Although the energy potential of bitumen has been known for a long time, it is only in recent times that a combination of higher oil prices and technological advances has allowed them to be widely considered part of the world's recoverable oil reserves. Several countries have known oil sands or extra-heavy oil resources. The vast majority is found in Canada and Venezuela. Other countries which might develop an industry include the United States, the Democratic Republic of Congo, Madagascar, and the Russian Federation.
In 1998 Scientific American brought to the world’s attention, for the first time in a prominent way, the promise of Canada’s oil sands situated in the province of Alberta. The magazine announced to the world what Canadian oil & gas companies had known for decades: the Alberta oil sands hold a tremendous amount of producible oil. It is estimated that Canada has about 175 billion barrels of oil that can be recovered with today’s technology. That represents the third largest oil reserves in the world after Venezuela and Saudi Arabia (rankings as of January 2011). The volume of recoverable reserves may further increase as advances in technology improve the recovery ratio. This underscores the importance of the oil sands resource in both Canada and in the world.
Over 97 per cent of Canada's reserves are located in the Alberta oil sands, with the majority of the remaining deposits being located in Saskatchewan. The Alberta oil sands constitute the world’s largest formation of bitumen. With an estimated total potential oil reserve value of 315 billion barrels, there remains a substantial opportunity for development of the three major Alberta oil sands deposits found in the Athabasca, Cold Lake and Peace River regions of Alberta. These resources represent significant long-term oil production within a politically stable country currently linked through existing infrastructure to markets in the United States. The growth of oil sands development has also prompted new proposals to expand the existing TransMountain (TMX) pipeline and to build the proposed Northern Gateway pipeline in order to facilitate the export of oil to Asia from Canada's west coast.
In 2010, Canada was the number one exporter of oil to the U.S. supplying an average 1.9 million barrels a day, compared with 1.2 million from Mexico and 1.1 million from Saudi Arabia. Oil production from the oil sands is expected to more than double in the next 10 years, making Alberta one of the few places in the world where oil production is increasing. Along with this growth opportunity, however, there are also environmental and social challenges that will have to be faced and overcome, as discussed later in this paper.
For further detailed information on the regulatory environment for oil sands projects in Canada, please refer to our separate publication Canada's oil sands: The opportunities and challenges for foreign investors
Canadian and foreign companies are increasingly combining through formal partnerships, strategic alliances and joint ventures to contribute the technology, expertise and capital necessary to execute a successful oil sands project. In its recent publication The rise of Asian investment in Western Canada, Ernst & Young reviewed the level of foreign investment in unconventional oil and gas assets in Canada, including oil sands, and concluded that during 2010 “… the number of inbound oil sands-focused transactions from Asia tripled, as countries like China, Japan, Thailand and South Korea actively sought to secure natural resources around the world and completed several major deals in Western Canada.” In total, Asian investment accounted for US$9.2 billion during 2010 (compared to US$5.9 billion in 2009 and almost nothing in 2008).
This increasing investment from Asia comes on the heels of significant and continuing investment from the United States by companies such as Exxon Mobil, ConocoPhillips, Chevron and Devon as well as investment from European-based companies such as Total and Statoil.
Continuing oil sand investment is evident from the number of significant oil sands and associated investments made in 2010 and 2011. These include the following:
- The acquisition by Sinopec International Petroleum Exploration and Production Company of ConocoPhillips’ 9.03 percent interest in Syncrude Canada Ltd.’s oil sands operation for US$4.65 billion, and subsequent acquisition of Daylight Energy for C$2.2 billion.
- The C$2.1 billion acquisition by China National Offshore Oil Corporation Ltd (CNOOC) of OPTI Canada Inc., a company holding a 35 percent working interest in the Long Lake oil sands project.
- The purchase by Thailand’s PTT Exploration and Production Company of 40 percent of the Kai Kos Dehseh oil sands project from Statoil ASA for US$2.28 billion.
- The investment by the China Investment Corporation, a Chinese sovereign wealth fund, of C$1.25 billion into the Penn West Trust to develop Penn West’s Peace River oil sands assets.
- A new joint venture between Suncor Energy Inc. and Total S.A., which included a C$1.75 billion payment by Total to Suncor as a result of the balancing of portfolio interests, and reportedly will result in Total spending $20 billion on Canadian oil sands projects by 2020.
China in particular appears to be investing significantly in oil sands. In addition to the transactions undertaken in 2010 and 2011 outlined above, PetroChina invested $1.9 billion in 2009 in oil sands developer Athabasca Oil Sands Corporation, Sinopec owns a 50 percent interest in the Northern Lights oil sands project in conjunction with Total and CNOOC originally purchased a 16.7 percent interest in MEG Energy, a small but growing oil sands developer that plans to eventually produce up to 500,000 barrels per day.
Venezuela follows Canada as the second largest commercial oil sands developer in the world. Its reserves can be principally found in the east of the country, north of the Orinoco River, in the Orinoco oil belt. They are not technically bitumen reserves, but rather extra-heavy oil deposits, still with a very low API gravity but which have not been subject to the same degree of degradation as oil sands. The Venezuelan deposits are at a much higher temperature than those in Canada (upwards of 40 to 50 degrees Celsius versus freezing for northern Canada), which improves their viscosity and means they are easier to extract using modern horizontal drilling techniques.
Although the deposits are easier to produce, they are still too heavy to transport by pipeline or to process in standard refineries. In the early 1980s, Venezuela’s state oil company, PDVSA, developed a method to enable the resources to flow in pipelines by emulsifying 70 per cent extra-heavy oil with water. This process produces Orimulsion, which can be burned in boilers as a replacement for coal and heavy fuel oil with only minor modifications. However, the Venezuelan government made a decision not to market Orimulsion any further since it considered that the prices obtained for such boiler fuel were to low when compared to market prices for syncrude.
The Orinoco oil sands belt in Venezuela is now thought to contain 513 billion barrels of ‘technically recoverable’ oil; this is more than double what was previously estimated (235 billion barrels). Although this represents almost double the 264 billion Saudi Arabian recoverable barrels, the heavy Orinoco oil requires a huge amount of refining to turn it into useful fuel, in comparison to Saudi light oil which is very easily refined.
Venezuela, unlike Canada, has not had the resources to harvest its supplies. It has not been able to optimise the design and construction of upgraders and heavy oil refineries due to a lack of capital and technological skill. The Venezuelan government has attempted to attract foreign investment to the industry. This met with initial success and leading international oil companies such as Phillips, Texaco, Conoco, TotalFinaElf (as they were all then known), ExxonMobil and Statoil, partnered with the state-owned PDVSA for four major heavy oil projects in the Orinoco belt. However, progress was partially suspended, due largely to the re-nationalization of the oil industry in 2007. Two leading companies involved in the extra heavy oil projects, ExxonMobil and ConocoPhillips, were expropriated after failing to agree terms for a new joint venture under the nationalization laws which gave PDVSA a minimum 60 percent stake. Chevron, Total and Statoil agreed to the new nationalization terms, and have continued to develop their projects with PDVSA.
The government’s policy to invite further foreign participation and the discovery of new resources, have resulted in increased interest in the area. In 2010, the China Development Bank agreed a US$20 billion facility with Venezuela's state oil company PDVSA to finance infrastructure projects: representing the largest ever financing in the area. Investments in the four key areas in the Orinoco belt – the Carabobo, Junin, Ayacucho and Boyaca areas – have continued since 2007. Numerous MOUs, study agreements and general agreements have been struck, but activity peaked in early 2010 when companies including Chevron, CNPC, Eni, Gazprom, Inpex, Lukoil, Mitsubishi, OIL, ONGC, Petronas, Repsol and Rosneft obtained contracts to develop large blocks and associated upgraders. Two of those new projects were awarded in a bid process and the rest were directly awarded, mainly based on State-to-State accords entered into by Venezuela over the past decade.
With dwindling resources in North America, and rising oil prices, it looks likely that the Venezuelan oil sands industry could follow that of Canada, provided the political environment facilitates the necessary investment. One of the biggest challenges as well is the fact that PDVSA is mandated to take at least 60 per cent in each project and therefore the need for their share of the capital increases exponentially.
Bitumen from oil sands is currently not produced on a significant commercial level in the United States. Oil sand resources are primarily found in the Uinta Basin in Eastern Utah, mostly on public lands. Resources in the area are estimated to be at between 12 and 19 billion barrels, representing about 90 per cent of all US resources, although not all of that would be accessible. Several projects were attempted in the 1980s, but they have all since been abandoned, due largely to stagnating oil prices at the time.
However, in September 2009, the Division of Oil, Gas and Mining of the Utah Department of Natural Resources gave its conditional approval to a notice of intention to commence large mining operations by Earth Energy Resources. The company, which was acquired by International LMM Ventures Corp in April 2011 and renamed US Oil Sands Inc (USO), has obtained a permit to construct a bitumen mining project at PR Spring in Utah, targeting first production in 2013. It also has bitumen leases covering over 32,000 acres of Utah state land for exploration, and has estimated that its current holdings have around 177.8 million barrels of discovered bitumen initially in place.
In the period since November 2009, the granting of permits to USO was appealed several times by two environmental groups in an attempt to prevent the USO project proceeding and setting a precedent for the industry. USO, meanwhile, maintains that its citrus-based solvent is capable of removing over 96 percent of hydrocarbons from oil sands while leaving no toxins or tailings ponds. The appeal process is ongoing with the Division of Oil, Gas and Mining and the Division of Water Resources.
Currently the USA imports around 20 per cent of its oil and refined products from Canada, and over 50 per cent of Canadian oil production is from oil sands. With oil prices rising, there are significant economic reasons for the United States to look to develop its own bitumen resources. However any proposed development of oil sands projects in the United States is likely to attract acute opposition from environmental groups, judging by the active resistance to the development of new pipelines to import Canadian oil sands crude, such as the Keystone XL pipeline. The outcome of the challenge to USO’s permits will have a significant impact on whether, and when, these resources are able to be developed.
Republic of Congo
In 2008, Eni discovered a large oil sands deposit in the Republic of Congo (Congo-Brazzaville) that was estimated to hold several billion barrels of recoverable oil. While the reserves may not be as large as the oil sands discovered in other countries, they are nonetheless substantial. Eni was granted an exclusive license to explore and develop two oil sands fields, Tchikatanga and Tchikatanga-Makola, covering around 1,800 square kilometres in Kouilou department, near the coast.
The resource discovered in Eni’s permits are reportedly deep, and less viscous than the average oil sands in Canada, which suggests that production is likely to be via in situ means rather than strip mining with subsequent water treatment. According to statements released by Eni, the company plans to use the Eni Slurry Technology (EST), a hydroconversion process employing a slurry nano catalyst and a particular process scheme to convert the bitumen into low environmental impact distillates without producing by-products. The EST plant will also utilise feedgas from the nearby Eni-operated M'Boundi gas field.
It is estimated that oil sands and extra-heavy oil lie beneath a substantial portion of Madagascar’s surface. The two most explored fields are Bemolanga (oil sands) and Tsimiroro (heavy oil).
The Tsimiroro field is wholly owned and operated by private company Madagascar Oil. It is located in the onshore Morondava basin, and as of September 2011 is estimated to hold between 1.1 billion barrels to 2.5 billion barrels. The field has been tested and will be produced using "in-situ" steam-flood methods, which the company expects to have a 70 per cent recovery factor. According to releases by Madagascar Oil, the steam flood pilot is expected to reach first production in the second half of 2012, and the national authorities estimate commercial production to commence in 2015.
The Bemolanga field is 60 per cent owned and operated by Total SA, with the balance owned by Madagascar Oil. Exploration activities commenced in 2009, and in mid-July the companies received a one year extension to the licence. However, the companies have deferred the bitumen mining project and the new work programme will focus on deeper conventional hydrocarbons. Accordingly, no production of bitumen is expected in the near term.
There are many wide and diverse ranges of estimates for oil sands in Russia, including up to as much as 250 billion barrels of bitumen resources. As there has been little exploration activity, and there is no real transparency on reserves reporting, it is difficult to estimate the resources with any degree of confidence. Recoverability is another factor to consider. While the Tunguska basin is expected to hold extensive resources, its location in the Krasnoyarsk Krai and Sakha Republic in Eastern Siberia means those resources are unlikely to be economically recoverable in the near future. Estimates of technically recoverable reserves are therefore more modest, including an estimate by the U.S. Geological Survey (USGS) of 33.7 billion technically recoverable barrels of bitumen, primarily in the Melekess oil sands in the Volga-Ural Basin in the Republic of Tatarstan.
There has been little in the way of oil sands development in Russia to date. Since 2006, OAO Tatneft has been operating a pilot project at the Ashalchinskoye field in the Volga-Ural basin to test a modified heat stimulation technology through dual wellhead horizontal wells. OAO Tatneft, whose largest shareholder is the Republic of Tatarstan, essentially has control over the oil sands in the Republic. The Volga-Ural area has also attracted international interest, and in September 2007, Royal Dutch Shell signed an agreement with OAO Tatneft to explore the heavy bituminous fields in Tatarstan.
As production of conventional oil resources declines in the traditional ‘workhorses’ of the Volga-Ural and Western Siberia basins, and the pilot SAGD project for recovering Melekess bitumen advances, there may be an increased push to develop bitumen in Tatarstan and across wider parts of Russia.