Wednesday, January 18, 2012

Canada's Oil Sands: Are We Exporting Canada's Energy Security?

Now that the Keystone XL pipeline project looks like it’s future is up in the air, I thought that it was timely to take a look at a recent paper by J. David Hughes of Global Sustainability Research Inc. entitled "The Northern Gateway Pipeline: An Affront to the Public Interest and Long Term Energy Security of Canadians".  This paper provides an interesting look at the rationale behind the building of the Northern Gateway Pipeline (NGP).  To assure you that Mr. Hughes is qualified to speak on the issue, he was employed as a petroleum geologist for the Geological Survey of Canada for 32 years.

For those of you who aren't aware, the NGP is a twinned pipeline being being proposed by Enbridge to move 525,000 barrels of diluted bitumen sourced from the oil sands projects in Northern Alberta to Kitimat, British Columbia and 193,000 barrels of condensate per day from Kitimat to Edmonton where it is used as a dilutant for the lower gravity synthetic crude.  This pipeline will function as competition for the proposed TransCanada Keystone XL pipeline to the United States Gulf Coast.  Kitimat, through their connection to open water via the Douglas Channel, is currently handling tankers carrying petrochemicals and will likely serve as a launching point for diluted bitumen as it is shipped to China.

Here is a summary of the project:

Here is a map showing the route of the pipeline:

Construction of the 1177 kilometre long, $5.5 billion pipeline is expected to commence in early 2014 with completion and commissioning of the project by the end of 2017.  Enbridge rationalizes the economics for construction of this project on their forecast of a tripling of oil sands production by 2035.  The paper by David Hughes refutes the need for the NGP based on more realistic production forecasts and expresses concerns about the future of Canada's energy independence as increasing volumes of oil are proposed for export.  In his paper, he also outlines the environmental concerns that must be taken into consideration over the route of the proposed pipeline, but I will not address those issues in this posting, rather, I will focus on the rationale behind why Canada should retain its own finite supply of energy resources rather than accelerating exports to other nations.

Mr. Hughes opens by outlining several problems with the reasoning behind the Northern Gateway Pipeline project:

1.) The current and planned export pipeline infrastructure is sufficient to handle the production from both existing and under construction oil sands projects.  Even with the future development of unannounced future projects in the Canadian Association of Petroleum Producers (CAPP) growth scenario, export pipeline capacity is sufficient through to 2025.

2.) Canada is a high per capita consumer of oil and a significant oil importer, importing 780,000 BOPD in 2010.  By committing to accelerated exports of oil, Canada's long-term energy security is under potential threat.

3.) The NGP is predicated on unreasonable oil sands production growth rates.  Under CAPP's optimistic forecast, the supply of oil sourced from oil sands will increase by 152 percent between 2010 and 2025.  Enbridge has used an extended forecast out to 2035 in which they project oil sands supply growing by 217 percent by 2035, an unreasonable level given the environmental, social and emissions impacts of tripling oil sands production not to mention the massive capital expenditures required to increase production to those levels.

4.) Accelerated liquidation of Canada's finite oil supply is not necessarily in the best interest of Canada's energy future, particularly in light of the fact that it appears most likely that the world is either at or very close to peak cheap oil.

As I stated earlier, for the purposes of this posting, I'd like to focus on Canada's present and future oil needs and the likelihood that Canada may well need its own oil in the future as domestic consumption rises and production falls.

Let's start out by looking at how much oil Canadians consume.  Canadians are among the world's highest per capita users of oil at 24.6 barrels of oil per person per year for a total of 1.75 million barrels of oil per day, more than five times the world's per capita average, even exceeding the per capita usage level of the United States.  Here is a graph showing Canada's daily consumption of oil by product:

Canada's conventional oil production peaked in 1973 at roughly 2 million BOPD.   Current growth in oil production is sourced strictly from both in situ and oil sands mining, accounting for 51 percent of Canada's 2.86 million BOPD in 2010 as shown on this graph:

Canada is a vast country and its oil wealth is not evenly distributed across the nation with the vast majority of oil and natural gas reserves being located in Southern Saskatchewan, Alberta and Northeast British Columbia.  This means that while the western parts of Canada are producing oil, the eastern provinces are forced to import oil for their needs.  Here is a chart showing the total volumes of oil imported and exported between 1989 and 2009 in thousands of cubic metres (one cubic metre of oil equals 6.289 barrels of oil):

Notice that annual imports of oil have risen in concert with the rise in exports to the United States.

Here is a graph showing the net oil imports and exports by province over time:

The provinces in Atlantic Canada and Quebec rely on oil imports for 100 percent of their consumption needs and Ontario is approximately 13 percent dependant on imported oil.  As it becomes increasingly apparent that the world's oil production levels cannot possibly grow indefinitely, the eastern half of Canada becomes increasingly vulnerable to the geo-political forces (i.e. OPEC which supplies 50 percent of Canada's imported oil) behind oil pricing and supply.

What should be of additional concern is the projected growth in Canada's oil consumption.  As shown on this graph, forecasts show that Canada's oil demand will increase in a range from 2.25 to 3.05 million BOPD by 2030:

This is particularly worrisome in light of Canadian Association of Petroleum Producers’ (CAPP) projections for future oil production showing that production of conventional light, medium and heavy crude is expected to fall significantly by 2025 with the only growth expected in the production of synthetic crude and bitumen.  According to CAPP, summing the production from all existing and under construction oil sands projects and the remaining conventional crude production results in peak oil production of about 3.6 million BOPD in 2018 as shown here:

This projection assumes that oil sands production will grow by 50 percent from 1.47 million BOPD in 2010 to 2.28 million BOPD by 2019.  Using CAPP's most over-the-top forecast of 152 percent increase to 3.73 million BOPD requires the development of an additional 1.5 million BOPD of highly speculative new oil sands projects.  This scenario is hard to imagine, particularly given that it has taken since 2000 just to grow production by a mere 800,000 BOPD at a cost of $91 billion.  

To give us a sense of the time involved and cost of a major oil sands project, let's take a brief look at one of Canada's most recent surface mining oil sands projects, Canadian Natural Resources' Horizon Oil Sands Project.  As a disclaimer, a member of my household actually worked for CNRL; this company is extremely effective at squeezing efficiencies out of every last dollar that they spend and they have been a rather spectacular Canadian oil company growth story.  CNRL's Board first gave approval for the building of the Horizon project in early 2005 after several years of planning.  Construction began in the second quarter of 2005 and the project was commissioned and producing its first oil in early 2009.  The final cost of Phase 1 of the project reached $9.7 billion, up 43 percent from the original estimate of $6.8 billion.  Phase 1 is designed to produce 110,000 BOPD of sweet synthetic crude oil at a cash operating cost of between $36 and $43 per barrel in 2010.  Additional investment in future phases of development are expected to bring Horizon's ultimate capacity to 500,000 BOPD and construction will take place in several stages.  CNRL's Board has approved 2012 capital expenditures at Horizon of approximately $2 billion in the steps necessary to bring production up to the 250,000 BOPD mark in the next few years.  You will notice that the company is committing very serious money to bring just 250,000 BOPD of additional synthetic crude on the world market.  This puts into perspective the massive funding that would be required to bring CAPP's most optimistic forecast of 3.73 million BOPD of oil sands production onto the market.  Interestingly enough, a January 2011 coker fire at the Horizon plant is estimated to cost between $350 and $450 million to repair and has set the project behind, showing the risks involved in oil sands operations.

We all hear that Canada has one of the world's largest oil reserve bases, third only to Saudi Arabia's massive conventional oil reserves and Venezuela’s combination of the two.  In sharp contrast to Saudi Arabia’s conventional oil resource, oil sands are a very high cost, low return resource.  The value of an oil resource is measured using a parameter called Energy Return on Energy Invested (EROEI).  In the case of conventional oil, EROEI averages about 20 to one (i.e. you get 20 times the energy for every unit of energy used to extract and produce the resource).  In the case of mineable oil sands, the EROEI is roughly 5.7 to one and in the case of in situ oil sands, the EROEI is roughly 3.8 to one.  This is largely because of the large amount of energy needed to mine the sand and upgrade the bitumen, most of which is supplied by natural gas.  This is where the large greenhouse gas footprint of oil sands enters the equation.

As well, while the oil sands reserves are immense, they are not infinite.  Of the 169.3 billion barrels of reserves reported by the Alberta government, roughly 80 percent are not surface mineable, requiring the use of more energy-intensive Steam Assisted Gravity Drainage (SAGD) in situ technology.  The remaining established reserves under active development, estimated at 26 billion barrels, could be exhausted after just 19 years of production at CAPP's most optimistic 3.73 million BOPD rate.  To date, 24 percent of Canada's oil sands under active development have already been consumed.  When this is totaled with the already consumed conventional crude, 51 percent of Canada's total oil reserves have already been produced.  As would be expected and as has been experienced throughout the history of oil production and exploration, the oil industry is exploiting the most easily produced resources first with the less profitable resources being left behind for future exploitation.  With bitumen saturations varying from 1 percent to 18 percent, there is quite a wide variation in resource value.  These remaining oil sands resources will be more costly to extract and will have a lower EROEI than what the industry is experiencing now.    A perfect example of this is the move toward exploring for conventional oil reserves in more remote and hostile environments including Canada's east coast offshore and Canada's Arctic where both operating costs and geological risk are extremely high.  Take it from my experience as a petroleum geologist, if there were an easier and cheaper way to produce oil, the oil industry would already be taking advantage of it.

Yes, we all know that China has an insatiable thirst for the world’s finite supply of commodities, particularly oil.  Rather than rushing to export one of our most precious and critical domestic natural resources, perhaps it is time to form a long-term, exhaustive national plan for Canada's energy future, ensuring that sufficient resources exist for future generations of Canadians.  Let's hope that we are not mortgaging our futures for the relatively short-term instant gratification of quick corporate profits for pipeline companies and the creation of a few transient jobs.  We need to at least weigh the opinions of qualified researchers against those of politicians and Corporate Canada who have their own agendas that aren't necessarily in our long-term, best interests.

I hope that this posting will cause Canadians to pause and reflect on the value of our remaining energy resources.  While I am not particularly a proponent of oil sands as an energy source, I think that it would be prudent to examine Canada’s future energy needs and make wise and informed decisions about the long-term ramifications of wholesale exploitation, both in terms of environmental and economic impact.  At some point in the relatively near future, Canada's domestic reserves of conventional oil will be exhausted and we'd better have Plan B in place well before that happens.


  1. This should be required reading for every member at every level of government in Canada.

  2. Let's hope that the Harper government does the right thing, although, I'm suspecting that they will react emotionally to the Keystone decision rather than pragmatically.


  3. Very impressive presentation made using graphs. This is well explained certainly.

    Petroleum Geologist’s Education and job Requirements

  4. We should build a refineries in Canada instead of investing in pipelines so we don't export our oil as a raw material. If we exported our oil as a finished good we could make more money for our Country. Also I think we should first take care of suppling all of Canada with Canadian oil before we decide how much we can export.

    1. It is very easy to say it like this but first, you have to look at the figures. In 2009 Canada exported energy worth $77.9 billion while imported energy worth only $34 billion. This makes a surplus nearly of $44 billion. Building and maintaining an oil distribution system for entire Canada is a project with a very long-term rate of return, therefore, with Canada's energy resources diminishing every day, it is maybe not the best decision. Perhaps it is time to invest this money into renewable energy sources?

  5. Awsome blog...very informative. I really don't support the Keystone project for the simple reason that it is tied to the American Market.The Northern Gateway in my opinion has the greatest advantage to Canada in the long run. Unfortunately our Governments have given away our resources to American owned corporations and we now have to live with it.Keystone will go through eventually. It is high time that Canadians became a little more conscious of what is going on with our resources and realise that our politicians are raping us blind

  6. They can still build thier pipeline just point EAST.Keep this oil in Canada and refine it here for Canadian usage.Think of all the jobs this will create.

  7. It seems very political to move the bitumin to foriegn markets rather than a refined product, if we move the bitumin it should be moved down east and have those refineries refurbished to handle this product. Keep the jobs in Canada and export the refined product!

  8. 2 points.

    Eastern Canada imports oil because it is cheaper to do so than pipe it all the way across the continent. While there is already a line from Edmonton to Sarnia, it is only capable of supplying about 375,000 barrels a day. In order to bring Alberta synthetic oil to Eastern Canada $25 to $40 billion would be required to build the new pipeline, add an upgrader to turn the bitumen into synthetic crude oil and expand the Ontario and Quebec refineries to process the extra crude volumes. There is no appetite for that kind of spending since it currently cheaper to import the crude from abroad and presumably Eastern consumers are unwilling to pay a premium to use Canadian oil.

    Secondly, the excess production has to be exported and it is always better for a producer to have multiple markets (China, Japan, Korea, India) than just one (USA) assuming that the extra costs are covered by higher prices as a result of having more competitors for your product.

  9. Very informative blog.
    Thanks for sharing....

  10. nice info.visit us for more oil related news.

  11. According to the numbers in this blog, I calculated the reserves (economically recoverable at today's price and technology) would last about 115 years at 4 million BOPD.

    Wikipedia numbers agree with the "economically recoverable" numbers and also claims that number is only 10% of "bitumen in place".

    Am I missing something?

    It looks to me like one only needs to be worried if the price does not go up and technology does not improve extraction efficiency.

  12. Anyone counting on the Northern Gateway Pipeline is having pipe dreams. It will never happen. 20 years of court cases and appeals lie ahead.

  13. Newfoundland has oil.

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