Q&A with Marcel Coutu

Syncrude's Chairman of the Board delves into operations, the environment and the demise of oil around the world. This article appears in the July 2008 issue of Oilsands Review.

By Peter McKenzie-Brown
Canadian Oil Sands Trust owns the biggest single share of Syncrude (37%), and the firm’s CEO is also Syncrude’s chairman. Oilsands Review asked Marcel Coutu about operating and environmental issues at the oil sands giant. His edited comments follow.

OSR: Developing new technology has been part of the business from the beginning. To what extent is that still the case?

MC: The first few years of this business were about survival, because oil prices were low and costs were high. When oil prices were low and margins were thin the driver for this business was always lowering costs. That really hasn’t changed much.

Both Syncrude and especially Suncor have been major developers of new technology. Suncor, for example, developed hydro transport – technology that enabled us to move oil sands ore by pipeline rather than truck. So all of a sudden we were operating satellite facilities, without having to truck ore to the processing site. That was a major innovation.

The tailings ponds are a major challenge area. It’s an important functioning part of our operations, and enables us to recycle our water. It’s a major challenge. We need to find ways to separate clay from the water more rapidly. This will help us reclaim land better.

OSR: Oilsands inflation has been high in recent years. How has that affected you?

MC: The one inflation component that has dwarfed all the others is the price of natural gas, which has moved up in parallel with the price of oil. We buy eight-tenths of an MCF of natural gas for every barrel of light sweet product we produce. The rest of our costs are increasing by low double-digit to high single-digit numbers, and over the years those costs add up. Fortunately, oil prices have more than offset operating-cost inflation.

OSR: How much energy do you consume for every barrel of oil you produce?

MC: About 1.5 gigajoules (1.5 MCF of natural gas equivalent) per barrel. That’s higher than 0.8 MCF, the number I mentioned earlier; that refers to purchased energy. The total energy we consume in our operations includes energy we generate as a by-product to our upgrading processes. It is largely electrical energy, in which we are more than self-sufficient.

We produce a lot of waste gas from our processes, and use that to fire gas turbines. We also have a lot of waste heat from our operations, and we raise steam with that heat and put that steam into steam turbines. This makes our operations more efficient.

Beyond that we arbitrage against the price of electrical power around the clock, sometimes selling electricity into the Alberta grid, sometimes buying it, depending on how those conditions align. We arbitrage those markets in both directions. We do the same with natural gas. It’s one of the businesses we do to make ourselves as energy efficient as possible.

OSR: How are you managing carbon dioxide emissions?

MC: We’ve been reducing them from the time we opened the plant gate. Carbon dioxide emissions are all about energy consumption – they are exactly the same thing; reciprocals, if you will. You only create CO2 emissions by burning fuels. We have always been incentivized to keep our energy consumption as low as we can, and lowering consumption means lowering CO2 emissions. We have always been focused on reducing CO2 emissions because they represent a direct cost to us.

OSR: You are a member of ICON, the Integrated CO2 Network. Any thoughts on carbon sequestration?

MC: The plants at Fort McMurray are the largest collectible source of CO2, but it is an expensive proposition. You have three levels of major expenditure there. You could sequester a lot of CO2, but I’ve seen numbers that you are actually generating more CO2 than you are sequestering by going through this process. First you have to construct equipment to extract the CO2, then build a pipeline, then pump the carbon dioxide into the saline aquifers, salt domes, old reservoirs or whatever you use to host the stuff.

OSR: The notion that crude oil supply is about to peak or has peaked is gaining a lot of currency. What do you think?

MC: Natural gas is in vast supply around the world but oil is not. Crude oil production in most of the producing countries in the world is in decline.

All OPEC can now do is raise prices by cutting production. They cannot lower prices by increasing production because they don’t have the capacity. We are in a very pure free market situation, with prices being set by supply and demand. When I look at that dynamic, I have stopped worrying about the demand side. No matter how much the US goes into recession, for any period that is important to any of us, any decline in consumption there will be offset by increased demand elsewhere – in China and India, but also in developing countries that produce their own crude oil. Those countries generally subsidize oil products, and subsidies accelerate demand growth.

At these prices you are seeing some conservation somewhere, but it is being more than offset by increased demand somewhere else. Whether people are still going to be buying at $200 a barrel I don't know, but by the time we get to $200 it will be the supply side that will keep things tight and moving upward.

OSR: How serious a problem is maintaining global production?

MC: Very. World oil production is generally in decline. You can assume that out of global production of 87 million a day, productivity will come off by 5-10 percent every year, so you have to replace that production each year before you can even begin to satisfy global demand growth. So what we are seeing is the demise of the commodity, since we are never really going to be able to meet the demand. Prices will be volatile, but the trend in my view is that prices will continue to climb. The demand will be fully there regardless of anything that happens to the US economy. The decline is real and cannot be arrested, at least not in the short term. One hundred and fifty dollar oil is within striking distance.

OSR: What is the role of the oil sands in this environment?

MC: Oil sands production is close to a million barrels a day, a little more than 1 per cent of global production. It’s going to take a huge amount of effort, capital and time, maybe ten years, to double Canadian oil sands production. It’s true that the Canadian resource is huge, but accessibility is long and slow. Our impact will be very slow.

One thing we need to bear in mind is that the size of our resource goes up with the price of oil; the higher world oil prices grow the greater our resources become. We have re-evaluated Syncrude’s leases, and that re-evaluation has taken us way up from 9 billion barrels, which was our traditional resource base. That’s good for Canada and Alberta and the rest of it.

OSR: How are you dealing with the labour shortages around Fort Mac Murray?

MC: To answer that, you have to think of labour as being in two buckets. The people in the operational bucket are there for the duration. They have great careers, pension plans and so on. Everyone puts their shoulder to the wheel, and we get the job done. We lose some people, but the situation is manageable.

Then there is the contract bucket – construction workers, pipefitters and so on, who are mostly there to work on expansions. They are there on a temporary basis and they are hard to hold onto. They are the challenging part of the work force. The labour problems we face are focused in that area.

OSR: Having waterfowl fly into the tailings pond brought international attention to Syncrude. Do you want to comment on it?

MC: We’ve extended apologies to everybody. It was really a heartbreaking incident for us. Why did it happen? Because we didn’t have our equipment deployed before the ice thawed. It’s something we have been managing for decades with success, but we got caught by the weather. We didn’t have our deterrents in place.

OSR: What are some of the other environmental issues you face?

MC: In general, our environmental story has been glowing. Where we have done a poor job has been in telling the world about it.

I’d like to comment in three areas – water, air and land. Let’s start with water. At Syncrude we consume two tenths of 1 percent of the water from the Athabasca River for our operations. We recycle as much as we can. If you extrapolate from that, the whole oil sands industry consumes less than 1% of the Athabasca’s flow.

Air is a more serious issue. We reduce our CO2 emissions because it makes economic sense, as I said earlier. But there are nastier things that we have been managing for years and they cost us a lot of money, and the nastiest of them all is sulphur dioxide. Our SO2 emissions peaked at 250 tonnes per day when we were producing around 250,000 barrels a day. In our last expansion we moved from 250,000 barrel per day to 350,000 barrels per day, and we invested about $1 billion in SO2 scrubbing equipment. We not only stopped the growth of SO2 emissions but reduced them slightly from our peak levels. Now we are spending another billion dollars to reduce those emissions to about 150 tonnes per day.

On the land side, in March we were the first company in the whole industry to get certification for land reclamation. We have returned that property to the province. It’s really impressive. You would never know there had been a mine there.

The Battery and the Charger

This article originated here.

B.C. and Alberta need each other’s power

By Martin Merritt
About 14 years ago, Alberta began to restructure its electrical system, and it’s been quite a journey to the market-based system we have today. Most people don’t understand what an important role British Columbia’s government-owned system plays in our market. From my perspective as head of the agency charged with making sure Alberta’s electricity markets are fair, efficient and competitive, I see our relationship with B.C. as mutually rewarding.

Alberta’s electricity market includes a host of buyers and sellers. At one end of the spectrum are small consumers like you and me who depend on electricity in our homes; on the other are huge industrial consumers mining the oil sands, operating pipelines and milling forest products.

On the supply side, generators range from wind farms east of Crowsnest Pass to huge coal-fired plants near Edmonton. The diversity of Alberta’s electricity supply has increased substantially. We now have more technology, fuels, locations, ownership, and maintenance diversity than in the past. Our system’s reliability, its cost structure and Alberta’s collective exposure to various risks are well-served by this diversity.

Less known is that Alberta and British Columbia are buyers and sellers of each other’s power. We Albertans buy from B.C. during our peak hours. B.C. buys from Alberta during the night. This arrangement confers tremendous benefits on both provinces.

There’s a misconception among some Albertans that the relationship between Alberta and B.C. is parasitic: we’re the host and they’re the parasite. According to this argument, our western neighbour is pulling a fast one by preying on a weakness in our market design.

The facts do not support those ideas. The power-exchanging relationship between the two provinces is symbiotic, and the symbiosis is based on geography. Alberta has lots of coal and natural gas, while B.C. has big mountains, long valleys and lots of rain. It makes perfect sense that B.C. based its system on hydroelectric power while we constructed one that primarily burns hydrocarbons. Because of these basic realities, over the years the two provinces have evolved a mutually beneficial relationship – somewhat like a battery and a charger.

The power we get from next door perfectly complements our own – and vice-versa. Alberta’s electrical demand varies substantially throughout the day and across the seasons. When we are fixing supper and using our home appliances our demand for power goes up, as it does during heat waves and cold snaps. It tapers off during spring and fall. Like other mechanical devices, generators fail unexpectedly from time to time. If they are wind-powered, their output is quite variable and difficult to predict.

Whether for reasons of temporary high demand, short supply or both, we’re fortunate to be able to buy electricity from our neighbour. Last year B.C. sent us as much as 465 megawatts for brief periods. What we have in B.C. is a standby generator that can provide us with significant amounts of reliable power on short notice.

Could Alberta make do without B.C.’s hydropower? Sure, by over-building generation capacity in the province. It’s worth noting that we don’t just buy power from B.C. because we can’t supply it ourselves. We buy it anytime that they are willing to supply it for less than it costs in Alberta. Every hour of the year Alberta generators have to compete with B.C. for the right to serve Albertans. If we had built a generator of our own just to supply the power that B.C.’s government-owned generators sent us in 2007, it would have run only 742 hours over the course of the year, or just 8 per cent of the time. This would make as much sense as buying an additional family car to avoid the odd cab fare.

Like cars, generators have costs that are largely fixed. Investing over $500 million plus ongoing maintenance in a generator that would run infrequently would be a very poor use of capital in any market. At the end of the day such power would cost far more than the power we buy from B.C.

Mutual self-interest has evolved a smarter way. We sell electricity to British Columbia at night when we have surplus capacity, so they can recharge their hydroelectric reservoirs. We buy electricity from B.C. at suppertime or on cold days or when a larger-than-normal number of our own generators are down for maintenance.

Our neighbour buys electricity from us when we least need it, and provides it to us when we need it most. This enables both provinces to make optimal use of their generating and storage capacity and use assets more efficiently. This keeps power prices lower in both provinces than they would otherwise be.

This arrangement has evolved naturally because of the physical differences between our electrical systems. It depends very little on differences in our market models. Yes, the market models are different. Alberta has developed a system in which markets determine prices and the pace of investment, while B.C. has a regulated, government-owned power system. British Columbians are justifiably proud of their hydroelectric system, although today’s B.C. taxpayers do not appear as keen to invest in publicly funded generation as their parents were. As a result, B.C. has become a net electricity importer. Many Albertans might be surprised to learn that in 2007 we sold much more electricity to B.C. than we bought from them, though overall Alberta too was a slight net importer in 2007.

Despite the vast differences in our market designs and because of large differences in the mix of our generation assets, the electricity systems of Alberta and British Columbia enjoy a unique symbiotic relationship. The big battery next door provides a market for our night-time surplus and a peaking supply for our crunch periods. Combine this with an investment climate that has attracted a steady stream of investor-funded generation projects for the past ten years, and you have a system that has provided reliable, sustainable power to the most robust economy in the country.

Alberta’s Market Surveillance Administrator, Martin Merritt is head of an independent agency developed to ensure that the province’s electric markets operate in a fair, efficient and competitive fashion. The MSA also monitors the retail natural gas market.