The Alberta Oil Sands in Canada contain the third-largest known oil reserves in the world, and their recovery operations are among the most successful to date. Of Alberta's total oil reserves, 168.7 billion barrels, or about 99 percent, come from the oil sands; the oil sands also account for an overwhelming majority (about 98 percent) of Canada's total oil reserves. The Canadian Association of Petroleum Producers, CAPP, projects in its annual forecast that Canada's oil production will more than double in the next 15 years, rising from 3.2 million barrels per day in 2013 to 6.7 million barrels per day by 2030. This projection is entirely driven by oil sands production.
Oil sands can be found throughout the world, but, of the nations with major reserves, Canada has the best political stability and is friendliest to energy producers. Consequently, global heavyweights such as ExxonMobil (NYSE:XOM), Royal Dutch Shell (NYSE:RDS.A), and Chevron (NYSE:CVX) have major interests in Alberta. A myriad of other producers, such as ConocoPhillips (NYSE:COP), BP, Devon (NYSE:DVN), Marathon Oil (NYSE:MRO), PetroChina (NYSE:PTR), Statoil (NYSE:STO), Suncor (NYSE:SU), and Canadian Natural Resources (NYSE:CNQ) also have a presence in Alberta and offer investors intriguing investment opportunities. Major oil field services companies, such as Halliburton (NYSE:HAL) and Schlumberger (NYSE:SLB) play a major role in the region as well, with many projects simultaneously coming on line.
At a macro level, it is noteworthy that the Alberta oil sands are ramping up at a time when many of the major oil producers are experiencing declining production and when the world needs more oil production simply to keep up with demand. In fact, ExxonMobil, Royal Dutch Shell, and Chevron all reported disappointing results for the fourth quarter and full fiscal year 2013. Production is declining, even as they have been spending at record levels to boost oil and gas output.
Challenges to Oil Sands Production
Oil sands offer big production potential, but that potential comes with big problems. Vast amounts of water, energy, and skilled labor are required to support operations. Furthermore, a strong and safe political environment and stable market pricing for oil are critical factors for long-term investment. Alberta is best-positioned to handle these requirements, but also faces other significant issues as oil sands production increases.
Pipeline capacity is especially problematic. While production capacity climbs toward the 6.7 million-barrels/day, or bpd, forecast, Canada's existing pipeline network can handle only 3.6 million bpd throughput. In addition to the Keystone XL pipeline, several new projects have been proposed to send crude east, west, and south, that will add as much as 3.1 million bpd of new capacity by 2018. None of these pipeline projects are fully committed, and political pressure is mounting. In a January 16th interview, Canadian Prime Minister Harper went as far as to say: "It takes a lot of energy to repress and to block a decision that is clearly and overwhelmingly in the national interest of the country." Based on these comments, it seems Canada will likely find a way to address the pipeline challenge.
Even more problematic are the daunting environmental challenges related to oil sands wastewater treatment. Specifically, producers are running out of room to store the contaminated water that is a by-product of the production process. After 1,600 ducks died in a tailings pond in 2006, provincial authorities introduced regulations governing the storage of fluid waste from oil sands. Larger concerns have emerged about contaminants spreading through drinking water supplies and the water table of the boreal forest ecosystem. These forests store almost twice as much carbon as tropical forests, and their degradation would pose significant risks for greenhouse gas release.
In essence, environmental concerns are difficult to solve and are emerging as the biggest threat to the Alberta oil sands (and other oil sands reserves globally.) The issue remains a serious problem without a solution; cost-effective methods for eliminating oceans of toxic wastewater from the recovery operations are urgently needed.
The Details of the Problem
The environmental problem with oil sands production is a matter of managing an enormous volume of toxic wastewater tailings from operations. Recovering one barrel of oil from sands requires anywhere from 2 to 4.5 barrels of heated water. After the heated water frees the oil from the sands, it becomes toxic and cannot be returned to the environment until it has been safely decontaminated. The wastewater is usually alkaline, slightly brackish, and carries high concentrations of volatile organic compounds. If there were a way to decontaminate this wastewater, it could be safely returned to the water table, but so far, no cost-effective solution has been found. Instead, massive quantities of contaminated wastewater are being temporarily stored in vast tailings ponds stretching further than the eye can see. These wastewater tailing ponds now cover a staggering 170 square kilometers and are approaching 1 billion cubic meters in volume. A federal study recently confirmed that these massive tailings ponds are leaking toxic waste into the groundwater and the Athabasca River, the water lifeline for the region. A Google search of "oil sands leaks" reveals hundreds of hits of various leaks, confirming the severity of the problem.
The problem is serious enough that the Canadian government imposed Directive 74 that sets out new requirements for the regulation of tailings operations associated with oil sands. It is the first component of a larger initiative to regulate tailings management, and specifies performance criteria for the reduction of fluid tailings and the formation of trafficable deposits. These criteria are required to ensure that the Energy Resources Conservation Board, or ERCB, can hold oil sands operators accountable for tailings management. Operators have used a suite of technologies to meet the requirements of this directive, but so far, no technology has been proven to be an effective solution in the face of growing waste streams from Alberta's oil sands operations.
The goal of the ERCB--to minimize and eventually eliminate long-term storage of fluid tailings in the reclamation landscape--appears to present a ticking time-bomb and disruptive threat to the future of the oil-producing companies, thereby forcing a need for a solution sooner than later. The Canadian government and oil producers have allocated tens of millions of dollars to fund research into solutions.
In addition to Directive 74, Alberta's Athabasca River water management framework sets strict limits on how much water oil sands companies can remove from the Athabasca River, with the goal of achieving a high level of protection that is balanced with the needs of the community, while also providing incentives for water conservation and innovation by water users.
Most Decontamination Technologies Not Cost-Effective
There are a number of companies that have been developing technologies to decontaminate the toxic wastewater tailings ponds, including companies such as GE Water (NYSE:GE), Danaher (NYSE:DHR), GreenHunter (NYSEMKT:GRH), and Aqua-Pure (OTC:AQPVF). Some regional players listed on Canadian exchanges are also engaged in finding solutions.
The good news is that they all have solutions that can work. The bad news is not that none are working well enough to scale to the levels required to decontaminate, in real time, the large volumes of wastewater involved in oil sands operations, nor are they cost-effective. As a result, wastewater tailings ponds, rather than shrinking, are instead growing at the rate of 177 million cubic meters per year; these are now confirmed to be leaking toxic waste into the groundwater and the Athabasca River.
University of Alberta Demonstrates Proof of Concept of Promising New Technology
The University of Alberta, considered a Center of Excellence for contaminated wastewater solutions, is the lead research center investigating wastewater technology. Dr. Mohamed Gamal El-Din, a leading expert in the area of water treatment and advanced oxidation, is heading these efforts and is funded by the Canadian government through the University of Alberta's Department of Civil and Environmental Engineering. The University and BioLargo, Inc. (OTCQB:BLGO) successfully demonstrated Proof of Concept of a promising new technology called AOS, or Advanced Oxidation System, that can rapidly dismantle difficult soluble contaminants; operate as a continual free-flowing system; function with very low power consumption; and compete at a fraction of the cost of other technologies.
Dennis Calvert, BioLargo's president, stated: "BioLargo's AOS Filter has been shown to reduce total acid-extractable organics in water at a rate never before demonstrated commercially. Based on proof of claim there is a belief BioLargo may have the lowest cost sustainable solution for the oil sands process-affected water. Having tested our technology, the esteemed University of Alberta is entering the AOS Filter industrial pilot-scale-testing phase, which we expect to confirm its commercial viability to treat oil sands tailings ponds and then eliminate the need for them on a go forward basis. Oil sands are commonly considered one of the most difficult water contamination situations. As such, this pilot project is expected to provide the groundwork for additional water treatment applications, including refining, fracking, remediation, agriculture and industrial waste among others."
The University is now beginning a pilot study and taking steps to validate efficacy, energy requirements, and flow rates for large-scale commercial application. AOS is expected to deliver a low-energy, cost-effective, continuous flow decontamination of wastewater, and to be scalable to handle any volume of wastewater. The University will receive royalties from BioLargo for its role in performing the pilot study and validating the AOS technology for commercial applications.
Oil sands production is big in Alberta and, on a global scale, makes up a significant and growing part of the energy pie. Of the many challenges facing oil sands production, the most daunting is the management of contaminated wastewaters. If government, industry, and research centers are successful with developing cost-effective, commercial-scale wastewater technologies, the anticipated high growth of oil sands production may proceed in an environmentally acceptable manner. If so, Canadian federal and provincial governments can continue to enjoy large revenues from oil production; oil producers and oil field service companies can return to a model of increasing production and profits that has been the hallmark of their industry; and oil and gas shareholders can reap the rewards of their investments.
However, if the wastewater problem is not solved, oil sands production will be constrained. The big oil sands players noted above will see lower revenue growth rates. Wastewater management challenges will drive incremental operating costs at the expense of margins, potentially impacting share prices and dividends. Investors in oil sands players need to pay close attention to these issues and adjust revenue and margin expectations accordingly, especially for Canadian producers who do not operate on a global scale. Risk-tolerant investors should be on the lookout for technology providers who can deliver cost-effective, commercially scalable solutions to the oil sands wastewater challenge; these will offer outstanding investment potential. Whatever the case, all parties have strong incentives to find innovative ways to treat toxic wastewater from oil sands production.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.