New Cenovus project points to cleaner oil sands production

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Alberta's approval of a large Cenovus oil sands expansion heralds a major shift in the way Canada's energy industry extracts bitumen.

In fewer than five years, the province predicts, more than half of oil sands production will be pulled from the ground using "in situ" methods, which don't require the mines that have produced the ugly open pits and toxic effluent lakes fuelling industry's current image woes.

Instead, the new breed of projects use more-conventional oil wells to inject high-pressure steam into the underground oil sands. The steam melts out the bitumen, which is then collected and brought to the surface. The industry calls the process steam-assisted gravity drainage, or SAGD.

It's an effective method of getting the resource out the oil sands, but still a relatively new one. Where mines can produce hundreds of thousands of barrels per day, the Cenovus Foster Creek project passed the 100,000 barrel-a-day mark only this year, the first of its kind to do so in the industry. On Monday, Alberta's Energy Resources Conservation Board gave its blessing to a 90,000-barrel-per-day expansion with three SAGD phases taking it to 210,000 barrels a day.

Bitumen from the first phase is expected by 2014; the remaining two phases will come on-stream by 2017, although those could be accelerated, said executive vice-president John Brannan in an interview.

"In SAGD, we're starting to hit our stride," he said. "We're really starting to understand how to develop these assets economically."

Roughly 80 per cent of the oil sands are too deep to mine, and must therefore be produced without mines, meaning much of the future belongs to SAGD.

In the next few years, a host of companies – including Suncor Energy Inc., Husky Energy Inc., ConocoPhillips, Devon Energy Corp., Athabasca Oil Sands Corp., MEG Energy Corp. and Connacher Oil and Gas Ltd. – are also expected to build additional in situ capacity. Together, they will contribute a substantial amount of the $148-billion the industry is expected to spend on oil sands in the next decade.

According to the ERCB, SAGD projects will grow at a 9.7-per-cent average annual growth rate over the next decade, and will outstrip oil sands mining by 2015. (In situ currently constitutes 44 per cent of Alberta's bitumen output.)

That could help boost industry economics, since SAGD tends to be cheaper to operate. Whereas a new mine requires a crude price of roughly $80 (U.S.) a barrel, SAGD needs $65, said Peter Ogden, an analyst with National Bank Financial. Having more SAGD could therefore afford the oil sands better insulation against economic uncertainty.

At the same time, however, "it's more risky from a reservoir standpoint," Mr. Ogden said.

In other words, SAGD projects are far more vulnerable to problems, whether from bitumen not flowing as expected or wells being improperly drilled. The risks are serious enough that Mr. Ogden doubts the ERCB predictions.

"I don't think they'll make their forecast, one on labour [because of looming shortages] and two on the fact that a lot of the SAGD reservoirs aren't going to ramp up as everyone expects," he said.

In fact, the Canadian Energy Research Institute, in its projection, suggests SAGD won't beat out mining until 2023.

Either way, however, SAGD is expected to grow quickly – and for an industry under attack by environmental groups, it can't come fast enough, since steam projects have a smaller surface footprint than mining.

Yet those groups point out that that SAGD, which uses natural gas to generate steam, produces more greenhouse gases than mining. And any growth only worsens critics' overriding concern that the oil sands are being built too quickly.

"The issue remains that we don't have environmental limits in place to protect the environment. So regardless of the form of oil sands developments, we're not on a responsible trajectory," said Simon Dyer, oil sands program director for the Pembina Institute.