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Costs rise for Canadian oil sands
Mineral resource of the month: Diatomite

Costs rise for Canadian oil sands updated Oct. 16, 2006

With development of Alberta’s oil sands proceeding at gold-rush pace, Canada has seen an increase in crude oil production. But with prices to produce the oil skyrocketing as well, analysts now wonder if the frenetic pace of development is sustainable.

Suncor, a Canadian energy company, mines oil sands in Alberta using shovels and trucks, which carry the sludgy sand to a processing plant where it is upgraded so that it can be refined into gasoline, diesel and jet fuel. The costs of producing the oil sands are increasing. Photograph is courtesy of Suncor Energy Inc.

In 2005, Canada produced about 2.5 million barrels per day of crude oil. Of that, 1.1 million barrels per day came from Alberta’s oil sands — deposits of heavy, viscous natural bitumen that has to be treated, or “upgraded,” to convert it to crude oil that can be refined into gasoline, diesel and jet fuel, says Richard Meyer, a geologist emeritus with the U.S. Geological Survey in Reston, Va. Producing the heavy oil is more costly and time-consuming than producing conventional oil, in part, he says, because it involves this intermediary upgrade step and transport to distant processing and consumption centers.

Nonetheless, in just the last couple of years, dozens of different production projects have sprung up throughout the province, and projections suggest a tripling in oil sands production to 3 million barrels per day in the next 10 years, according to Canada’s National Energy Board in Calgary. That growth will necessitate an expansion in infrastructure, including pipelines, upgraded facilities, and houses and communities for workers, Meyer says. But rising production costs and other challenges are threatening to slow the growth.

Indeed, in a media conference call in July, Shell Canada’s president Clive Mather said that Shell’s expansion in the Athabasca Oil Sands Project in Alberta would cost $10 billion to $12.8 billion (Canadian), instead of the $4 billion projected in 2003. The reasons for the rise in capital costs of oil production are primarily labor shortages and increases in the cost of commodities used in oil sands production, such as steel and natural gas, says John Staub, an analyst with the U.S. Energy Information Administration (EIA). Commodity prices are rising because of increasing global demand for them, Staub says, especially from developing countries like China and India. The labor situation, however, is a bit more complicated.

“There’s a limited number of skilled people in the region and a significant challenge of housing,” Staub says, in that the area of Alberta where the oil sands production occurs is “pretty remote.” Companies are left with the choice to either fly or bus people in from several hours away, or to build a lot of infrastructure to support a burgeoning industry, both of which are expensive propositions.

Some local communities, such as the Regional Municipality of Wood Buffalo in Alberta, are trying to work with the provincial government and the industry to “mitigate the impacts” of oil sands expansion, while sustainably building the infrastructure to support the expansion. Such regions are seeing their roads and social infrastructure and housing capacity “tested” by the rate of oil sands development, says Andrew Cameron, a spokesman for the National Energy Board.

Oil sands producers are facing another challenge, in the form of mounting environmental concerns. Several environmental groups, such as the Pembina Institute, are working to limit development in the region until what they call a more sustainable development plan can be put forth.

One of their concerns is that producing the oil uses a lot of water — 2 to 5 barrels of water per 1 barrel of oil — and a lot of natural gas — 700 to 1,200 cubic feet of gas per barrel of oil, according to the National Energy Board. {Editor's Note, added to the story online: This amount differs from what we printed. The amount of gas shown here does not take into acocunt the amount naturally burned off during oil production.} Using that quantity of water threatens surface water reserves in the semi-arid region, and burning the gas removes it from use as another energy source. Additionally, upgrading the oil involves releasing significant quantities of greenhouse gases into the air, Meyer says. Companies such as Shell Canada and Syncrude say that they are working to develop new technologies to “responsibly” develop the oil sands in the region.

Despite these challenges, however, with high oil prices and global demand continuing to grow, “we’re definitely going to see a strong growth in the oil sands,” Staub says. At 174 billion barrels of proven reserves, Canada’s oil sands are the second largest known hydrocarbon reserve in the world, after Saudi Arabia, and are especially attractive due to the country’s economic and political stability, according to EIA — something that cannot be said of most other oil fields in the world.

Megan Sever

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Mineral resource of the month: Diatomite

Alan Founie, the diatomite commodity specialist for the U.S. Geological Survey, has compiled the following information on diatomite, used in everything from containing industrial spills to producing beer and wine.

Diatomite is a soft, very fine-grained, siliceous sedimentary rock that is usually very light grey or beige in color. It is very finely porous, very low in density and essentially chemically inert. Rocks containing diatomite are excellent reservoir rocks for hydrocarbons.

Diatomite is one of the few natural nonfuel mineral resources of biologic origin. It consists almost exclusively of the miniscule skeletons of aquatic algae known as diatoms. Diatoms are a type of algae that blooms in lakes, streams and oceans. Diatoms are abundant today, and they were common in many ancient environments.

The diatom cells contain an internal, elaborate siliceous skeleton consisting of two valves (frustules) that vary from less than 1 micrometer to more than 1 millimeter in diameter but are typically 10 to 200 micrometers across and have a broad variety of delicate, lacy, perforated shapes varying from spheres and cylinders to discs, ladders, feathers, and needles. Accumulations over thousands of years of these skeletons in some lakes and shallow marine environments are extremely thick and produced what is known as diatomite.

Recovery of diatomite from most deposits is through low-cost, open pit methods. Explosives are not normally needed at either surface or underground operations because of the soft, friable nature of the rock. Diatomite usually is processed near the mine to reduce the cost of hauling the crude ore, which can contain as much as 65 percent water.

The United States is the world’s leading producer and consumer of diatomite and accounts for about one-third of annual world production. In 2005, 653,000 tons of diatomite valued at $179 million was produced in California, Nevada, Oregon and Washington. Other nations with significant diatomite production are China and Denmark.

Diatomite was used by the ancient Greeks as an abrasive and as a source of lightweight building bricks and blocks. In the mid-1800s, diatomite became of industrial interest in Western Europe when pulverized diatomite became the preferred absorbent and stabilizer of nitroglycerine used in Alfred Nobel’s invention, dynamite.

The first U.S. production of diatomite was in Maryland in 1884. In the late 1880s, huge, very pure, deposits identified near Lompoc, Calif., became the focus of mining interest. These deposits remain prominent in world markets today, and resource estimates indicate that at current use rates the deposits near Lompoc could supply the entire world diatomite demand for several hundred years.

The major use of diatomite is as a filtration medium for beverages (especially beer and wine), sugar and sweetener liquors, oils and fats, petroleum and chemical processing, pharmaceuticals, and water (industrial processes, potable, swimming pool and waste). The use of diatomite for biological filtration, including filtering human blood plasma has grown in recent years.

Diatomite sawn into shapes continues to account for a significant part of world diatomite production and it has long been used as lightweight building material, especially in China. Other uses of diatomite include insulation and insecticide. Although many substitutes are available for diatomite for some of its uses, its unique qualities ensure its continued use in many applications. For example, tradition and taste factors in the wine and beer industries, which are by far the largest users of diatomite as a filter, will limit encroachment into that market for the foreseeable future.
For more information on diatomite visit:

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