By Olivier Ludwig
Light, sweet crude may get all the press, but increasingly, the energy markets have looked to heavy oil—or denser, less viscous crude than the current WTI standard—to stave off the impending peak oil supply crunch.
In fact, crude from the oil sands and other "heavy oil" deposits could make all the difference, says Candice Beaumont, manager of L Investments. Beaumont is also a financial consultant for Genoil, an emerging heavy oil technology firm (and one of L Investments' portfolio companies). She is a member of the Independent Petroleum Association of America.
At the recent Inside Commodities conference, Oliver Ludwig briefly interviewed Beaumont about the fundamentals for oil sands production, including how heavy oil is obtained, whether heavy oil "counts" in the peak oil debate, and just how much different increased oil sands production would make anyway.
Ludwig: What's the factor that constrains heavy oil? Is it the technology of bringing it out of the ground? Why isn't it being pursued more aggressively?
Beaumont: I think in 2008, when we had the financial crisis, a lot of the heavy oil projects, like those up in Canada, went into financial trouble. A lot of these companies had their projects put on hold, due to the financing market. It's very capital-intensive to do a heavy oil project, to build an upgrader; it's billions of dollars. So that's a huge capital barrier to entry to getting these projects going.
So, since 2008, we haven't seen an infusion of capital come back into the market, which is why production has been slow.
Ludwig: Is it a refining issue, also?
Beaumont: No, not really. Refiners can have their processes converted, like Valero (NYSE:VLO), which has been converting all their refineries to process heavy oil. So the refineries have started to convert over so that they can process heavy oil.
Ludwig: Valero is the gold standard, right? They are making gold out of manure, so to speak, as a business model.
Ludwig: When we say "heavy oil," are we talking strictly oil sands, or are there other categories?
Beaumont: Well, there are oil sands and, of course, there are other grades of oil that are heavier or lighter than oil sands. So, there's heavy oil that has the 10 API [gravity] oil, which is much easier to produce, and then there's the 2 API [gravity] oil, which is very heavy, very difficult to produce. But it can be done.
Ludwig: Do they use naphtha? What do they do?
Beaumont: They use SAGD, which is steam-assisted gravity drilling.
Ludwig: Which is natural gas fired, right?
Beaumont: Basically, unless you can use gasification; then you can reuse the energy and don't need as much natural gas. A lot of the heavy oil projects have started to use gasification; it's like recycling, where you reuse the hydrogen and you don't need natural gas.
Ludwig: I read that there's some concern that this use is actually creating imbalances in Canadian natural gas imports, because so much of [the natural gas] has been diverted to the oil sands projects up there in Alberta. Is it significant enough to make a dent in the natural gas output coming from Canada as well?
Beaumont: It's a moving target.
Ludwig: If oil sands were produced as aggressively as theoretically possible, would that production make a meaningful difference to delay the onset of peak oil?
Beaumont: Definitely. We are still going to have peak oil at some point, but it would delay it. So, right now we have about 400 million barrels of light oil, we have about 14 years of production. So, with 900 billion barrels of light oil that is recoverable currently, if we can get that production online, it gives another 30 or 40 years. So, it just puts that whole peak oil problem way out there in the future rather than in our generation. It's helpful.
Ludwig: The problem being that all these capital projects are pretty much on hold.
Beaumont: For the moment, some of them are on hold and some of them are coming back online as the capital markets are coming back online.
Ludwig: Where else are oil sands located besides Canada?
Beaumont: There are some oil sands in the United States as well. In Utah there are some oil sands, and in West Texas. But it's harder to produce in the U.S., because it's still environmentally very difficult.
In Canada, it's in very remote places, it's 40 below zero, nobody is going to that neighborhood. In the U.S., in West Texas, people live where the oil reserves are and so you couldn't have the type of environmental impact that they are doing in Canada, where they are basically destroying the environment. If a bird flies over a river near the oil sands, the bird dies just from flying over the river. It's that toxic. They are just dumping all the waste into the waterways. If you did that in the U.S. you would be in jail.
Ludwig: Is that going to be an issue over the long term?
Beaumont: It's an issue. But because it's in remote areas and not inhabited, they aren't worrying about the pollution, because nobody lives in that area. So, they can do it.
In Russia, some of the heavy oils are in Siberia and in other places where people don't really live. So if you are producing oil in Siberia, it's got a negative environmental impact, but nobody probably really cares.
Ludwig: What about the water resources? Extraction of oil sands is very water-intensive.
Beaumont: It is. Is that an impediment? You just need access to water.
Ludwig: But the water that's left behind is quite polluted, right?
Beaumont: Exactly, and that's one of the environmental problems with producing heavy oil.
Ludwig: Are there technologies to clean that water, recycle it and get it back in the same game?
Beaumont: Yes, we at Genoil have oil water separation technology we've been working on and it's in production, at some of the navy bases. It's not specific to oil sands, of course, but when you have polluted water—say, the oily water in the Gulf of Mexico, or a ship that has dirty oily water in the bilge—it can clean the water there. It's just a typical standard oil water separation technology, but it cleans the water down to negligible parts per million.
So if you have a problem with polluted oily water, it can be used to clean it after you've polluted the water. It's a solution on the back end.
Ludwig: So you don't see political or environmental problems that would really stop this juggernaut from getting started?
Beaumont: In the U.S., yes; the environmental issues have stopped production and that's why we are not pressing heavily on the U.S. But in Canada and in Siberia, the government is less concerned with the environmental impact.
Ludwig: When would you imagine the oil sands will be up and running in a big way that will make a significant impact on the whole supply/demand equation?
Beaumont: We are at 9 million barrels of production today, and it takes about three years for a project to come online. So current predictions have it that by 2025, production [will be] up to over 20 million barrels a day. That's International Energy Agency statistics. Obviously if we throw more capital at more projects, we can bring things online faster.
Disclosure: No positions