Thursday, March 29, 2012

Tallying the Oil Reserves

How Canada made it to number three in the world

This article appears in the April issue of Oilsands Review
By Peter McKenzie-Brown
The issue of how much recoverable oil is in the ground in Canada has been a matter of political and commercial interest since the first surveys undertaken by the Geological Survey of Canada in the 1870s.

American eyes were opened to the true potential in April 2003 at a hearing of the U.S. Senate’s foreign relations committee. Convened to examine international energy security, the committee learned that Canada was an energy superpower. Alberta’s energy regulator had changed its method of calculating oilsands reserves, with the result that booked reserves in Canada suddenly rose from 5 billion to 180 billion barrels.

Canada suddenly stood in second place worldwide after Saudi Arabia. The Canadian Association of Petroleum Producers (CAPP) has since moved Canada into third place by accepting a calculation of Venezuela’s vast extra-heavy crude oil reserves which puts that country at the head of the pack.

No one knows what happened to the eyes of Canadian senators when they heard the first credible estimate of how much oil was in place in the Athabasca area, at a hearing that took place in 1888. The senators were provided with an estimate from R.G. McConnell of the Geological and Natural Survey of Canada.

McConnell’s calculation came from assumptions based on field and lab work: first, there were at least 1,000 square miles of bitumen-saturated sand in the area; second, the sands were 150 to 225 feet thick; third, and this result came from laboratory tests that involved boiling oilsand samples, that the bitumen content averaged 12 per cent by weight. Therefore there were about 30 million “long tons” of bitumen in place—roughly speaking, 220 million barrels. McConnell’s estimate was short by orders of magnitude; to put it in perspective, Canada now consumes about 200 million barrels every three months.

McConnell’s number was an estimate of resources in place, of course, and not a reserves estimate. At that time the very concept of reserves – hydrocarbons that are economically producible at current prices using current technology – was unknown. No one had any idea how to calculate what percentage of oil in the ground would ever see the inside of a pipeline.

Bedevilled engineers
Petroleum engineering gradually emerged as a profession, and engineers soon figured out how to book reserves from conventional oil and gas reservoirs. However, how to calculate oilsands reserves was an issue that bedevilled engineers and geologists for many decades. This led to some curious anomalies.

For example, when the $235 million, 45,000 barrel per day Great Canadian Oil Sands (now Suncor Energy Inc.) plant went on stream in 1967, it represented a substantial investment for the company and soon became a significant contributor to Canadian oil supply. The Canadian Petroleum Association (CPA-now CAPP) booked 6.3 billion barrels of oilsands reserves in its authoritative Statistical Handbook when the project went on stream, but reduced that number to about 1.5 billion in 1975. And when the 140,000 barrel per day, $2.3 billion Syncrude plant went on stream in 1978, the situation became even more absurd: the association didn’t add any new reserves. It was as though the oil was appearing out of nowhere. By the early 1980s a growing number of in situ projects, including Imperial’s Cold Lake activities, made the situation untenable.

According to Hans Maciej, retired vice president of the CPA, in the early 1980s he asked the group’s reserves committee, “‘Where the hell is [the oil] coming from?’ That was quite the discussion,” he recalls.

The committee eventually agreed that they had a problem, but there further endless questions about how to resolve it. “One thing was very easy,” says Maciej. “We could put whatever Great Canadian Oil Sands produced, let’s say it produced a million barrels that year and just add it to reserves – you know, wipe it out. Well that didn’t go very far. [However], after lengthy discussions we decided that we would credit every producing project, and every project that had approval and was sort of certain to go ahead. There was some judgment involved, but we said we would [book their reserves at] 25 times their annual production.” Maciej adds, “This was a very conservative estimate, [but] just to get things going we finally agreed on 25 years.”

CAPP’s reserves committee relies heavily on data provided by its member companies, and the association laboured mightily to stay on top of the country’s burgeoning oilsands reserves, which with special speed during the last 15 years as Syncrude and Suncor expanded, new mines came on stream and in situ projects multiplied.

However, according to CAPP’s research manager, Steve Rodrigues, it became increasingly difficult to get the necessary data from oilsands producers in the last decade – “not because of concerns about revealing competitive information, but because companies increasingly felt that they were not adding value by generating this information.”

One result was that CAPP’s calculation of oilsands reserves – historically, the Canadian standard – now compared to those being calculated by provincial and federal regulators. The numbers presented to the U.S. Senate’s foreign affairs committee were, after all, government numbers, and they were 24 times greater than CAPP’s.

Throwing in the towel
Where did the regulators get their numbers? In a recent presentation, Neil McCrank, who served as chair of the Alberta Energy and Utilities Board until 2007, offered the background. The “new focus on in situ development created a need for the regulators to find new ways of assessing and monitoring these projects…one of the major contributions made by the [regulator] was to recognize the need to re-categorize the in situ bitumen ‘resource’ to a ‘reserve’ where it was proven on the ‘core and cuttings’ analysis to be commercially viable with current technology.”

Bob Taylor, who was then Alberta’s assistant deputy minister for oil development, stresses that the Department of Energy does not play a role in these discussions. However, he says, the information used to recalculate reserves would have been rigorous and the models used would have been mathematically challenging.

“Every leaseholder is obligated to go out and prove up a resource on the basis of one well per section, or the equivalent of one well per section plus some seismic, so it might be one well every couple of sections with seismic lines connecting them so that you can get the stratigraphy. So what [the regulator] did was to have geologists look at each company’s assets,” while examining proven technologies and likely future demand. Using all this information, they created models that could generate highly credible reserves calculations.

Such was the origin of the proved reserves that caused so much excitement in Washington in 2003. According to the McCrank, the announcement of more than 173 billion barrels of oilsands reserves “was initially criticized, but after a stout defence of its scientific approach… the international oil and gas community accepted these reserves calculations.”

So did CAPP. In 2010 the organization threw in the towel as far as using its own method of calculation was concerned. An organization that has celebrated its independence from government since its earliest predecessor was formed in 1927 began using numbers from both Alberta and federal regulators as the basis for calculating oilsands reserves.

The association’s in situ oilsands reserves suddenly jumped by around 2,000 per cent, while its mineable reserves more than tripled. Canada’s industry had caught up with its regulators, and the results were parabolic.

Of course, reserves estimates will never be unanimous. The most widely accepted global authority on energy numbers, BP’s Statistical Review of World Energy, most recently puts Canadian oil reserves at 33 billion barrels, or tenth place. Venezuela at 175 billion stood in second place, while Saudi Arabia is the top dog at 264 billion.

We’ve come a long way since 1888, but we still have a way to go.

This article is part of a  series which reflects information from the Petroleum History Society’s current Oil Sands Oral History Project, which is recording the stories of oilsands pioneers in their own words. As with its previous oral history projects, transcripts and recordings will reside in Calgary’s Glenbow Archives. Peter McKenzie-Brown is part of the team of researchers/writers behind the project.
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