In Alberta, An Instinctive Understanding

This article appears in the August issue of Oilweek magazine

By Peter McKenzie-Brown
“Pipelines are us,” Bob Taylor reminded me one day over lunch. Formerly Assistant Deputy Minister of Energy (Oil) with the Alberta government and now a consultant who specializes in energy systems innovation, he was discussing the two-fold importance of pipelines to the oilsands.

Before moving to the punch line, however, he put the discussion into context. Because of environmental worries, “oilsands producers are facing steadily increasing resistance in the provincial, national and international arenas.” He continued: “Unless we address these issues, the industry risks losing the social license to operate.”

With that, our wide-ranging discussion turned briefly to a particular theme. One reason you need pipelines is to take production to market. Without new or expanded pipelines, production growth would be next to impossible. However, the oilsands also require specialized pipeline networks to reduce their environmental impacts and to produce more efficiently.

Several examples illustrate this theme, and each carries a budget of $400 million or so. One is Williams Energy’s Boreal Pipeline, which will run from just north of Fort McMurray to Redwater, Alberta. The other is Enbridge’s Waupisoo pipeline expansion. Waupisoo originates at a terminal on Enbridge’s Athabasca Pipeline, 70 kilometres south of Fort McMurray. From there it stretches southwest to a pipeline hub near Edmonton. In addition, Pembina Pipelines is building a pair of lines to serve producers operating near Slave Lake.

Boreal Pipeline
The proposed new Williams pipeline is part of a project which turns waste into commercial products. So doing, it reduces carbon emissions and feeds valuable feedstock to the petrochemical sector. Williams Energy’s cryogenic liquids extraction plant near Fort McMurray recovers natural gas liquids and olefins from a stream of off-gases produced at the Suncor plant. Located about five kilometres away, it returns a sweet, leaner fuel to Suncor, which uses the returned gas for generating industrial heat. This enables the plant to operate more efficiently and reduces its carbon dioxide emissions.

As importantly, this profitable project provides feedstock for the petrochemical industry. Williams transports the recovered gas liquids to a facility in Redwater, northeast of Edmonton, for processing into products such as ethane, propane, butane, condensate and the olefins of ethylene, propylene and butylene. Before Williams began this operation, the hydrocarbons were just burned.

Now eight years old, this business has been so successful that Williams is expanding it. The new 420-kilometre long, 12-inch diameter Boreal pipeline will initially transport to Redwater up to 43,000 barrels of liquids per day. Later, it will expand to 125,000 barrels per day. Pipeline construction will take three seasons – from this fall to spring 2012.

As part of this large project, the company is building up processing facilities at both ends of the pipe. For example, Williams recently raised a 70-metre fractionation tower at its Redwater plant. This allows the company to produce a higher-quality product from the existing 14,000-barrel-per-day plant by splitting the butane and butylene components. There is much more to come.

Waupisoo Expansion
As summer began, Enbridge announced that it had made commitments to producers to make available an additional 229,000 barrels per day of capacity on the Waupisoo Pipeline. The 380-kilometre pipeline system is designed to carry up to 600,000 barrels per day of oilsands crude.

Four additional pumping stations and upgrades to two existing stations are the basis for the expansion which will take Waupisoo to design capacity of 600,000 barrels a day. The expansion will take place in two phases. The first 65,000 barrel per day expansion will be complete in the second half of 2012. An additional 190,000 barrels per day will be added by the second half of 2013.

The actual capacity of the line will depend on the viscosity of the crude it is carrying. Heavier oils travel more slowly, reducing capacity. Lighter oil blends are faster, and will be the transportation product used when the line is operating at design capacity.

Regulated by Alberta’s Energy Resources Conservation Board (ERCB), Waupisoo links producers to their upgraders and to refineries in the Edmonton area. It also connects to some of Canada’s other oil pipeline systems.

Enbridge operates the world’s longest crude oil and liquids transportation system, with a network of lines in Canada and the United States. The Waupisoo expansion will strengthen Enbridge’s position as the largest pipeline operator in the oil sands region; also, it likely will cement the company’s position as the shipper of choice for new oilsands producers.

Pembina
Of course, no one will ever dominate that market, as another pair of lines now under construction by Pembina Pipelines illustrates. The company’s new Nipisi Pipeline – designed initially to transport 100,000 barrels per day of diluted heavy oil – will reach from north of Slave Lake to Judy Creek. From there it will connect to an existing pipeline system, delivering products to the Edmonton area. Ultimately, Nipisi’s capacity can be doubled.

As part of this project, Pembina will construct its Mitsue Pipeline, which will ship 20,000 barrels per day of condensate diluent from Whitecourt to producers operating north of Slave Lake. Mitsue could ultimately be expanded to 45,000 barrels per day. Cost of this package of pipelines? About $440 million.

Each in its way, the pipelines covered in this review represent different aspects of what’s going on in the industry. On the one hand, they support growth. On the other, they contribute to greater efficiency and reduced environmental impacts. In Alberta the understanding of these two purposes seems almost instinctive – probably because, for decades, within the province vast networks of these systems have been operated by tens of thousands of employees. As a result, new pipelines and pipeline expansions encounter relatively little public resistance. Pipelines are us.

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Waste to Wealth

Why waste management in the oilsands could better echo the mutually beneficial relationships in nature. This article appears in the August issue of The Oilsands Review.

By Peter McKenzie-Brown
Academics have developed a discipline known as industrial ecology to help explain the behaviour of the economic world, but you can do more than use this discipline to understand economics. You can use it for strategic planning. According to an influential group of thinkers headquartered in Alberta, the future of the oil sands lies in “industrial symbiosis” – a specialty within the field. It’s a simple idea, but it could have the power to transform the oil sands sector.

A few months ago I got an invitation to participate in a workshop developing this idea, with a key proviso: If I reported on the proceedings, I couldn’t attribute a quote to anyone without first getting permission. The point was to create a working environment in which no one felt constrained by the presence of a reporter. No problem: for this article, the ideas are more important than the industry, government, and university people behind them.

The workshop was jointly sponsored by ConocoPhillips and Alberta Innovates, an umbrella group of provincial agencies meant to be “catalysts of innovation” in the energy and environment, health, technology and bio sectors.

We met at the provincial government’s McDougall Centre in Calgary. While the topic was zero waste from the oil sands, participants produced the usual amount of think-tank rubbish in the form of Styrofoam cups and disposable plastics. Probably nothing was recycled – one of the easy forms of waste management.

The task set before the group was to brainstorm a plan for regional integration in the Fort McMurray area. Under this scheme, industry and government would look for ways to encourage the creation of waste-reducing business ties. Oil sands companies, other industries and municipalities in the region would share or co-locate infrastructure to reduce redundancy, harness waste energy and convert residual materials into value-added by-products.

The Big Word
To understand this, let’s get the big word out of the way. Symbiosis occurs when living things develop cooperative or dependent relationships with others so they can live longer or better and prosper. Familiar examples: people on the one side, cultivated plants and domesticated animals on the other. Each side needs the other to thrive.

Industrial ecology describes industries as ecosystems with behaviours somewhat similar to those in nature. Industrial symbiosis involves creating dependent or cooperative relationships within the sector. Done right, this approach can create more sophisticated, efficient and profitable businesses. It can also reduce the output of such industrial wastes as heat, carbon dioxide emissions, and other pollutants.

There are many instances of companies extracting by-products from a waste stream and then transforming them into money-making products. For example, Williams Energy Canada removes pentanes, butanes, propane and olefins from the off-gas stream at Suncor’s Fort McMurray operations. The company pipes the butanes and olefins to Redwater, where its 14,000-barrel-per-day plant further processes them into petrochemical feedstock. In May Williams announced a series of expansions to this system, including the construction of more processing facilities and a new pipeline.

Another example is the fertiliser plant at Syncrude, which helps the oil sands giant comply with environmental regulations. Marsulex Inc. owns and operates the plant which, using technology the fertiliser company developed, employs waste ammonia from Syncrude to help clean up sulphur emissions from bitumen processing and upgrading. The value-added by-product from the operation is ammonium sulphate fertilizer.

Similarly, Shell strips feedstock from the hydrocarbon stream at its oil sands upgrader at Scotford. The company pipes those by-products to its nearby petrochemicals plant for feedstock.

Looking into the future, Edmonton-based Titanium Corporation has developed an entire business plan based on processing waste oil sands material into valuable products. The company has developed technology that can recover both heavy minerals (zircon and titanium) and bitumen from tailings ponds at Fort McMurray-area plants.

There are economic and environmental benefits to this approach. Companies can generate profits for their shareholders. The environmental footprint is smaller, because symbiosis enables industrial players to manage emissions and other waste streams better. And there are improvements in the economics of transforming low-cost bitumen into higher-value products. It seems like a no-brainer.

The Toilet and the Tailings Pond
Over two days, workshop discussion was thoughtful and varied, and it included colourful one-liners enlivening subtle and colourful ideas. One person summed up a complex discussion with an on-the-spot maxim: “Don’t connect the toilet to the tailings pond.” The idea is that the plumbing should be designed to easily redirect plant by-products (including waste heat) to new facilities as money-making uses for them are found.

Co-author of an executive primer titled Discovering Industrial Ecology, the University of Alberta’s Dr. Stephen Moran suggested that companies should “assign to each major waste a product number, then assign a product manager to it.” An important outcome of that perception-altering idea would be the creation of markets for valuable wastes. Syncrude’s waste ammonia is one good example. Another: the propane and heavier hydrocarbons which Suncor used for plant fuel until Williams began to extract them for feedstock.

At the other end of the feedstock spectrum, consider that ERCB regulations now require the companies drilling Steam-assisted gravity drainage (SAGD) oil sands wells to send all materials from the well, including oil sands from the horizontal legs, to a secure landfill. Why not treat that material as oil sands ore and ship it instead to a mining operation for processing?

According to Bob Taylor – formerly Alberta’s Assistant Deputy Minister for Oil and now a consultant who specializes in energy systems innovation – all manner of coordination is possible. If several facilities coordinate their waste management operations, there will be fewer garbage trucks barrelling down the road. What about gasifying solid waste produced by field camps along with suitable regional waste, including slash from woodland operations? He also suggests a regional water strategy that “seeks to utilize this limited resource to support a much higher level of development and production than if we continue down the current path.” Taylor sees co-generation as another important area of opportunity. For example, waste heat from generating electricity could produce steam for cyclic steam stimulation (CSS) or SAGD operations.

There are also opportunities in assets external to the oil sands – infrastructure like roads and highways, the power grid and an often-discussed railway link to Fort McMurray. According to Taylor, “engaging parties beyond our normal spheres of influence (will help us) realize (symbiotic) opportunities that will enable our industry to better meet social and profit expectations alike.” The ideas got increasingly complex, and it quickly became clear that the potential is huge.

Triangles
One appeal of waste management through industrial symbiosis is that it contributes positively to three of society’s broadest concerns: economic growth, stewardship of the environment and efficient energy consumption. Take the Williams off-gases project, which strips heavier hydrocarbons from Suncor’s fuel stream. This industrial magic enables the plant to operate more efficiently, reduces Suncor’s carbon dioxide emissions and provides feedstock to the petrochemical industry. Not a bad outcome for a single piece of innovation.

A participant noted with some surprise that the environmental footprint is triangular in shape, with its three sides consisting of land, air and water. “What you do to change results in one of these areas affects results in the others.”

In that context, the goal of zero waste from the oil sands can act as a principle to help the industry overcome the public perception of the industry’s behaviour by directly addressing the issue. It will also provide guidance to the build-out of the industry. Forecasts suggest that three quarters of the plants that will dot the oil sands in 2030 are yet to be built. These facilities are still at the concept or design stage, and they represent the biggest opportunity to embrace industrial symbiosis. Notably, they will be receiving the greatest scrutiny from regulators and a public demanding “greener” energy.

Another triangle is driving oil sands development. Its three sides are social attitudes and demands; regulatory and industrial codes; and technical skills and operating environments. As in the case of the footprint triangle, what you do to change results in one of these areas affects results in the others. In the area of technical skills and operating environments, there’s a triangle of areas where industry players need to look for improvements.

According to Dr. Doug James, who with Bob Taylor facilitated the workshop, one is “inside the plant fence.” Individual operations need to seek out better processes for cleaning up or eliminating waste generation. These could include capturing and using waste heat, for example, and using waste materials for gasification. Joy Romero, Canadian Natural’s vice president of bitumen production, cited a process at Horizon which “purchases waste CO2 to add to our tailings. This undoes the effect of caustic soda, allowing fines and clays to settle, and water is released for reuse almost immediately from the tailings ponds.”

There are also “across the plant fence” opportunities, by which different companies work together to make their combined operations more efficient. For example, they could build joint facilities for water treatment and waste water handling or develop joint hydrogen production facilities – perhaps using gasification of coal and biomass – for use in upgraders.

And there are opportunities from “across-the-region coordination” – the construction of common pipelines and other transportation infrastructure. One possibility would be regional landscape planning with Alberta-Pacific Forest Industries, which has forestry rights covering most of the oil sands area. This “might reduce the joint forestry-SAGD footprint by 30%,” said James.

Tragedy of the Commons
In a presentation, Dr. Eddy Isaacs of Alberta Innovates described a 90-year pattern of oil sands development. His essential argument was that oil sands development periodically goes into crisis before being rescued by a visionary. Sunoco Chairman J. Howard Pew saved a floundering Suncor, for example, and Frank Spragins, the first president of Syncrude, brought that project back from a near-death experience.

The oil sands are now in crisis because of public perceptions. According to one academic, “Perception is reality and the perception is that you guys are making a mess up there. You’ve got a problem.” Dr. Soheil Asgarpour, president of the Petroleum Technology Association of Canada, agreed. “We aren’t communicating what we are doing properly,” he said, “and we aren’t doing enough.”

According to facilitator Bob Taylor, industrial symbiosis is a key part of the solution, since it harnesses economic forces to reduce waste and save energy. The best part of this system, though, is that it develops naturally. Symbiotic relationships began forming long before the idea was coined.

In Alberta, the classic example is the Industrial Heartland, north of Edmonton. That industrial region has grown organically since the late 1940s, when Imperial Oil brought a tin-pot World War II refinery down from Whitehorse in response to the discovery of oil near Edmonton. Not until recently was the idea of industrial symbiosis even whispered there. Now reflecting more than $25 billion in investment, this 582-square-kilometre region hosts forty large companies and many small ones. Together they operate numerous refineries and plants, pipelines, fabricating facilities, service companies and other interdependent businesses.

For the oil sands, there is no reasonable alternative to greater and continually evolving industrial symbiosis. In a background document, Bob Taylor and Doug James suggested that the extreme alternative to a sensibly industrial ecology is reflected in a notion known as “the tragedy of the commons.” The phrase was first articulated in an influential 1968 article by the late Dr. Garrett Hardin, an academic whose First Law of Ecology proclaims, “You cannot do only one thing.”

In his famous article, Hardin described a situation in which individuals act independently and rationally in their own self-interest. Collectively, however, they deplete a shared, limited resource even when it is clear that it is in no one’s long-term interest to do so.

To illustrate his point, Hardin proposed a hypothetical and simplified situation based on land tenure in medieval Europe. The picture he drew was one of herders sharing a common pasture for their cows. It is in each herder’s personal interest to put the next (and succeeding) cows he acquires onto the land, even if this means exceeding its carrying capacity and temporarily or permanently damaging the land. The herder receives all of the benefits from an additional cow, while the damage to the common is shared by the entire group. If all herders make this individually rational economic decision, the common pasture will be depleted to the detriment of everyone.

Society is now much more complex than in medieval times, of course, and today’s petroleum sector clearly understands that permission to produce Alberta’s resources requires public approval. Oil sands people at the workshop frequently mentioned the need to “preserve your social license.”

“The implication for the oil sands industry,” wrote the two workshop facilitators, “is that, in the absence of a higher guiding principle, each company will tend to act in its own interests, ultimately resulting in degradation of the environment. Of course, the government through regulations imposes such higher guiding principles. However, it appears at this time that the rapid expansion of the industry operating on an individual basis reaches sub-optimal results regarding environmental stewardship.”

One way for industry to demonstrate better stewardship is to collectively develop good will by sharing new, lower-waste technologies. It is important for companies to secure intellectual property rights for their ideas. If they didn’t, someone else could secure the patent and demand royalties on the technology. However, producers have little reason not to share them within the oil sands community. After all, said Doug James, “in the oil sands once you acquire your land the competition is over. Compared to the revenue stream from oil sands production, any income you might derive from licensing production technology is peanuts.”

Moving toward zero as a goal will reduce waste products, he said, but it will also reduce “wasted opportunities, wasted human capital, wasted funds and wasted reputations.”

He Rocks

 Former "coker rat" Byron Lutes plays the guitar, rides a longboard and - oh, yeah - is leading a serious oilsands contender

This article appears in the August issue of Oilweek.

By Peter McKenzie-Brown
I didn’t expect the answer Byron Lutes gave me when I asked what kinds of books he reads. “I read a lot,” he said. “Just last night I finished When Giants Walked the Earth, by Mick Wall. It’s a biography of Led Zeppelin. It was great.” The choice surprised me. As we talked, however, the title seemed increasingly fitting. Surely if there’s an industry dominated by giants it’s the oilsands, yet here’s a guy leading a small company who wants to become a leader in the game.

Lutes has a ready smile and a lot of confidence in what he’s doing – turning the two-bit shell of a VSX (Venture Stock Exchange) company into a serious oilsands contender.

A chemical engineer by background, the athletic president and chief executive officer of Southern Pacific Resource Corp. graduated from the University of Calgary in mid-1986, just as oil prices collapsed from $30 per barrel to $10 and layoffs within the industry became the order of the day. “Only two of about 50 graduates in my chemical class got jobs after graduation.” Byron Lutes was one of them. As a student he’d worked at Suncor during previous summers, and the company wanted to keep him on.

Instead of getting the typical new hire’s tour of the company, though, he found himself working for Suncor just as it became immersed in labour strife. Employees at the oilsands plant had gone on strike, and he was shipped off to Fort McMurray to help operate the upgrader. “I was a coker rat,” he says. “I was swinging valves and cutting coke. It was a dirty job – all-night shifts – but I loved it because I got to learn a lot coming right out of school. I spent eight years at Suncor, doing various things. I did reservoir engineering and a year and a half stint in marketing. It was a terrific company to work for, and I got a lot of great experience.”

When he was 30, Lutes’ romance with junior oils was about to begin. “One of my former bosses, Sid Dykstra, had set up a company called Newport Energy and he asked me to join him. The company was making about 2,200 barrels of oil a day. Over the next seven years we grew it to about 30,000 and then sold out to Hunt Oil.” He stayed with Hunt for the next three years, running their Canadian operations. “That was a complete change, going from a grassroots, publically traded Canadian company to a private, very large American one. I knew I wasn’t going to stay.”

In 2002 he went to work for ManCal Energy, a privately-held company owned by Calgary’s Mannix family. “We were always growing stuff, developing it and selling it to take a profit. That was part of our game plan. We didn’t want to build up the staff complement, which was about 20 people. ManCal was another really good company to work for.”
 
Food chain
After five years with ManCal, Dave Antony – the chair of Southern Pacific Resource Corp – approached Lutes “out of the blue” to run the company. “It’s been quite a ride. (The company) had a bunch of land in the oilsands and some exploration programs, and they needed someone to come in and lead it.”

Though the oilsands are an area where giants generally do walk the earth, Lutes sees a lot of opportunity for junior oilsands companies. “Smaller companies can move their projects forward faster, from a regulatory, financial, and execution standpoint,” he says. “They can exploit areas that a larger company may have overlooked. They (can) attract and retain top entrepreneurial expertise. There will always be room for different sizes, as in any industry, and the food chain will also likely always be there.”

The story of the resurrection of Southern Pacific illustrates two quite different business models that are part of the industry’s food chain. The company, which has an undistinguished pedigree, was first traded on the old Vancouver Stock Exchange as New Wellington Mines Limited, in 1953. According to Lutes, “Dave (Antony) and his associates find shell companies, clean them up, recapitalize them and put in a management team.” That’s one part of the food chain.

A private company known as Bounty Developments Ltd. illustrates another. Bounty’s “modus operandi is to get land positions and turn them over to another company, keeping an override on the land. They’ve been very successful with that. We made a deal with them, met some work commitments and acquired 219 square miles of land (sections) in the oilsands, most of it raw acreage. We earned an 80 per cent interest in the property.” Southern Pacific has since expanded its oilsands acreage, and now has an average 81 per cent working interest in 301 sections.

To play in the oilsands you need lots of money, and institutional investors in particular won’t touch a company listed on the Venture Exchange – too much risk. Southern Pacific needed to move to the Toronto Stock Exchange, and that required cash flow.

To get there, the company issued equity and took on debt to acquire Senlac, a Saskatchewan heavy oil property producing 5,000 barrels per day. The price was $90 million. “As soon as we had that we were a going concern, and it enabled us to advance to the TSX. That means more due diligence, but a lot more investors now will put their money into the company.” The company began trading on the TSX in June.

SAGD-able
To look to the company’s future, you need to first look a bit deeper into its recent past. When Lutes took on the president’s role at the beginning of 2008, the boom was still around, although it had been soured by Premier Stelmach’s ill-considered and now largely defunct “fair share” royalty revisions.

“When I first joined we were getting ready to start up a major winter drilling program. The company had in the neighbourhood of $60 million in the bank, and we had a lot of core holes to drill but the market was getting choppy. So we were lucky enough – and (chairman) Dave (Antony) was smart enough – to realize it may not be easy to raise equity in the market, so we really conserved our cash.” Lutes pulls out a map. “We cut back on our drilling program but were lucky enough to find in this McKay block a significant resource that we thought could support a good SAGD project. We focused and drilled into this area and found ourselves a project.”

The company’s first oilsands production will come from two pieces of land separated by the McKay River. Especially when he talks about the first of these properties, Lutes gets visibly excited. “It’s a great property to sink our teeth into as our first green-field Athabasca bitumen SAGD project. The reservoir has all the properties you need to make SAGD work, no complications like top gas or bottom water or shale compartments, and this one can use a proven technology.”

He stresses that you shouldn’t “risk the company by using unproven technology. Let the big guys figure that stuff out. We know that SAGD will work. Reservoir thickness ranges from 15 metres to about 30 metres. It’s definitely SAGD-able.” Oil saturation in the reservoir ranges from 70-80 per cent with an average of 75 per cent, he says. The reservoir “is not as thick as some properties further south” like Suncor’s Firebag project. “However, it’s a great property.”

At the low point in the financial crisis, last year Lutes’ team prepared a SAGD proposal for submission to the ERCB. “We designed a 12,000 barrel per day project for two reasons. From a regulatory perspective, it’s the fastest way to get onstream. If you make a proposal for more than 12,600 barrels (2,000 cubic metres) per day, approval takes another year. That’s the first reason. The second is that if you develop a smaller project, you can use standard equipment. Other companies are using the same pots and pans as we’ll be using. That gives us better control of our capital costs, since that equipment is made locally. We don’t have to go to international manufacturers.”

As for expansion and timing, Lutes is characteristically optimistic. “We think we’ve got enough resource to expand. We have contingent resources, and we think we can grow our capacity up to the 36,000 barrel per day range” within two years of construction of the first project. “Our first project is going to be steaming up at the end of 2011, and on full production by 2013. We think we can expand to the east side of the McKay River and also expand the original project on the west side. We hope to have applications in by the middle of 2011. Based on our recent experience, the applications take about 14 months to process.”

The cost of the initial project will be about $428 million. For Phases 2 and 3, Lutes estimates $380 million. “The difference is that infrastructure costs for the next phases will be lower once we are in the area.” Southern Pacific will use cash flow from Senlac in Saskatchewan and from McKay to fund growth in other oilsands leases.

Longboarding
Outside the office, Lutes is both musical and athletic. He’s had an interest in rock music since he and some friends started up a rock band in high school: “I played bass and sang.” The guitar playing is something his three sons – Cory, 19, who is studying engineering at UBC; 11-year-old Kyle; 9-year-old Dylan – have all taken up.
His wife Kathy and he are heavily involved with soccer with the younger boys. Formerly an accountant with TransCanada, she is now a full-time mum and treasurer of her kids’ soccer club. I ask about hockey. “We absolutely love hockey. We watch it religiously but we don’t play it. The reason is that we have a genetic problem,” he deadpans. “We can’t turn right on skates.”

He can turn right on the longboard, however. Essentially a surfboard with wheels, these long skateboards can measure 1.5 metres in length, and good riders can perform complex tricks on them. “I took up longboarding this summer,” he says. “Longboards really cruise. My kids have them, and they are a lot of fun. I figure if the kids want to use them, I might as well go boarding with them. I play basketball with them, too.”

How do you sum up Byron Lutes? A guitar-playing businessman, a longboarding engineer, an executive hooked on rock concerts. Too bad he can’t turn right on his ice skates.

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Low-Carbon Recovery

CO2 based theories of global warming need to be balanced by consideration of other ideas. This chart, which came off the Internet, illustrates an important opposing idea.

By Peter McKenzie-Brown

There are a number of people like Harold Nikipelo out there. The president of Edmonton-based Lifeview Oil and Gas Management Services, Nikipelo thinks he’s developed a better mousetrap – a new tool for heavy and conventional enhanced oil recovery. He joins such innovators as Sonic Technology Solutions Companies and N-Solv Corporation in his efforts to create practical, low-carbon recovery systems.

When you get him started, Nikipelo begins by enumerating the competing systems. Steam-assisted gravity drainage (SAGD) has been advancing for more than 20 years. More recent approaches include Petrobank’s toe-to-heel air injection (THAI) and its CAPRI system, which places a nickel-based catalyst bed in a horizontal wellbore. Other companies are experimenting with pulsed wave-front technology, solvent injection, electrical down-hole heating, steam flooding and the injection of solvent gases like carbon dioxide.

By no means is Lifeview alone in its efforts to find the holy grail of low-carbon recovery. One of the most important trends in bitumen recovery is the drive to produce the stuff with lower emission ratios. In the best of all possible worlds, this means better environmental credentials and lower cost of recovery. For environmental and economic reasons this is the wave of the future. Increasingly, production systems will have to respond to demands for reduced pollution – especially the emission of greenhouse gases (GHGs).

Nikipelo is one of a number of people combining and refining low-carbon recovery technologies in the interest of greener bitumen production. His company has developed a slick experimental production configuration that combines pulsing, thermal flooding, solvent gas injection and toe-to-heel injection. “For the thermal, we are injecting hot gas using a patent-pending three-stage process. The water or wet steam may be alone or combined with a catalyst. Our thermal unit is also generating electricity for our down-hole heating system, which pre-heats the hot gases to maximize potential. All emissions are being sent down-hole. The process greatly reduces both emissions and water usage.” His low-carbon alternative to SAGD begins with the idea of mitigating environmental problems but may also be a lower-cost solution for many producers.

“Our process is focused on using less water than SAGD. When we reduce water usage, we reduce the demand for fuel to generate steam, thus reducing fuel consummation. Our process is focused on zero emissions to atmosphere. All emissions are used in the process and are injected into the bitumen.” As Nikipelo tells the story, when he took his original concept to the Alberta Research Council, Dr. Alex Turta (team leader for enhanced oil recovery) said “You’ve got something important here….it may change the way we look at heavy oil recovery and possibly enhanced conventional recovery as well.” Turta in effect invented the THAI system, and the Lifeview approach is based on a number of his ideas.

According to Nikipelo, Lifeview’s tool injects steam and a scrubbing gas intermittently into the reservoir. This eliminates the requirement for continuous injection. This brings greater buoyancy into the reservoir, Nikipelo says. “It enables the steam to go into the proper part of the reservoir, creating a mobile oil front. At the end of the day, to justify the cost of a small SAGD operation you need a tool that can produce a small, cheap and portable tool – something small and inexpensive enough that can prevent smaller oilsands reservoirs from becoming stranded.”

Whether or not Nikipelo’s idea is an answer to the industry’s low-carbon prayer, it exemplifies a grail that an almost Arthurian roundtable of entrepreneurs and companies are seeking: ways to produce heavy oil and bitumen with lower carbon output.

In the field the smaller, leading edge companies include MEG Energy (Christina Lake in the Athabasca sands), OSUM Oil Sands (Cold Lake oilsands and Grosmont bitumen carbonates at Saleski) and Laricina Energy (also at Saleski and in the Athabasca at Germain). Private companies like Drakkar and Earth Energy Resources are, respectively, testing bitumen carbonate production in Peace country and oilsands in Utah. Also, of course, big, established players like Imperial, Shell, Husky and Cenovus Energy are making good progress in lowering per-unit emissions.

As these players successfully develop low-carbon production technologies, their efforts will simultaneously contribute to both the industry’s image and to its bottom line.

The Image Disaster
Part of the reason this development has become so important is that the oilsands business is now the ultimate whipping boy for petroleum industry critics. This year, things have reached what one can only hope is the bottom of a trough.

True, the year began on a high note. At their ballyhooed meeting in Ottawa, Prime Minister Harper and US president Barack Obama agreed to begin a “clean energy dialogue.” The focus of the talks would be “a cleaner, more secure energy future for both nations”, and it would involve immediate, big investments in energy research and development.

The two countries would collaborate on energy research related to advanced biofuels, clean engines, and energy efficiency, according to the Prime Minister’s website. “To address the energy and environmental challenges that we face together, the two nations agreed to expand collaboration in these and other key areas of energy science and technology.” Suddenly, it seemed, the green agenda had caught on in Ottawa.

Then things went awry, beginning with a devastating critique of the oilsands business in National Geographic. In the autumn, environmental activists staged highly publicized demonstrations at oilsands facilities.

As activist Jordan Poppenk described one such incident, “Activists from Greenpeace successfully broke into a tar sands operation in Alberta...and held up production for hours as they chained themselves to equipment and unveiled a banner reading “Tar Sands: Climate Crime” on a major access road....”

“American, Canadian and French activists broke into Shell Canada’s Albian Muskeg River oilsands mine north of Fort McMurray,” he happily continued, “and successfully halted production at the mine for six hours. The protest lasted for 30 hours and ended with a negotiated settlement between Greenpeace and Shell with the activists leaving peacefully and Shell agreeing not to press charges. The action was timed to coincide with the release of a report by Greenpeace condemning the tar sands as well as a visit by Prime Minister Stephen Harper to U.S. President Barrack Obama. The protest leaked into coverage of the U.S./Canada summit on major U.S. networks.”

At about the same time, environmental and aboriginal groups in the United States filed a federal suit against Enbridge’s proposed Alberta Clipper, on the grounds that recent approval for the bitumen pipeline goes against the public interest.

Smoke and Mirrors
Even such a knowledgeable and thoughtful observer as Jeff Rubin (formerly CIBC’s chief economist) claimed that oilsands facilities “leave an archipelago of tailings ponds – toxic by-products of oil-sand production and death-traps for migrating wildlife.”

Rubin’s tome on deglobalization – Why your world is about to get a whole lot smaller – delivers at least a few shock-jock ideas about the oilsands. “The production of a single barrel of oil pollutes 250 gallons of fresh water,” he said, “and emits over 220 (pounds) of carbon dioxide into the atmosphere.” To put the latter number in context, a barrel of bitumen weighs about 370 pounds.

Rubin does not cite the source of these figures, but they illustrate a second reason why low-carbon recovery has become so vital. The raw cost of eliminating carbon dioxide emissions from bitumen and heavy oil production is high and growing, especially because so much of those emissions are associated with increasingly expensive fuel consumption.

You can slice and dice Rubin’s numbers in many ways, especially since they make no reference to the industry’s mitigation efforts. For example, you might argue that at some point in time just about every volume of water on earth has been polluted by something or other. Natural systems have been purifying water since rain began falling in the pre-Cambrian. At oilsands plants the practice of recycling contaminated water, the use of deep-well injection and industrial evaporation are just some of the solutions that apply.

Carbon dioxide emissions, of course, are a different kind of cat. Once produced, they are devilishly costly to remove from industrial processes and inject into subterranean storage basins. Shell’s Quest carbon capture and storage project, for example, will sequester carbon dioxide from the upgrader at the company’s Scotford complex near Edmonton – an upgrader which receives bitumen from Shell’s Albian plant.

The Quest project will receive $865 million in grants from the governments of Alberta and Canada. In announcing the federal government’s $120 million contribution to the Shell project, Natural Resources Minister Lisa Raitt called carbon capture and storage “the most viable emission-reducing technology for fossil fuels.” She added, “These projects will reduce greenhouse gas emissions while creating high-quality jobs for Canadians now and benefitting our environment for future generations.”

True for mineable oilsands and bitumen upgrading processes, but the argument falls short when in situ production comes into play. Here, players like Lifeview’s Harold Nikipelo offer better, more viable solutions. Let’s begin with a look at the numbers. Under ideal conditions, Shell’s Quest project will have a lifetime cost of about $1.5 billion, including both capital costs and operating expenses. It will sequester about a million tonnes of carbon dioxide per year over its 40-year life. In nominal terms, and assuming excellent operating results, that means the cost of sequestration will be about $37.50 per tonne.

The Benchmark
Assuming these numbers are largely correct, an interesting number falls out of some simple math. If producing a barrel of oil from bitumen releases one tenth of a tonne of CO2 (Rubin’s number), then the nominal cost of eliminating greenhouse gases through carbon capture and storage would be about $3.75 per barrel. If you believe that regulators are going to get serious about eliminating emissions from bitumen production, then technologies that can reduce emissions for less than that $3.75 benchmark may be bargains.

The problem is in accountability. You can count the cost of sequestering carbon dioxide. How do you account for greenhouse gas emissions you don’t produce? This is a question environmental policy-makers can answer. The good news for industry is that as an economic question it can be good for the bottom line. For a lot less than $3.75 per barrel, clever engineers can find ways to forego the production of equivalent weights of greenhouse gases.

“Presently SAGD operations are running two to three barrels of steam to one barrel of oil. Our goal is to reduce that number (by using a different production system),” Nikipelo reiterates. “When we reduce the steam-oil ratio, we reduce both capital and operating costs for water treatment, steam generation and storage facilities. There can be huge savings.”

To calculate per barrel savings you need to plug such other factors as calendar day productivity, ultimate recovery rates and project life into your spreadsheet. Also, the system you employ must be robust (minimal downtime) and affordable. In a political climate deeply concerned about greenhouse gas emissions and water pollution, the oilsands industry’s best new mousetraps are going to trap GHGs in situ, so the industry later has less to capture and sequester.