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Article Excerpt
The Alberta oil sands, which comprise over 170 billion barrels of proven recoverable reserves, are a resource of an order of magnitude similar to many estimates of ultimate world conventional oil reserves. Campbell Watkins maintained a long-standing emphasis on the essential economic component of any meaningful definition of the world's natural resources. The fact is that the Alberta oil sands have had a very shaky economic foundation until only recently. The intention of this paper is to examine this emerging resource from an economic perspective; one, it is hoped, similar to that which Watkins evinced, in order to fully assess the extent to which the Alberta oil sands may be regarded as being no different in any meaningful way from other oil resources.
1. INTRODUCTION
G. Campbell Watkins was, for over thirty years, the most prolific economic analyst of the Canadian petroleum industry. As such, at first glance, it may appear peculiar that he wrote relatively little about the Alberta oil sands, which at over 170 billion barrels of proven recoverable reserves, (Alberta Department of Energy website, last updated December 2005) are a resource of an order of magnitude similar to many estimates of ultimate world conventional oil reserves. Watkins' omission is not so strange when we recall his long-standing emphasis on the essential economic component of any meaningful definition of the world's natural resources. In the well-known formulation of Erich Zimmermann (1951, p.15), "Resources are not, they become." The suggestion that our use of natural resources is constrained to a greater degree by economics than by physical limits is, of course, controversial, but has had a long history of acceptance in economics going back at least as far as Barnett and Morse (1963). In a somewhat broader framework, the requirement of economic feasibility corresponds to Firey's criterion of 'gainfulness', which, along with 'possibility' (i.e., physical existence and technological capability) and 'adoptability' (i.e., cultural acceptance), define usable (or, better yet, marketable) resources (Firey, 1960, p. 37).
The fact is that the Alberta oil sands have had a very shaky economic foundation until only recently. The intention of this paper is to examine this emerging resource from an economic perspective; one, it is hoped, similar to that which Watkins evinced, in order to fully assess the extent to which the Alberta oil sands may finally be 'becoming'. The paper is divided into two main parts. Section 2 offers a brief history of the development of the oil sands and an overview of their status as an economic resource, including past production and pricing. Section 3 considers future prospects of the oil sands. Finally, Section 4 offers a brief conclusion.
2. THE TWENTIETH CENTURY: A PROMISING RESOURCE
Oil from the Alberta oil sands is often called 'non-conventional', a reference to the almost complete inability to produce the oil using conventional primary recovery techniques. Oil sands are deposits of bitumen, a molasses-like viscous oil with an API value of less than 10o that will not flow unless heated or diluted with lighter hydrocarbons (Alberta Department of Energy website, last updated December 2005). This essentially heavy hydrocarbon mix adheres to sand particles and will not flow readily through pore spaces in the reservoir. (1)
The oil sands deposits are substantially large, and are concentrated in four main areas in eastern and central Alberta which lie primarily north of Edmonton beneath 140,800 square kilometers of north-eastern Alberta (Alberta Department of Energy website, last updated December 2005).
2.1 A Brief Early History: Pre-1960
The existence of the oil sands as a hydrocarbon resource has long been known. More specifically, the surface shows along the Athabasca River were used by aboriginal groups long before the early European explorers noted the existence of the oil around 1800. (For a detailed history of the oil sands refer to Chastko, 2002 and Ferguson, 1985.) Prior to 1900, the Canadian federal government supported research that established the large size of the petroleum deposits, suggested a basic technique of water flotation for separating the oil from the sand and demonstrated the feasibility of distilling usable oil products from the heavy oil. The first half of the twentieth century saw significant government-supported research, and some subsidization of private companies in the pursuit of commercial oil sands production. By the 1930s, largely through research at the provincial government's Alberta Research Council, a basic three-stage technological approach was set out, which is still common in much oil sands production: an initial stage would strip mine bitumen-laden rock that lay near the surface; a hot water flotation process would free the bitumen from the rock; and a refining process would upgrade the bitumen from very heavy and high sulphur crude to sweet, light crude ('synthetic crude' or 'syncrude') or into specific light refined petroleum products.
While research and development externalities may have supported the involvement of the federal and provincial governments, economic viability proved elusive; transforming the physical resources into (economic) reserves continually appeared immanent. In fact (with three exceptions as discussed below) throughout the entire twentieth century, and regardless of the level of oil prices, unit costs always seemed to be marginally higher than prices. By way of example:
* In 1949 the government of Alberta commissioned Sidney Blair, who had earlier been a researcher on the oil sands at the Alberta Research Council, to write a report on the oil sands. Blair undertook a detailed examination of all the technical tasks involved in producing synthetic crude and came up with a cost estimate of $3.10 per barrel (bbl) (Blair, 1950, p.75). In 1950 Blair noted that Alberta Redwater crude delivered to the Lakehead sold for a mere $3.00/ bbl. Furthermore, as Blair's cost estimates did not appear to include capital costs, any taxes or royalties, or any formal allowance for the constant technical problems earlier abandoned pilot plants had systematically experienced, it was established that oil sands output fell just below commercial viability. Falling Alberta oil prices after 1949 offered further disincentive for production.
* In the 1980s, the proposed Alsands (or Other Six Lease Owners (OSLO)) project was expected to produce 70000 barrels per day (bbl/d) of syncrude. The operators engaged in long negotiations with the federal and provincial governments, but by 1992 work officially stopped; costs were simply too high, given world oil prices in the 1990s.
2.2 The oil Sands Resource Base
The extensive size and non-conventional nature of the oil sands allowed early estimation of the volume of oil in place. As a result, and rather unusually for the oil industry, exploration costs for oil sands projects are essentially sunk costs. At first glance, the size of the reserves and our knowledge of their existence might suggest a commonality with the oil industry in the main Middle East producing countries, a point to which we will return later.
The "Reserves Reports" of the Alberta Energy and Utilities Board (EUB, prior to 1993, the Alberta Energy Resources Conservation Board) set out estimates of the volume of oil sands' oil-in-place and outlined a criteria for determining estimates of producible volumes. Dunbar et al. (2004, Chapters 2 and 3) provide a good review of the resource characteristics of Alberta heavy oil deposits, and the production technologies currently under consideration. As noted above, the produced natural resource is bitumen, which may then be upgraded to light syncrude at a certain recovery factor. The first two commercial oil sands mining plants built in Alberta, for instance, produce a little over 0.8 of a barrel of syncrude per barrel of bitumen.
'Established reserves' (initial or remaining), are volumes known with a reasonable degree of certainty to be producible under current technologies and anticipated economic conditions. Until recently this meant that volumes recognised as reserves were restricted to projects currently in production (some widely cited statistical sources, such as OPEC and BP, still adhere to this criteria). Almost all such reserves come from large commercial projects, though small amounts may be credited to experimental pilot projects. However, since the early 2000s Alberta and Canadian statistics have accepted large volumes of oil sands resources not currently in active production as qualifying as reserves, and in 2003 the U.S. Energy Administration Information (EIA) accepted these estimates as binding. Thus, for example, BP estimated end of 2004 Canadian oil sands reserves at about 16 billion barrels, in contrast to the EIA's 174 billion.
It is also important to realize that Alberta's oil sands and heavy oil deposits are not homogeneous. The natural product is a mix of hydrocarbons, water, sand and other earth materials like clay. Among the important ways in which deposits differ are: specific gravity (some crudes are heavier than others), bitumen concentration (the proportion by weight or volume which is bitumen, ranging from 1 to 18%) and depth (where shallow deposits- usually up to 75m deep- are regarded as amenable to mining operations). Two completely different production techniques are used in the oil sands: strip mining for shallow deposits, and in situ techniques (similar to conventional heavy oil enhanced recovery schemes) for deeper sands. Deposits of intermediate depth are generally considered be the most difficult to produce since they are too deep to be mined, but shallow enough that injection fluids leak quickly to the surface.
Shortly after European discovery of...
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