Canada’s Oil & Gas Industry: The Rise of the Oil Sands

At the same time, oil and gas are profitable industries for Canada: Nationwide, the Canadian upstream oil and gas industry is expected to generate an estimated $115 billion in annual revenue, $20 billion in royalties, land sales and taxes, and $50 billion of investment into infrastructure and jobs in 2011, according to a recent report from the Calgary-based private equity firm ARC Financial Corp.

RESOURCES

As Slavko Stuhec, general manager, Canada Oil & Gas, Flowserve Flow Control, points out, “The increasing global demand for oil, especially from stable regions of the world, drives continued exploration and development.”

What’s more, indicators predict the price of crude will stay high for some time. While several drops below $100 per barrel occurred this spring, Robb Sharp, Canadian sales manager for Flowserve’s Limitorque line of electric actuators, points out that such fluctuations are commonplace. His comments are backed up by Fatih Birol, chief economist at the International Energy Agency. In a April 28 interview on CNN Money’s “Strategy Sessions,” he said: “There may be zigzags up and down, but the main trend is: oil will be more and more expensive, unless the consuming countries, such as U.S. and China, find a way to use less oil, especially in the transportation sector, cars, trucks and jets. I don’t see this as happening in the next few years to come.”

GAS LAGS BEHIND

Things are not as rosy with natural gas, for the most part because the rapid growth of the U.S. shale gas industry has depressed prices. “The whole gas industry has been turned on its head in the last four or five years,” says CAPP’s Davies. As a result of this development, North America has “gone from a place of … looking at substantial amounts of liquid natural gas imports to ways to export it,” he says.

This is not to say Canada does not have plenty of gas shale of its own. Estimates of shale gas within the Western Canada Sedimentary Basin resource, for example, vary from 86 trillion cubic feet (Tcf) to over 1,000 Tcf, according to the government of Alberta. But up to now, there has been limited production of this shale with most of the activity focused on research & development.

SOURCES OF OIL

Conventional crude oil deposits in Canada are primarily in the western provinces, the Northwest Territories and Atlantic Canada, which CAPP says contributed about 10% of Canadian production in 2009. As stated earlier, however, production from conventional sources is expected to decrease over the next few decades.

Oil sands, on the other hand, are expected to grow in production. According to “The Impacts of Canadian Oil Sands Development on the United States’ Economy” by Canadian Energy Research Institute (CERI) reserves in place in 2009 were at about 1.7 trillion barrels, with about 10% of that or 170 billion barrels (bbl) recoverable. These reserves are located almost entirely in Alberta spread out over more than 140,000 square kilometers.

Of the total Canadian crude production of 2.8 million bbl per day in 2010, 1.5 million or 54% were from oil sands, according to CAPP. By 2015 total production is expected to reach 3.3 million bbl per day, with 2.2 million or 58% from oil sands. By 2020 those numbers are expected to increase to 3.9 million bbl per day total, with 2.9 million bbl per day or 74% from oil sands, as shown in Figure 1.

OIL SANDS

Oil exists in the oil sands as bitumen, a semi-solid form of crude oil mixed with sand and water that’s roughly the consistency of peanut butter and is made up of as much as 18% hydrocarbons. To be used, the hydrocarbons must be separated from the sand, then upgraded into a synthetic crude oil that can be further refined into commercial petroleum products.

The economic situation for producers of oil sands looks bright: At the same time increases in the world price of crude oil have made oil sands more economically viable, the cost of extraction from sands has decreased. From 1985 to 2000, the industry reduced the cost of production from about $40 per barrel for mining/upgrading and $23 per barrel for in-situ bitumen, down to about $16 for mining and $15 for in situ, according to the Alberta Chamber of Resources Oil Sands Technology Roadmap. That roadmap, which was created to show how the industry could achieve its goal of five million barrels per day by 2030, foresaw commercial success with oil priced at $25 per barrel.

HOW IT’S EXTRACTED

Two methods of recovering bitumen are used today: surface mining or in-situ extraction. For surface mining, the Oil Sands Developers Group says the largest players are the Athabasca Oil Sands Project (a joint venture of Shell, Chevron and Marathon), Canadian Natural Resources Ltd., Suncor Energy Inc. and Syncrude Canada Ltd. Those companies have a total output of 1.057 million bbl/d from existing projects.

The largest players in the in situ market are Canadian Natural Resources Ltd., Cenovus Energy Inc., ConocoPhillips, Devon Canada Ltd., Imperial Oil, MEG Energy, Nexen Inc., Shell Canada and Suncor Energy. Together with several smaller players, these companies account for production of 833,500 bbl/day.

Surface mining is used for shallow deposits. The process takes roughly two tons of sand to produce one barrel of oil, and disposal of tailings (a combination of water, sand, silt and fine clay particles that are a byproduct of removing the bitumen from the oil sand.) has become a burden.

Several methods are used for extracting the bitumen from mined sand. The most common is to crush the mined material, mix it with warm water (sometimes adding caustic soda), and feed the mix to a primary separation vessel (PSV), where it settles into three layers—a bitumen froth on the top, sand on the bottom, and in between, a layer of “middlings,” which are a mixture of bitumen, sand, clay and water. The froth is treated to remove water and suspended solids, diluted with naphtha and treated again by settling or centrifugation. Middlings are treated, primarily by injection of air to recover residual bitumen, which is then sent back to the PSV.

Shell Canada and Exxon Mobil Corp. are experimenting with high-temperature froth treatment, which is said to reduce atmospheric carbon emissions for the process by 10 to 15%.

In situ extraction is used for deeper deposits within oil sands. CAPP estimates that in situ, which in 2009 accounted for a third of production, will eventually become the most-used method, simply because 80% of the Alberta oil sands deposits are too deep for surface mining.

Several methods reduce the viscosity of the bitumen so it can be extracted. In steam-assisted gravity drainage (SAGD), two large pipes are inserted horizontally into the bitumen formation, one about five meters above the other. Steam (generally produced using natural gas) is injected into the upper pipe, melting the bitumen and causing it to drip down to the lower pipe to be pumped out. While steam by itself is considered fairly benign, the same is not true when residual chlorides and salts are dissolved in the wet steam.

SAGD can be augmented by adding solvents to the steam to help thin the bitumen; the solvents are then recovered for re-use at the end of the process.

In situ combustion uses the bitumen itself as the source of heat, eliminating the need for an external energy source. This involves injecting air into the oil sands and starting a fire that heats the material, causes cracking of some of the lighter fractions and creating a mixture of heated bitumen, hot water, steam and combustion products that are extracted via production wells. Petrobank Energy has done considerable work on one type of in situ combustion—called toe-to-heel air injection—which involves vertical wells to inject air and horizontal production wells. Advantages of this method include greater percentage recovery, lower capital and operating costs, no requirements for added water and less greenhouse gas emission. Petrobank expected production using this method to begin in the second quarter of 2011.

UPGRADING

Before it can be used or sold, recovered bitumen must be upgraded to create synthetic crude oil (syncrude), which can be used as feedstock in conventional refineries. This is done with a combination of thermal conversion, catalytic conversion, distillation and hydrotreating.

CHALLENGES TO VALVES

Oil sands applications are challenging for valves, mostly “because of the composition of the bitumen,” says Flowserve’s Sharp. “The entire process is very abrasive and corrosive.”

Also, because of the sand that flows through, valves in oil sands processes may last only three to six months. In surface mining, valves used in the extraction process are subjected to considerable abuse and may have lifetimes measured in weeks. Steam separators are another tough application in oil sands, and letdown valves used in SAGD steam generation have tough jobs. The upgrading process involves abrasive media at extreme temperatures and pressures. Other challenges include temperatures that get as high as 797°F (425° C), high-velocity for abrasive flows, cavitation and corrosive media. Urethane linings, hardened seats and trims are frequently used for this service (Figure 3).

SUMMARY

Canada is certainly a major player in oil and gas, and with the potential that oil sands hold, that market is sure to expand. With the U.S. looking for sources that don’t depend on Middle East events, the opportunities in Alberta and the rest of the country will only grow more attractive as time passes.