winters are cold in northern Alberta, so we need to keep an eye on the temperature and movement of our liquids within the pipelines to ensure they don’t freeze. Shutting down or slowing down production can have an effect on these balances as well.
With these considerations in mind, we prefer to run our facilities with a focus on our long-term commitments to the oil sands. The operations of our oil sands projects were steady during the economic downturn. We did slow down the pace some of our future oil sands development and construction plans during this time to maintain some flexibility in our plans in case we needed to adjust them in response to the economy, global financial markets and oil prices.
Of course, if there were a safety or environmental reason that required the facility to stop production there are safeguards in place to make that happen.
I understand that producing oil from oil sands is quite expensive, and that your exact production costs are proprietary. However, can you give us some ballpark estimates? What I would really find useful is a comparison between the costs of oil from oil sands and the cost of extracting oil from deep water in the Gulf, or alternatively, really deep water off the coast of Brazil. If we see a moratorium on deep water drilling can this be economically offset by extracting more oil from oil sands?
We don’t speak about the capital costs or profitability on a project-by-project basis, partially because it’s a very complex. It’s misleading to quote one number for costs, breakeven prices or profitability because the profitability of any one project relies on several fluctuating factors – natural gas prices, original capital investment, labour costs, royalties, the cost of carbon, market demand and the light-heavy oil differential. I’ve seen estimates by different analysts that provide this comparison but I can’t provide it for you.
What I will say about the oil sands is they represent a safe and secure resource that is in close proximity to the United States – Canada’s top export market and a net importer of oil.
I have heard a lot about the impact of oil sands on the environment. My impression is that to a large extent the disturbance associated with the operation can, and will be, cleaned up, but there are still questions about the carbon footprint of oil extracted from oil sands and the use of water. In the not too distant future, we are likely to put a substantial cost of carbon emissions, and water is likely to be much more expensive. Do we expect oil from oil sands to be economically viable in such a scenario?
We believe the oil sands can be developed responsibly and are working hard to minimize the impact of our operations on the environment. Right now, we’re innovating ways to reduce our land, water and air impacts. Take land, for example. We just piloted a new aggressive reclamation program we call Faster Forests. We give forests a head start by planting trees on areas we’ve disturbed, which is a step above traditional reclamation processes. Since 2009, ConocoPhillips Canada has planted over 130,000 trees at our Surmont project.
We also have a heavy focus on oil sands technology development. In fact, we’re planning to spend over $300 million on heavy oil technology over the next five years. We think we can find a balance between delivering the energy we need, managing our environmental impact and benefiting the economy.
SAGD technology is a relatively new technology, only about a decade old in terms of commercial application of it, and we expect to see it evolve in the future to become even more efficient and to have an even smaller environmental footprint. Some of the facts of SAGD production are as follows:
• Water – SAGD producers, on average, recycle 90% of their water.
• Land – SAGD production looks very similar to conventional oil production. In fact, it has
a smaller surface footprint than some forms of conventional oil production.
• Air – The greenhouse gases produced in the production of a SAGD barrel of oil are about 5 to 15% higher than those produced in the production of the average barrel of oil consumed in the United States.
I can’t speak for all other members of industry, but I know we’re focusing our technology program on reducing our water use, managing greenhouse gases, reducing our land footprint, and improving our economics and efficiency.
We believe a technology investment will allow us to continue developing this resource in a responsible, safe and economically feasible way. We’ll find ways to recover the resource more efficiently and cost effectively over time. We’re an industry of bright and innovative people and I have no doubt we’ll rise to meet this challenge.
The oil sands are concentrated in a remote area with little infrastructure or local workforce. Further, some of the sites are on First Nations land. Can you comment on how these factors complicate oil sands production and how ConocoPhillips is mitigating these problems?
In the oil sands area, many of our neighbours are Aboriginal peoples and we work with them through a community consultation process to understand local issues and how our projects may impact their communities.
Additionally, we collaborate with First Nations in identifying important areas. These areas may have historical value or be important for maintaining a traditional way of life.
We also work with them to create local benefits from our projects. We place a high priority on purchasing goods and services locally and give local and Aboriginal contractors and suppliers the opportunity to participate in projects through a competitive bid process.
In addition to economic benefits, we are developing programs to support youth development. This series of programs, collectively called Gen Y: We Care, provides youth with development opportunities targeting areas such as self-esteem and leadership.
We are continuously working with the community organizations, governments, communities, health and safety, industry and environment professionals in the region to ensure that there is mutual benefit in the development of our oil sands projects. It is an ongoing process.