| The Economist | September 03, 2009
CRITICS of the exploitation of Canada's tar sands watched gleefully this year as the collapse in the oil price did what their opposition could not: dent the oil industry's enthusiasm for this mixture of sand and bitumen, which generates a lot of pollution when it is extracted and "upgraded" into oil. A year after crude markets began their slump, however, there are green shoots appearing in the ravaged muskeg soil. On August 31st PetroChina, a state-owned Chinese oil firm, agreed to pay C$1.9 billion ($1.7 billion) for a majority stake in two tar-sands projects.
Admittedly, the frenzy of recent years is over. By one count, 13 projects that were on the books a year ago have been delayed or cancelled. Investment is falling. Between 2008 and 2010 developers were expected to spend C$128 billion on tar sands projects. Now the outlay will be around C$80 billion, according to the Oil Sands Developers Group (OSDG), an industry body. Forecasts of oil production from the tar sands have also taken a hit. Just a couple of years ago the Canadian Association of Petroleum Producers predicted output would reach 4m barrels a day (b/d) by 2020. Now it says 3.3m b/d by 2025.
But that is still more than double current production. The bulk of that growth will come from projects that are already under way. In May Imperial Oil said it would go ahead with its C$8 billion Kearl project to bring 110,000 b/d of bitumen into production within three years. Output will eventually rise to 300,000 b/d. And although the number of workers living in temporary accommodation north of Fort McMurray, Alberta, in the heart of the tar sands, has fallen from over 27,000 last year to around 23,000 now, that is higher than in 2006, when the boom was in full swing.
Imperial, in which Exxon Mobil owns a majority stake, estimates that the cost of developing Kearl fell by as much as C$1 billion during the year it was delayed. Falling costs could bring other projects back into contention, too. Just a year ago an oil price of around $80 a barrel was needed to justify new developments. Now that price has dropped to around $60, says Suncor, another developer. Steel, cement and labour have all got cheaper. "I had contractors naming their price to me a couple years ago," says a manager from Shell's Muskeg River mine. "Now I have three different companies competing for a contract." Consolidation of the kind that saw Suncor, historically one of the biggest investors in the tar sands, complete its purchase of Petro-Canada last month, might help reduce costs further through economies of scale.
There is also good news for those firms that do not simply mine the tar sands, but inject steam underground to separate the sand from the bitumen "in situ"‚Äîa process that accounts for about half of the region's output. The price of natural gas has plummeted with the discovery of vast new reserves across North America, including in the neighbouring province of British Columbia. Cheaper gas, in turn, means cheaper steam.
Meanwhile demand for crude from the tar sands is growing. The opposition of American environmentalists notwithstanding, consumption by refineries in the Midwest will hit 2m b/d by 2015, estimates the OSDG. Cambridge Energy Research Associates, a consultancy, says Canada's share of the American oil market could grow to 37% by 2035 from 19% last year. Output from the tar sands could reach 6.3m b/d by then, the consultancy believes. The Canadian Energy Research Institute, a local think tank, says rising output could contribute about C$3.6 trillion to Canada's GDP over the next 25 years.
That makes the downturn in the tar sands less a collapse than a pause for breath. Some even worry that another damaging boom could be in the offing. Peter Lougheed, a former premier of Alberta, says the inflation that accompanied the free-for-all of recent years made life expensive for ordinary Albertans and undermined the province's other industries. New projects should be staggered, with only one coming on-stream at a time, he argues. Development may be moving at a more sedate pace for the time being. But the tar sands' continued appeal, combined with predictions of a recovery in demand for oil, could raise the issue again, and sooner than many expected.