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Nonstop Growth for Gas-Eating Canadian Oil Sands Development

There is no relief in sight from gas demand growth in the Alberta oil sands that is eating into supplies available for export to the United States, according to a Canadian industrial gas consumer forecast.

Petro-Canada, one of the industry's most cautious planners, highlighted the growing industry determination to keep the oil sands rush going in a new filing with the Alberta Energy and Utilities Board. Non-stop growth, described as "full-scale continuing construction," is sought by the plan for a bitumen processing plant named the Sturgeon Upgrader after its rural location about 40 kilometers (25 miles) northeast of the Alberta capital of Edmonton.

Instead of oil prices, the key factor setting the pace is a company strategy for keeping together a team of scarce skilled construction workers. Up to 4,500 will be required. The program calls for the upgrader job to start immediately after about 2,500 workers finish renovations currently underway at a Petro-Canada's oil refinery on Edmonton's eastern edge in early 2008.

A skilled team will be kept together by the continuous construction plan. The non-stop approach is intended to help prevent delays, worker shortages and cost inflation caused by feast-or-famine project rushes that have repeatedly driven up price tags on oil sands developments.

The Sturgeon upgrader will be built at a pace set to match construction of the Fort Hills bitumen mega-mine north of Fort McMurray by Petro-Canada, UTS Energy and Teck Corp. Fort Hills will also require a skilled labor force peaking at 4,500 or more.

New cost estimates are still being prepared. Petro-Canada shareholders were warned earlier this year to expect combined costs for the bitumen mining and processing projects to come in at C$90-$120,000 (US$81-$108,000) per barrel of production capacity.

The forecast indicated total commitments to Fort Hills and Sturgeon will approach the price tag of up to C$12.8 billion (US$11.5 billion) on an expansion scheduled to begin early in 2007 by the Athabasca Oil Sands Project, which also has a Fort McMurray Mine and Edmonton-area upgrader. At the same time, Suncor Energy is embarking on a C$7 billion (US$6.3 billion) expansion of its combined bitumen mine and upgrader plant north of Fort McMurray.

The Sturgeon site will go into operation in three phases. The first stage is scheduled to start producing in 2011 at a rate of 130,000 to 145,000 bbl/d. As the refinery-ready synthetic oil begins flowing, construction will start immediately on two plant additions of about 85,000 bbl/d each. The site will eventually process up to 340,000 b/d of bitumen, including all Fort Hills production and additional raw material from other oil sands projects that do not include upgraders.

By stripping unwanted materials such as charcoal-like petroleum coke and sulphur out of bitumen, the Sturgeon plant will make up to 280,000 bbl/d of premium synthetic oil. Upgrader production fetches prices up to twice as high as bitumen at refineries. Athabasca and Suncor have set their sights on achieving production of 500,000 bbl/d through continuing expansion stages.

Thermal oil sands extraction and processing systems consume up to 1 Mcf of gas for every barrel of production -- and sometimes more, in cases of inefficient projects and low quality reserves. Total oil sands gas consumption is forecast by widespread Canadian industry consensus to triple within 10 years to 1.8 Bcf/d -- an amount equal to all the new arctic supplies that will be added by the proposed Mackenzie Gas Project.

Oil sands growth is a factor in a steady decline seen ahead for pipeline exports of Canadian gas by the 2007 edition of the U.S. Energy Information Administration's (EIA) annual 25-year international outlook report.

The EIA forecast anticipates an annual average decline in Canadian gas exports of 4.6%, down from 3 Tcf in 2005 to 2.7 Tcf in 2010, 1.6 Tcf in 2020 and 920 Bcf in 2030.

Oil sands production, on the other hand, is forecast to nearly quadruple to 3.7 million bbl/d. Canadians expect the lion's share of the output to continue to be exported to the U.S. as the nearest and lowest-cost market, although two pipeline proposals call for connections to new tanker terminals on the Pacific coast of British Columbia that could ship oil sands crude overseas.

The oil sands growth wave is driven by Canadian price expectations that closely parallel the EIA forecast. The new outlook report, projecting prices in "real-terms" 2005 dollars, sees oil stabilizing in the $50/bbl range with a tendency to trend upwards after 2014 as demand overtakes new supply sources including the oil sands. Watch for oil to hit $95 in 2030, the EIA says in its lone published estimate of a future current or "nominal" dollar price, taking inflation into account.

Oil sands projects now under construction were planned to survive oil prices in the $30 range. The next generation is crafted to work at $40 and thrive on $50.

The projects continue to be helped, despite rising political controversy, by an agreed provincial and federal "generic fiscal regime" enacted nine years ago to stimulate projects. The system limits provincial royalties to 1% until construction costs are recovered, and cuts corporate taxes virtually to zero by allowing accelerated expense write-offs. After construction bills are paid, royalties are limited to 25% of net revenues after production costs.

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ISSN © 2577-9877 | ISSN © 1532-1231
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