FROM ARABIE TO THE SANDS OF CANADA
The Daily Reckoning Presents: A DR Guest Essay from
resource man John Myers, on the scene in the Athabasca
oil fields in way north Canada...
FROM ARABIE TO THE SANDS OF CANADA
by John Myers
Northern Alberta, Canada. A security gate. And a
construction site that looks like any other.
Workers stand around wearing hard hats and steel-toed
boots. On their breaks, they smoke cigarettes and watch
the steam rise from their coffee mugs.
But if things turn ugly for America's oil-rich allies in
the Middle East, it may turn out to be one of the most
valuable locations in the world.
On a cloudy Canadian afternoon two weeks ago, I paid
this site a visit. It sits just outside Fort McMurray, a
small and remote Canadian mining town. It doesn't look
like much. But this is the epicenter of the Athabasca
Oil Sands, the largest oil shale resource in the world.
In case you're not familiar with the term, oil shale is
essentially a piece of surface rock and sand saturated
with oil. Unlike pockets of raw crude that used to shoot
up from Texas oil wells, there is no pressure building
in a field of oil shale. The oil has already seeped to
the surface and collected in pools of molasses-like
bitumen.
The Athabasca's Oil Sands contain an estimated 1.7
trillion to 2.5 trillion barrels of bitumen. From that,
an estimated 300-plus billion barrels of oil are
recoverable with current technology.
That's no small cache. The U.S. and Russia combined have
less. Even Saudi Arabia reports "only" 200 billion
barrels in reserve.
But harvesting processed oil from a shale deposit is
dirty work. It requires massive equipment. And up until
recently, it's been too expensive to be considered an
alternative to the cheaper, more volatile oil resources
we get from the Middle East.
But all that has changed. As we were about to find out:
"Each wheel on these trucks has its own electric motor,"
said Howard, our tour guide and a retired engineer,
"...And wait until you see the shovels. They cost $19
million each."
He pointed to a 400-ton monstrosity, riding on tires
that were each bigger than our full-sized tour van. We
couldn't see the shovels yet. They were busy on site at
the Steepbank Mine, where they could rip 100-ton chunks
of shale from the earth, to send off for processing.
It only takes a few hours to transform each load into
oil. The shovel loads are dumped into the massive
trucks. The trucks, in turn, dump everything into
crushers. The result is delivered to a primary
extraction plant where separation begins.
The bitumen that results is injected with steam. Then
it's diluted with naphtha and piped into a refinery.
There, it's purified and sent off yet again to be
processed into diesel, light sweet or sour crude.
One 100-ton load of shale yields about 50 barrels of
oil, which is ultimately shipped to markets all over
North America via pipelines.
This may be a long way from the days of Dallas and oil-
rich Americans. But with pressure mounting in the Middle
East - and domestic oil production in America at its
lowest level in 40 years - the shale-oil industry could
hand resource investors their biggest profit since the
1970s. Especially now that extraction technology has
forced processing costs to plummet.
When Suncor began operations in 1967, the cost of
producing oil from oil shale stood at more than $30 a
barrel. Even at the height of the Yom Kippur War, oil on
the open market fetched only $12, making shale oil
irrelevant. In 1984, it cost $25 to get a barrel of oil
from shale. But the market price per barrel was $15.
Now, however, the metrics have changed. Suncor's per-
barrel extraction costs are down to $10.67 a barrel,
thanks entirely to new technology and economies of
scale.
With $3.25 billion Canadian in new investment, costs
could plunge still further - as low as $9 a barrel.
That's on par with what it already costs America to tap
dwindling resources of conventional crude. It's also
well below the current cost of oil on the open market -
at $21.85 as of this writing. And Suncor is prepared.
In 1999, their oil-sands project produced 85,000 b/d in
1999. By the end of 2002, they expect to produce 225,000
to 250,000 b/d - or $5.5 million worth per day - even if
oil prices don't rise a penny.
With Middle East volatility spreading and pressure
increasing, oil prices will head upward. Fast. And
Suncor's profit margin will only get wider.
Shell and Syncrude already invest heavily in adjacent
properties. In fact, by 2015, Athabasca's Oil Sands will
produce 2.5 million b/d, or 60% of Canada's total oil
production. This creates huge opportunity for shrewd
resource investors. How so?
First, unlike oil trapped in underground deposits, oil
shale reserves are easily discovered. They seep to the
surface. Costly exploration budgets carried by
conventional oil producers aren't part of the equation.
Second, the U.S. market is locked in. George W. Bush has
made it clear that the U.S. reliance on Middle East oil
will shift to reliance on Athabasca's Oil Sands.
And third, new technology and economies of scale
continue to reduce production costs, making shale-oil
recovery more viable by the day.
A mining town as remote as Fort McMurray isn't the first
place you'd expect to see a cameraman from CNN. But is
this Canadian hinterland worth watching? From where I
stood just two weeks ago - amid massive machinery, the
rumbling hum of diesel engines, and towering refinery
smokestacks - it certainly seemed so. |
