Canada's energy sector taps bitumen, sticky rival to oil sands
CALGARY, Alberta, July 8 (Reuters) - Pilot projects in an as-yet undeveloped oilfield could remake Canada's energy map, if producers can successfully wrest a sludgy, tarry substance called bitumen from porous rock in remote northern Alberta.
The bitumen in the caverns and cracks of the dolomite and limestone rock is a vast resource, estimated by Alberta regulators to hold close to 500 billion barrels of oil, or more than the combined recoverable oil reserves of Saudi Arabia and Venezuela, the world's top two oil states.
The bitumen, an asphalt-like form of heavy oil, doesn't count in international tallies of Canadian energy reserves because nobody has yet succeeded in extracting it on a large scale, despite small-scale attempts in the 1980s. So Canada still ranks third in the world by oil reserves.
The high price of oil and technology developed for the nearby oil sands may change that equation, and a few projects are already testing whether the long-ignored deposits can be developed profitably.
One effort is led by Glenn Schmidt, an energy executive who sold oil sands developer Deer Creek Energy Ltd to France's Total SA for nearly C$1.7 billion ($1.62 billion) in 2005.
With partner Osum Oil Sands Corp, Schmidt's closely held Laricina Energy Ltd is operating the first pilot project in three decades in the West Athabascan Grosmont, about 100 kilometers (60 miles) west of the oil-sands center of Fort McMurray, Alberta.
"Like all oil companies, you ask 'Where to next?"' Schmidt said in an interview. His answer was the carbonate fields, tested but abandoned by Unocal in the 1980s because of issues at the well and a low oil price.
Though Laricina has made its pilot work, there's no telling yet if other projects in the region can be developed at a reasonable cost.
The area lacks infrastructure and the rock is as costly and as grubby to mine as the oil sands, the world's third-largest oil deposit, where the bitumen is trapped in sand.
The "technology development is uncertain," Robert Bedin, an analyst with ITG Research, wrote in a research report earlier this year about the Grosmont. Even the new application of existing technology, "is fraught with blind alleys and unanticipated setbacks," he wrote.
BILLIONS OF BARRELS
Experts have known for years about the oil in areas like the Grosmont, but the oil sands had better infrastructure and attracted development first.
The Grosmont bitumen has the consistency of peanut butter. Insiders call it dolofudge, after the dolomite rock that holds it. The Grosmont is the largest of the fields, with an estimated 406 billion barrels of bitumen.
Canada now has 175 billion barrels of proven oil reserves, behind the 262 billion barrels credited to Saudi Arabia and Venezuela's 211 billion.
So if regulators judged that roughly a fifth of the 500 billion barrels of bitumen were economically extractable - a big if - Canada would leap to first place in global reserves.
"We would need to see that commercial operations are repeatable before an entire deposit is added," said Travis Hurst, a technical adviser for the Alberta Energy Regulator, which compiles the province's reserve estimates.
Extracting the Grosmont oil can use the same energy-intensive processes developed for the oil sands. Companies drill one well that pumps in steam to heat the bitumen, and a second, lower down, to collect the heated sludge and pump it to the surface.
Laricina and Osum are using this thermal steam-assisted gravity drainage technique to tap their 1.7-billion-barrel Saleski field, adding solvents to make the bitumen ooze faster.
The technology was successful enough that independent evaluators let the two companies book about 120 million barrels from part of the Saleski as recoverable reserves, a first for the Grosmont.
The two companies' joint Saleski project could produce 12,500 barrels per day by 2015. Osum's Sepiko Kesik project, planned separately, could produce 60,000 bpd. Canada produced a total of 3.2 million bpd in 2012.
The two companies are private and don't give details on the cost of their projects, but a 72,000 bpd oil sands project using similar technology would cost about C$2.5 billion. Such a development would need oil prices of around $80 a barrel to be profitable, while recent prices have topped $100 a barrel.
Laricina has backing from the Canada Pension Plan Investment Board, while Osum is backed by Warburg Pincus, Blackstone Capital Partners, Korea Investment Corp and Goldman Sachs.
Royal Dutch Shell Plc is also an investor in the region, after a C$468 million purchase of nearly 220,000 acres (89,000 hectares) of land in 2006. The company has begun construction of a small pilot project to test technology that would convert the bitumen into light oil by heating it underground at very high temperatures, a much different method than one Laricina is using.
But the expansion of the oil industry into bitumen will raise questions about the environmental costs and about how Canada would get additional oil to market.
Industry says bitumen projects will emit as little carbon dioxide as the best oil sands projects, but green groups already say the thermal projects in the oil sands are too carbon-intensive to be sustainable.
"The world simply can't handle the development of more high-carbon fuels at this point," said Mike Hudema, an oil sands campaigner with Greenpeace Canada.
Existing pipelines are already full, and the oil-by-rail alternative is costly. The industry believes that new and expanded pipelines to both the east and west coast, as well as to the United States, will be in place when needed.
"At its essence (the Grosmont) is a really good oil reservoir. That's what attracted us to it in the first place," said Steve Spence, Osum's chief executive. "We just had to figure out the right way."