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July 08, 2006

Oil Sands Production Costs Skyrocket Peak Oil

One of the facts of life in a Peak Oil world is that the cheap oil has mostly all been pumped. What's left is oil that's going to be increasingly expensive to extract. Take Canadian oil sands. People who see our salvation there don't understand what it's going to cost.

Al Gore puts it starkly in an interview with Rolling Stone:

For every barrel of oil they extract there, they have to use enough natural gas to heat a family's home for four days.

And they have to tear up four tons of landscape, all for one barrel of oil. It is truly nuts. But you know, junkies find veins in their toes. It seems reasonable, to them, because they've lost sight of the rest of their lives.

Now it looks like oil sands are going to be a whole lot more expensive than people thought. Edmonton Journal (via Oil Drum):

Fears that cost pressures have spiralled out of control in the northern Alberta oilsands spooked investors Thursday in the wake of news that Shell Canada's Athabasca oilsands project could potentially pay upwards of $11 billion to generate an extra 100,000 barrels of oil a day.

Even in an industry that has seen its share of multibillion-dollar cost overruns to build megaprojects, word that Athabasca's first major expansion could cost 50 per cent higher than the current $7.3 billion pricetag hit oilsands producers hard on the stock market.

Bob Gillon, an energy analyst with John S Herold in Connecticut, said the Athabasca expansion would now cost six times what the original project did, on a daily flowing barrel basis.

"It's not a knock on Shell or this project, everybody's facing it," Gillon said in an interview Thursday.

"But my Lord in heaven. If you're talking about something that cost you six times as much as it did six or eight years ago, even with the move we've had in oil prices, we're getting these things back to where the economics...are going to get skinny in a hurry." [...]

Gillon said at $11 billion, the company is paying twice as much for 100,000 barrels of oilsands crude as it would by buying conventional production.

"Now, it lasts forever and it doesn't decline, and supposedly once you get it running you don't have the maintenance capital to stay in position. But that's not so sure either — sometimes they break, they catch fire."

Gillon said the dramatic cost escalations could ultimately put an end to oilsands companies drawing the largest investment dollars in the energy industry.

A long list of new projects that have not yet begun development might be dropped off the list, said Gillon. [...]

The Athabasca announcement sent shock waves through the market Thursday, affecting other oilsands producers and those currently involved in building new projects. [Emphasis added]

Oil sands production will continue. We addicts need our fix. But this is an early indication that rosy projections about technological supply-side fixes to what is at bottom a demand-side problem need to be treated skeptically. Junkies are experts at denial. And they get everything wrong.

On the bright side, higher oil prices may help us on the global warming front, pushing people to conserve and move to non-carbon-based energy alternatives. One can hope, anyway. Or is that just more denial?

Posted by Jonathan at July 8, 2006 05:18 PM  del.icio.us digg NewsVine Reddit YahooMyWeb