Monday, July 10, 2006

Oil sands development difficult, costly

Canada's oil sands projects are becoming increasingly problematic, thanks to escalating costs and growing environmental concerns. The recent boom that centers around this energy resource claims Fort McMurray as its home base, but as the Financial Times reports, this Alberta boom-town is experiencing growing pains. That's something the town seems to share with the local resource extraction projects.

Like the municipality, the oilsands industry is discovering the downside of a boom. Excitement over the spiralling oil price has given way to frustration over shortages of labour and equipment and soaring costs. The stampede has also driven up land prices for new oilsands projects.

The oil sands, or tar sands (depending on your point of view), have always been something of a difficult resource base to exploit. Extracting the heavy oil from thick mats of clay and sand is an energy intensive and land disrupting process. The tar sands deposits are actually mined open pit style or extracted by steam injection, a method which requires large amounts of water and energy.

Add the spectre of sizeable greenhouse gas emissions and it's easy to see that this activity will draw protests on multiple fronts. But even without outside protest, the companies involved in producing energy from the tar sands are encountering difficulties with higher than expected costs. These companies were probably not working from a base of overly-sunny expectations; everyone has known for quite some time that the tar sands projects were economical only during times of high crude oil prices.

What drove people to develop this resource was its sheer size and the prospect of extracting hydrocarbons in a politically stable, mining friendly environment. Alberta's tar sands are estimated to contain 175 billion barrels of oil (proven reserves) and this is where Western development has been concentrated. Venezuala's Orinoco oil belt is home to similarly sized "heavy oil" deposits, but does not meet the description of a politically stable area at this time. While some of the bigger players involved in the region are sticking it out, "new taxes and ownership measures" imposed by the Venezuelan government are unlikely to attract new investment and operations from foreign companies.

The tar sands projects have been kept aloft by high oil prices, but recent conditions have brought about some tightness and uncertainty in the industry. Shell Canada and Western Oil Sands issued a warning last week about cost pressures related to the expansion of their Athabasca projects, causing Western's share price to fall by 13% over the next two days. As this Resource Investor article points out, the "market chill" extended to most of the tar sands producers trading on the Toronto Stock Exchange.