Published on 04/11/2006

Canadian oil production comes mainly from three different sources: the Western Canada Sedimentary Basin; the oil sands deposits of northern Alberta; and offshore fields.

Oil sands contain deposits of bitumen, a heavy, viscous oil.

Oil sands contain deposits of bitumen, a heavy, viscous oil. There are two methods currently used to extract bitumen from the ground: open pit mining and in situ (Latin for “in place”). Open pit mining resembles conventional mining techniques and is effective in extracting oil sands deposits near the surface. However, the bulk of Canada’s estimated oil sands deposits (80 percent) are too deep below the surface to use open pit mining.

The second method, in situ can reach these deeper deposits. In situ extraction involves the use of steam to separate bitumen from the surrounding sands and lift it to collection pools near the surface. To date, Canadian oil sands producers have employed each method almost equally, but future production will likely shift to emphasize in situ extraction. Once extracted, oil sands producers must add lighter hydrocarbons to the bitumen to allow it to flow through pipelines. Upgraders then process the bitumen into “synthetic crude.” Some oil sands projects have integrated upgrading capacity, while others must send their raw bitumen production to another facility.

The Athabasca oil sands deposit, in northern Alberta, is one of largest oil sands deposits in the world. There are also sizable oil sands deposits on Melville Island in the Canadian Arctic, and two smaller deposits in northern Alberta near Cold Lake and Peace River.

All of the largest oil sands projects in the Athabasca area utilize open-pit mining. The Syncrude Project, operated by Canadian Oil Sands Limited, produced 280,000 bbl/d in 2004. The Suncor’s project has a total production capacity of 280,000 bbl/d, though a fire in 2005 caused a prolonged shutdown of the operation, with 2005 production averaging only 171,000 bbl/d. The Athabasca Oil Sands Project (AOSP), operated by Shell Canada, began production in 2002 and currently has a capacity of 155,000 bbl/d. AOSP suffered from a fire in January 2003 that shut production down for three months.

A relatively new in situ technology called steam-assisted gravity drainage (SAGD).

The in situ oil sands projects in the Athabasca area are smaller than their mining counterparts. In 2004, Suncor began operations at its Firebag project, which utilizes a relatively new in situ technology called steam-assisted gravity drainage (SAGD). Firebag had a production capacity of 35,000 bbl/d in 2005. Other SAGD projects include Petro-Canada’s MacKay River (30,000 bbl/d) and Dover (1,400 bbl/d); EnCana’s Foster Creek (40,000 bbl/d), and Christina Lake (10,000 bbl/d); and Nexen’s Athabasca (1,300 bbl/d) and Long Lake (2,500 bbl/d). Petro-Canada’s Dover facility also contains a demonstration project of a new in situ technology called vapor extraction (VAPEX). VAPEX utilizes solvents, such as butane, to extract raw bitumen, rather than steam, which could allow significant cost savings for in situ operators.

The Athabasca deposit is also the focus of most planned expansions of the oil sands industry. Major projects scheduled for start-up in 2006-2007 include ConocoPhillips’ Surmount (25,000 bbl/d) and Total’s Joslyn (10,000 bbl/d). Petro-Canada plans to bring 50,000 bb/d of mining capacity online by 2009 at its Fort Hills oil sands project In February 2005, Canadian Natural Resources Limited (CNRL) decided to pursue its $11 billion Horizon project, which could produce 212,000 bbl/d by 2012.

Outside of the Athabasca deposit, the largest oil sands project is Imperial Oil’s Cold Lake in situ facility, with a capacity of 140,000 bbl/d. Also in the Cold Lake area, CNRL operates Primrose (50,000 bbl/d), while Husky plans to bring its 30,000-bbl/d Tucker project online in 2006. In the Peace River deposit, Shell Canada operates Cadotte Lake (11,000 bbl/d).

Advances in oil sands technology could reduce production costs

Despite the considerable excitement surrounding the development of Canada’s oil sands reserves, there are still several difficulties that could impede the future development of the industry.

Analysts predict that the production of synthetic crude from oil sands is only economically viable with synthetic crude prices in the $30 per barrel range. While further advances in oil sands technology could reduce production costs, it is likely that economical synthetic oil production will continue to be dependent upon high crude oil prices.

Second, the oil sands industry is heavily reliant upon water and natural gas, which is necessary in both the extraction of bitumen from oil sands and the upgrading of bitumen to synthetic oil. Even though there have been some efforts to reduce this dependence on natural gas, any increase in natural gas prices or sharp reduction in natural gas supply would have critical repercussions for the oil sands industry.

Finally, there have been reports that the oil sands boom is creating a labor shortage in Alberta’s oil industry, especially in Fort McMurray. This has led to an escalation in labor costs and construction delays due to a lack of available workers.

Source: Energy Information Administration