Will Canadian Oil Sands Profits Flow – Or Dry Up?
By: Mary Foster - Marketing Communications Manager
5/22/2007

The jury is still out on the effect Canada’s legendary oil sands deposits may have on North American energy prices, as well as on the economic future of Canada itself.

On the other hand, the economic benefits for U.S. companies seeking to sell equipment and components to this multi-billion-dollar industry are readily apparent – as long as both the demand for energy and oil prices remain high.

Hundreds of millions of barrels of oil located just across the border of a staunch American ally seems like the perfect solution to the Gordian knot of international oil politics. But, like everything else involved with oil and energy, that solution may not be as clear as it seems at first glance.

The largest deposit of Canadian oil sands is in the province of Alberta. The provincial government estimates that from 1.7 to 2.5 trillion barrels of oil are trapped in a complex mixture of sand, water and clay. In comparison, Saudi Arabia has 262 billion barrels of proven oil reserves. In fact, all OPEC nations combined have fewer than 900 billion barrels.

Canada’s oil-saturated sand deposits are left over from ancient rivers in three areas, Peace River, Cold Lake and Athabasca. The Athabasca area is the largest and closest to the surface, accounting for the large-scale oil sands development around Fort McMurray. Canada already exports more oil to the U.S. than any other country – 1.85 million barrels a day compared to Saudi Arabia’s 1.5 million barrels.

But the effect of all this oil on the U.S. and Canadian economies is difficult to predict because of several factors, including just how great a consumer of oil and natural gas the U.S. will continue to be.

Oil sands yield their bounty in two ways: open pit mining and hot water extraction. Each is difficult and expensive, and each adds much more cost to the extraction of the oil.

Additionally, about 80 percent of Alberta’s oil sands are buried too deep below the surface for open pit mining. This oil must be recovered through drilling technology in which steam is injected into the deposit to heat the oil sands, lowering the viscosity of the bitumen – a heavy, carbon-rich and extremely thick oil. The hot bitumen migrates toward producing wells, bringing it to the surface, where it is fed into a vessel which further separates it from sand and water. The bitumen is skimmed off the top to be cleaned and processed into usable crude oil.

If U.S. oil consumption remains high, it will be profitable for companies to mine Canada’s oil sands and sell the refined product. If consumption falls, or if the world-wide price of crude oil falls, the profits will tend to disappear like oil poured on dry sand.

And just how much oil U.S. consumers will need in the coming years is anyone’s guess because of the volatile nature of this particular market.

President Bush, in his State of the Union address, proposed policies that would reduce gasoline demand by 20 percent from projected levels in 10 years.

If that happens – and if the ambitious efficiency targets of the European Union and China are also met – high-cost producers, such as Alberta’s oil sands companies, would be hardest hit by weak demand and soft prices. In 2005, total government revenues from oil sands in Canada were $123 billion. That figure could decrease substantially, as could the economic boom in Alberta.

Currently, sales are robust for a select group of U.S. firms, including Illinois-based Caterpillar, Inc., and Wisconsin-based companies such as Rockwell Automation, Inc., Bucyrus International, Inc., and Manitowoc Crane Co., all of which make major contributions to the oil sand region north of Edmonton. U.S. companies supply the largest share of market import for equipment and supplies, and the U.S. government says this is a great opportunity for less-experienced U.S. exporters because it’s relatively easy to sell to Canadian customers.

But many factors in addition to prices and consumption may affect the profitability of oil sands producers. These include Canadian government tax policies, environmental concerns and the inadequate infrastructure in and around Fort McMurray, which could hamper transportation of equipment, supplies, people and products.

While great potential exists for U.S. sales to Canadian firms, there remain potentially volatile factors that could affect oil sands production. So, while U.S. firm shouldn’t hide their heads in the sand regarding business opportunities, they should be keenly aware of the issues associated with this investment.