Alberta oil sands developers are feeling the costs but are still not about to back away from projects that are making them one of the biggest and fastest-growing consumers of natural gas in North America, the Canadian Energy Research Institute predicted in a new state-of-the-industry survey.

CERI found strong oil prices stop tight gas markets from becoming a make-or-break factor in tapping the estimated 174 billion barrels of recoverable bitumen that rank Alberta oil reserves as the world’s second-largest after Saudi Arabia.

CERI research director Bob Dunbar acknowledged oil sands developers are poised to increase gas consumption for heat processes, bitumen upgrading and power generation at a rate that will consume all the new supplies that would arrive on the proposed Mackenzie Valley Pipeline — and then some. The Arctic gas project is scheduled to start deliveries at about 1 Bcf/d around 2008 then accelerate towards 1.9 Bcf/d.

An “unconstrained” development pace, where high oil prices prompt all entries now in a C$60-billion (US$45-billion) lineup of projects to proceed, would increase oil sands gas consumption about six-fold to 3.7 Bcf/d by 2017, CERI said. The Calgary institute, a quasi-official think tank supported by the Canadian provincial and federal governments as well as the industry, described unconstrained development as not a realistic scenario.

Dunbar said such a rapid pace would require “unsustainable” average annual investment of C$6.2 billion (US$4.7-billion) and an army of construction workers that Canada just does not have. The Alberta oil sands sector managed an annual investment pace of C$4.8 billion (US$3.6 billion) during the last burst of growth in 1999-2002. But it was accomplished only by putting severe strains on western Canadian industrial supply and labor markets that caused oil sands cost overruns in the 50% range.

CERI calculated the oil sands sector can manage a growth rate of C$4.4 billion (US$3.3 billion) in annual investment that requires a labor force averaging about 9,000 skilled construction workers at northern project sites. Such rapid development, which would increase oil sands production 180% to 2.8 million bbl/d, will be sustainable if oil prices average US$32 per barrel, CERI concluded. Even if oil retreats sharply to $25, the agency predicts C$3.1 billion (US$2.3 billion) in annual average oil sands investment to raise production 120% to 2.2 million bbl/d over the next 14 years.

In the scenarios seen as realistic by CERI, oil sands gas consumption at least doubles and potentially more than triples into a range of 1.5-2.5 Bcf/d. Consumption will likely be in the higher rather than the lower end of the range because oil appears to be on course to exceed US$25, CERI predicted.

Dunbar acknowledged “these are very big numbers.” In fact, oil sands gas demand will become large enough to become a prime contributor to upward pressure on gas prices, he said. But Dunbar said the future of oil sands gas consumption will be “a matter of the marketplace working.” High gas prices are expected to create incentives to husband supplies, rather than to kill projects outright.

Echoing forecasts by TransCanada PipeLines Ltd., CERI sees oil sands developers as on course at least to reduce gas consumption, which runs as high as 1 Mcf per barrel of production at “in-situ” or underground extraction projects using injections of steam to generate bitumen flows. With new projects coming into production at a brisk clip, oil sands gas consumption is estimated to have risen to about 680 MMcf/d last year from 500 MMcf/d over the past couple of years.

Dunbar pointed to numerous research efforts and evident interest in spurring them on such as a recent meeting on the oil sands gas use issue between industry and Alberta government leaders. He also pointed to next-generation technology, already adopted by Nexen Inc. and OPTI Canada Inc. for a project now entering construction, that replaces gas by using a portion of bitumen production to make oil sands plant fuel.

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