ROB Insight is a premium commentary product offering rapid analysis of business and economic news, corporate strategy and policy, published throughout the business day. Visit the ROB Insight homepage for analysis available only to subscribers. Click here to read more international insights.
For oil sands companies, the list of business threats includes costs, carbon and the not insignificant obstacles raised by critics. But there may be another equally important issue: quality of crude reserves, and how they affect most other considerations.
For decades, the menace of the dry hole was what kept oil industry wildcatters and executives up at night. But that beast was considered largely vanquished when companies turned to the oil sands, where everybody knows bitumen-rich rock underlies an area the size of Florida.
But that belief may be too simplistic. After all, some of the highest-profile misadventures in the Fort McMurray region have come from misreading what lies below. Look no further than Long Lake, the Nexen Inc. – now CNOOC Ltd. – project that remains far from its expected output, largely because the rock didn't yield its hydrocarbons as expected.
Now, one of the most senior figures in the oil sands engineering community says rock – or reservoir – quality also sits among the chief hurdles facing the oil sands industry.
"We are working with clients who are always challenged by confidence in the quality of ore and reservoir," said Peter Madden, who until recently served as president of oil sands for AMEC, the multinational engineering giant. He recently returned to England after over six years in Alberta, and spoke to ROB Insight by phone.
The type and quality of a reservoir has major implications for the techniques and quantities of energy that companies must use to best extract it. Take, for example, a company that expects it will need to inject underground 30,000 barrels a day of steam to melt out 12,000 b/d of oil. If the reservoir doesn't behave as expected, and only 5,000 b/d comes flowing out, profits margins disappear and the entire operation's economic rationale is undermined.
"There are projects out there that just when they've gone into production, haven't yielded [what was expected.] And it's not a function of producing steam or reliability of the plant upstairs. It is whether the rocks release the oil as the geophysicists thought they would."
And it gets more complicated: Companies tend to go to the best areas first, the so-called sweet spots. As those get developed, reservoir quality becomes an even greater concern for future projects.
"The upcoming prospects will have to struggle with the ore quality that is there," Mr. Madden said. That reservoir quality is especially important at a time when the value of heavy oil has waxed and waned so rapidly that it's hard to count on strong pricing.