My trip to see the oil sands

Last month, the Canadian Association of Petroleum Producers organised a field trip for a group of economics professors to see a couple of the oil sands installations. I once wrote somewhere that the oil sands are the most important Canadian economic fact of our time, and I jumped at the offer to join the tour. I'm glad I did. There are many very good articles out there describing what is going on in northeast Alberta - much better than I could write - but reading those accounts is most emphatically not the same as seeing the installations in person.

Other people who have gone more often and seen more will have longer and better stories to tell. What follows are my impressions of what I saw and learned.

The people in Fort McMurray work hard: While checking in, I asked the clerk at the hotel reception desk when the breakfast buffet opened: "5:00". You can hear the trucks warming up well before then, and I'm given to understand that the Fort McMurray rush hour - and yes, there is a Fort McMurray rush hour - is under way by 5:30 am. Our tour was to start at 8:00, which seemed unreasonably early to me, but which turned out to be timed so that the roads would be relatively clear by the time we set out. The opportunity cost of leisure is very, very high in Fort McMurray.

Here is the first picture I took - not by a professional photographer, nor with a high-quality camera, and from a moving bus - as we drove towards the Syncrude north mine operation:

Desolate, barren plains with towers emitting smoke in the far distance (it's actually almost all steam, but I didn't know that at the time). I felt like we were driving into Mordor.

The people who run oil sands operations take safety very, very seriously:

At times, this seemed a bit comical - I was once scolded for not holding onto the banister of the 5-step staircase leading into a building - but it's not hard to see why they would be so fanatical about it. Even if you set aside the usual concerns about workers' welfare, these installations operate 24/7: they really, really don't want to be obliged to shut things down in order to deal with an accident.

The Syncrude mining operation is astonishing in pretty much every dimension you can think of. The north mine - which was opened by Jean Chrétien in 1996 - is now a hole about 200-300m deep and 8 km across, and I if I recall correctly - and I may not - is due to remain active for another 10-15 years or so.

The extraction bit here is pretty simple: the diggers drop a couple of scoops onto the haulers, and the haulers trundle for the 15 minutes it takes to dump their loads at that crusher in the forefront. It's the scale that's incredible: each load is about 400 tonnes, which is in turn transformed into 200 bbls of synthetic crude. And the heavy haulers - the word 'trucks' seems inadequate - are the size of a house.

The next step is to separate the bitumen from the sand (the stuff that isn't bitumen is the tailings). The upgrading process itself consists of breaking the bitumen - which consists of molecules of long carbon chains, and with not much hydrogen - into the shorter hydrocarbon chains that make up synthetic crude. (You pick up a lot of this talk around Fort McMurray.) This goes on in one of the many, many buildings that look like this:

The elapsed time from shovel through the upgrading process and to the pipeline is about four hours.

One of the things that happens during the upgrading process is that sulphur is extracted. There's no way to get the sulphur to market (there is no railroad, and trucking is too expensive), so Syncrude has accumulated enormous stockpiles of the stuff; here's a picture of a portion of one of the dozen or so piles that I saw:

Apparently the stockpile is so large that if they ever did figure out how to get that sulphur to market, it would squash the world price like a bug.

Syncrude would be very disappointed with me if I didn't point out that when when an ore body is exhausted, they don't simply walk away from a gigantic hole in the ground and move on to dig another. The next stop on our tour was this reclamation project at the former East Mine:

 

That little piece of Mordor was in fact a former mine that is in the process of being reclaimed. This portion is further along in the process:

This is where we talk about the famous tailings ponds. The tailings - the oil sands with the bitumen removed - are roughly the consistency of yogurt. The basic strategy of dealing with them is to let it settle so that the sand sinks to the bottom and the water rises to the top. When the sand has settled out and the water is removed, you get that picture of Mordor I posted above.

Oh yes, while we were there, explosions were going on all the time. After the disaster of all those ducks trapped in the tailings ponds at the Aurora mine, Syncrude set up a system of radars (yes, really) to detect any waterfowl that might be in the area and cannons to scare them away.

The next step involves taking the layer of dirt that was dug away to expose the ore (they call it the 'overburden') and using it to do some serious landscaping to recreate the sort of terrain that had been in place before the digging began - muskeg and all.

Our Syncrude guide even made us go out and walk around in the newly-reconstructed muskeg, and it was just about as much fun as you'd imagine a stroll in the northern woods in 30+C weather would be. Okay, my grumpiness was partly my own fault: I had forgotten to wear a long-sleeved shirt and they made me wear a windbreaker to conform with their safety regulations. On the upside, I did get a picture of this bison, part of a longer-term project to re-introduce them to the area:

One the important things to understand about the Syncrude operation is that time there is measured in decades: two or three decades of extraction, another couple of decades of reclamation, and then another couple of decades to make sure that the ecology of the reclaimed land is sustainable.

That was the first day's outing. The next day was at the ConocoPhillips-Total Surmont in situ site. Surmont 1, to be precise: construction of the Surmont 2 expansion project was in progress a couple of kilometers off in the distance. The ore bed there is too deep to get at using mining techniques, so they use steam-assisted gravity drainage (SAGD). This involves drilling pipeline pairs that enter the deposit horizontally. The top pipe blasts steam into the deposit, making it sufficiently liquid to flow by pipeline, and the bottom pipe draws the steam and bitumen mixture away. This is what a typical well pair looks like above ground:

There are a score or so of these at each 'well pad' and Surmont 1 has 18 well pads. That makes for a lot of pipes heading back to the main installation:

Steam will get the bitumen to the main installation, but it's not going to get it to world markets. The next step is to take out the water (it's recycled) and to dilute the bitumen (which can't flow; it's basically solid tar at room temperature) with a solvent. The resulting mixture is called dilbit - diluted bitumen - which can be shipped south by pipeline. The solvent is recovered during the refining process at the other end, is sent back and recycled.

And that was my tour. What did I learn, beyond a bit of conversational chemical engineering? One of my first reactions was to wonder why the production of synthetic crude and dilbit is classified by the NAICS as 'oil and gas extraction' while oil refineries are part of the manufacturing sector. Maybe much of our much-discussed "crisis in manufacturing" would go away if upgraders were classified in the same way refineries are.

The question I kept asking revolved around this graph from last year:

If we took multifactor productivity seriously as a measure for technical progress, we'd (wrongly) conclude that firms in the oil and gas sector were using technology three times more advanced in the early 1960s than they're using today. So my question was how technical progress in the oil and gas sector should be characterised, because clearly the 'producing more with fewer inputs' MFP measure was the wrong way of going about it. These were the answers I got:

• Technical progress has expanded the number of projects that are economically viable. For example, before the development of in situ technologies, ore deposits that were too deep to get at using mining techniques would have been left alone. The counterfactual of no technical progress would be a decline in output.
• Much/most of the investment is front-loaded: oil sands projects require years of construction before production starts. According to this list, current oil sands production capacity is 2.25m bbl/day, and another 788,000 bbl/day - some 35% of existing capacity - is under construction. Since current investment expenditures are applied to Statistics Canada's perpetual inventory model, the projects under construction show up as a current increase in the capital stock with no corresponding current increase in production. This would drive estimates for MFP down, ceteris paribus.
• Environmental regulations are more strict. This is the only point I hadn't thought of before. The idea here is that expenditures that reduce environmental degradation but do nothing to increase oil production will show up as a reduction in measured productivity. I don't know how important a role this has in explaining the oil and gas producutivity puzzle, but it's not something to dismiss out of hand. 

 And that's my report. My advice for anyone who receives an invitation to tour the oil sands is to take it.

Comments

[wendy waters]

Great description. If more people saw first hand the activity do you think it would change opposition levels?

[rsj]

Great post!

I love this stuff. Here is a nice National Geographic Megastructures video on the oil sands:

http://www.youtube.com/watch?v=Z4lxpZUw3bw

The whole megastructures series is first rate, btw.

I think the whole manufacturing sector versus extraction sector makes sense, because in the extraction sector you have to innovate in order to extract as much as you did last period. In manufacturing, innovation means you produce more.

It makes perfect sense that innovation in gas refining allows you to do so more efficiently with fewer inputs. Therefore you produce more outputs per unit input. That is why refining should go into manufacturing. Mining is part of extraction, and is subject to the curse of extraction, which is not to disparage mining in any way or say that it is not high tech or important.

[jt]

Thanks.
Similar to productivity, do you think measures of R&D are also distorted? Sometimes I wonder if the very tough engineering in these dirty industries are underestimated, and some guy doing routine software Q&A testing at RIM is considered doing "R&D" and is overestimated.
PS Why do you have to wear long sleeve shirts?

[Stephen Gordon]

I'm not sure. I think it's a rule for everyone working there: no exceptions.

[Marc Lee]

Nice pics but not a word about climate change or greenhouse gas emissions? Externalities?

[Stephen Gordon]

Dingdingding!

And we have a winner for the "First comment complaining that I didn't indignantly denounce the tar sands" contest!

No. Because I've written about that before. I don't have to write about it always and everywhere. Sometimes I just want to learn and understand things. Even if it makes me a bad person.

[oblivious]

Well your big question was about the apparent "decline" in productivity in resource extraction, and your new insight is that it's caused at least in part by new regulations that reduce externalities. It seems like the obvious question that follows is what the impact of capturing carbon costs might be on MFP (and whether the particulars of the carbon pricing scheme make a difference), and whether that impact is desirable of a productivity metric.

[Edeast]

Were you allowed to take pictures?

Everytime I'm there, I'm not allowed, but that is as staff.

[Edeast]

On the long sleeves, it was ridiculous, they had us as treeplanters wearing longsleeves visivests hard hats, and safety glasses miles away from any equipment. I quit pretty quick.

Also what you call muskeg, I'm skeptical. From what I understand, Syncrude has been able to reclaim land allright, but they are having a hell of a time recreating wetlands, which is why David Laidler et al, were up in arms about the feds getting out of inland fisheries. Leaving reserves as the only remaining fed jurisdiction. Not that that gets you much, since last time I was there Fort McKay was trucking in water.

[Stephen Gordon]

oblivious: Actually, a carbon tax would probably make it more likely that technology improvements would show up in MFP. Most of the GHG emissions from the oil sands comes from the energy generation required to extract and upgrade the bitumen. Innovations that reduce energy inputs would show up in the standard productivity measures.

[Stephen Gordon]

Edeast: Yes, I asked for and received permission to take pictures. The Syncrude people were the ones who raised the wetlands question, and they seemed to be keen on making the point that they're trying.

[oblivious]

Huh, interesting. Honestly I was only thinking of the accounting and had failed to consider how incentives would change. Thanks for responding, I clearly wouldn't know how to think about these things.

[Bob Smith]

Great post!

[Edeast]

On SAGD, I think Surmont is going to be the largest in the world, but those records don't last long. Nexen just up the road, is able to recycle water as well, but complains that it is too expensive, and is trying to pull water from the Clearwater, which is a heritage river. CNOOC already owns 35% of it. Also SAGD may not disturb the surface as much, but I think it releases more CO2 per barrel.

I think locals were pissed when Conoco Phillips pulled out of Syncrude and brought in Sinopec, due to the shared tech that Syncrude has developed. Also a lot of locals make the same argument Simon made a couple weeks ago, on what is the rush, they'd prefer a monopoly for a couple centuries.

[Stephen]

That's really interesting stuff. If you ever get a chance to speak to someone in the pipeline industry you'll learn some more things that I suspect anyone not in that sector would know about but should. I have a few friends in this industry, a pipeline inspector, a GM for a pipe lining company (an new American FDI one no less), and a side drilling operator. Side drilling is a technology that has become very important. Remember that Simpsons episode, "Who Shot Mr.Burns?" If so or no, one of the jokes was Mr,Burns stealing newly found oil under the school by building an oil drill sideways to get the oil from the school. This is a real method of oil extraction. I am told it gets mostly used when First Nations refuse drilling on their land. I have no doubt the pipeline to Kitimat will be built. Even if lots of it is built underground, which of course is more expensive and why lining is used.

The other interesting fact I've learned is the main reason we're seeing these pipeline leaks is because the pipes are simple old and need to be replaced like any old infrastructure. I asked one of these friends why lining isn't used for over-ground pipes to help prevent leaks. I'm told over-ground leaks are easy to stop normally and can be quickly. It's just when old pipes are being used it becomes a pain. Mostly since you can't predict a leak anymore than you can predict your dishwasher from not working suddenly. I still think the piping industry for political reasons should consider using lining. Obviously they can just pass the cost on the consumers.

Never knew about the sulfur. Would it be worth sending it through a pipeline? I read it's used for fertilizer. Sell it to China, India, and Africa. Offer it for free to anyone who buys our oil maybe.

[Stephen Gordon]

Actually, there was a certain amount of pipeline talk during the trip, but since I knew essentially nothing about it, I don't have a lot to say. One thing I did learn - much to my surprise - is that there already *is* an oil pipeline that can take western Canadian oil to eastern Canadian markets: Line 9.

[Tim Newman]

Nice post. I'm in the oil business (not on the Canadian tar sands, though) and can answer the question about the long sleeves. It is a pretty simple safety issue, you want anyone on the site to have their arms and legs protected. A coverall won't protect you from something serious, but it can be a handy barrier to prevent anything from nasty or hot liquids, sunburn, mosquitos, hot surfaces, or sharp bits of metal from coming into direct contact with you. Almost every modern oil and gas facility in the world has this rule in place, and everyone within the restricted area has to abide by it. A lot of it doesn't make sense to an outsider, but to somebody in the industry it is as common as wearing a seatbelt.

[Dave Giles]

Nice post! I learned a lot from it. Thanks!

[Ross Hickey]

Great post. I've always wondered about the oil sands. It's great to learn something new. Thanks!

[Ben Doon]

One thing I did learn - much to my surprise - is that there already *is* an oil pipeline that can take western Canadian oil to eastern Canadian markets: Line 9.

Threats to cut off the flow of Alberta crude to eastern Canada in the 1980s NEP dispute would have rung hollow with no pipeline.

[Ben Doon]

If you want to look at MFP more comprehensively, a few suggestions:

1) The big decline in the red line, 1973 to 1982, coincides with a boom/bust in the O&G sector. A number of dynamics happening.

2)Mostly mining in oil sands prod up to end of graph period (2000). More SAG-D and boom in overall oil sands investment in next decade (2000-2010)

3)The few year lag in between cap investment and production would be a minor shift downward on MFP graph, and will balance out over time (new projects come on production as newer projects enter development). And should diminish as you get a larger installed baseline of operating facilities.

[Stephen Kessels]

I would suggest you relocate to Fort McMurray for at least 5 years. Make sure to drink the water from the Athabasca river and eat the fish from there. If you don't get cancer after that, I will support the tarsands project.

[Stephen Gordon]

Would you do that where you live?

[whitfit]

A few interesting, and as Stephen notes, slightly off topic, comments about the environmental effects of the tar sands.

Wendy Waters writes: "Great description. If more people saw first hand the activity do you think it would change opposition levels?"

and Stephen Kessels writes: "I would suggest you relocate to Fort McMurray for at least 5 years. Make sure to drink the water from the Athabasca river and eat the fish from there. If you don't get cancer after that, I will support the tarsands project."

Although I think that the immediate and local environmental effects are important, I worry that Wendy's observation is pointing out the way in which we as a society miss the point about these things. The big danger to me here is global warming. The amounts of energy required to get this stuff out of the ground and process it, the reclamation of the tar sands once the mining is complete, and the effect of the supply of oil on prices and consumption are to me much more important.

The problem with the more serious, but "silent" killer of global warming is that it is not just the responsibility of Albertans and the oil companies, but of all of us who use energy, vote for politicians at the Federal level who might be able to do something about carbon taxes on a broader scale and are engaged in discussions about the policies around this stuff.

[Andrew F]

I was thinking that your hosts would probably be happier if you didn't refer to the place as Mordor.

[Jon]

http://www.businessinsider.com/canadian-oil-sands-flyover-2012-5?op=1

Certainly emphasizes th negative more than Stephen does.

[Jacques René Giguère]

Stephen: I would drink water from Lac Rapide and eat fish from the Moisie river. In fact , I do.
That's why I fought against the uranium mine 500 metres from the city's freshwater source...

[whitfit]

Jon's post - re Business Insider article.

Those photos and descriptions are fascinating, and give a better picture of the mine operations.

I think that Stephen's report, based on his tour, did not have an obligation to discuss the negatives of the oil sands project that he toured, and I'm not sure that the Business Insider article did either. I think that the difference is that Stephen had a tightly controlled tour, put on by the company. In that context perhaps more discussions of the "tightly scripted" component could have been mentioned/discussed, but he did say it was a tour by them and he was under their control. In this case it is classic reporting - what did you see and hear?

However, Stephen's economic analysis is interesting and a useful part of the conversation.

Stephen does recommend that anyone offered a trip to the oil sands take it. I would wonder if perhaps a tour is a less useful way of understanding the oil sands than a broader view offered by pictures, videos and other sources that aren't just from the proponents/opponents. Plus, flying to Fort McMurray burns an awful lot of hydrocarbons.

[Edeast]

If you do end up in Fort McMurray, my buddy is the pilot in the business insider article. I think it only costs a couple hundred dollars to rent the plane.

[Simon van Norden]

Nice post Stephen!

The picture of the Sulphur pile just scares me. For decades, there has been a much smaller pile in North Vancouver (visible from much of downtown Vancouver and Stanley Park.) I still recall the year it caught fire. Sulphur has a high ignition point, but burns very hot. The main combustion product is SO2, a colourless gas that is odorless at lethal concentrations (as anyone who has worked in pulp mill will recall.) The Vancouver Fire Department had trouble handling this type of fire, as pouring water on it converts the SO2 into H2SO4 (i.e. Sulphuric Acid, a highly corrosive acid.)

You've really got to hope that the private and public sector people in charge understand the environmental and safety challenges this poses.

[Simon van Norden]

"One the important things to understand about the Syncrude operation is that time there is measured in decades: two or three decades of extraction, another couple of decades of reclamation, and then another couple of decades to make sure that the ecology of the reclaimed land is sustainable."

Do we (literally) have to be stupid think this is likely to happen?

Could the other readers please comfort me by pointing out other examples of large projects that humans successfully manage on such time scales, when decades of large-scale expenditure are required at the back end to offset negative externalities created during the exploitation phase?
(Anyone? Anyone? Bueller?)

If I were to advise a CEO, I would have to argue that his/her fiduciary responsibility to shareholders required them to pay out as much as possible to shareholders during the extraction phase, lever up with debt, and go bankrupt during the remediation phase. If I were to advise a politician, I would have to point out the potential benefits of postponing costly remediation efforts to future administrations while remaining firmly committed to their goals.

That makes it hard for me to be optimistic....perhaps someone can point out what I've failed to consider.

[Ben Doon]

That makes it hard for me to be optimistic....perhaps someone can point out what I've failed to consider.

The impact of public awareness/pressure to clean up the operations.

ERCB Directive 074: February 3, 2009
Tailings Performance Criteria and Requirements for Oil Sands Mining Schemes

One example of a company responding to the new directive/regs:

http://www.suncor.com/en/responsible/3229.aspx

How effective the changes are over time remains to be seen.

[Mitch]

A clarification on Line 9: The pipeline was originally built to handle west -> east flow, but was then reversed in the mid-1990s to move imported waterborne crudes. Now, with the surge in inland North American crude production, a re-reversal has been proposed and approved; I'm not certain if it is yet in service. Approvals were granted this summer.

Interesting that you call the diluent "solvent." Primarily, the diluent is natural gasoline, one of the natural gas liquids recovered from shale drilling in "wet" U.S. plays (Eagle Ford, southwest Marcellus). Natural gasoline is railed from Texas and Pennsylvania to Canada, blended with bitumen and then piped to Chicago area refineries.