Canada's Oilsands Industry Comes Of Age

June 28, 1999
This aerial view of the Syncrude Canada Ltd. plant shows the extraction facility at left, utilities plant and upgrading complex near the center, and feed breakers in the foreground. All photos appearing in this feature are courtesy of Syncrude Canada. A panoramic view of the North Mine. [59,432 bytes] A 240-ton heavy hauler and electrical cable shovel are used to mine oilsands at Syncrude Canada's North Mine. The Caterpillar 793B heavy hauler, when fully loaded, weighs as much as a Boeing
Eric P. Newell
Syncrude Canada Ltd.
This aerial view of the Syncrude Canada Ltd. plant shows the extraction facility at left, utilities plant and upgrading complex near the center, and feed breakers in the foreground. All photos appearing in this feature are courtesy of Syncrude Canada.
First sighted and recorded nearly 300 years ago, Canada's oilsands have long been recognized as a natural resource of huge significance and potential.

But, for most of its modern history, this resource has remained largely untapped. Visible in places along river banks and therefore easy to discover, it tempted early misunderstanding of its true nature and composition.

Indeed, until decades of conventional exploration tactics proved otherwise, the surface outcroppings were thought to be seeps from a free-flowing pool beneath. Instead, the oil and sand were bound together all along the vast length of the deposit.

Vast resource

The Canadian oilsands resource is spread across 77,000 sq km of relatively remote northern Alberta landscape in the Western Canada Sedimentary Basin-an area that, even excluding oilsands production, produced 99% of Canada's crude oil and natural gas in 1997.

Located in four deposits-Peace River to the west, Athabasca and Wabasca to the north, and Cold Lake to the east-the oilsands are thought to hold 1.7-2.5 trillion bbl of bitumen in place. Of this amount, about 300 billion bbl are considered to be recoverable with current technologies and processes. This puts the oilsands resource on a par with Saudi Arabia's conventional proved oil reserves and makes it one of the largest hydrocarbon deposits in the world.

If all of the oil in the oilsands could be recovered, the world's oil demand would be met for the next 100 years.

Covering an area of more than 42,000 sq km and containing an estimated 1 billion bbl of bitumen, the Athabasca deposit (which is often combined with Wabasca, given its proximity) is the largest of those oilsands deposits in Alberta. In places, the Athabasca River cuts a channel through the oilsands, leaving visible layers of bitumen along the bank.

The deposits range in thickness to more than 60 m. It is estimated that throughout the oilsands, only about 20% of the oilsand layer is buried at depths of 80 m or less, making surface mining possible.

The remaining reserve-buried as deeply as 760 m-is mined by in situ production.

Innovation key to profitability

Dashed hopes of discovering conventional reserves of oil-although no doubt a source of dismay and frustration for early generations of would-be entrepreneurs-nonetheless spurred a much more useful and longer lasting commodity: a strong spirit of never-say-die commitment and continuous innovation.

The first challenge-the discovery of a viable scientific process to separate the oil from the sand-was conquered with the patenting of a hot water flotation process in 1927.

Commercial trials and experimental pilot projects followed for decades after, adding to the store of knowledge, making progress, but ultimately proving uneconomic or, after the discovery of significant conventional petroleum reserves in Alberta-foolhardy for some.

Syncrude, an integrated surface mining operation established in 1964, did not ship its first barrel of oil until 1978, a delay inspired in more or less equal part by questionable economics, uninspiring government policy, corporate wrangling, and the continuing need for research.

In fact, Syncrude's initial objective was to conduct research on the economic and technical feasibility of mining oil from the Athabasca oilsands. Plant construction began in 1973, and 5 years later, the first barrel of upgraded crude oil-Syncrude sweet blend-was put into the pipeline.

By the time it produced its billionth barrel in 1998, the company had become the world's largest producer of light sweet crude oil from oilsands and the largest single source of oil in Canada. Syncrude is a joint venture owned by: Imperial Oil Resources 25%; Petro-Canada 12%; Athabasca Oil Sands Investments Inc. 11.74%; AEC Oil Sands LP and Canadian Oil Sands Investment Inc. 10% each, Gulf Canada Resources Ltd. 9.03%; Canadian Occidental Petroleum Ltd. 7.23%; and AEC Oil Sands Ltd. Partnership, Mocal Energy Ltd., and Murphy Oil Co. Ltd. 5% each.

Syncrude's current lease areas are estimated to hold 17.3 billion bbl of bitumen in place, 9.4 billion bbl of which are potentially recoverable using existing technology. These reserves are sufficient to sustain roughly 50 years of production.

So, regardless of the obstacles that might be faced down the road, broad-based innovation has helped lay the groundwork for a healthy and profitable future for Syncrude, the oilsands industry, and all of those involved.

Canada's new energy vision

By about the mid-1990s, along with the rest of the industry, Syncrude had reached a threshold of development: Production had increased fourfold-to 73.9 million bbl in 1995 from 18 million bbl in 1979-and per unit operating costs had been cut nearly in half, to $13.69 (Canadian)/bbl from $25.81/ bbl.

But in the words of the National Oil Sands Task Force, "ellipseThe future of the resource [was] not assured. Before stakeholders agree to pay the economic and social costs of new development, they must be convinced that the prize is worth the investment."

The task force had been formed in 1993 by the Alberta Chamber of Resources to develop a new energy vision for Canada and to serve as a catalyst for the further development of the oilsands resource. With broad-based membership comprising representation from operating companies, government, research agencies, and labor, environmental, and supplier groups, the task force identified several key levers of further development. They included the establishment of a new, generic fiscal regime that would apply to all developers, with tax and royalty terms that divided revenues and costs fairly between investors and government. The regime would be stable, fair, and predictable and would result in a level playing field for all, including new entrants to the industry.

In pulling the levers, the economic and social returns would be vast: Total industry sales were projected to grow to 1.2 million b/d of crude oil from 800,000 b/d within 25 years; up to $25 billion in investments would be required to finance this expansion; and 44,000 permanent new jobs would be created by 2020.

It was a tempting but not an irrefutable case. Some groups were concerned with the potential environmental impacts of expansion, others that government was being asked to subsidize another Canadian megaproject. The environmental issue is discussed at more length elsewhere in this article. But the charge of a tax break was entirely unfounded and, perhaps given the complexity of the system, is occasionally misinterpreted to this day: The net gain to all levels of government over the life of the expansion plan is $97 billion (Tables 1-2). All of Syncrude's projects will be financed entirely by its owners.

In November 1995, the Alberta government announced the creation of a new set of generic royalty terms that would apply to all new projects. A few months later, the federal government followed suit on the tax side. And in June 1996, the oilsands industry launched a new era of expansion.

A new era

Today, oilsands account for about 26% of total Canadian crude oil production. With industry-wide expansion programs announced or under way, this amount could increase to 50% beyond 2005.

Granted, a sustained period of low oil prices has sparked a more intensive review of capital expenditure programs, and, in some cases, developments have been temporarily scaled back or deferred (Table 3). But, all in all, developers remain optimistic for the future, and the new era of development is expected to proceed more or less on schedule.

Indeed, activity to date already tends to exceed forecasts put forth by the National Oil Sands Task Force more than 4 years ago: Total investment is expected to amount to more than $25 billion by 2010, production is expected to more than double to 1.7 million b/d, and job creation and revenues to government will significantly surpass the original estimates.

For Syncrude's part, Syncrude 21, a suite of capital investments valued at $6 billion over the next 9 years, is on track. The project encompasses the $500 million Mildred Lake North Mine opening and upgrader capacity expansion project already in progress; the $1.5 billion investment in the new Aurora Mine; $1 billion for continuous improvement to operations; and the $3 billion upgrader expansion project. Syncrude 21 comprises the largest single investment by a company in western Canada and one of largest in all of Canada.

Last year-Syncrude's 1 billionth bbl year-the company set the latest in a series of production records, shipping 76.7 million bbl of Syncrude sweet blend (about 12% of Canada's petroleum requirements) at its lowest-ever unit cost of $13.57/bbl. During that year, the first-stage upgrader debottleneck was completed. Engineering progress on the second production train for the North Mine was finished, and it will begin operations in third quarter of this year. In addition, construction of the Aurora Mine and the second stage of the upgrader project are well under way. The mine and the rest of the upgrading debottlenecking project will be fully operational in mid-2000.

With 1999 capital expenditures currently budgeted at more than $600 million, Syncrude is targeting production of 82 million bbl this year at an average cost of $12.40/bbl. Syncrude 21 will nearly double this amount, in stages, by 2007, when the upgrader is in full operation and costs per barrel have been further reduced to $11-12.

Within the next 10 years, Syncrude is expected to account for about 25% of Canada's oil production.

Obviously, recent oil prices-certainly falling below levels any producer would have preferred-have affected attitudes and outlooks in the industry. But despite its large size, Syncrude was able to respond quickly to this environment and to maintain momentum on major strategic projects. The company has reviewed its operations and deferred discretionary costs in base plant projects and operating expenses. Syncrude 21 remains on schedule and on target.

Considerations for the future

As much as operational efficiency contributes to overall profitability, exclusive emphasis on dollars and cents management in the industry would likely be doomed to failure.

Imagine, for example, the effect of a new, revolutionary technology that cut costs in half while tripling emissions of greenhouse gases. Such a technology would be unacceptable in today's multifaceted, more demanding world. The formula for success must be balanced between efficient and responsible operations.

There are many elements to the equation, of course. But environmental impact (or loss management overall), science and technology development, aboriginal relations, and work force development are among those that will have the greatest bearing on Syncrude's future performance.

Loss management

With lease areas larger than about 25% of the world's countries; huge, complex, and potentially dangerous industrial machinery; and thousands of people on the job every day of every year, Syncrude is a major industrial risk generator.

Morality should and does dictate a safe and healthy work environment.

Less obviously, perhaps, plant economics also gain from the operational reliability that can be associated with good loss management policy and safe practices. In fact, the benefit of reliability can be measured at Syncrude. It yields more on-line time and more production from capital assets, all of which leads to more revenue and a higher return on capital employed. It is estimated that Syncrude's loss management policies add about $125 million-or 10% of its annual crude oil production-to the company's bottom line every year.

Integrating environmental performance into its core operating systems, Syncrude is also committed to responsible growth and the principles of sustainable development. The record is one of continuous improvement in all areas of environmental performance, whether working to preserve the quality of land, water, or air. As for the future, Syncrude will allocate 1 in every 4 capital dollars-more than $1 billion in total-to new technologies that will result in improved environmental performance.

All in all, continuous improvement in loss management practices will help Syncrude achieve its production and operating cost targets in the years ahead.

Science, technology development

The raw materials for the oilsands industry are as "low tech" as one can get; the final products-synthetic crude oil and bitumen blend-are comparable to the raw materials of other industries. However, the processes used to make these products are anything but low tech. The oilsands industry is, in fact, one of the most technologically advanced industries in Canada.

Along with revisions to the federal and provincial fiscal regimes, the National Oil Sands Task Force also identified continued science and technology development as a key lever for achieving an increasing rate of return for bitumen and crude oil in a market in which those products must take prices set by conventional crude and commodity markets.

With a research center at Edmonton, Alta., and a variety of partnerships established with academic, research, and industry organizations, Syncrude is one of the top research and development companies in Canada. One significant example of a Syncrude-developed/adapted technology, is hydrotransport. A truck-and-shovel system supplies ore to a cyclofeeder, where it is mixed with hot water to produce a slurry that is then pumped to the extraction separation system through a slurry pipeline. Extraction begins in the pipeline, thus allowing a less capital-intensive, more cost-effective and energy-efficient operation.

Research and development will continue to produce the technologies that drive Syncrude's economic growth through greater efficiencies and sound environmental performance.

Aboriginal development

Syncrude's area of operations features Alberta's highest concentration of aboriginal people as a percentage of the general population.

Respect, understanding, and cooperation are qualities to aspire to in this environment and, to a large extent. these are all goals that have been mutually achieved. Syncrude is the largest industrial employer of aboriginal people in Canada, and it seeks to maintain that status, shares opportunity, respects diversity, and benefits from the continued development of a fully qualified work force at home.

Community activities in general, and aboriginal development programs in particular, comprise a way of doing business that, while certainly minimizing the odds of unproductive dissent, more importantly generate an invaluable amount of good will vital to the continued operation of the company. Syncrude will continue to interact and consult with all its stakeholders throughout the development of Syncrude 21.

Work force development

Recent estimates suggest that during 1999-2007, about 7,400 workers will be required in the Athabasca oilsands industry to support expansion plans. About 40% of these opportunities will arise from retirement or attrition within the existing work force, while the remainder will represent new positions.

Syncrude forecasts a requirement for about 2,800 new employees over the period to sustain existing operations and to support the Syncrude 21 expansion.

It will be competing with other companies to attract the skills it needs to maintain and improve upon overall productivity and so faces a serious challenge in building its work force.

The challenge cannot be defined as one of plugging warm bodies into assembly-line positions. As the industry evolved and came to rely more and more on sophisticated technologies across the board, work force education and skill requirements increased accordingly.

The minimum educational standard for Syncrude's current work force is at least a high school diploma; about 17% hold university degrees, and about 30% of those are above the graduate level.

All in all, the Syncrude work force is extremely well-educated and qualified to do the job.

But to assure that remains the case in future, the company has developed an extensive organizational development business plan and participates in a wide variety of initiatives and business-education partnerships designed to create opportunities for students and skills for employers.

Work will continue in this respect as Syncrude 21 proceeds and will have a direct bearing on the degree of Syncrude's success achieving its business targets.

Maintaining the balance

The future holds both challenge and opportunity for the oilsands industry.

But, generally, the forecast is a bright one if only because the industry's long history is one of discovery and continued innovation both within and beyond the plant gate.

It may well be true that past trends are not be the best indicators of future performance.

But oilsands companies have weathered many storms before, and though perhaps temporarily chastised, have always emerged wiser and more determined.

The Author

Eric Newell has been Chairman of Syncrude Canada Ltd. since 1994 and Chief Executive Officer since 1989. He is a past president of the Alberta Chamber of Resources, which formed the National Oil Sands Task Force in 1993. The task force developed a New Energy Vision for Canada and has played a key role in launching a new era of development in Canada's oilsands.

Copyright 1999 Oil & Gas Journal. All Rights Reserved.