- The Washington Times - Saturday, November 26, 2005

Americans thirsty for fuel are looking to Canada, which stands ready to capitalize on its historic role as the United States’ leading supplier of energy.

Canada, with the world’s second-largest reserves of oil, is already the biggest and most reliable provider of electricity, oil, gasoline, uranium and natural gas to the United States.

But the massive commerce in energy between the countries each day generally escapes notice because the transactions are more often free of the political tensions that pervade U.S. relations with other major energy suppliers, such as Iraq and Venezuela.

Electricity flows across the 4,000-mile-long border as easily as water and air. A network of pipelines links Canada’s rich oil and gas fields in the western province of Alberta with U.S. refineries in Chicago that feed essential fuels to drivers and homeowners in the Midwest.

The close and well-tuned energy relationship with Canada has attracted renewed attention and appreciation from U.S. leaders this year as worries about unstable supplies of oil in the Middle East, Africa, Latin America, and even the hurricane-prone Gulf of Mexico have mounted, causing political and economic distress.

President Bush said the United States is eager to see Canada ramp up production from its enormous fields of sands mixed with oil in northern Alberta — a treasure trove whose 174 billion barrels of proven reserves is second only to Saudi Arabia’s in size.

Canada already is supplying the United States with nearly 1 million barrels a day of crude from the oil sands. But because deriving oil from the sands is laborious and costly, increased production will not come quickly.

The oil companies making claims in the Alberta reserves plan to triple production to 3 million barrels a day in the next 10 years, putting them on a course to hit 5 million barrels by 2025 — about one-quarter of current U.S. consumption.

Greg Melchin, Canada’s energy minister, said Americans seem particularly keen to expand the U.S.-Canada energy relationship to avoid becoming more dependent on volatile energy suppliers in the Middle East and elsewhere.

“We can provide them with energy security,” he said. While it will take time for Canada to ratchet up production to the high levels sought by the United States, its progress has been steady. And once production is up and running, consumers will not have to contend with big disruptions such as terrorist attacks or hurricanes.

Some members of Congress have expressed anxiety that recent tensions between the United States and Canada over the lumber trade and Iraq may have led Canada to explore selling nearly 500,000 barrels a day of oil from the sands to China through a pipeline that would be built to the Pacific Coast.

“China’s expressing an interest,” said Mr. Melchin, and it has started two small pilot projects in the oil sands. But “geography will always lend an advantage to the U.S.,” because pipelines and refineries are already in place, he said. “Clearly, it’s the largest consumer. It will always make sense economically to deal with the U.S.”

Large and critical investments will have to be made, however, in building more pipelines and upgrading refineries if the full potential of the oil sands is to be realized, he added.

The oil sands have brought into the limelight Canada’s wealth of resources, derived from its huge land mass — second only to Russia’s in size. It has given the northern giant an embarrassment of riches.

With only one-tenth the population of the United States, Canada has more oil, gas and hydroelectric resources than it can use. Canadians consider themselves twice blessed to be residing next door to the world’s largest energy consumer, to whom they can sell their surpluses.

Power flows south

At a time when the world is searching for clean and renewable sources of energy, Canada is in the enviable position of deriving nearly 60 percent of its power from hydroelectricity, one of the cheapest, cleanest sources.

With one-fifth of the world’s fresh water contained in broad rivers and lakes scattered throughout vast, pristine and unpopulated hinterlands, Canada has become the world’s largest hydroelectric producer, enabling it to export 20 percent of the power it generates to U.S. cities and towns in the Northeast and Midwest.

That power is funneled into the United States from the provinces of Quebec, Ontario, Manitoba, and New Brunswick through an electrical grid that is so intricately connected with the U.S. grid that large areas of Canada went dark two years ago when the Northeast United States experienced a massive blackout.

Canadian officials remember the episode, which was caused by the neglect of a U.S. utility in Ohio, with levity rather than anger. “We told our American counterparts that the mistake could happen on our side of the border next time,” a Canadian diplomat said.

While Canada overall provides the United States with more electricity than it takes in, provincial officials say the close ties have helped them to better manage their dam projects by smoothing out the ups and down of peak energy use through power swaps across the border.

The United States, with its warmer climate, uses more electricity than Canada during the summer to fuel air conditioners, and that is when it imports heavily. But it is able to return the favor during the winter, when Canada needs more power to heat homes and businesses.

Members of Congress, mindful that the United States is still faced with the threat of power shortages because of lagging investment in power plants and transmission facilities, have been looking to Canada for additional supplies.

Canadian officials say that provinces such as Manitoba and New Brunswick have enough surplus hydroelectric capacity to satisfy an additional 16 percent of U.S. electricity needs.

But several obstacles have been limiting growth in power exports. Demand for electricity has been growing strongly in Quebec, Canada’s largest hydroelectric producer, and it does not expect to have surpluses to provide the United States in the future.

Other Canadian provinces have no way of transmitting the power they could produce to the United States because the U.S. electric grid is near maximum capacity in many areas and would not be able to accept the additional load from Canada. Local community opposition to expanding U.S. facilities has been fierce.

Still, because the United States is such a rich market, paying electricity rates two to three times higher than the controlled rates paid by Canadian customers, Canadian utilities are striving to find ways to overcome the obstacles.

One option emerged this summer as a result of legislation passed by the U.S. Congress to encourage investment in the U.S. power grid. Canadian officials believe it may enable them for the first time to invest Canadian pension funds in upgrading structures on the other side of the border.

Tapping the oil sands

Canada and its oil industry also will have to overcome some big technical and financial obstacles if they are to realize the full potential of the vast Athabasca oil sands that lie in and around Fort McMurray in northern Alberta.

The sands appear deceptively accessible because they do not lie under miles of ocean or arctic permafrost like much of the oil now pumped in the United States. But turning the gooey globs of what looks like road tar into the gas that runs cars is not cheap or easy.

Many of the technologies used to extract and upgrade the heavy bitumen found in the soil are still under development. Companies cannot use the standard drills and equipment that for decades have extracted fuel around the world for as little as $2 a barrel.

Most of the fuel in the reserves is deep underground and must be tapped by first heating the subarctic earth, which is frozen solid in the winter, to liquefy the oil so it can be pumped out.

Oil close to the surface is stripped out in open-pit mines that dwarf other mining operations around the world in size. It takes 2 tons of oil sands wrenched out of the earth using the world’s largest excavators and trucks to produce one barrel of oil. The cost of these arduous means of extraction ranges from $15 to $25 a barrel.

While that may seem a cinch with oil prices today hovering near $60 a barrel for premium crude, many long-timers in the oil industry are skeptical, noting that oil prices fell to $14 as recently as 1998.

The U.S. Energy Information Agency raises another problem, noting that companies rely heavily on natural gas both to heat the soil to extract the heavy bitumen it contains, and to upgrade the bitumen into a lighter, synthetic crude that can be sold to U.S. refineries.

But natural-gas supplies are dwindling in both the U.S. and Canada. Gas prices have skyrocketed in recent years and now are five to six times what they were in the 1990s.

Because of the high cost of gas, the U.S. energy agency earlier this year concluded that the oil sands projects would be endangered if the price for Canada’s synthetic crude — which is the equivalent of premium crude traded in New York — drops much below $30.

Any gas shortages or further sharp increases in gas prices “would have critical repercussions for the oil sands industry,” says the agency, which played a critical role in boosting interest in the Canadian oil sands when it recognized them for the first time as economically recoverable in 2002.

Canadian officials have been working to minimize the gas used in extraction, and expect to tap into sizable gas supplies likely to come out of the Mackenzie River delta in coming years.

But over the long run, they are aware of the critical need to find substitutes for gas. They note that Alberta contains a mother lode of methane in its extensive coal beds that eventually may be used to replace gas in the extraction process.

Alain Moore, a spokesman for SynCrude Canada Ltd., a pioneer in developing the oil sands, said another fall in oil prices to 1990s levels would not wipe out the industry, which has whittled down operating costs so it can continue to produce oil at $15 a barrel.

“We’re not counting on oil prices staying where they are,” he said. Another collapse in market prices would put a stop to new extraction projects, however, because of their huge initial costs, he said.

Surmounting obstacles

The snag caused by soaring natural-gas prices this year, triggered by two hurricanes that wrecked vital U.S. Gulf Coast gas-production facilities in September, is only the latest hurdle that the industry has had to surmount in its efforts to turn the muddy sands into liquid gold.

The trickle of oil coming out of the sands today took massive investments and decades of experimentation to produce. Oil analysts say it will take an estimated $100 billion of new investment in pipelines and refineries, as well as the discovery of new technologies not even imagined to coax the rest of the oil out of the reserves in coming decades.

Processing the bitumen not only is costly, messy and time-consuming, but it imposes huge costs on the environment.

While the industry has been careful to address environmental issues as they arose, such as by reclaiming the land strip-mined for oil, some major issues remain to be resolved.

“There’s a huge potential, but it’s not automatic that it will happen,” said Len Bolger, co-chairman of the Alberta Energy Research Institute. “We have to overcome a lot of challenges.”

Aside from the natural-gas issue, it’s not clear where the large amounts off water needed in the extraction process to separate the bitumen from the sand will come from in the future, he said.

The Athabasca River flow in the winter is not sufficient for those looking to ratchet up production, he said. The far north of Alberta has a lot of water, he said, but residents there are resisting moves to funnel it down to the oil sands.

Also, refineries in Chicago, Edmonton and elsewhere down the pipeline from Fort McMurray do not have the equipment and capacity needed to refine massive quantities of the crude into gasoline, jet fuel, heating oil and other products, he said.

“It can be done, but it will take a lot of money to prepare the refineries,” he said.

By far the biggest problem is the gargantuan “environmental footprint” created by the pit-mining operations, he said. Companies have done a laudable job of returning the land to its original condition, but the huge amounts of water used in early mining operations left tailings ponds so large they can be seen from the space shuttle, he said.

“The scale of it is just not acceptable,” he said. “They are reducing the tailings flow with the growth of plants, but we need new technology to overcome these challenges.”

Greg Stringham, head of the Canadian Association of Petroleum Producers, said another obstacle to growth for the industry is a shortage of skilled workers, particularly plumbers, pipefitters and electricians.

Companies operating out of the Fort McMurray area are “really stretched to the hilt” and need another 20,000 technicians and craftsman to make good on their expansion plans, he said.

The limits on greenhouse-gas emissions Canada has accepted as part of the Kyoto global-warming treaty are not a major obstacle, however, he said, estimating they would add at most another 50 cents a barrel to the cost of producing the oil.

With crude prices having doubled in the past two years, the incentive to keep working at it and overcoming problems is great. The Canadian oil industry has profited like never before, fueling an economic boom in Alberta.

Just this year, brimming royalties that the Alberta government reaped from leasing land to oil companies enabled the province to eliminate all of its debt and provide a $400-per-person “prosperity bonus” to each resident of the province.

That has given the massive and intrusive oil projects much greater public support in Canada than such projects generally enjoy in the United States. The U.S. Congress, by contrast, has voted for decades to rule out new leasing of federal lands in Alaska or on the outer Continental Shelf.

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