PUBLISHING
Copyright © 2009 Gordon Kelly


All rights reserved. No part of this publication may be reproduced, stored in a retrieval
...
Contents
Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .vi
Prefa...
6. Mining Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105
   Syncrude . . . ...
12. Marketing Bitumen and Synthetic Crude Oil . . . . . . . . . . . . . . . . . . .227
  Canadian Markets . . . . . . . . ...
Technical Abbreviations
Metric
 Gas Volumes                                    Gas Price
   m3          cubic metres      ...
Abbreviations
AECL     Atomic Energy Canada Limited                         CHOPS   Cold Heavy Oil Production with Sand

A...
H2      Hydrogen (gas)                                         NWMP    North West Mounted Police (now RCMP)

HBC     Hudso...
Preface

T
           here are four reasons for writing this book. The foremost reason is to tell
           readers that ...
Alberta will be a source of oil for decades but it should become a leader in other
types of energy, especially hydrogen. B...
Acknowledgements

T
         here are many people I want to thank for helping me put this work to-
         gether. The fi...
1
                              Ch ap t er        On e




              Rising to the Challenge



I       t is the end o...
The Oil Sands



in a prosperous economy. It also made recommendations on how to improve
the process. Nine months ago, the...
Rising to the Challenge



      The energy industry in both provinces has made a firm commitment to
develop their oil and...
The Oil Sands



technologies if it wants to continue to be a supplier of energy to Canada. Alberta
will continue to have ...
Rising to the Challenge



dustry has not been finding replacement volumes of that magnitude for decades.
The world is rel...
The Oil Sands



especially for transportation. If we develop new sources of power before oil
runs out, there will be no h...
Rising to the Challenge



Keeping the Oil Sands Viable
The economic future of Alberta is closely linked with the oil sand...
The Oil Sands



Encouraging Better Technology
Oil sands technology is constantly improving. Many processes have already
b...
Rising to the Challenge



Keeping the Oil Sands Profitable
The province has seen a serious drop in oil sands royalties in...
The Oil Sands



wisdom of investing in future energy research. Alberta should do it again, only
this time with hydrogen a...
2
                            Ch ap t er       Tw o




            Background and History



T          he first white ma...
The Oil Sands



sands overlaid the older Devonian limestone and that they covered large areas
of the region. It would be ...
Background and History



also reported that the bitumen could be separated from the sand using water.
     By the end of ...
The Oil Sands



there was a strong rivalry between Ells and Clark and the federal and provincial
governments over the oil...
Background and History



oil sands. It is now a historic site. An aerial view is shown in Exhibit 5. In 1925,
he also bui...
The Oil Sands



                                                of modern-day Fort McMurray,
                            ...
Background and History



Sands. They, in turn, sold the plant in 1957 to Royalite (part of Imperial Oil
Ltd) who shut the...
The Oil Sands



West almost from the start. The Hudson’s Bay Company controlled and ad-
ministered all the lands from Hud...
Background and History



government split the EUB back into two groups, with the Energy Resources
Conservation Board (ERC...
The Oil Sands



      The hearing process for new projects has improved over the years. Large oil
companies cannot wait o...
Background and History



The First Oil Sands Plants
In 1962, Great Canadian Oil Sands (GCOS), with the support of the Sun...
The Oil Sands



cold. The plant averaged 2,400 m3/d (15,000 b/d) during the first year, or one-
third of design capacity....
Background and History



initially only a pilot project but proved that bitumen could be recovered from
the deeper format...
The Oil Sands



Borden ruled against the Montreal pipeline because the economics would not
support it, but he recommended...
Background and History



Yom Kippur War triggered major oil price increases in international oil from
about US$3/b to ove...
The Oil Sands by Gordon Kelly
The Oil Sands by Gordon Kelly
The Oil Sands by Gordon Kelly
The Oil Sands by Gordon Kelly
The Oil Sands by Gordon Kelly
The Oil Sands by Gordon Kelly
The Oil Sands by Gordon Kelly
The Oil Sands by Gordon Kelly
The Oil Sands by Gordon Kelly
The Oil Sands by Gordon Kelly
The Oil Sands by Gordon Kelly
The Oil Sands by Gordon Kelly
The Oil Sands by Gordon Kelly
The Oil Sands by Gordon Kelly
The Oil Sands by Gordon Kelly
The Oil Sands by Gordon Kelly
The Oil Sands by Gordon Kelly
The Oil Sands by Gordon Kelly
The Oil Sands by Gordon Kelly
The Oil Sands by Gordon Kelly
The Oil Sands by Gordon Kelly
The Oil Sands by Gordon Kelly
The Oil Sands by Gordon Kelly
The Oil Sands by Gordon Kelly
The Oil Sands by Gordon Kelly
The Oil Sands by Gordon Kelly
The Oil Sands by Gordon Kelly
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Table of Contents, sample chapters, bibliography from The Oil Sands: Canada's Path to Clean Energy? by Gordon Kelly, published by Kingsley and distributed by Fitzhenry & Whiteside

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The Oil Sands by Gordon Kelly

  1. 1. PUBLISHING
  2. 2. Copyright © 2009 Gordon Kelly All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, recording, or otherwise, without the prior written permission of the publisher, except in the case of a reviewer, who may quote brief passages in a review to print in a magazine or news- paper, or broadcast on radio or television. In the case of photocopying or other repro- graphic copying, users must obtain a licence from Access Copyright. Cover and interior design by Dean Pickup Project management by Kingsley Publishing Services www.kingsleypublishing.ca Printed in Canada by Friesens on 100% recycled paper 2009 / 1 Library and Archives Canada Cataloguing in Publication Kelly, Gordon, 1933– The oil sands : Canada's path to clean energy? / Gordon Kelly. Includes bibliographical references and index. ISBN 978-0-9784526-5-0 1. Oil sands–Environmental aspects–Alberta. 2. Oil sands–Environmental aspects–Saskatchewan. 3. Oil sands–Economic aspects–Alberta. 4. Oil sands–Economic aspects–Saskatchewan. 5. Clean energy industries–Alberta–Forecasting. I. Title. TN870.54.K45 2009 333.8'232097123 C2009-903190-6 Ordering information: www.kingsleypublishing.ca
  3. 3. Contents Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .vi Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .ix Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xi 1. Rising to the Challenge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 The Path to Clean Energy? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Where Is Oil Going? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Keeping the Oil Sands Viable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Funding Alternative Energy Research . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 2. Background and History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 Early History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 “The Board” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 The First Oil Sands Plants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 The Oil Wars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 OSLO and Husky Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 AOSTRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 Alberta Today . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 Saskatchewan Today . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37 3. The Peak Oil Debate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 The Ability to Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42 Hubbert’s Peak . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 World Demand and Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48 4. The Geology of the Oil Sands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65 The Geology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65 Athabasca . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69 Cold Lake . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70 Peace River . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71 Formation Thickness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71 Saskatchewan’s Oil Sands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72 5. The Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75 Mining Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .76 Heavy Oil Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81 Imperial Oil and Cyclic Steam Stimulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .83 Steam Assisted Gravity Drainage (SAGD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .86 The Well Drilling Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .90 SCC and SAGD Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .93 Newer Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .95 Future Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101
  4. 4. 6. Mining Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105 Syncrude . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .109 Athabasca Oil Sands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .111 CNRL’s Horizon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .114 Kearl . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .115 Fort Hills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .117 Northern Lights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .118 7. The In Situ Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .121 Husky’s Heavy Oil Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .122 Imperial’s Cold Lake . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .124 CNRL Wolf Lake . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .126 Encana’s Foster Creek . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .127 Blackrock Hilda Lake . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .129 Shell’s Peace River . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .129 Petro-Canada’s MacKay River . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .131 JACOS Hangingstone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .132 ConocoPhillips Surmount Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . .133 Total’s Joslyn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .135 Suncor’s Firebag . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .137 Petro-Canada’s Meadow Creek . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .139 Opti-Nexen’s Long Lake . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .140 EnCana’s Christina Lake . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .143 Devon’s Jackfish . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .145 MEG Energy’s Christina Lake . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .147 Connacher’s Great Divide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .148 8. The Province and Climate Change . . . . . . . . . . . . . . . . . . . . . . . . . .151 Kyoto and Climate Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .152 Carbon Capture and Sequestering (CCS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .160 The U.S. Cap and Trade Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . .165 9. Reducing Oil Sands Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .167 The In Situ Footprint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .181 Impact on Local Residents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .190 10. Improving the Fiscal Regime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .195 Alberta Royalties and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .196 The Alberta Royalty Debate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .202 Sovereign Wealth Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .207 11. The Provincial Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . .215 The Infrastructure Gap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .216 The Need for a Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .225
  5. 5. 12. Marketing Bitumen and Synthetic Crude Oil . . . . . . . . . . . . . . . . . . .227 Canadian Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .227 U.S. Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .229 Major Export Pipelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .230 The Bitumen Differential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .232 The Upgrading Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .234 Alberta’s Upgrading Dilemma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .236 Upgrader Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .237 U.S. Refinery Upgrades . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .239 13. Possible Future Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .241 The Arctic Pipelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .241 The Need for Workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .250 Broadening the Supply Channels . . . . . . . . . . . . . . . . . . . . . . . . . . . . .252 Project Scheduling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .255 Finding Jobs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .256 TILMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .257 Accommodation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .258 On-site Accommodation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .260 Fly-In, Fly-Out Jobs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .262 The Benefits to North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .264 14. The Bumpy Slope from Hubbert’s Peak . . . . . . . . . . . . . . . . . . . . .267 Finding Energy Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .268 The Impact of Peak Oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .271 The Impact of Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .272 The Ability to Cut Back . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .273 The Implications for Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .274 Implications of NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .275 The Ideal Situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .278 15. The Path to Clean Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .279 The Need for a New Direction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .281 Carbon Sequestering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .285 Battery-Powered Cars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .285 Hydrogen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .291 Hydrogen Transfer and Storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .294 Improving Wind and Solar Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . .297 Hydrogen Fuelled Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .303 The Research Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .306 Alberta’s Ability to Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .307 Closing Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .310 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .313 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .320
  6. 6. Technical Abbreviations Metric Gas Volumes Gas Price m3 cubic metres GJ Gigajoule Km3 thousands of cubic metres $/GJ dollars per trillion joules Mm3 millions of cubic metres Bm3 billions of cubic metres Oil Volumes Gm3 trillions of cubic metres m3 cubic metres Tm3 thousands of cubic metres GHG Gases Mm3 millions of cubic metres te tonnes Bm3 billions of cubic metres Kte thousands of tonnes Mte millions of tonnes Land Areas Gte billions of tonnes ha hectares km2 square kilometres 1 km2 100 hectares Imperial Gas Volumes Bb billion barrels Mcf thousands of cubic feet Tb trillion barrels Mmcf millions of cubic feet Bcf billions of cubic feet Land Areas Tcf trillions of cubic feet ac acre mi2 square mile Oil Volumes section 640 acres b barrels township 36 square miles Mb million barrels Electric Power Units Fuel Consumption kW kilowatt km/l kilometres per 100 litres MW megawatt mpg miles per gallon GW gigawatt TW terawatt Volumes or Amounts over Time Mm3/d millions of cubic metres/day Power Supply Bcf/d billions of cubic feet/day kW-hr kilowatt-hour Bcf/yr billions of cubic feet/year MW-hr megawatt-hour Mte/yr millions of tonnes/year GW-hr gigawatt-hour Gte/yr billions of tonnes/year m3/d cubic metres/day Pressure Mb/d millions of barrels/day kPa kilopascals Bb/d billions of barrels/day mPa megapascals Bm3/yr billions of cubic metres/year psi pounds per square inch vi
  7. 7. Abbreviations AECL Atomic Energy Canada Limited CHOPS Cold Heavy Oil Production with Sand AERCB Alberta Energy Resources Conservation CLAWR Cold Lake Air Weapons Range Board CME Canadian Manufacturers and Exporters AERI Alberta Energy Research Institute CMO Collateralized Mortgage Obligations AEUB Alberta Energy & Utilities Board (now AECB and AUC) CN Canadian National Railway AHFMR Alberta Heritage Foundation for Medical CNG Compressed Natural Gas Research CNOOC China National Offshore Oil Company AHPP Alaska Highway Pipeline Project CNRL Canadian Natural Resources Limited AHSTF Alberta Heritage Savings Trust Fund CO2 Carbon Dioxide AIF Alberta Ingenuity Fund CPV Concentrating Photovoltaic ANY Athabasca Northern Railway COSI Centre for Oil Sands Innovation AOSP Alberta Oil Sands Project CP Canadian Pacific Railway AOSTRA Alberta Oil Sand Technology and Research Authority CSS Cyclic Steam Stimulation (Huff ’n Puff) APG Aboriginal Pipeline Group DDT Dichloro-Diphenyl-Trichloroethane (insecticide) APMC Alberta Petroleum Marketing Board EIA Energy Information Agency ARC Alberta Research Council EOR Enhanced Oil Recovery ASRA Alberta Scientific and Research Authority EPA Environmental Protection Act AUC Alberta Utilities Commission (formerly AEUB) ERCB Energy Resources Conservation Board BTU British Thermal Unit EU European Union CAPP Canadian Association of Petroleum Producers EUB Energy and Utilities Board (now ERCB) CBM Coal Bed Methane FERC Federal Energy Regulatory Commission (U.S.) CCS Carbon Capture and Sequestration FIFO Fly-In, Fly-Out CDO Collateralized Debt Obligations FMGC Fort McMurray Group of Companies CEAA Canadian Environmental Assessment Act GCOS Great Canadian Oil Sands CEMA Cumulative Environmental Management As- sociation GDP Gross Domestic Product CERI Canadian Energy Research Institute GHG Greenhouse Gases CFC Chlorofluorocarbon GSC Geological Survey of Canada vii
  8. 8. H2 Hydrogen (gas) NWMP North West Mounted Police (now RCMP) HBC Hudson’s Bay Company NWT Northwest Territories HBS Harvard Business School OPEC Oil Producing and Exporting Countries HDI Human Development Index (UN) OSLO Other Six Lease Owners HSTF Heritage Savings Trust Fund OSUM Oil Sands Underground Mining IEA International Energy Agency PADD Petroleum Administration for Defence District IRAP Industrial Research Assistance Program PCP Progressive Cavity Pump JACOS Japan Canada Oil Sands Limited PdVSA Petroleos de Venezuela S.A. LNG Liquid Natural Gas PEM Proton Exchange Membrane LPG Liquid Petroleum Gas PV Solar Photovoltaic LHB Lloydminster Heavy Blend QEII Queen Elizabeth II (Highway) MBA Master of Business Administration R&D Research and Development MFT Mature Fine Tailings RCMP Royal Canadian Mounted Police (Mounties) MGP Mackenzie Gas Project SAGD Steam Assisted Gravity Drainage MSAR Multiphase Superfine Atomized Residue SCO Synthetic Crude Oil MSDC Mistee Seepee Development Corporation SOFC Solid Oxide Fuel Cell N&L Newfoundland and Labrador SOR Steam-oil Ratio NAFTA North American Free Trade Agreement SO2 Sulphur Dioxide NAR Northern Athabasca Railroad SWF Sovereign Wealth Fund NASA National Aeronautics and Space Administration TAP Trans-Alaska Pipeline NDP New Democratic Party TCPL TransCanada Pipelines Limited NEB National Energy Board THAI Toe-Heel-Air-Injection NEP National Energy Program TILMA Trade, Investment Labour Mobility Agreement NIABY Not In Anyone’s Back Yard USGS United States Geological Service NIMBY Not In My Back Yard WCSB Western Canada Sedimentary Basin NSERC National Sciences and Engineering WTI West Texas Intermediate Oil Research Council WWI World War One NT Northern Transportation Limited WWII World War Two viii
  9. 9. Preface T here are four reasons for writing this book. The foremost reason is to tell readers that the Alberta and Saskatchewan oil sands are not the envi- ronmental monster some people would have you believe. Contrary to what many activists say, resource companies are not destroying millions of acres of pristine wilderness and blackening western Canada’s skies in pursuit of big- ger profits from “dirty oil” and the “Tar Pits.” The activists love to focus on the “Before” and “During” pictures but never show the “After” pictures where the land has been restored to close to its original natural state and condition. They never show bison roaming the restored land. Development of the oil sands projects are proceeding as planned, in an or- derly manner with significant safeguards by the two provinces for people and the environment. This book includes dozens of pictures, enabling the reader to see how projects are being operated. Major environmental improvements are on the way and future developments will be “clean.” This book tries to tell read- ers that Chicken Little may be mistaken in predicting that the sky is falling. The second reason is to provide the “The sky is falling!” reader with an understanding of the impor- Chicken Little (aka Henny Penny) tance of the oil sands to the economic in a British adaptation of a fairy growth of Canada over the next few decades. tale from Buddhist Indian folklore Given reasonable oil prices and proper di- rection, the oil sands will be generating thousands of new jobs over the coming years and have the potential to buy billions of dollars of new equipment, services and technology. The book suggests it is better to develop the oil sands to keep Cana- dians employed and the economy strong than to shut them down, as suggested by many environmentalists, and import oil from the Middle East. The oil sands can become a major economic driver for Canada. After Black October 2008, this is an important factor for people across Canada who want jobs. The third reason is to present a challenge to the province of Alberta, espe- cially Premier Stelmach, to take the lead in becoming the environmental champi- ons of Canada by using the Heritage Fund to develop clean power sources for the future. Alberta should not only clean up the existing sources of emissions from the oil sands but support expanded research into new mobile power systems. Hydrogen and electricity will become the primary mobile energy sources of the 21st century. Alberta should help fund the research needed to make these technologies commercially viable in Alberta as soon as possible. The province should be at the forefront of new energy technology and not a follower. ix
  10. 10. Alberta will be a source of oil for decades but it should become a leader in other types of energy, especially hydrogen. Because it can take up to 30 years to design, test and replace existing power sources, it becomes important to start the search now. The fourth reason is to supply readers with information on how they can participate in the development of oil sands projects. The oil sands can become a major factor in creating jobs across Canada. The book contains clues for those who would like to work in the oil sands but live in other provinces such as British Columbia, Ontario, the Maritimes and Quebec. It can be done with “Fly-In, Fly-Out” (FIFO) employment. This option gives those who would like to live in other regions the opportunity to make a good living in the oil sands but still spend much of their lives with family and friends at home. It also reas- sures readers that the environmental impact is not as serious as many people sug- gest and that it will be reduced significantly in the future. Canadians rarely brag about the good things they do. We are similar in many ways to our American and British cousins, but have been the young, quiet one who doesn’t get much glory. We did not have a revolution but became a nation in a peaceful, civilized way. Our West was settled peacefully because the Hudson’s Bay Company and the Mounties brought law and order to the region for two centuries before the settlers arrived. How many people know about Vimy Ridge, in WWI, where Canadians captured the hill in three days with 17,000 casualties, while the British and French had lost 200,000 men over two years and not been successful? It was Canadians who stormed Juno Beach on D-Day, one of five beaches in the world’s biggest invasion, but there is not one Canadian featured in the movie The Longest Day. We are the quiet suppliers of wheat, lumber, pork, beef, maple syrup and many other raw materials to the world, as well as some of the best hockey players. It is time we played a more dominant role on the global stage and not let the kibitzers stop us. For some rea- son, we are our own worst critics. The world is changing and Canadians have the opportunity to play a leading role in making things better in the future. The Canadian oil sands are one of the largest oil reserves in the world. They are the largest mining project in the history of man, but few people really know much about them. Much of the information people have heard is wrong be- cause critics are deliberately spreading distorted information. This book is not going to make the reader an expert on the processes being used to get the bi- tumen from the oil sands to market, but it should help clarify the technology and complexity of the process. It is time the real story is told. x
  11. 11. Acknowledgements T here are many people I want to thank for helping me put this work to- gether. The first is obviously my wife, Jane, who has put up with “just an- other few paragraphs” around bedtime. This book is dedicated to her. Special thanks to four long-time friends who helped shape my life. Bill Deeks has been my best friend for much of my life. Marilou Taylor, my former secretary at Arthur D. Little, took the time to critique my rough draft and has always been a loyal friend. Walter Kudryk, my office-mate at Touche, went con- sulting around the world with me for 30 years. Unlike Johnny Cash, we did not get everywhere, but we had a lot of interesting times trying. Andre Nikitine, a classmate from Harvard Business School, died suddenly during our Russian oil venture. I owe many thanks to the four of you. You made my life much richer. I also want to thank many of the people in the industry who took the time and effort to talk to me about their chosen aspect of the oil sands sector. These include Harbir Chhina and Leanne Deighton from EnCana, Janet Annesley from Shell, Paul Spring of Phoenix Heli-Flight, Travis Robertson and Andrew Buzinsky of Weatherford, Syd Dykstra of Opti-Canada, Michael Fournier of Lockerbie & Hole, Brad Anderson at the Construction Owners Association of Alberta, Duane Mather of Nabors Canada, Ron Green of the PTI Group, Brian Harrison of Devon Canada, and Michael Shaw of Atco Global and Pat Klak of the Leduc-Nisku Economic Development Authority. Additional thanks also go to those who helped get the book into print: Dorinda Wong, Maureen Johnson and Charlene Dobmeier. If there are errors in the book, they are mine alone. xi
  12. 12. 1 Ch ap t er On e Rising to the Challenge I t is the end of April 2009 as this book goes to print. The Canadian fed- eral election is over. The coalition failed to surface after Hon. Michael Ig- natieff took over leadership of the Liberal Party, and Jack Layton is still hungry for a Cabinet seat. The Dion Green Shift seems to have been relegated to the trash can, as has Mr. Dion. The Democrats won the U.S. election and President Barack Obama is in power. His party will control both the House and Senate. The crash of the global economy and stock markets has created major new concerns for the coming years. The Stelmach government has just issued a 20-year policy statement for the oil sands. President Obama has made his first quick trip to Ottawa. Before things can change again, this book is going to print. It is difficult to write about a moving target. Black October 2008, combined with oil prices of US$140/b over the past year, have created a serious recession in the global economy that will last for at least 12 to 18 months, but the world economy should recover. Countries around the world are going through the worst financial crisis in 80 years, but the au- thor expects they will recover because most of them are pumping huge amounts of cash back into the system to get it working again. The biggest question is timing. Canada is in good shape financially but will be hurt by the slowdown in key markets. Although the next few years will be tough, Alberta and Saskatchewan could become leaders in helping Canada remain strong. The Harper Conservative Government has brought down a budget that promises deficits of $64 billion over the next two years in order to stimulate the economy. This book outlines how the oil sands and Alberta might help Canada come through this crisis better and faster than most other nations. This book was originally aimed at telling people about the oil sands and how Alberta could take a major role in being the economic driver for Canada 1
  13. 13. The Oil Sands in a prosperous economy. It also made recommendations on how to improve the process. Nine months ago, the major problem was that the western Canadian economy was over-heated, but Black October changed things very quickly. The Saskatchewan economy is still strong but both Alberta and British Columbia are slowing down. The rapid collapse of world markets and oil prices suggest Prime Minister Harper and the premiers are going to have to work hard over the next few years to keep the Canadian economy healthy. This book puts forward ideas of how the oil sands can help Canada become a stronger economic driver. There are many who are suggesting that the oil sands have hit a plateau and that the boom days are gone as project after project is delayed or cancelled. There is also concern for their impact on the environment. This book suggests that the slowdown is good because it gives time for future projects to evaluate how they can be improved to reduce capital and operating costs through more efficient planning and the use of improved technology. It also assures readers that the environmental impact is not as serious as many people suggest and that it will be reduced significantly in the future. The Path to Clean Energy? Early readers have asked how the oil sands can possibly be the path to clean energy in Canada. Right from the start it is important to be aware of the main points of the book. These are: • Alberta can develop the oil sands in a “clean” manner and will do so. • The world is likely to experience “Peak Oil” between 2015 and 2020. • Alberta should invest in research of “clean” fuels for the future. Canada has the capability to be one of the leading nations of the world in the 21st century and both Alberta and Saskatchewan can help lead the way. This book suggests Alberta should become a leading supplier of both “clean” oil and renewable energy power to North America in 2020 and beyond. Saskatchewan is a world supplier of uranium. For those not familiar with the terminology, “clean” energy does not emit excessive greenhouse gases (GHG), or sequesters them; while alternative energy sources, once in place, emit hardly any GHG. How can the oil sands become the supplier of “clean” energy? The answer is through technology. If Canadians can take bitumen and heavy oil and turn it into gasoline and fuels, they can take the process further and do it “cleanly”. It must be remembered that emitting GHG has only become a target for environmentalists since 2000 when they came to the conclusion that these gases were causing global climate change. The oil sands and heavy oil projects were designed and built two and three decades ago and conformed with the laws existing at that time. 2
  14. 14. Rising to the Challenge The energy industry in both provinces has made a firm commitment to develop their oil and energy resources in an environmentally benign manner, but it takes time and money to change direction and technology. The oil sands sector is firmly committed to making the oil sands a clean source of energy in the future and will achieve that goal within a few years. It has the money, the resources and the technology to make it happen. This book outlines how it can succeed. This is primarily a book about Alberta because most of the oil sands are in that province, but it also includes Saskatchewan because some of the oil sands cross the border and most of the heavy oil is in it. The two provinces are major exporters of energy to the world. Saskatchewan is the largest uranium exporter on the planet and the energy that it exports in yellowcake annually exceeds the energy in Alberta’s oil and gas. At the same time, the book looks at the need for new mobile sources of en- ergy for the future. Energy research, sponsored by Alberta, should be expanded and taken to the next level to develop cleaner, more efficient fuels of the future. Alberta has been successful with this approach in the past. In 1974, Premier Lougheed set up the Alberta Oil Sands Technology and Research Authority (AOSTRA) to develop oil sands technology. He recognized that Alberta’s con- ventional oil was running out. In order to continue being a supplier of energy to Canada for the next 80+ years, it was necessary to invest in the oil sands. AOSTRA was a research organization that invested $670 million in oil sands research from 1974 to 1999 that turned bitumen into an economically usable fuel. This was not government research, but private sector research par- tially funded by the province. This was the best investment the province ever made. It resulted in $120 billion of capital investment over the past 20 years and could result in another $200 billion in the coming decades. Alberta needs to make a similar investment in research now in order to generate the business opportunities for 30 years from now. Future mobile energy will revolve around hydrogen and batteries and it is essential that Canada become a leader in these technologies. This approach is described in greater detail in the final chapter. Where Is Oil Going? It is time to recognize that oil is running out on a global basis and that new al- ternative sources of “clean” transportation energy will have to be used over the next 20 to 30 years. There are many sources of renewable energy—solar, wind, nuclear and electricity—that can provide GHG-free power but they cannot be used for transportation. A windmill is no good when your car’s gas tank is dry. It is going to take time to develop new power sources that can reduce depend- ence on diesel oil, jet fuel and gasoline. Alberta should become a leader in one or more of these renewable energy 3
  15. 15. The Oil Sands technologies if it wants to continue to be a supplier of energy to Canada. Alberta will continue to have lots of oil, but it should also be able to supply alternative energy and power. It is time for Alberta to invest in research across Canada in order to develop the clean transportation fuels needed for the future. Electric- ity, batteries and hydrogen power will be the key to energy success by 2040. Al- berta should focus its efforts in these areas, along with the associated technology. Canada is the largest per capita user of hydrogen in the world, so we should aim to become leaders in that technology. It will not be easy, but Canada has the capability to become the leader in these sources if we start now, work together and are committed. Above all, it requires leadership. The objective is to get enough infrastructure and technology into place as soon as possible to create, test and improve the power generation equip- ment needed to replace oil. The world is in a race to see whether oil runs out first or whether the new power sources make it obsolete. Alberta should aim to be in the enviable position of being able to supply both oil and alternative sources of energy. Big Oil says there are oil supplies for 40 years but the latest International Energy Agency (IEA) report says the world will be 15 Mb/d (15 million barrels a day) short of oil by 2015 unless new oil fields are found. That is 2.4 Mm3/d (2.4 million m3 a day) for those who think in metric terms. This prediction is a se- rious shortfall that is almost 17% of demand. A recent survey of the top 800 fields in the world shows volumes are declining at rates faster than expected. No one knows for sure when Peak Oil might happen but this book suggests it will likely first occur between 2015 and 2020. It will not be caused by a shortage of oil to be found but by an industry that has too many “cooks” with different agendas. The industry could fail to develop enough supplies to meet rising de- mand. Low prices in 2008 and 2009 will have an impact. Between restrictions on drilling, NIMBYs, environmental controls and National Oil Companies (NOCs) owning the best prospects there could be delays that will prevent enough new oil supplies being brought on stream to meet demand. Oil will still continue to flow when Peak Oil hits. There just won’t be enough to meet the demand. Half of the world’s oil will still be available, but there will be a shortage until new supplies can be brought on production. The first Peak Oil crisis will likely be short but could be followed by more serious crises, depending on whether the world is willing to let the oil industry find and produce more oil in the following years. This book suggests that Peak Oil is closer than people in the oil industry are willing to concede. Big Oil assures us that this will not happen until 2040 or be- yond. (What else can they say?) The reality is that the world is consuming some 31 Bb/yr (31 billion barrels of oil annually or 1,000 barrels per second) but the oil in- 4
  16. 16. Rising to the Challenge dustry has not been finding replacement volumes of that magnitude for decades. The world is relying on about 25 declining supergiant oil fields for much of its supply. The graph in Exhibit 1 shows that in order to maintain the total energy needs of the world, new power sources will be needed in the future to replace oil. 1. Past and Future Sources of Power These new sources are labelled as Hydrogen and Alternative sources. Alter- native includes such power sources as solar, wind, batteries, biofuel, microhydro, tidal, geothermal, etc. Nuclear and coal power will continue to grow. Solar and wind power have been growing rapidly but are still small and highly inefficient. Batteries are expected to start making a major blip in 2009 with their use in cars. As an energy source, the term “battery” is incorrect as batteries store electricity generated elsewhere, and belong in a separate category. Hydrogen, including fuel cells, is just beginning to have an impact but will prove important as technology improves and the infrastructure grows. Canada should be a leader in that growth. If the world is running out of oil, it makes the oil sands more valuable and development of alternative power sources especially critical. The world is facing a situation where there might not be enough available alternative power sources, especially for mobile power, in time to replace oil. If Big Oil is wrong and does not find enough oil to meet future demand to 2040, there is no other energy source to replace it. The world will be in a terrible mess. The world relies on oil, 5
  17. 17. The Oil Sands especially for transportation. If we develop new sources of power before oil runs out, there will be no harm done. There is security in having alternative sources ready. Alberta (and Canada) should aim to be the supplier of two kinds of “clean” energy as soon as possible. The advent of Peak Oil before 2020 brings with it the potential for high oil prices in the early years of the coming decade, as shown in Exhibit 2. The slow- down in the world economy has dropped oil prices below US$40/b in early 2009. This low price will be temporary and oil should rise to US$50/b to $60/b later in 2009. By 2010, the price of oil is expected to fluctuate somewhere be- tween US$60/b and US$70/b. While OPEC is not a strong cartel, it is expected to be able to keep the global price within the US$60/b to $100/b range after 2010, but the price will continue to rise over the longer term. Oil will likely hit US$150/b within the decade unless massive supplies of new oil are found. 2. Price of Brent Crude Oil price is very important because oil sands projects in Alberta are depend- ent on the global price of oil. Fortunately, start up of new projects is not based solely on the price of oil at the time when the decision to proceed is made. Most SAGD projects, for example, can be profitable at US$60/b if they have good sands, use the latest technology and are built and operated with tight cost controls. Because the oil flow lasts for 10 years or more, the important factor is the average price during the production period. Oil sands construction may slow down during 2009 but the province will still be kept busy with other projects. Construction activity will be stronger in future years as North America will still need oil and Alberta is a reliable source. It will be even more valuable if it is considered “clean” oil. 6
  18. 18. Rising to the Challenge Keeping the Oil Sands Viable The economic future of Alberta is closely linked with the oil sands. This sug- gests it is very important to the Alberta government to keep them economi- cally and environmentally viable. In February 2009, the Stelmach government made that commitment. This means getting costs down and curbing environ- mental impacts. The province is already supporting several programs but few people outside of Alberta are aware of them. This book explains them. Climate Change In the minds of most people across the globe, the world is definitely warming up. The majority of people believe climate change is being caused by GHG and are prepared to support efforts to control them. The IPCC (Intergovernmental Panel on Climate Change) is leading efforts to see that GHG sources are forced to curb emissions. Alberta has recognized the politics of the situation and has commit- ted itself to sequestering provincial GHG emissions, is developing other clean sources of energy and has a moderate carbon tax in place. This is good policy. It is important for the province and oil industry to correct the problems of “dirty oil” and be the suppliers of clean technology to the world rather than to continue being a target for activists. Alberta is a responsible province and should be known globally for more than tailings ponds and dead ducks. Al- berta is already pushing industry to find the answer to the tailings ponds within two years and is leading the charge to become the leader in the sequestering of GHG. It is also urging the oil sands industry to use new technology to reduce the environmental impact of the oil sands. This book says it will be successful. Building Infrastructure The province has been lagging in the construction of highway and rail links that could help the oil sands projects reduce their capital costs. Specific prob- lems include the need for a four-lane divided highway to Fort McMurray, a heavy-load rail link to the oil sands and a high-speed commuter train along the Edmonton-to-Calgary corridor. The slowdown of the economy will allow the four-lane road (under construction) into Fort McMurray to be completed. CN Rail is proposing to move bitumen by tank car from the oil sands so im- provements on the rail line must be going ahead. There is still a need for im- proved commuter rail transport in the province, especially into Fort McMurray. Infrastructure is important to reduce the capital costs of oil sands projects and the province is closing the gap. 7
  19. 19. The Oil Sands Encouraging Better Technology Oil sands technology is constantly improving. Many processes have already been implemented but others such as sequestration and the elimination of the tailings ponds are still a year or two away. The rate of bitumen recovery is in- creasing while impact on the land has been reduced. Other technologies can re- duce the need for water, natural gas and land use and should be encouraged. This reduces the cost of future oil sands projects and improves the quality of the product. These technologies are discussed in greater detail in the book and should reduce both the costs and the environmental impact over the years. Scheduling the Oil Sands Oil sands projects have recently experienced a series of delays and cancella- tions. The slower approach in 2009 could be beneficial in reducing costs. Dur- ing this slow period, the province should encourage a more orderly process for scheduling new oil sands projects. At the same time, there is a need to find more resources from across Canada. New projects will continue to be devel- oped for most of the coming century so there is no reason why they cannot be properly scheduled. The reserves are known, as is the demand for them. The industry should work out a means of building projects in sequence to meet that demand at the lowest cost. The planning tools are available; the province should ensure they are used. The Alberta government has indicated it is com- mitted to orderly development of the oil sands. One way or another, it must achieve that objective. Spreading the Oil Sands Benefits Alberta and Saskatchewan are already working to find additional people and re- sources from across Canada and other countries to help the industry reduce costs. The province has been a strong supporter of the program to attract more workers on a Fly-In, Fly-Out (FIFO) basis and finding new suppliers globally to provide the modules needed by oil sands projects. While this is largely a pri- vate sector program, the support of the province and other provinces is im- portant for wider credibility. Alberta should push harder to reduce provincial trade barriers and encourage more participation by the other provinces to be- come suppliers of labour and equipment to the oil sands, especially during the coming “tough” times. 8
  20. 20. Rising to the Challenge Keeping the Oil Sands Profitable The province has seen a serious drop in oil sands royalties in 2009 because of the lower profits of the oil sands projects from low oil prices. It may be neces- sary to adjust oil sands royalties in 2010 and 2011 to encourage expansions and new projects if oil prices remain low. The economic benefits to Canada of new projects are too important. The Generic Royalty had many benefits, especially the Accelerated Capital Cost Allowance (ACCA), which could be brought back, in cooperation with the federal government, to ensure new projects continue to be built. The federal government has an equal interest in keeping the oil sands economy strong because of the employment and taxes that are gener- ated. Oil prices should rise over the next few years, but both governments know they need to keep the oil sands sector financially healthy to generate revenues. Funding Alternative Energy Research Canada has the potential to become a global leader in many areas over the com- ing decades, but especially in the alternative energy field. Canada is the lead- ing per capita user of energy in the world (ignoring small refining countries). We used 3,516 kg of oil equivalent per capita in 2007 compared to the U.S. at 2,862 kg. Canada has experienced suppliers in most areas of oil, gas, nuclear, hydro, wind, tidal and alternative energy sources. We lag in solar because of the short winter days. Canada is the largest per capita user of hydrogen in the world, with Al- berta being the leader in this country. The country has talented energy research capability all across the country, but there is a need to provide more focus, pump in more money and create a sense of urgency to become world leaders in non-polluting energy, especially in the transportation area. The world is nearing a major turning point in energy and Alberta should fund research across Canada to become a leader in renewable power sources. Most Canadi- ans would likely agree that this is the field of endeavour where we should excel. This suggests an opportunity for Alberta. Putting surplus funds from the semi-dormant Alberta Heritage Savings Trust Fund (AHSTF) into research is the best way to invest it for future generations. The Heritage Fund was meant to be an investment for the future not a “rainy day” fund. A rainy day fund will not be necessary if oil prices are rising, but being a leader in other energies will be essential 30 years from now. The money should be invested creatively so that it will create jobs for both present and future generations of young people. If invested as wisely as the AOSTRA funds, it will provide many times its value in the future rather than sitting in a semi-dormant fund. AOSTRA proved the 9
  21. 21. The Oil Sands wisdom of investing in future energy research. Alberta should do it again, only this time with hydrogen and stored power as the objectives. Research into sources of clean power of all types, but especially mobile power, would be a major investment in the future. This would show leadership at the national level and could be the basis of major exports from Canada in fu- ture years. Alberta would be strengthening Canada’s competitive future by pumping research money into universities during slow economic times that will pay off in the future. A united research approach from many provinces to cre- ate new sources of clean power, supported by the Heritage Fund, should be suc- cessful. Canada has very capable universities. It is time they worked together to make this research successful. This is discussed in greater detail later in the book. This research program will need to be significantly larger than the AOSTRA program. A preliminary analysis suggests desired results could be achieved by aiming for 4,000 projects over 15 years at $1 million per project, for a total of about $4 billion. Maximum expenditures in any year would be about $500 mil- lion while the average would be about $250 million. The AHSTF held some $15 billion in assets in 2008, even after the market crash, so this funding level is well within the fund’s ability to handle. The Alberta Energy Research Insti- tute (AERI) has the goals and structure in place to carry out this work. It now needs broader funding and expansion to achieve these objectives. Canada has never been challenged in a single high technology research proj- ect with funding of this magnitude. It would give a major boost to energy research across Canada, especially during tough economic times. Canada needs to support “research-ready” projects for masters and doctoral candidates that will challenge them to create a cleaner world. This approach will direct their environmental zeal towards getting real results, by developing new hydrogen technology and innova- tive concepts in mobile power. The best thing about the AOSTRA research ap- proach is that it had the flexibility to invest in all types of novel ideas. We are racing against other countries that are pouring billions of dollars into research on new technology to reduce their reliance on oil. Much of this is going into coal and nuclear energy, but Canada should focus its efforts on hy- drogen and electricity for mobile power sources. Canada has a greater need for transportation energy than any other nation in the world and should focus on these areas. It also fits better with the needs for future major exports from east- ern Canada (i.e., cars, trucks, planes, trains and new systems). Canada has the capability to rise to the challenge. It may take a few years to get up to full speed but with AHSTF funding, innovations in new sources of energy and power could be in use in Canada within the coming decade. The book outlines how the oil sands are a natural path for Canada in its search for clean energy for the future. 10
  22. 22. 2 Ch ap t er Tw o Background and History T he first white man to see bitumen from the largest oil deposit in Canada was Henry Kelsey, manager of the Hudson’s Bay Company (HBC) at York Factory in 1719, when a Cree, Wa-Pa-Su, brought him a sample. In those days, HBC traders didn’t travel far from their forts around the Bay and let the native trappers bring their furs to them. It was not until 1778 that a North West Company trader, Peter Pond, actually saw the deposits when he entered the Athabasca River watershed via the Clearwater River. A picture of the sands is shown in Exhibit 3. Pond described the oil sands de- posits along the river and how the local Natives used the thick gummy mate- rial to waterproof their canoes. He was followed in 1790 by Alexander Mackenzie, another North West Company explorer, who paddled up the Athabasca River past “bituminous fountains” on his way to the Arctic Ocean using the river that would later bear his name: At about 24 miles from the fork (of the Athabasca and Clear- water Rivers) are bituminous fountains in to which a pole of 20 feet long may be inserted without the least resistance. The bitumen is in a fluid state and when mixed with gum, the resinous substance collected from the spruce fir, it serves to gum the Indians’ canoes. In its heated state it emits a smell like that of sea coal. Diary of Alexander Mackenzie, 1790 Sir John Richardson first passed through the area in 1819 on his search for the Northwest Passage, and again in 1848 in a search for Sir John Franklin’s lost expedition. His knowledge of geology allowed him to recognize that the oil 11
  23. 23. The Oil Sands sands overlaid the older Devonian limestone and that they covered large areas of the region. It would be years before many white people came to the region again. The world needed to find a use for oil first. Canada was one of the earliest users of petroleum with the development of oil wells dug by hand near Petrolia, Ontario, in 1856, a year before Colonel Drake drilled the first oil well in Penn- sylvania in 1857. The Petrolia oil fields dominated the oil indus- try in Canada for many years and led to the establishment and growth of one of Canada’s large refining and petrochemi- cal complexes at Sarnia. The oil fields’ location in Lambton County, only 27 km (16 mi) east of the St. Clair River, made Sar- nia a logical location for build- ing the refining facilities that 3. Handful of Oil Sands needed large amounts of water. One of the companies that start- ed in Ontario in 1880 was Imperial Oil Limited, a firm that has been a leader in the oil industry in Canada ever since. Between 1860 and 1900, a major share of Canadian petroleum needs was supplied from the Ontario oil fields. The Sarnia refineries continue in that role to the present day. More important, this was the training ground for many of the people and companies who were to build Canada’s petroleum industry. The Petrolia oil fields are a historical site now and worth a visit. Early History In 1867, the Dominion of Canada came into being and the British Crown bought back the Hudson’s Bay Company grant lands before turning them over to the Canadian government in Ottawa. By 1870, the Hudson’s Bay Company had merged with the North West Company and the expanded HBC built a fort at the junction of the Clearwater and Athabasca rivers to trade furs. They called it Fort McMurray after their chief factor in the region. In 1875, the Geological Survey of Canada (GSC) sent botanist John Macoun through the area. He reported on the sands and the interesting observation that water would wash the oil out of the sand. In 1882, the GSC sent Dr. Robert Bell to further define the discovery, followed the next year by G. C. Hoffman, who 12
  24. 24. Background and History also reported that the bitumen could be separated from the sand using water. By the end of the 19th century, the Ontario oil fields were declining and the Canadian oil industry was searching for new sources of petroleum. The oil de- posits in the northern Alberta forests attracted attention from a variety of people. In 1905, the provinces of Alberta and Saskatchewan came into existence, but the federal government specifically did not transfer the mineral rights to them in the belief that natural resources could be better developed by the federal government. Initially it was believed that the oil in the oil sands came from large pools underground that could be tapped by drilling wells. In 1906, Alfred von Ham- merstein earned his place in history for being the first to drill six wells in the area, but he found salt instead of oil. Others tried, with no useful results. Heavy oil was found in small fields in Saskatchewan in 1911, but it was never devel- oped to any degree because the heavy oil was too difficult to refine at that time. During WWI, there was a renewed interest by the federal government in trying to develop the oil sands. In 1913, the Mines Branch sent Sydney Ells, an engineer, to carry out a more detailed survey of the oil sands. His maps are the first comprehensive assessment of the resource. He felt the asphalt had poten- tial for road building and found a California refinery that could process the material. In 1915, Ells was able to access funding and did some road building in Edmonton with the bitumen, but little else happened in this respect during the war. In 1925 and 1926, Ells carried out more core drilling to further define the size and depths of the deposits. For over 40 years, Ells was active on behalf of the federal government in trying to develop the oil sands, and was an hon- oured guest when the first oil sands plant opened in 1967. He is remembered today by a river bearing his name near the Bi- tumont site. The locations of these early sites are shown in Exhibit 4. In 1920, Alberta started to take more interest in developing its natural resources. It hired Dr. Karl Clark, who had worked with Ells, and set up the Scientific and Industrial Research Coun- cil of Alberta the following year. In 1930, its name was changed to Alberta Research Council 4. Past Place Names (ARC). Over the next 30 years, 13
  25. 25. The Oil Sands there was a strong rivalry between Ells and Clark and the federal and provincial governments over the oil sands. This brief outline cannot begin to cover all of the people and companies who tried to develop the oil sands and failed, but there were many. The magnitude of the oil deposits that were found in the “tar sands,” as they were called in those days, was well known and attracted dozens of peo- ple who hoped they might make their fortunes developing this source of ener- gy. This book only tracks a few of the more prominent participants. Two of the more successful people were Dr. Karl Clark and Sydney Blair, who developed a process using hot water to separate the bitumen from the sand. In 1924, they built a small separation unit at the University of Alberta and followed this up the next year with a larger model at the Dunvegan rail yards on the outskirts of Edmonton. They brought in oil sands by hopper car from the Fort McMurray area for their tests. Contrary to expectations, they found that the major problem was not separating the bitumen from the quartz sand and water, but removing the impurities from the bitumen afterward. It still is. In 1922, Robert Fitzsimmons acquired a lease at Bitumont from the federal government, about 90 km (54 mi) north of Fort McMurray, where he mined the 5. Bitumont Site 14
  26. 26. Background and History oil sands. It is now a historic site. An aerial view is shown in Exhibit 5. In 1925, he also built a hot water separation process and marketed the heavy oil residue under the name of International Bitumen Company. The process was crude but he was able to use the material for roofing, roads and eventually some fuel oils. The Depression seriously slowed the provincial economy but Fitzsimmons managed to keep the company alive until 1942 when he finally sold out. In 1929, Dr. Clark’s Dunvegan plant was moved from Edmonton to Wa- terways, on the Clearwater River just south of Fort McMurray. The move meant the plant was closer to the sand deposit and was made in anticipation of the federal government transferring the mineral rights to the province the follow- ing year. In 1930, the federal government transferred the mineral leases under the province to Alberta but kept back 809 ha (2000 ac) around Fort Mc- Murray. This was likely due to Ells wanting to continue his involvement with the oil sands. The federal government granted the first lease in this special area to a company run by Max Ball, a petroleum engineer from Denver. The province cried foul. The lease was for property near the junction of the Horse and Athabasca rivers, near Fort McMurray. Ball formed a company that would eventually be called Abasand Oils Ltd. Abasand built a plant on the leased property that was completed in 1936 and could process 223 te/d of oil sands. This was later expanded to 352 te/d. The company managed to sur- vive throughout the Depression but the plant burned down in 1941. WWII created a desire to find better ways to recover the fuel potential of the oil sands. Lloyd Champion bought the Bitumont plant in 1942, renamed it Oil Sands Ltd, and started to upgrade the plant using technology and support from Dr. Clark and the Alberta Research Council. The federal government was supporting the Ells-sponsored Abasand project, but both of the oil sands plants at Abasand and Bitumont became millstones around the necks of their respec- tive governments because the new processes and equipment failed to be built on time and completed on budget. The war was both a spur and an impediment to development of the oil sands. While governments provided money to develop a new source of oil, construction labour, equipment and steel were scarce. Delays, breakdowns and lack of diluents also posed problems. Workers were not eager to move to the remote sites. The Abasand plant was rebuilt between 1941 and 1944, but burned down again in 1945. The Bitumont plant was not completed until summer 1949. The Province of Alberta took it over because of its debts: $500,000 that Oil Sands Ltd. could not repay. They proved that the process worked and then shut it down. In 1951, the population of the Village of Fort McMurray was 621. A picture 15
  27. 27. The Oil Sands of modern-day Fort McMurray, with a population approaching 80,000, can be seen in Exhibit 6. During WWII, the search for new sources of oil was not confined to the oil sands. There was an expanded search for oil all across the West, from Manitoba to the Rockies, to supplement the small oil volumes being pro- duced at Turner Valley and at 6. Fort McMurray the Norman Wells field, dis- covered in 1919. A few heavy oil fields were found near Lloydminster and were exploited during the war but the volumes were small, with only 7,900 m3 (50,000 b) being produced. This volume was sufficient to attract Glenn Nielsen, President of Husky Oil Company in Cody, Wyoming, to Alberta. He moved a small second-hand refinery into the Lloydminster area in 1947. Husky was very small company at the time, but it grew rapidly over the following years, refining the cheaper heavy oil to supply to a string of gas stations across the American and Cana- dian prairies. Following its start in Petrolia, Imperial Oil Ltd (a 70% subsidiary of Stan- dard Oil of New Jersey, now ExxonMobil) had become the largest oil company in Canada and was the most active driller on the western plains. It was the largest owner of producing wells in Canada with holdings in both Turner Val- ley and Norman Wells. After drilling 132 dry holes in the 1940s, it found oil in the Leduc field in February 1947, Redwater in 1948 and several more fields in 1949. All were prolific Devonian reefs that produced light oil. These discover- ies spawned dozens of small independent companies and attracted oil compa- nies from around the world. The Alberta oil industry soon found more new fields and drilled hundreds of wells that produced thousands of barrels of light oil daily. The problem quickly became one of finding markets for the new sup- plies as the prairie refineries were quickly saturated. Pipelines were started to the east and west to find new outlets for Alberta crude. Two companies looked to the future and saw that the huge oil deposits in the Athabasca region might someday be valuable. Nobody else was interested in them and millions of barrels of oil were available for pennies per barrel. In 1953, Abasand Oils was restructured into the Great Canadian Oil Sands Company (GCOS) by a consortium led by J. Howard Pew, the chairman of Sun Oil of Philadelphia. In 1954, Alberta sold the Bitumont plant to Can-Amera Oil 16
  28. 28. Background and History Sands. They, in turn, sold the plant in 1957 to Royalite (part of Imperial Oil Ltd) who shut the operations down again. Oil sands operations could not com- pete in a world where light crude oil was under US$2/b. Between 1945 and 1970, North America faced a huge crude-oil oversup- ply problem that restricted the output of most of the oil wells on the conti- nent. This meant that each well was allocated a specific volume of oil it could produce. Markets for Alberta crude in the U.S. were limited because the Americans were reserving their markets for domestic supplies, mostly from Texas. The oil sands plants sat idle for over a decade, although efforts con- tinued in the lab to find ways to reduce the cost of extracting and using the bitumen. In 1956, the Suez Crisis interrupted oil supplies from the Middle East and the subsequent formation of OPEC, in 1961, shook the oil industry worldwide. International oil companies started to look to domestic reserves as an asset safe from expropriation and a fall-back source of supply if the Cold War cut off sup- plies from distant countries. In Alberta, the Ernest Manning government de- cided to encourage oil sands production by guaranteeing oil sands plants up to 5% of Alberta’s oil market. This caused consternation among the independent oil companies whose production was being restricted and who were lobbying to open up the Montreal market to Alberta crude. Montreal was a large Canadian market, mostly supplied by Venezuelan crude. Alberta producers wanted to build a pipeline from Sarnia to ease their oversupply problem. The Diefenbaker government appointed a Royal Com- mission to examine the problem. The 1959 Borden report recognized the eco- nomic hazards of a crude oil pipeline to Montreal and limited Alberta crude to Ontario and markets west. It was 1970 before the United States’ production of oil peaked and started to decline. With declining domestic supplies, the U.S. federal government relaxed its restrictions against imports, allowing more Canadian crude into their markets. The volumes have grown steadily over the years and Canada is now the largest supplier of oil to the U.S. “The Board” Canadians are a people who seem to like being governed far more than their neighbours to the south. A key phrase in the North America Act that created Canada was the term “peace, order and good government,” which contrasts with “life, liberty and the pursuit of happiness” in the American Declaration of Independence. The story of the settlement of the Canadian West is far more peaceful and lawful than the American West. Law and order was established in the Canadian 17
  29. 29. The Oil Sands West almost from the start. The Hudson’s Bay Company controlled and ad- ministered all the lands from Hudson’s Bay to the Rockies from 1670 until Canadian Confederation in 1867. Their rules were the law. There was a period of two years after Confederation when there was no official law enforcement and traders from Montana created problems with the Blackfoot and other tribes by selling them whisky. In 1869, the Northwest Mounted Police force (NWMP) was formed and sent west to correct the problem. The NWMP established forts throughout the west and brought law to both Alberta and Saskatchewan, then collectively known as the Northwest Territories. The two federal territories did not become provinces until September 1, 1905. The mineral rights under Alberta and Saskatchewan belong to the province unless otherwise granted to other landowners. As a result, 81% of the mineral rights in Alberta belong to the province and indirectly, to the citizens, while in Saskatchewan the percentage is slightly lower, at 78%. The remaining 19% and 22% are owned mainly by the Government of Canada (under national parks), by First Nations or by the Hudson’s Bay Company, Canadian Pacific or Canadian National railroads. These latter companies helped settle the Canadian West and were granted the mineral rights under some lands as part of the deal. The early settlers were also granted the mineral rights under their land until into the 1890s. But after that time, they were kept for the federal Crown. The federal government transferred the mineral rights to the provinces in 1930. There are only about 1,000 private leaseholders in each province. Most of the settlers with mineral rights let them lapse during the Depression when they could not afford to pay the annual fees. This makes the Alberta and Saskatchewan public very interested in the way oil and gas reserves are devel- oped in their provinces since they are the major beneficial owners. In 1930, when mineral rights were transferred from the Canadian to the Alberta government, there was no controlling body to rule on how the gov- ernment’s mineral rights should be handled. In 1938, after the Turner Valley gas field had been drilled and produced so irresponsibly, the Alberta government created the Petroleum and Natural Gas Conservation Board to set out rules for the orderly control of future oil and gas fields within their jurisdiction, and to see that the public interest was protected. In 1956, the name changed to the Oil and Gas Conservation Board. In 1971, the Lougheed government restructured it as the Energy Resource Conservation Board (ERCB) with control over elec- tric power, pipelines, and coal as well as oil and gas. In 1995, the Klein Government united the Public Utilities Board and the ERCB to form the Energy Utilities Board (EUB). In 1996, the Alberta Geologi- cal Survey group was added to the organization. It was viewed as a way to re- duce costs during a period of tight budgets. On January 1, 2008, the Stelmach 18
  30. 30. Background and History government split the EUB back into two groups, with the Energy Resources Conservation Board (ERCB) regulating the oil and gas industry, and the Al- berta Utilities Commission (AUC) regulating the utilities industry. The ERCB is a very powerful entity within the province. Its combination of many capabilities gives it a quasi-judicial role in the control of the province’s energy resources. It has the people, resources and power to evalu- ate, monitor and enforce the geological and energy resources within the province. It approves applications to develop all energy resources and regu- lates them to ensure they comply with what was promised. The board also has the authority to shut down operations that do not conform. It has expert staff that it can send in to independently evaluate and assess what is happen- ing on any lease or property. Its normal manner of operation is through open hearings so that everyone can air their opinions. They are prepared to change or cancel projects if there are strong reasons to minimize the impacts on peo- ple and the environment. The role of the board has generally been very beneficial over the years. It runs a tight ship. For over 80 years, Alberta’s oil and gas have been developed using the best practices of the time. Conservation has been an important part of the board’s role right from the start. When required, they will step into a bad environmental situation and take control in order to ensure it is corrected. This has happened several times when wells have blown out of control. One of the worst disasters was the 1948 Atlantic #3, near Edmonton, that blew out of con- trol and spewed 190,000 m3 (1.2 Mb) of oil onto farmland. The ERCB stepped in and hired people to bring the well under control and clean up the environ- mental damage. Today, it is almost impossible to see where it happened. The board has not always been perfect, but it has applied the principles of try- ing to conserve the land as well as the oil and gas resources for the people of Al- berta. Their approval process requires every large and small project to go through a public hearing before it can proceed. The drilling of every single oil well in the province is announced and notification is published publicly so that all parties in- volved can get their support or opposition out on the table for debate. On some occasions over the past decades, there have been two or more competing projects aiming to achieve the same objective, but often only one is allowed to proceed if it would be wasteful to have two. New gas discoveries are often required to route their gas to competitive gas plants and treatment facil- ities for processing rather than developing their own. It is cheaper for the roy- alty owner (i.e., the people of Alberta) if the oil or gas goes to an existing plant that has surplus capacity. The oil or gas will be processed at a fair cost to both sides. The objective is to maximize the economic benefits and to protect the interests of the province and the public. 19
  31. 31. The Oil Sands The hearing process for new projects has improved over the years. Large oil companies cannot wait out the “small” people. Opposition groups such as First Nations, landowners, environmentalists and others opposing a project must be given funding by project sponsors to hire lawyers or other experts to thoroughly evaluate and challenge it. The hearings on very complex projects can often take one or two years before the board issues a permit to proceed. Oil sands projects have never been allowed to proceed without significant environmental scrutiny by the board and, as discussed in greater detail later, the scrutiny is getting tougher. The board listens to the critics of all projects and im- plements changes, as needed, to try to mollify opponents. The general impar- tiality of the Conservation Board over the years has caused it to become a model for governmental regulatory agencies for oil and gas around the world. The professionalism of its approach and the general fairness of its regulations have been adopted in many jurisdictions. The quality of its online computerized re- porting systems provides the industry with some of the best and most respon- sive data in the world. Despite trying to run a program that is fair to everyone, the ERCB has its share of critics. There are many people, especially in the agricultural and envi- ronmental sectors, who disagree that the ERCB is impartial and feel that it al- most always sides with the oil and gas sector. Many farmers and ranchers resent the ability of the ERCB to order them to allow their land to be used by the oil companies to run seismic, drill wells and produce oil or gas with only minimal rentals to the owners for its use. They own the land and pay taxes on it. Many feel the damage is more than the rents. Most oil firms try to minimize the dam- age and retain good relations with the landowners but over the years, problems can arise and become a major source of aggravation. This can range from leav- ing gates open, letting cattle out, to spills of water, oil or other pollutants. It is an on-going problem. The ERCB has tried to encourage the use of technology to reduce the im- pact on rural communities. For example, with directional drilling, new wells can often be located close to the road allowance to minimize the impact on agricultural land. New drilling and production techniques reduce some of the problems but sour gas, coal bed methane projects and water use are a constant source of conflict between the oil industry and both rural communities and environmentalists. 20
  32. 32. Background and History The First Oil Sands Plants In 1962, Great Canadian Oil Sands (GCOS), with the support of the Sun Oil Com- pany, submitted an application to the ERCB for permission to build a 5,000 m3/d (31,500 b/d) oil sands plant, a volume close to the 5% of market that was prom- ised by the Manning government. GCOS had built a pilot plant that proved out their technology. The process was similar to Dr. Karl Clark’s technique of using hot water to separate the oil from the sand. Their application was soon followed by two competing submissions from Cities Service and Shell. Both of these plants asked for volumes of 15,900 m3/d (100,000 b/d) to make the project more economic. The hearings debate was long and fierce, but in 1964, the board author- ized GCOS to build its plant. The construction company, Bechtel Corp. of San Francisco, led in Canada by the same Sydney Blair who had worked with Karl Clark, advised GCOS to increase the volume to 7,200 m3/d (45,000 b/d) to make the plant more economic. The board approved this expansion because Sun Oil agreed to purchase the additional volume of crude oil for its Toledo refinery, and since this was considered outside Alberta’s traditional market, the extra volumes were allowed. Pro-rationing of crude oil was tough in those days. By 1962, the population of Fort McMurray had grown to about 2,000 peo- ple, but the province granted it “New Town” status, making it eligible for in- frastructure support. One major investment was the $3.3 million Grant MacEwan Bridge across the Athabasca River, allowing heavy trucks access to the GCOS building site. Although initially called the “Bridge to Nowhere”, it is so busy today that another span is planned. Construction of hospitals, schools and other government services followed as thousands of people moved north. In 1967, Premier Manning officially opened the new oil sands plant (now Sun- cor) in a town that had grown to over 6,000 people. The community has seen exceptional growth over the years as more people move north to find high pay- ing jobs, badly straining a regional infrastructure trying to provide the ameni- ties of life for nearly 80,000 people. The problems of this growth are discussed in greater detail later in the book. The Suncor plant had operational problems from the start. The new plant used bucket wheels, draglines and conveyors that were designed for coal min- ing because no one had ever designed an oil sands mining plant before. Equip- ment problems were severe. When one part of the supply train failed, all production on the site came to a halt. The plant designers had no experience with -40º Canadian winters and the equipment constantly had problems. Bucket teeth broke trying to penetrate the frozen ground, large chunks of frozen bitumen jammed the crushers, and conveyor belts split in the extreme 21
  33. 33. The Oil Sands cold. The plant averaged 2,400 m3/d (15,000 b/d) during the first year, or one- third of design capacity. The company was only kept alive by the faith of the Sun Oil Company, which poured in tens of millions of dollars to keep the company operating. It was five years before the plant operated to capacity, and seven years before it made a modest profit. In 1991, Suncor got rid of the bucket wheels and conveyors and switched to trucks and shovels so the oil sands handling process system is now more reliable. If one unit breaks down, it hardly has any impact on the flow of tonnes of raw sand and bitumen to the processing plants. Suncor has not stopped the search for improved systems and will likely scrap the huge trucks and shovels to go to better systems. In 1971, a Conservative government, under Hon. Peter Lougheed, was swept into power and changed many of the policies of the Social Credit regime that had been the government for 36 years. Lougheed is a grandson of Sir James Lougheed, a senator and one of the prominent founders of the province. A lawyer and graduate of the Harvard Business School, Peter Lougheed was to become one of the best premiers in a province that has had a series of compe- tent leaders. Lougheed was eager to get a second oil sands plant built. In 1968, Syn- crude, a consortium consisting of Imperial Oil, Gulf Oil and Atlantic Richfield (Arco), submitted an application for a 12,700 m3/d (80,000 b/d) plant. It started to work through the negotiation process with the federal and provincial gov- ernments to set out royalty, tax and environmental agreements. Both sides played hardball but negotiations almost collapsed when Arco withdrew from the project. Arco was heavily committed to Alaska’s Prudhoe Bay project at the same time and felt Alberta was demanding too much. The project teetered on the edge of collapse. In August 1973, two levels of government (Jean Chrétien and Donald Mac- donald, the federal representatives, and provincial representatives Bill Davis and Darcy McKeough for Ontario, and Lougheed, Don Getty, Mervin Leitch and Bill Dickie for Alberta) stepped in to pick up the $300 million that was Arco’s share. The federal government bought 15% of the equity, the Alberta government bought 10% and the Ontario government took 5% to ensure the project went ahead. They later sold these ownership shares at a profit once the project started and was successful. Construction of the Syncrude plant began in 1974 and opened on September 15, 1978, with an initial capacity of 19,900 m3/d (125,000 b/d). Its present capacity is 55,600 m3/d (350,000 b/d). In 1966, Imperial Oil started the hearings process to develop the Cold Lake bitumen deposits. These oil sands are too deep to mine, like the deposits far- ther north. They need steam heat to soften the bitumen underground so it can be pumped to the surface. Cold Lake was the first of the in situ projects. It was 22
  34. 34. Background and History initially only a pilot project but proved that bitumen could be recovered from the deeper formations using steam. After extended hearings, it received per- mission to expand further. These initial approvals have since grown into over 4,000 wells being drilled in 14 phases of development. Cold Lake is now the biggest producer of bitumen in Canada. In 1997, the Klein government was working its way out of a serious reces- sion and also wanted more oil sands plants built. They introduced an innova- tive “generic royalty” system aimed at encouraging large investments in new oil sands projects. The Athabasca Oil Sands Project (AOSP), led by Shell, had applied to build a third mine and upgrader. Rather than each project negotiat- ing individual royalty and tax arrangements, as Suncor and Syncrude had done, the federal and provincial governments decided to develop one “generic” roy- alty system that would be applied to all oil sands projects. The generic royalty was adopted. AOSP was the third oil sands mine and upgrader project. It started construction in late 1999 and was completed in 2003. Under the generic royalty arrangement, the oil company would only pay a 1% royalty until the capital cost was paid out, at which time the royalty went to 25% of profits. No taxes were payable during this initial period. Oil sands proj- ects have high capital needs and this approach allows companies to get all their investment back before the province takes its share. Both governments agreed to this formula. It lasted for 10 years and was extremely successful in encour- aging investment. In 2006, the Klein government conducted a review of the royalties when oil prices rose to the $60/b range and came to the conclusion that no adjustment should be made. This conclusion brought abuse and scorn from left-wing ac- tivists as well as from many other sectors of the population who were convinced the oil companies were getting too rich at the expense of the Alberta royalty owners. The Stelmach government reviewed the royalty again when it came into power and implemented a new system in October 2007. Details of the roy- alty are examined in greater detail in Chapter 10. The Oil Wars The National Energy Board (NEB) is the federal pipeline and petroleum ex- port regulator in Canada. The organization originated with the 1957 Borden Royal Commission, which the Diefenbaker government set up to examine the need for a pipeline from Alberta to Montreal. At the time, all North American oil wells were under tight production control and Alberta producers were re- stricted in their imports to the U.S. They wanted to open new markets in Que- bec with a pipeline directly to Montreal to replace oil imported from Venezuela. 23
  35. 35. The Oil Sands Borden ruled against the Montreal pipeline because the economics would not support it, but he recommended that there be a federal body set up to regulate oil and gas pipelines in the country. In the United States, there is a similar body, the Federal Energy Regulatory Commission (FERC). These two bodies now regulate all oil and gas pipelines north of the Rio Grande. The Diefenbaker government passed the National Energy Act in 1959. Gyrations in the world oil markets resulting from wars and the formation of the Organization of the Petroleum Exporting Countries (OPEC) in 1960 con- tributed to the NEB gaining more power over the next few years. The NEB was not a popular group in Alberta in its early years because its initial man- date insisted that a 20-year supply of oil and gas be kept in the ground for Canadian consumers before exports would be considered. This clause dis- couraged new exploration in western Canada because there was no benefit to finding new fields if the gas or oil had to stay in the ground for two decades before being sold. OPEC was founded in 1960 but it took several years before it exerted much influence. One key factor was the U.S. hitting Peak Oil in 1970. Once the U.S. was unable to influence the price of oil, OPEC raised prices; gradually at first, from around US$1/b to US$1.50/b over the next decade. The higher prices started a minor oil boom in Alberta. More severe oil shocks were triggered in 1970 when Libya raised oil prices to its customers and OPEC cut production by 5% to enforce its aims on Middle East foreign policies. Oil prices rose from US$1.80/b in 1970 to $3.80/b by 1973. Small independent oil companies were formed by the dozens in Calgary. Exploration surged. In April 1972, Premier Lougheed moved to exert provin- cial control over oil prices and introduced an increase in oil and gas royalties, eliminating the maximum royalty of 16⅔% that had been in place under the Manning government. He felt the province should get an increased share of the rising oil price. At the same time, he created the Alberta Oil Sands Technology and Research Authority (AOSTRA) to encourage development of the oil sands resource, with special attention to underground recovery. In September 1973, the Trudeau government in Ottawa brought in legis- lation to protect Ontario consumers from rising world oil costs by freezing the price of all western Canadian crude oil for six months. The federal government also agreed to provide the Maritimes and Quebec and other regions that relied on imports with subsidies that would be funded by increasing the taxes on the oil companies and raising the tariffs on exports of oil to the U.S. It also created Petro-Canada, a national oil company that was to be the “window on the in- dustry” and provided it with $800 million in cash to take over three Canadian oil companies with varying degrees of foreign ownership. In October 1973, the 24
  36. 36. Background and History Yom Kippur War triggered major oil price increases in international oil from about US$3/b to over US$10/b. For those not familiar with the politics of the time, Trudeau was a Liberal prime minister whose political (and voter) base was very firmly in Ontario and Quebec. His government held few seats west of Ontario. He believed strongly in the power of the federal government to control many aspects of life in Canada. In particular, he was determined to enforce the supremacy of the fed- eral government, especially over Quebec secession and Alberta’s oil wealth. Al- berta’s Lougheed was equally determined that the people of Alberta receive fair prices for their resources. The two were on a collision course. Saskatchewan was an innocent bystander that got dragged into the fight. The freezing of oil prices was not well received by the private sector oil in- dustry or the Lougheed government and opened many years of bitter relations between Ottawa and Alberta. The province saw this as an intrusion into its ju- risdiction. Lougheed created the Alberta Petroleum Marketing Commission (APMC) with broad powers over the pricing, marketing, production and reg- ulation of oil and gas within the province to counteract the federal moves. This included higher royalties, which increased the provincial share of revenue and reduced the federal share from taxes. The Trudeau government retaliated by disallowing the deduction of provincial royalties for income tax purposes, thus increasing their revenue flow share. Trudeau also brought in the Petroleum Ad- ministration Act, which gave it authority over oil and gas pricing across borders within Canada and internationally. The Federal government generally has the final authority in disputes with the provinces. After the initial price freeze in 1973, the Federal government gradually al- lowed the price of Canadian oil and gas to increase over the next five years, and by 1979, Alberta oil was within US$3/b of world prices. That year, the global oil situation got worse when the Shah’s regime in Iran collapsed, sending world oil prices up by 150%. The Canadian government also changed that year, after 16 years of Liberal rule, with the election of Progressive Conservative Joe Clark with a very shaky minority government. Clark was a 39-year-old Albertan from High River who was voted from office seven months later in the 1980 election, when a renewed Pierre Elliot Trudeau came back to power with a majority government. The seven months in opposition had made Trudeau more determined than ever to exert federal control over the country. He and Marc Lalonde imple- mented the National Energy Program (NEP) in October 1980, affirming Ot- tawa’s supremacy over energy affairs and aiming to curb the wealth and power of Alberta. The objective was to create a Canadian-controlled oil industry that would have “made in Canada” oil and gas prices and give the federal govern- ment more control and revenues. The lower-than-world prices were designed 25

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