Wednesday, August 19, 2009

Profiting from the North American Oil Sands

Whiskey & Gunpowder

Gary’s Note: Oil sands operations are almost unbelievably immense, but increasingly necessary if we want to keep the lights on. Byron King explains why you should take a stake in these operations right now.

Whiskey & Gunpowder
By Byron King

August 19, 2009
Pittsburgh, Pennsylvania, U.S.

Profiting from the North American Oil Sands

A couple of weeks ago I was in Fort McMurray, Alberta.  I was visiting two large oil sands operations, courtesy of Conoco Phillips, Syncrude Canada and the American Petroleum Institute, which sponsored the trip.  I’ve been all over the place, but never to a working oil sands operation.  This was a first for me, and quite an eye-opener.

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What Are These Oil Sands?

Back in Pleistocene time, the glaciers covered much of northern Alberta.  In places, there was a mile of ice.  During some of the warmer periods, there was a lot of melting.  On occasion, and in some places, there were giant, glacial-dammed lakes.

Every now and again, these glacial dams would break, sending massive volumes of water downstream, wiping away pretty much everything along the way.  Well, it turns out that in this scoured-out area that included much of the rock covering some lower Cretaceous deposits of oil.  Or rather, it was “oil” that had long ago lost the volatile components.  The stuff is properly called bitumen.

Thus we have an area in northern Alberta that’s about the size of New York State.  That area holds near 1.4 trillion barrels of bitumen resource.  To be sure, not all of it is recoverable.  In terms of recoverable “reserves,” there are only (ahem…) about 175 billion barrels, or over eight times the total of U.S. oil reserves.

Of those 175 billion barrels, about 20% are near enough to the surface to strip mine.  That’s within about 250 feet or so.  Any deeper, and the cost-benefit calculation dictates that you have to recover it via a well-and-pumping process.  Still, that makes for about 35 billion barrels of bitumen that could be extracted by mining.  (About 1.5 times total U.S. oil reserves.)  The actual, mineable area is about the size of Rhode Island.

The Heart of Oil Sands Country

All of which gets me back to why I was in Fort McMurray.  This is the heart of oil sands country.

Near 200 years ago, early explorers noticed gooey oil seeping out of the banks along the Athabaska River.  On warm days, with direct sunshine, the stuff actually flows.  Mostly, it has the consistency of peanut butter.  Unless it’s cold up here – which happens a lot – and it’s hard as a rock.

Needless to say, people talked about these “oil sands” for a lot of years.  Then in the 1960s, some people within Canadian industry and the Alberta government began to do something about it.  They decided to develop them.  It’s a long, long story.

Here’s the Short Version

The short version of the story is that large-scale oil sands development began in the 1970s.  It took gigantic levels of capital investment, like tens of billions of dollars.  That’s not pocket change.  So a group of lease-owners got together and pooled their capital to form Syncrude Canada, a joint venture.  First mining started in 1978.

Thing is, the way Syncrude operates it’s not really “mining.”  It’s landscape architecture.  Under Alberta law, Syncrude could not turn over its first shovel of rock without a master plan for remediation and restoration at the end of the cycle.

So for much of the 1970s, Syncrude performed baseline environmental studies and data-gathering.  Then they started digging in 1978.  At first, the pit looked like a moonscape of open pit mining.

The process is fairly straightforward.  Big shovels (really big) scoop large volumes (really large) of oil-laden sand (API number 8, the “bitumen”) into gigantic loaders (and I mean gigantic.)  The loaders haul the rock to a crusher.  The crushed rock goes to a washing bin, kind of like your washing machine at home except it’s the size of a high-rise office building.

The Syncrude operation washes the bitumen off the sand using naphtha.  Then they separate the bitumen, recover the naphtha for reuse, take the clean sand (and it’s clean), and replace it in a previously-mined pit.

The process uses a lot of water, but not as much as the horror-stories you might hear about “draining the rivers” of northern Canada.  Each barrel of water is recycled about 18 times.

The process uses a large amount of natural gas, but not as much as you may have heard (like, “all the natural gas of northern Canada.”)  Pretty much everything about the operation is built with co-generation in mind, so they continuously recover the heat at each stage.  That natural gas goes a long way, from what I saw.

If it takes, say, five years to dig a pit, then it may take five or more years to fill it back up with sand during the restoration process.  Syncrude’s goal is to handle the rock as little as possible.

Eventually, Syncrude returns the land to original grade, although they have some artistic license with the contours.  They cover the land with the original topsoil, that’s been in cold storage (northern Alberta… it’s cold up here for 10 months of the year).  Then they replant trees, and that’s saying something because the growing season is under two months.  It takes 80 years for your basic spruce tree to reach maturity.

There’s even a new water table, despite the disturbance of the land.


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Where Things Now Stand

So at this stage, after 30 years or so of mining (with about 80 years to go, at current rates of extraction), Syncrude has come to a point of delivering 350,000 barrels of synthetic crude oil per day.  They take the 8-API bitumen and upgrade it to oil that’s competitive with West Texas Light.  Then they deliver it to the JV members, for whatever use the owners want to make of it.

Along the way, the Syncrude process removes the sulfur, so it’s sulfur-free (refiners like that).  In fact, there’s a mass of sulfur up at Syncrude that’s about the size of the Step-Pyramid at Suqqhara, Egypt.  And along the way, Syncrude sells the sulfur to the chemical industry.

I visited a former Syncrude mine, about 3.5 miles square and formerly about 200 feet deep.  Now it’s restored to grade, with trees growing and a herd of 300 wood bison grazing.  For the cynics out there, I’d say that it’s not some environmental Potemkin Village because you can’t fake a replanted forest of 25-year old trees.  You can’t fake a 300-bison herd.  Not on a former mine site 3.5 miles square.

Bottom line is that this is an immense operation.  Syncrude employs 5,000 people, plus 2,000 contractors.  Paychecks are north of $100,000 per year.  Every oil sands job supports 3 local jobs, 6 provincial and 9 others across North America (especially at Caterpillar, where they build those giant, 400-ton loaders).

In the coming weeks I’m going to delve deep into North American oil sands operations and any companies that may be set to profit. Oil sands are nothing new, but now may be the perfect time to scoop up shares of a small player or two…

Byron W. King

Parting Shot...

Back to the hollering!

A few points about your and your reader's recent musings over healthcare reform:

1.  Quite a few people seem to think that there is not that much wrong with the current system. These ones must be in the upper income spectrum to believe this. Any public option is bound to be better than what we now have, and the current cost of this "care" to the middle class is second only to the mortgage. This is not a free-market system, in any way shape or form. It is a corporatist system, top-heavy with bureaucracy, that enjoys monopolistic markets, has groups of people making life-and-death decisions for the purpose of profit only, and spends way too much on fancy new facilities, executive pay & perks, and advertising budgets.

2.  Much is being made about "higher taxes" and "high costs" of any public option, and this is all pure conservative "think tank" propaganda foisted upon dim and paranoid minds. Higher taxes? Yes. But what's not being said is that tax increases will be more than offset by reductions or elimination in insurance premiums, due to increased financial efficiencies.

3.  Much is being made about how bad the public system is in Canada, but little comment about anywhere else. Several European countries have fine and effective public systems, that could be modeled after, and costs are less than half of what we are paying. 
I know none of this will ever get printed by you, and there is much more truth out there that is being ignored by other pseudo-free-marketers, solely because it is an extremely lucrative "business" to profit immensely from people's fears of death and disease. Profitable, but totally immoral.

We have nothing to hide and stand to profit nothing. We aren’t pseudo-free marketers; we’re the real, ruthless thing and we know the dangers of monopolies—like governments!

You seem to be laboring under the notion that just because government takes something over it will be new, improved and infinitely available.

Insurance companies have gotten between the doctor and the provider to ration care cruelly, inflate costs and take their cut. (I’m sure we’ll be arguing about the “free market” nature of insurance more in coming Shots.)

The government will be worse than the insurance providers, except they won’t be operating at a profit.

If you want to see how well the much ballyhooed European system work, gird yourself and read some news here... mostly from actual U.K. papers!

But now here’s a report from South Africa…

The SA medical aid scene appears to be on the brink of some sort of a disaster and Big Brother is also planning to introduce a "Free Medical Aid" package for its 48 million citizens. Personally I have excellent medical insurance as a pensioner but just how long that will last is a serious question.
However let me recount a recent discussion with a family member who is a consultant surgeon specialised in treating burns patients. She is employed at a government-controlled hospital where most patients are treated at little or no cost.  More recently she was involved in rehabilitating two factory labourers who had been severely burnt. Both patients required extensive medical attention with daily visits to the theatre to remove damaged tissue. After some 6 months of hospitalisation they were discharged. The estimated cost of medical care was R4.8million and R3.2 million respectively. Whilst your readers might not be conversant with the value of a South African Rand I can assure you R4.8 million is the equivalent to 8 yrs salary before tax to me and I hold a middle management position within the oil industry.
I have experienced the UK NHS system albeit many years ago and I survived the stay in hospital. However I am now told things have changed for the worse since the mid 1970's. I too have been a patient at another SA government hospital and experienced no problems but again that was a long time ago. I visited a friend dying from cancer in the same hospital some 3 years ago and was profoundly shocked to see the disgusting state of the wards-- unswept floors and mould growing on the ward walls. I shall not describe the state in which I found my friend. Unbelievable to say the least!
A government-controlled health care system? It will cost a fortune to operate anywhere in the world. Good luck to all US tax-paying citizens!!


We can throw statistics at each other till we’re blue. I can run as many anecdotal accounts as pour into my inbox. But those of you who must believe that you can get something for nothing will continue to believe so.

But we’ll continue to talk at each other about it for a few more years. When it becomes untenable…as the quality continues to slide and the costs mount…the whole system will collapse in clumps around the world…just like other forms of collectivism.

Until then, the wheels are greased and we’re on our way. You can expect rationed care ala the federal government to be rammed down your throats.

Maybe you should really give the Whiskey Trade of the Decade more thought. Get out now while you can. Or you can take your chances with your local secessionist movement. Your editor is a lover, not a fighter, and is not one to stand in history’s way.

Remember: there is no shame in hiding in South America till this all blows over. Maybe one day your descendants can return and re-settle a fragment of the U.S. once the D.C. monster has rolled over and died.

Gary Gibson
Managing Editor, Whiskey & Gunpowder

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