The International Energy Agency claims that 37 million barrels per day of non-conventional oil will be produced by 2030. This is too optimistic an estimate feels N. SHANMUGANATHAN, looking at the trends and extrapolating the production scenario in the Canadian and Venezuelan tar sands, the main sources of non-conventional oil.

N. Shanmuganathan

The world has 10 trillion barrels of oil left

Rex Tillerson, ExxonMobil, May 2006.

Mr Tillerson is probably right, but what is important is how much oil can be produced, at what costs and in what timeframe. The different species of hydrocarbons have very different characteristics with varying production and depletion patterns which need to be accounted for when forecasting supply. As we will soon demonstrate, combining all types of hydrocarbon reserves into a single category is highly misleading.

Liquid hydrocarbons can be broadly classified into conventional and non-conventional crude.

Though there is no industry-standard definition, for our purpose we will assume that the following categories constitute the non-conventional type: Heavy oil produced from tar sands, shale, etc,; deepwater greater than 500 metres; polar; and natural gas liquids (NGL).

Of these categories, the source of greatest promise is heavy oil. Of the world's non-conventional oil originally in place, that is, seven trillion barrels, the tar sands in Venezuela (they call it extra-heavy oil), the tar sands in Canada and the shale oil in the US account for more than 80 per cent.

Canadian Tar Sands

The International Energy Agency (IEA) claims that 37 mbpd (million barrels per day) of non-conventional oil will be produced by 2030, with the bulk coming from the Alberta tar sands of Canada and the Orinoco belt in Venezuela.

The Canadian tar sands, a production source for 40 years now and with a capital investment in excess of $25 billion, produce a little over one mbpd today. The operations in Venezuela are relatively more recent, with a production of just 54,000 bpd, and so it is useful to study the Canadian tar sand operations to extrapolate the production scenario.

Canada's oil sands are a significant source with the initial volume of crude bitumen in place estimated at 1.7 tb (trillion barrels), of which about 170 bb (billion barrels) is recoverable.

In fact, if the reserves of tar sands were included along with the reserves of conventional crude, Venezuela would catapult to No. 1 and Canada to No. 3 (now a low 22) in the list of countries with proven reserves.

Incidentally, at the cost of repeating what has been said in our earlier articles, we should state that the officially reported reserves of the OPEC are inflated and its current reserves are much lower than those shown in Chart 1.

The usual argument of the Cornucopian's (title coined by Prof Kenneth S. Deffeyes to indicate the group whose ideological position is opposed to that of the Hubbertians) is that there are huge reserves of tar sands (as indicated in Chart 1), which can make up for the depletion of conventional crude.

Never a Saudi Arabia

The oil sands are extracted in two ways: "Open Cast Mining" and "In-situ Thermal Extraction". In the former the overburden has to be removed to reach the deposit, with 75 metres depth being the current economic limit. Huge pits are excavated, and what amount to industrial plants are erected to separate the bitumen from the sand.

In-situ methods have been applied to extract bitumen from deposits too deep for surface mining. They rely on reducing the viscosity of the bitumen with the help of solvents, steam or underground combustion.

There are many reasons why even after nearly four decades of operations and billions of dollars in capital investments and technology improvements, the tar sands have yielded just about one mbpd. The main reasons are because they are:

Energy intensive:

EROEI (Energy Returned On Energy Invested) defines the net energy available after accounting for the energy spent in extracting, transporting and refining the original source. For conventional crude, EROEI is about 1:30 that is, 30 barrels of oil for every one barrel invested. The equivalent for Canadian tar sands is about 1:1.5 to 1:3, indicating much lower energy returns.

Environmentally damaging:

Oil sands production generates about three times as much greenhouse gas emissions as conventional oil production. For every barrel of oil from tar sands we get about 80 kg of CO2 emissions. This translates to an emission of about 70 Megatons of CO2 from the oil sands industry alone by 2010 while Canada is committed to reducing CO2 emissions by about 240 Megatons by 2010.

There is rampant seepage of pollutants from ponds, pits and landfills into freshwater aquifers making them unsuitable for drinking and fishing.

Use other scarce resources:

In-situ operations use lots of clean water in the form of steam to mobilise the bitumen. It takes about three barrels of clean water to extract one barrel of bitumen.

Natural gas is used for generating steam and to recover and extract the bitumen. Also, as the bitumen is low in hydrogen, natural gas is used in the upgradation process to produce synthetic crude oil (SCO). Mr Mathew Simmons, Chairman and CEO of Simmons & Company International, argues that using natural gas to produce SCO is like turning gold into lead.

According to a Long-Term Crash Mining forecast by Prof Kjell Aleklett (Uppsala University, Sweden), we can achieve a production of about five mbpd by 2030 from the Canadian tar sands ( Chart 2). This is of course ignoring the resource constraints of water, natural gas and environmental restrictions.

The study also indicates that a nuclear plant would be necessary to provide the energy needs as the available natural gas reserves of about 90 Tcf in Canada would be completely exhausted by 2025 if used for the programme.

Given the resource constraints, we can expect no more 2.5-3 mbpd from the tar sands of Canada by 2030. The situation with Venezuela is much worse.

While the oil majors would more than willingly make the capital investments in Canada, nobody would do so in Venezuela, courtesy, Hugo Chavez.

PdVSA (the state-run oil company of Venezuela), even if willing to allocate the capital, does not possess the technical expertise to run such an operation. About 0.5-1 mbpd is all that can be expected from the Orinoco belt by 2030.

So how does the IEA assume that we will get 37 mbpd of non-conventional oil by 2030? Maybe we will get five mbpd from Canada.

Suppose we are more optimistic and assume that Venezuela comes to be accepted as a "true democracy", the ensuing capital and technology flows might bring in another five mbpd from Venezuela.

Where will the remaining 27mbpd come from? It is clear that the ultimate production profile of oil would be driven primarily by the reserves of conventional crude for a long time to come. Even if we have 20 trillion barrels of non-conventional oil, it wouldn't do much to postpone the Peak.

We are not saying that the tar sands are not important on the contrary, on the down slope of Hubbert's Curve, it will become much more important.

It is just that they cannot be produced in sufficient quantities to account for the depletion of conventional crude.

(The author is a Chennai-based financial adviser.)

(This article was published in the Business Line print edition dated August 16, 2006)
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