Alberta oilsands projects will continue to contribute to upward pressure on natural gas prices as virtually the only industrial sector left in North America where consumption is still rising, Canada’s National Energy Board predicts.

In a review of markets for gas and liquid byproducts, the NEB forecasts oilsands industry demand will hit 1.01 Bcf/d by late 2006. The new level will be a 40% increase in just two years from oilsands gas use that averaged 720 MMcf/d in 2004.

The rise in oilsands gas consumption about matches the rate of increase in northern Alberta bitumen and synthetic crude production, which is expected to hit 1.2 million bbl/d by late 2006.

Oilsands projects have yet to put into practice emerging techniques of making significant reductions in their use of gas for heat-driven bitumen extraction systems, synthetic-oil upgrading and power generation. But the NEB acknowledges the developers are trying, and parallel projections by Alberta investment firm FirstEnergy Capital Corp. point out there is strong and growing financial incentive to step up work on efficiency improvements.

“Oilsands operators are currently developing and implementing new technologies, such as bitumen gasification, to reduce natural gas use in their processes,” the NEB observes. A variety of methods are under study.

The leading candidate for use on a large scale is tapping the bitumen barrel’s “heavy ends” or asphaltenes for “synthesis gas” or methane akin to the product of old-fashioned plants that derived fuel for early generations of urban street lamps from coal. The Alberta industry’s engineers continue to work on methods of vastly accelerating and expanding the old processes,especially for the “upgrader” plants that convert low-grade bitumen into refinery-ready oil.

Three projects now in advanced design and construction stages use variations on the new technology theme, known as “asphaltene gasification”: an upgrader expansion by Suncor Energy, the Long Lake project by Nexen Energy and OPTICanada, and the Heartland Upgrader by BA Energy.

Initial production from the new, more energy-efficient projects is still a year or more away. As a result the NEB makes no claims that the oilsands draw on gas supplies will diminish significantly, saying “the technology has yet to be proven.”

Gas consumption emerged as a top priority issue for oilsands developers and their investment following when representatives of both sides met for a closed-door conference, sponsor RBC Capital Markets said. In a statement issued from the meeting RBC vice-chairman Bill Sembo said the oilsands sector’s biggest challenges include limited refining markets, construction labor shortages and “the long-term impact of rising natural gas costs.”

FirstEnergy forecasts that as oilsands production rises into the range of two million barrels daily by 2010, annual operating costs will more than double to about C$10 billion (US$8 billion) from C$4 billion (US$3.2 billion) in 2004. “Costs are tied to commodity price forecasts, as much of the input into production is energy.”

The figures are conservative, having been generated with oil and gas price forecasts made prior to the startling effects on energy markets of hurricanes Katrina and Rita.

Even allowing for commodity prices to settle down as the storm scares fade, FirstEnergy predicts the tight and anxious state of the oil and gas markets will affect oilsands industry behavior. “This cost structure will likely change as we are seeing companies begin to explore alternatives to burning valuable natural gas, such as Nexen and OPTI gasifying the otherwise valueless bottom of the barrel at their Long Lake project, beginning in 2007.”

The adjustment will take time but it will happen, FirstEnergy suggests. “As companies move toward using the energy contained in bitumen to power oilsands operations, gas use and costs will decrease,” the investment house predicts.

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