The biggest mining and processing complex in the Alberta oilsands, stung by the sustained strength in natural gas prices, has set out to pare down its reliance on gas. Gas is burning up 20% of Syncrude Canada’s operating budget and the value of the natural gas has reached the point where manufacturing it from oilsands bitumen could pay off, COO Jim Carter said.

High gas prices have arrived at the same time that Syncrude is increasing its fuel requirements on a large scale by building a C$7.8-billion (US$5.8-billion) plant expansion to raise synthetic oil production by 50% to 350,000 bbl/d in 2006. The oilsands complex can do without further cost increases. Overruns on the expansion have nearly doubled the construction tab from initial estimates of C$4.1 billion (US$3 billion) three years ago.

The construction program made “good progress” since the Syncrude consortium disclosed in March a C$2.1-billion (US$1.6-billion), 37% cost increase and took action to impose discipline, CEO Charles Ruigrok said. “There’s nothing new to report on that front,” he told a conference call on the plant’s annual sustainability report.

Taking control of natural gas consumption has emerged as a Syncrude priority. The 4,000-employee operation pledged in its financial, environmental and social sustainability report to improve its energy efficiency and work on alternative fuel options. Technology for extracting gas from bitumen has advanced, Carter said.

“It wouldn’t be more complex than what we’re already doing. It would really just entail capital investment to do it. That’s driven by gas prices.” Energy costs at the Syncrude complex averaged C$4.44/bbl (US$3.30) of production in 2003 or one-fifth of a total C$21.07 (US$15.60), which was a 24% increase compared to 2002 production costs of C$17.05/bbl (US$12.60).

Even before the plant expansion, Syncrude already consumes about 150 MMcf/d of gas. The oilsands complex spent C$350 million (US$260 million) on gas in 2003 when the annual average price set on international markets hit C$6.28 per gigajoule (US$4.90 per MMBtu), up 66% compared to C$3.79 (US$2.95) in 2002.

Measured by production volumes, Ruigrok said Syncrude is off to a strong start this year. The plant set a record 253,000 bbl/d in first-quarter 2004 and is expected to sustain the pace.

But Syncrude also set a target of reducing production costs by nearly 15% to C$18/bbl (US$13.30) to improve profits for owners Canadian Oil Sands, Imperial Oil, Petro-Canada, ConocoPhillips Canada, Mocal Energy, Nexen Inc. and Murphy Oil Co. The target will only be hit if natural gas prices reverse direction by falling in the second half of this year to drag the 2004 annual average down to an average C$5 per gigajoule (US$3.70 per MMBtu), the Syncrude sustainability report said. Syncrude is only the most prominent case of the oilsands industry recognizing its gas pains and attempting to cure them, thanks to the size of the 26-year-old complex.

The three Alberta oilsands mining and bitumen upgrading complexes spent a total C$692 million (US$512 million) on natural gas in 2003, according to a study of the sector by Calgary energy investment boutique Peters & Co. Gas costs at the synthetic oil production sites have multiplied more than five-fold since 1999, when the tab for the year was C$132 million (US$98 million). The oilsands sector’s total gas costs are much higher.

The rest of the oilsands total of about one million barrels per day comes from “in-situ” or underground extraction that relies heavily on gas as fuel for heat processes used in separating bitumen from sand. While oilsands gas use is currently forecast nearly to triple into the range of 1.6-1.8 Bcf/d within 10 years according to the National Energy Board and TransCanada PipeLines, the entire sector is trying to go on a fuel diet.

The newest projects, the Long Lake development by Nexen Inc. and OPTI Canada and the Heartland Upgrader by BA Energy, are designed to eliminate the use of purchased gas entirely by making the fuel from their own bitumen. The operator of the oldest mining complex, Suncor Energy, is studying the use of byproduct coke to make synthetic gas while also expanding conventional drilling to increase corporate supplies. The newest mine project, the Athabasca consortium led by Shell Canada, has pared down gas use per barrel of oil output by lowering operating temperatures and using improved upgrading technology.

Changes in the gas habit are expected to be gradual rather than a sudden scramble. Gas is not the only item fetching high prices, Carter pointed out. At Syncrude, part of the gas purchased is used as a plant feedstock tapped for hydrogen to upgrade mined bitumen into refinery-grade synthetic oil. So the money spent on gas is not all burned up as fuel but part of making the liquid product: “We get it back on the selling price,” Carter said.

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