Still Think Oil Sands are the Answer?
Posted by Prof. Goose on August 10, 2005 - 9:06pm
Mike Millikin over at GCC has put together a piece on the growing costs of increasing outputs from oil sand deposits:
Technorati Tags: peak oil, oil
Shell Canada has increased its estimated cost for expanding its Athabasca Oil Sands Project production to 300,000 barrels a day from the current 200,000 by 83%—from C$4 billion (US$3.3 billion) to C$7.3 billion (US$6 billion).More importantly:
Shell Canada plans to raise production in two more 100,000-barrel-per-day stages to an eventual 500,000 kbpd.
In the AOSP, the Muskeg River Mine extracts the bitumen, which is sent via a pipeline to the Scotford Upgrader in Fort Saskatchewan, Alberta. After upgrading from the heavy bitumen to a lighter oil, the product is sent to refineries.
(The pipeline owner, Terasen, recently said it may spend as much as C$1 billion (US$826 million) to almost double daily pipeline capacity to 500,000 barrels by 2009. On 1 August, Houston-based Kinder Morgan agreed to buy Terasen for about US$5.6 billion (C$6.9 billion).)
"Costs are just getting mind-boggling," said Glen MacNeill, who manages C$800 million in assets, including 105,000 Shell Canada shares, at Sentry Select Capital Corp. in Toronto. "It's making me a lot more cautious. Investors just can't go in and buy the models that the companies are giving you because they don't work."
But even if the expansion cost is shared across the total volume of the subsequent planned expansions (essentially tripling the volume), that still works out to C$66.67 (US$55) per annual barrel of production—and that's without factoring in any additional capital costs for the final two expansions.We don't know exactly what that means regarding when oil sands become profitable, but it sure ain't $65/bbl.
Technorati Tags: peak oil, oil
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Good God! PG -- I've commented information on this before, out of control costs for getting low grade oil out of these oil sands at enormous costs using large quantities of natural gas and water, not to mention the energy-intensive logistics of the extraction process. CERA would have us believe that this is going to be some kind of panacea by 2010. This has been and is a fantasy.
EP has had some very insightful things to say about it. A good, timely post.
When the hell are these"energy optimists" going to remove their heads from .... uhmmm ... the place where the sun never shines?
Perhaps its way too naive for me to suggest that we start conserving energy like crazy, as if it's wartime, which it is.
I've been reluctant to put much money into oil sands for this reason, although I do operate under the assumption that if Shell - which has global reach and a global awareness of what is happening in fields in many countries - is willing to spend these dollars, its for a good reason.
To them, good reason = profit and a strong assumption that the buyers will be there at a price which generates a return. For energy investors a chunk of change needs to be allocated in oil sands but for near term gains I prefer more traditional producers... and domestic natural gas even more.
The early oil sands innovators were laughed at, way back when, at what seemed like a science project. Of course other commodity and labour costs were lower then than now... what if they had to start a build out and the R+D required to make a go of it, with today's costs?
That's the big fear, isn't it... that business and government will wait too long - that it will be too late to do the work neccessary to replace / find alternatives.
Back to natural gas... people are just starting to wake up to the fact that NG is trading at levels not normally seen in the summer time. Some of this appreciation is purely oil driven but its becoming more and more clear that we are going to see a supply crunch and higher NG prices over all perhaps not just for this year but for the next few.
Last time NG was at current levels (or at contract-adjusted similar peaks), going back to 1996, weeks of:
2004-11-26
2004-10-29
2003-02-28
2000 - December - early Jan 2001
The "average" price for most of 2005 was around 7$; in 2004 it was about $5.80, about the same in 2003.
In 1999 you could buy some NG contracts in the low 2$ range.
We may be looking at 10 - 14$ NG this winter. 30 - 100% increase in heating costs in the winter; already 40 - 80% increase in fuel costs for NG-driven electricity this year over last.
Stunning!
Useable liquids from tar sands in Alberta can only rise and rise due to NG costs, I assume that's your point, Mike? That makes sense to me earlier and now....
Shell is spending that money because oil prices are going to go up and up and up, they know that and they're not stupid in regard to business profits.
This takes me back to some remarks that were made on previous threads in which Jim Kunstler was criticized in one of his "over the top" posts at clusterfuck for saying that "non-conventional" sources were not going to be cheap.
Damn right.
"I've been reluctant to put much money into oil sands for this reason, although I do operate under the assumption that if Shell - which has global reach and a global awareness of what is happening in fields in many countries - is willing to spend these dollars, its for a good reason".
Seems the only conceivable reason is that there isn't anything else!
Did everyone else see the National Geogrpahic Channel show on oil sands? It was one of those "moster proejcts" or "mega machine" type shows ... but oh my gosh it drove down how hard they work (and how much they spend) to get oil. They also stressed how fast everything wears out, when you are processing SAND 7x24.
I saw that and just shook my head ... that people could think that effort could replace cheap oil.
The mountain of excess sulfur they'd been stacking up was pretty impressive too.
Well, everybody might want to remember the obvious - if an oil company runs out of oil, what does it do?
Thus Shell and others will put their money into things they can wrap their mind around that are in their area of expertise, not outside of it.
Look at the percentage of BP money going into solar or the percentage of Chevron money going into NiMH batteries....they are NOT comfortable moving away from their core expertise.
"But even if the expansion cost is shared across the total volume of the subsequent planned expansions (essentially tripling the volume), that still works out to C$66.67 (US$55) per annual barrel of productionand thats without factoring in any additional capital costs for the final two expansions."
If I get this right, the cost of the first stage is
$55/bbl * 300000 bbl/d * 365 d = $6 billion
Say a 10% return is required on that $6 billion.
100000 bbl/d brings in $600 million/year at $16.4/bbl .
Operating costs would have to be $48.6/bbl to make production
unprofitable at $65/bbl.
Operating costs could easily be in the high forties. Coal costs at least $30/ton nowadays (mostly mining costs); aggregate quarries charge around $10/ton. Since it takes two tons of oil sands to make one barrel of oil, there could be anywhere from $20-$40/bbl just getting the sands. To that add the natural gas costs for heating and hydrogenation, the cost of water, and the cost of labor I could see close to $50/bbl.