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The Oil Sands

Description of the Oil Sands Industry

Oil sands are composed primarily of sand, bitumen, clay minerals and water.  Bitumen, in its raw state, is a heavy, viscous, crude oil.  Generally, bitumen is produced through either in situ recovery or truck and shovel open pit mining.  In situ recovery takes place both by primary development, similar to conventional crude oil production, and by enhanced development whereby generally the reservoir is heated to reduce the viscosity of the bitumen, allowing it to flow to a vertical or horizontal wellbore.  Currently, there are three main methods for producing in situ bitumen: primary production, cyclic steam stimulation and SAGD.  For oil sands open pit mining projects, once mined the bitumen is separated from the sand and clay with hot water in the extraction plant and subsequently cleaned in a froth treatment processing plant.

In situ production is different compared to production of bitumen by mining in several other ways, including the smaller scale of development that is typically associated with in situ. Mining projects generally require a scale in the order of at least 80,000 to 100,000 barrels per day to be economically viable whereas in situ production schemes are often in the range of 10,000 to 30,000 barrels per day.  This allows a smaller scale of development whereby the costs of projects are generally more manageable.  Smaller phases of production allow learnings and new technologies to be incorporated more readily into subsequent phases.  Regulatory and construction timelines are also generally much shorter than those experienced in mining projects allowing production and cash flow to occur sooner to support the expansion of additional phases.

Bitumen is currently sold in two principal forms: either as nonupgraded or upgraded bitumen.  Nonupgraded bitumen refers to crude bitumen that is blended with a lighter viscosity product (referred to as a diluent) in order to meet specifications for transport through pipelines.  Upgraded bitumen refers to the portion of crude bitumen production that is upgraded to synthetic crude oil or other petroleum products.  Most upgraded bitumen is used by refineries as feedstock.  Nonupgraded bitumen has many characteristics similar to, and is generally priced like, conventional heavy oil.  Upgraded bitumen, depending on the level of upgrading it has undergone, has many characteristics similar to, and is generally priced like, conventional medium to light oil.

In the ERCB’s most recent report entitled “Alberta’s Energy Reserves 2012 and Supply/Demand Outlook 2013-2022[1], published in June 2013, the ERCB states that the Alberta in-place bitumen volume (specifically referring to the Athabasca, Peace River and Cold Lake Oil Sands Areas of Alberta) is approximately 1,845 billion barrels, of which approximately 315 billion barrels are ultimately potentially recoverable.

To date, mineable oil sands reserves comprised a relatively small portion of total oil sands reserves, 34 billion barrels or about 20% are considered recoverable by surface mining and the rest, some 135 billion barrels are considered recoverable by in situ methods.  In contrast, the ERCB notes that approximately 65% of the remaining established mining reserves are currently being developed, while less than 3% of the remaining established in situ reserves have reached development stage.



[1]     The remainder of the information set forth under the heading “Industry Overview – Description of the Oil Sands Industry” including all tables and figures is derived from the ERCB report entitled “ST98-2013: Alberta’s Energy Reserves 2012 and Supply/Demand Outlook 2013-2022″, published in June 2013. Readers are urged to consult the full text of the report which is available on the AER website at http://AER.ca.


 In-Place Volumes and Established Reserves of Crude Bitumen (billion barrels)

Initial Recovery Method

Initial Volume in-place

Initial Established Reserves

Cumulative Production

Remaining Established Reserves

Remaining Reserves Under Active Development

Ultimate Potential Recoverable

Mining 131 39 6 33 23 69
In situ

1,714

138

3

135

3

246

Total

1,845

177

9

168

26

315

Bitumen Production within the Athabasca Oil Sands Area[2]

In 2012, Alberta operators produced 340 million barrels from the mineable area and 365 million barrels from the in situ area, totalling 705 million barrels.  This is equivalent to 1.9 million barrels per day in 2012 and this was the first year that production from in situ operations surpassed production from mining operations in the Alberta oil sands.  The ERCB projects that total raw bitumen production will reach 3.8 million barrels per day by 2022, as illustrated in the chart below.  Of that number, in situ crude bitumen production will account for over 2.2 million barrels per day, by 2022.  The ERCB’s current forecast has increased primarily due to the addition of new proposed projects and the accelerated development schedules for existing and approved projects.  Factors which may affect the pace of development have been considered, such as the availability of labour and equipment.


[2]      Supra, (ERCB) above.

The forecast of crude bitumen and upgraded bitumen production relies heavily on information provided by project proponents.  This includes data on production capacity submitted during a project’s application process, in addition to other publicly available materials such as quarterly reports, presentations, and press releases, which provide information on schedules for bringing the resource on stream.  A project’s viability depends largely on the cost-price relationship between production, operation and transportation costs (supply), and the market price for bitumen and upgraded bitumen (demand).  Other factors include the refining capacity to handle bitumen or upgraded bitumen and competition with other sources of supply in U.S. and Canadian markets.  The forecasts for crude bitumen and upgraded bitumen include production from existing projects, expansions of existing projects, and new projects that have been granted approval. Demand for upgraded bitumen and nonupgraded bitumen in Alberta is based on refinery demand and transportation needs.  Alberta upgraded and nonupgraded bitumen supply in excess of Alberta demand is marketed outside the province.

Outside Alberta, the demand for Alberta nonupgraded and upgraded bitumen is influenced by many factors, including the price differential between light and heavy crude oil, the expansion of refineries currently processing nonupgraded and upgraded bitumen, the altering of current light crude oil refineries to process nonupgraded and upgraded bitumen, and the availability and price of transportation to ship nonupgraded and upgraded bitumen, as well as the availability of diluent for shipping nonupgraded bitumen.

With resurgent light oil supplies in western Canada and the U.S. Midwest, and an oversupplied U.S.  Midwest market, discounting of nonupgraded and upgraded bitumen, and western Canada light oil is expected to continue in the short term.  The largest export markets for nonupgraded and upgraded bitumen from Alberta have traditionally been the U.S. Midwest, with a refining capacity of 3.6 million barrels per day, and the U.S. Rocky Mountain region, with a refining capacity of 0.6 million barrels per day.  However, these markets are now currently oversupplied due to the increase in light oil production and limited pipeline capacity to other markets.  As such, there is increasing interest in accessing other market regions going forward.  Among the other regions is the U.S. Gulf Coast, with a refining capacity of 8.8 million barrels per day.  Access to this region is of particular importance for nonupgraded bitumen, as this region has traditionally been served by heavy oil and maintains refineries capable of handling nonupgraded bitumen.