Report 2 from China – Pipelines for oil from Canada’s oil sands

Posted on September 18, 2012

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One of the reasons that I am in China is that, at the moment, we are discussing increased collaboration with the Chinese University of Petroleum in Beijing, CUPB. It is Professor Feng of the School of Business Administration at CUPB that leads research on Peak Oil at that university. He organised a workshop to take place before our discussions with the theme “The Impacts of Peak Oil”.

At the workshop there were about 20 of us seated around the central table and then a further 20 people sitting behind us. Aside from representatives from CUPB there were delegates from the China Academy of Social Sciences, the oil company CNPC, Chinese members of the IPCC and people from Tsinghua University, the National Energy Administration, Uppsala University and Grant MacEwan University in Edmonton, Canada. Primarily were were to discuss Peak Oil but also China’s energy security and what China is doing to secure its future oil supply.

The first item on the day’s agenda was a discussion of Canada’s oil sands. The experts invited to speak on this issue were Professors Mike Henry and William Wei from the School of Business at Grant MacEwan University. Professor Henry began by reviewing a few fundamental facts about the hydrocarbon reserves in Canada’s oil sands but more information exists in chapter 10 of my book, “Peeking at Peak Oil”. Here is a quote from the book,

“Some years ago “tar sands” was the most common name given to what is called “oil sands” today. Indeed, the appearance and consistency of the oil that is extracted from these sands does remind one more of tar than crude oil. The industry term for the hydrocarbons found in the oil sands is “bitumen”. Large deposits of bitumen exist in the province of Alberta in Canada. The total volume of this bitumen, the “Original Oil In Place” (OOIP), is 2,000 billion barrels (gigabarrels, Gb). Of this, 170 Gb are thought to be extractable. This would represent a recovery factor of around 9 % which is similar to some of the lowest recovery factors of the world’s oilfields. The bitumen exists at various depths. Approximately 20 % of it (35 Gb) exists at depths shallower than 75 metres and can be mined using conventional mining techniques. The total surface area for which this mining approach is viable is 4,700 square kilometres. The greater part of Canada’s accessible bitumen must be extracted using other “in situ” methods. The most common in situ method is named Steam Assisted Gravity Drainage (SAGD).”

Today Canada’s oil sands produce approximately 1.5 million barrels of synthetic oil per day (Mb/d). For the production to be profitable requires a price for that oil of US$45 per barrel. In a few years an even higher price will be needed since, to date, no tax has been paid to the Canadian state. Pipeline capacity exists to transport current production but if production is increased by, e.g. 0.5 Mb/d then large investments will be required to increase this. Professor Henry indicated that Canada lacked such capital. Previously capital from the USA had helped to finance expansion of oil sands production but the current weak economic climate was making financing of expansion more difficult. Chinese oil companies have now begun to purchase these production installations and, naturally, they want the oil to be shipped to China. However, the USA regards the oil sands in Canada as its oil. The situation is ripe for conflict. One thing is certain and that is that increased oil production from the oil sands will require a new pipeline. It is very interesting to study the two projects that are currently being planned.

It was Professor Wei who presented the two pipeline projects in more detail. Currently, the synthetic oil is transported to the USA through the so called Keystone Pipeline. Now there is a suggestion that new pipelines should be built to supply 0.9 Mb/d to refineries near the Gulf of Mexico. The new pipelines will allow increased production of 0.51 Mb/d (http://en.wikipedia.org/wiki/Keystone_Pipeline). Currently there is much talk that Canada’s oil sands will make Peak Oil irrelevant so it can be useful to know what production volumes the oil industry itself is discussing. In this case it is an increase of 0.5 Mb/d. At the moment the Keystone XL project has been shelved since President Obama has not allowed it to proceed. A final decision will be made after the presidential election.

For Canada there is an additional project to consider. It is the Enbridge Northern Gateway pipeline, http://www.northerngateway.ca/. This is where China enters the picture. The project is estimated to cost $5.6 billion and they will lay two underground pipelines from Bruderheim, Alberta to Kitimat, British Columbia as well as build a terminal at Kitimat with 14 cisterns.

(From www.northerngateway.ca)

The lesser of the two pipelines will transport condensate to the Edmonton area from Kitimat and then this condensate will be blended with the bitumen from the oil sands to produce a liquid synthetic oil that will then be refined. The 1,177 kilometer return pipeline to Kitimat can transport 0.525 Mb/d. If one considers that the condensate pipeline has a capacity equivalent to 30% of the oil pipeline’s capacity then this means that around 0.15 Mb/d of the volume is simply shuttled to Edmonton and back and that the actual oil volume that will be transported to Kitimat is 0.375 Mb/d. The synthetic oil that is transported to the USA is also blended with condensate and this means that the Keystone XL pipeline is also an increase in transport capacity of only 0.375 Mb/d. Together these pipelines would allow for an actual increase in production of synthetic oil of 0.75 Mb/d in the foreseeable future.

Since we are in China we mainly discusssed the Northern Gateway pipeline. Canada’s motivation for building the pipeline is as follows:

* It is in our national interest to have competition for our resources. Northern Gateway would provide Canada access to large and growing international markets in Asia and the United States west coast.

* Strengthen the nation’s position as a global energy producer and facilitate more investment in Canada. Bring significant and lasting benefits to the economies and the people of northern B.C. and Alberta – and all Canadians –in an environmentally safe and sustainable way.

We heard that China has a policy of collaboration with various nations to secure its oil consumption. An investment such as the Northern Gateway pipeline is one such collaboration. In the discussion the Chinese representatives advanced the idea that the investment should be seen as assistance to Canada so that it can increase its oil exports. Our Canadian friends described how opinion in Canada was divided on this. Many think that the oil should stay in North America, i.e. that the Keystone XL pipeline should be prioritized, while others think that the Chinese investment would allow Canada to free itself from the USA.

Before the Northern Gateway pipeline can be built Canada’s government and those in control of British Columbia and the various indian reservations along the pipeline’s route must agree. At the moment China is making great efforts to get the indian reservations to agree. Currently it seems that the British Columbian government will say no but if the project makes a large contribution to the region they may agree.

In the next report I will discuss Peak Oil and our continued collaboration with CUPB.

(In Swedish)

En av anledningarna till att jag är i Kina är att vi just nu diskuterar ett utökat sammarbete med China University of Petroleum I Beijing, CUPB. Det är professor Feng, School of Business Administration vid CUPB, som leder forskningsarbetet om Peak Oil vid universitetet och inför våra diskussioner ordnade han en workshop med temat ”The Impacts of Peak Oil”.

Vi var cirka 20 personer som var bänkade runt centralbordet och sedan ytterligare ca 20 personer bakom oss. Där fanns förutom representanter från CUPB deltagare från China Academy of Sciences, China Academy of Socail Sciences, oljebolaget CNPC, kinesiska representanter för IPCC, Tsinghua Unversity, National Enegy Administration, Uppsala University och Grant MacEwan University i Edmonton, Kanada. Vi skulle framförallt diskutera Peak Oil men också Kinas energisäkerhet och vad Kina gör för att säkerställa framtida oljeförsörjning.

Första punkten på dagordningen var att vi skulle diskutera Kanadas tjärsand. Inbjudna experter var professorerna Mike Henry och William Wei från School of Business, Grant MacEwan University. Professor Henry inledde med att redovisa för lite basfakta om reserverna men mer fakta finns i kapitel 10 i min bok” Peeking at Peak Oil”. Här är ett citat från boken:

Some years ago “tar sands” was the most common name given to what is called “oil sands” today. Indeed, the appearance and consistency of the oil that is extracted from these sands does remind one more of tar than crude oil. The industry term for the hydrocarbons found in the oil sands is “bitumen”. Large deposits of bitumen exist in the province of Alberta in Canada. The total volume of this bitumen, the “Original Oil In Place” (OOIP), is 2,000 billion barrels (gigabarrels, Gb). Of this, 170 Gb are thought to be extractable. This would represent a recovery factor of around 9 % which is similar to some of the lowest recovery factors of the world’s oilfields. The bitumen exists at various depths. Approximately 20 % of it (35 Gb) exists at depths shallower than 75 metres and can be mined using conventional mining techniques. The total surface area for which this mining approach is viable is 4,700 square kilometres. The greater part of Canada’s accessible bitumen must be extracted using other “in situ” methods. The most common in situ method is named Steam Assisted Gravity Drainage (SAGD).

Idag är produktionen ungefär 1,5 miljoner fat om dagen och för att den produktionen skall vara lönsam krävs det ett priset på den syntetiska oljan på 45 dollar per fat. Om något år krävs det ett ännu högre pris eftersom det hittills inte varit någon skatt till staten på produktionen. Man har pipeline kapacitet för dagens produktion, men om man ökar produktionen med t.ex 0.5 Mb/d då krävs det stora investeringar. Professor Henry menade att Kanada saknade det kappitalet. Tidigare har det varit amerikanskt kapital som hjälpt till med finanseringen, men dagens svaga ekonomi gör finanseringen svårare. Kinesiska oljebolag har nu börjat köpa upp produktionsanläggningar och man vill naturligtvis att oljan skall skeppas till Kina, men i USA betraktar man oljesanden i Kanada som sin olja. Det är upplagt för konflikter. Ett är säkert och det är att ökad produktion kräver nya pipeline. Det är mycket intressant att studera de två projekt som man planerar.

Det var Professor Wei som mer i detalj presenterade de två pipelineprojekten. Idag kommer den syntetiska oljan till USA genom den så kallade Keystonepipelinen och nu finns det förslag att man skall bygga nya ledningar så att man skall kunna forsla 0,9 Mb/d ner till raffinaderier vid Mexikanska golfen. De nya ledningarna skall ge utrymme för en ökad produktion med 0.51 Mb/d (http://en.wikipedia.org/wiki/Keystone_Pipeline). I den diskussion som nu pågår om att bland annat Kanadas oljesand skall göra Peak Oil ointressant kan det vara bra att veta vilka volymer som industrin diskuterar. I detta fall är det en ökning med 0.5 Mb/d. För tillfället ligger Keystone XL projektet på hyllan då President Obama har sagt nej. Ett definitivt beslut kommer efter presidentvalet.

För Kanada finns det ytterligare ett projekt att ta hänsyn till och det är Enbridge Northern Gateway pipeline, http://www.northerngateway.ca/. Det är nu som Kina kommer in i bilden. Projektet beräknas kosta 5.6 miljarder dollar och man skall gräva ner två pipelines från Bruderheim, Alberta till Kitimat, British Columbia samt bygga en terminal vid Kitimat med 14 cisterner.

Den mindre av de två pipelines skall frakta kondensat till Edmontonområdet och sedan skall detta kondensat blandas med tjäran från oljesanden så att man får en flytande syntetisk olja som sedan skall raffinadereras. Den 1177 kilometer långa ledningen tillbaka kan transportera 0.525 Mb/d. Om man tar hänsyn till det faktum att kondensatledningen har en kapacitet som motsvara 30% av oljeledningens kapacitet så betyder det att cirka 0.15 Mb/d bara skickas fram och tillbaka och att den verkliga kapaciteten bara är 0.375 Mb/d. Även den syntetiska oljan till USA blandas upp med kondensat och det betyder att Keyston XL i verkligheten också är en ökning med 0.375 Mb/d. Tillsammans finns det potential för en verklig ökning med 0.75 Mb/d under överskådlig framtid.

Då vi var i Kina diskuterade vi framför allt Northern Gateway pipeline. Motiveringen i Kanade till att bygga är den följande:

* It is in our national interest to have competition for our resources. Northern Gateway would provide Canada access to large and growing international markets in Asia and the United States west coast.
* Strengthen the nation’s position as a global energy producer and facilitate more investment in Canada. Bring significant and lasting benefits to the economies and the people of northern B.C. and Alberta – and all Canadians –in an environmentally safe and sustainable way.

Vi fick höra att Kina har som politik att man skall sammarbeta med olika länder för att trygga sin oljekonsumtion. En investering som denna är ett sådant sammarbete. I diskussionen framfördes från kinesiska representanter att man skulle se på investeringen som en hjälp till Kanada så att de kan exportera mer. Våra kanadensiska vänner framförde att det fanns delade meningar. Många anser att oljan skall stanna i Nordamerika, dvs Keystone XL skulle prioriteras. Samtidigt finns det de som tycker att den kinesiska investeringen medför att Kanada kan frigöra sig från USA.

Innan ledningen kan byggas återstår det att Kanadas regering, att de styrande i Brittisk Columbia, och att de olika indianreservat som passeras säger ja. För tillfället gör Kina stora ansträngningar för att få indianreservaten att säga ja. Just nu verkar det som om BC kommer att säga nej, men om projektet är mycket positivt för regionen kan det bli ett ja.

I nästa rapport skall jag diskutera Peak Oil och vårt fortsatta sammarbete med CUPB.

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