The Canadian Oil Sands - A Backgrounder: Challenges

by Bennett Jones LLP

Oil sands projects and developers are exposed to various risks and challenges, including:

  • Cost Overruns and Delays. Many oil sands projects have encountered cost overruns and delays. Historically, some fully integrated oil sands mining projects have faced cost overruns of over 55 percent, largely attributable to labour shortages, engineering-related change requested during the construction phase and the difficulties inherent in managing large-scale projects, particularly those involving upgraders. The risk of recurrence of such overruns has been considerably mitigated through operational improvements, technological innovation and greater industry and government planning.
  • Supply of Diluent. Condensate and other products are used to dilute unprocessed bitumen product (typically in the 20 to 30 percent by blend volume range), but diluent supply is declining and falling short of demand. To ensure that diluent supply does not hinder oil sands development, industry players are seeking to adapt to shortages and reduce demand, including the potential use of heated pipelines and blending with alternate viscosity reducers (such as refinery naphthas and lighter grade conventional and synthetic oils). The Southern Lights pipeline, which went into service July 2010, will help meet the increasing demand for diluent by petroleum producers in Western Canada. This pipeline extends from the U.S. international border to Edmonton, Alberta, and offers petroleum producers in Western Canada a reliable supply of diluents from U.S. refineries and supply centers.
  • Emissions Controls. Legislative measures have been introduced to address climate change. Alberta became the first jurisdiction in North America to legislate greenhouse gas (GHG) reductions for large industrial facilities. The regulatory regime requires facilities in Alberta emitting over 100,000 tonnes of carbon dioxide equivalent per year to reduce their emissions intensity by a specified amount. Emitters that fail to meet the target have the option of buying Alberta-based carbon offsets, or paying $15 per tonne over reduction targets into the Climate Change and Emissions Management Fund. The fund supports projects and technologies aimed at reducing GHG emissions in the province. See the Environmental Concerns section located on page 32 for further information regarding emissions control and climate change.
  • Reliance on Natural Gas. Most oil sands projects rely heavily upon natural gas for energy, steam, power or hydrogen production for use in the upgrading process. It is estimated that the oil sands industry alone is consuming 500 million to 800 million cubic feet (MMcf) per day of natural gas, or approximately three to five percent of total Canadian natural gas production. Using current technology, in situ projects require about 1,000 cubic feet of natural gas per barrel of bitumen recovered. Mining projects need 250 cubic feet of natural gas per barrel of bitumen and upgraders use up to 500 cubic feet of natural gas per barrel of synthetic crude. Natural gas usage is estimated to increase as the production from oil sands projects increases dramatically over the next several years.
  • Reliance on Water. The Water Management Framework imposes strict limits on water usage for the Lower Athabasca River. Together all oil sands projects can withdraw no more than three percent of the average yearly flow of the Athabasca River for their business use. During periods of low river flow, Alberta Environment limits water consumption to 1.3 percent of annual average flow. At times, this can mean that industrial users will be restricted to less than half of their normal requirements given current approved development. Many in situ projects recycle up to 90 percent of the water used in their operations and use deep-well saline water as an alternative to river water wherever possible. Industry is continually working on making production more efficient so water usage is further reduced. In mining operations, 7.5 to 10 barrels of water is used for every barrel of upgraded bitumen. However, with recycle rates of 40 to 70 percent, this means only three to 4.5 barrels of water make up is required. For in situ operations, about 2.5 to four barrels of water is required for every barrel of bitumen extracted. Recycle rates of 70 to 90 percent for in situ operations significantly reduce the required amounts of water make up.

Mindful of these challenges, the industry has implemented general strategies to mitigate cost overruns and avoid risk, which include:

  1. tighter control over project management;
  2. partnering with government bodies to address education concerns and preparing the workforce for future employment opportunities in the industry;
  3. use of temporary worker immigration programs;
  4. modularizing construction components to improve productivity;
  5. improving materials management practices to help avoid on-site delays;
  6. increasing emphasis on developing and deploying new technologies that reduce the use of natural gas and fresh water resources; and
  7. recycling materials where possible.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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