|November 18, 2013|
Oilsands epic stretches back more than a century
|The history of Alberta's oilsands --- a centuries-old story of exploration, geology, chemistry, political science, international finance and cutting-edge technology --- is also an epic tale of human achievement.|
It is because of men like Maxwell Ball, Sidney Ells and Robert Fitzsimmons, Dr. Karl Clark, Sidney Blair and Count Alfred von Hammerstein, Ned Gilbert, Roger Butler, former Alberta premiers Ernest Manning and Peter Lougheed, and oil executives J. Howard Pew, Frank Spragins, Jack Armstrong, Rick George and Eric Newell that a curious and frustrating natural resource evolved into the beating heart of Alberta's thriving economy.
These oilsands pioneers and others, no matter the era, expertise or motivation, recognized and experienced both the potential and the pitfalls of chasing their bituminous dreams.
The industry has paid tribute to some of these trailblazers. Fitzsimmons, von Hammerstein, Manning, Newell, Butler, Armstrong and Spragins have been enshrined in the Canadian Petroleum Hall of Fame.
Those first on the scene near Fort McMurray in the late 1800s and early 1900s could see, smell, touch and taste the black substance oozing out of the riverbanks --- some could envision all manner of uses for the vexing, viscous stuff, from road material to wartime fuel.
'IT'S BLACK, THICK, STICKY MATERIAL'
But they also discovered then, as did their successors did from the 1950s through today, that no lasting good can come of even a vast trove of resource riches without an economical means of extraction, separation, upgrading and transportation to move bitumen from its Athabasca birthplace to markets that are always hungry for more.
This wasn't and isn't the stuff of gushers in Oklahoma, oil that practically flowed on its own to market. There was and is no subterranean pool of liquid black gold as von Hammerstein had hoped, and suggested to potential investors and politicians alike. This was bitumen. Tar sand.
"If you had it in a bucket, it's black, thick, sticky material," said Robert McClements, an American engineer who rose from plant manager at Great Canadian Oil Sands in Fort McMurray in the 1960s to chair of Philadelphia-based Sun Oil. "You couldn't get it out of the bucket. You had to scrape it out with a stick, it was that viscous. It was full of sulphur. The first thing you had to do was reduce the viscosity of that heavy, black tar. Call it oil, because it was basically very heavy crude oil, but when you looked at it, it sure looked like tar and smelled like tar."
That sticky substance --- 1.8 trillion barrels' worth trapped in Alberta's oilsands --- has had the world beating a path to Fort McMurray for 150 years. And those intrepid American and Canadian scientists and entrepreneurs who ran tiny pilot plants and pumped out modest production were eventually replaced by multinational corporations that now produce more than a million barrels per day.
"The most appealing feature of the oilsands was the fact that they were there to be taken," former CEO of Suncor Rick George wrote in 2012 in his autobiographical book Sun Rise. "Instead of cruising the world in search of oil hidden beneath ground and drilling 10 dry wells for every one that proved successful, why not focus on the largest known source of oil? A lot of minds went to work on the idea over the years. A lot of money was spent to make it happen and a lot of companies invested millions of dollars in the dream."
HARD TO EXTRACT, HARD TO SELL AND HARD TO MAKE IT PAY
But it wasn't always full-steam ahead. Expansion and extraction activity in the oilsands is forever tied to the world price of crude oil and subject to the vagaries of geopolitics. After modest advances toward commercial production were made through the 1920s and '30s, the oilsands were somewhat forgotten after the Second World War. In 1946, oil was worth just $1.63 a barrel. After the discovery of conventional oil at Leduc in 1947 and Redwater in 1948, the province and industry focused on wells, not oilsands, and the price of oil rose only to $2.77.
The high cost of bitumen extraction would eat clean through that selling price and much, much more, a fact that scared away investors and left most of the bitumen in the ground, where it would stay until it made financial sense to dig it up.
The idle resource did not sit well with premier Ernest Manning, an unabashed oilsands booster who began beating the drum in the late 1940s. He led all the members of the legislature on a tour of the Bitumount plant in 1949, not long after the government took over control from Robert Fitzsimmons. He assigned the Research Council of Alberta's Sidney Blair to produce a comprehensive report on the bituminous sands of Athabasca, which was delivered in 1950. The report claimed that the cost of oilsands mining, separation, upgrading and transport to the Great Lakes was $3.10 per barrel. But Blair also figured that a $43-million plant could produce 20,000 barrels per day and a profit of at least five per cent.
The industry momentum gained from that groundbreaking report was intensified by a six-day gathering of oil executives and government representatives in Edmonton. The Research Council's board of trustees sponsored the Athabasca Oil Sands Conference from Sept. 10 to 15. About 120 delegates representing government and oil companies pored over the report at length --- 1,500 copies were printed and distributed throughout the province --- and were involved in technical sessions on oilsands geology, mining, processing and transporting the final product to market. About 75 of them then went to Fort McMurray to tour the Bitumount plant.
"There can be no doubt that it resulted in a substantial advance toward the goal of oil sand development," the Research Council stated in its 1951 annual report, which also lays claim to game-changing terminology. That name-changing proposal remains a hot-button issue today in the arena of environmentalists and politicians.
"It is the considered opinion of those concerned with the cause of oil sand development that the term 'bituminous sand' and 'tar sand' should be dropped. They both imply that the oil sands do not contain petroleum. This implication is false and has a bad influence from the standpoint of development. The proper term to use is 'oil sands.' "
More than 60 years later, that debate continues as opponents of oilsands development inevitably refer to it as tarsands.
'IF I HADN'T WRITTEN THAT LETTER,
I DON'T THINK THE OILSANDS WOULD HAVE STARTED'
Though J. Howard Pew was thousands of kilometres removed from the oilsands in Philadelphia, home of Sun Oil, in the 1950s he was keenly interested in their potential and shared Manning's grand vision of the lasting value of the resource. Still, the financials surrounding a full-scale enterprise were so bad that even Pew needed help convincing Sun Oil board members to spend money on that vision.
Timely assistance came in the spring of 1951 in the form of a letter from Ned Gilbert, Sun Oil's top landman in Canada.
On April 9 of that year, Gilbert's immediate boss, George Dunlap, told everyone in the Calgary office that Sun Oil management in Philadelphia was no longer interested in entering the tar sands due to prohibitive costs. Gilbert considered it a mistake, and went over Dunlap's head by penning a letter to Pew.
"I will not attempt to speak for the engineers and geologists," wrote Gilbert. "But I know of no other place in the world where I can, if I am the first to apply for a tar sands permit, obtain proven oil reserves for less than $1.40 per acre."
Pew was able to leverage the letter into board approval to proceed. By 1953, the Great Canadian Oil Sands consortium was formed, with Sun Oil as a major backer, and leases and patents were acquired. The oilsands area was on its way to full-scale development.
"I was sitting in the back of a room the other day and somebody was giving a talk on the oilsands and I thought to myself, if I hadn't written that letter, I don't think the oilsands would have started. It gave me quite the feeling," Gilbert told the Fort McMurray News last fall.
More than 60 years later, hundreds of billions of dollars have been spent on development and tens of billions more deferred, pending better economics.
The megaproject mentality that transformed the oilsands was fostered by men like Frank Spragins, the former Syncrude CEO, according to researcher Peter McKenzie-Brown.
"A number of colossal projects will have to be undertaken and such projects take time," Spragins told a university audience in 1977, a year before he died, according to McKenzie-Brown. "Twenty years for the Syncrude project, for example. Therefore, we should waste no time in getting major heavy oil and tar sands projects underway. To do this, it will take complete co-operation between industry and government with a good measure of support by the public. Hopefully the Syncrude Project will be a guide in this direction. Henceforth, if we know the way, the big word is action and that means action now ..."
MEN OF ACTION
The oilsands were always dependent upon men of action. A champion of the oilsands as Syncrude CEO in the 1980s and '90s, Eric Newell looks back fondly at the men, like Spragins, who set the table for him and his contemporaries.
"I grew up at Imperial Oil and our hero at the oilsands was Jack Armstrong, when he went head to head with the Exxon chair," Newell said in June.
After Armstrong's death in 2010, his son David told the Calgary Herald that his father considered his role in forming the Syncrude consortium to be his biggest achievement.
"It was a very difficult negotiation," he said, referring to his father's recollections. "From the initial start, I think Imperial's commitment was $325 million and it ended up being $625 million. He flew to New York and spoke with Cliff Garvin, who was chairman of Exxon at the time, and said, 'Cliff, I've spent $625 million of your money. You can either agree with me or fire me.' "
Oil was both plentiful and cheap, and the Syncrude project was offering a measly six-per-cent return, but Armstrong did not get fired. The Syncrude project had other major players in addition to Armstrong.
"Frank Spragins, the reason we call him a hero, twice Syncrude was turned down on their application," said Newell. "He wasn't going to give up."
The Syncrude consortium was formed in 1964. But with the GCOS plant online in 1967 and a massive oilfield discovered at Prudhoe Bay in Alaska in 1968, the prevailing fear was of a North American glut, not a shortage, so Syncrude's grand plans had to wait.
In 1969, the Alberta government finally granted Syncrude limited approval and a construction start date of 1973.
Newell said Pew's influence was still being felt at the time. Pew had committed $250 million of Sun Oil's money to GCOS in the early 1960s and swallowed hard every time the board of directors didn't like the look of the bottom line.
"They just took a huge bath in red ink for all that time and Howard Pew said, 'This is a strategic resource, we're going to stay there,' " said Newell. "Syncrude got approved but at very marginal economics. My rhetorical question always was, 'Do you think Syncrude would have been built if Howard Pew had not had the guts to stay in?' He was hugely committed. I think the Syncrude owners deserve a lot of credit, but certainly Howard Pew is one of the industry heroes."
On an oilsands timeline that encompasses 150-odd years, the '60s and '70s were but a blip --- an important and busy time to be sure, but merely part of the story sandwiched between its early beginnings and more recent technological breakthroughs.
THREE ERAS OF OILSANDS: BITUMEN, REFINING, IN SITU
Oilsands history, like the resource itself, is more readily identifiable when separated into distinct parts. While Newell prefers to view it in terms of key happenings --- including the passing of the Natural Resources Transfer Act in 1930, world oil shortages of the 1970s and the National Oil Sands Task Force work in the 1990s --- McClements sees three distinct eras: bitumen, refining and in situ.
"If you can think of it in those three eras, then it's easier to talk about the history, who played a role, and what were the significant elements in it," McClements, 85, said by phone in May from his home in Florida.
"There was a clearly defined period of producing bitumen by these rugged individuals and smart research scientists who produced bitumen and were able to sell it. But it cost more to produce than what was made (from selling it)."
He was talking about the likes of Ball, Fitzsimmons, Clark, Ells and Blair, all of whom were active in a variety of roles in the oilsands in the 1910s and '20s, before the Dominion of Canada passed the Natural Resources Transfer Act that gave control of the resource to the provincial government. Ells was the Dominion's representative on the ground, sent from Ottawa more than once to survey large chunks of the oilsands region, which at the time was thought to hold vast pools of oil that could be tapped through conventional drilling methods.
Clark and Blair were a formidable research duo in Edmonton and on the ground up north, and are credited with improving upon the hot water separation process, for which they were awarded a patent in the late 1920s. They processed bitumen at a pilot plant in the basement of a University of Alberta building. But hot water had already been used on oilsands for decades.
"If you try to pick an incident that initiated the bitumen era, you could go back to the late 1800s, 1870, when a guy by the name of (Henry 'John' Moberly) set up a trading post for the Hudsons Bay Co. at the mouth of the Clearwater and the Athabasca Rivers," said McClements. "What he did then was, he took a pot of hot water, probably fired by wood, and stirred into it and made a slurry out of tarsands. He probably had to stir it only for a few minutes and allow it to settle. A gravity separation took place, the sand fell to the bottom and the bitumen rose to the surface.
"One hundred years, plus or minus, later, at the Great Canadian Oil Sands Plant, we did exactly the same thing. The basic process did not change in 100 years."
But development of the oilsands was nonetheless propelled into the major leagues by Shell, Syncrude and Sun Oil through the 1960s and 1970s. Their executives assured Alberta politicians that oilsands production would mushroom to 50,000 barrels per day at the GCOS and 100,000 bpd at Syncrude and Shell operations. It signalled a seismic shift in scale.
"The next era was the refining era, where the large international oil companies brought the money, brought the expertise, brought the market, and developed, demonstrated and built, and are continuing to build, the refining of that heavy bitumen," said McClements.
"What they were proposing was just such a mind-boggling difference to what had taken place in the previous hundred years. What they had the ability, finances and technology to do, was take the bitumen that many people had produced (but actually was worthless, because it had no value in the marketplace) ... they were able to take that bitumen and turn it into products that you could heat your house with, operate your car with. They were able to refine it into saleable, high-quality products."
It wasn't smooth sailing through the 1980s and into the 1990s, however. The major oilsands players struggled with production issues. The price of crude, held to the teens and low $20s per barrel after the shortage of the early 1980s abated, was debilitating.
'A BOTTOMLESS PIT OF LOSSES'
"For twenty-five years, the GCOS oilsands project had all the appearance and performance of a massive white elephant," George wrote in Sun Rise. "By 1990, the brilliant vision of J. Howard Pew had deteriorated into an apparently bottomless pit of losses resulting from production costs that often exceeded the market price of the oil."
Newell said Canada had basically forgotten about the oilsands again in the early 1990s. He recalled speaking to newspaper editorial boards and government officials in the East who were surprised to learn that Syncrude was in production.
"I used to joke that I was CEO of the best kept secret in Canada."
The industry needed to make changes, and the National Oil Sands Task Force was born in 1993, bringing together 35 government and industry organizations and 70 people, primarily to hammer out a royalty regime.
"We said, look, governments can no longer afford handouts, investors have to be able to get a good return, so here is what we need to do: reduce the up-front risk to investors in return for a fair share of the profits upon completion of the capital project."
Newell said they sold a vision of jobs and royalties, then needed to deliver. They cut costs, improved production processes and margins. Those reformative days called for a major rethink of their clunky technology, away from bucket wheels and conveyor belts that were constantly breaking down.
"Bucket wheels, and in particular Suncor bucket wheels, were ideal proof of a rule that every engineer understands instinctively: the more complex a piece of mechanical equipment, the greater the probability of its breaking down," George wrote in his book.
The 1,600-tonne, 10-storey-tall machines were built to mine coal, not the harder oilsands. And they certainly weren't meant for the frigid temperatures of northern Alberta. George wrote that three bucket wheels were in operation at Suncor when he arrived in 1991, and constant mechanical failure meant downtime averaged almost 50 per cent each year.
"I was convinced that replacing the bucket wheels with a more reliable system would produce an immediate leap in productivity. I also knew that buying the new equipment would require a major and unbudgeted capital investment, necessitating approval from a head office that considered spending money on the oilsands like tossing cash into a deep, dark hole."
REPLACING BUCKETWHEELS WITH
TRUCKS WAS A TURNING POINT
He envisioned, and eventually procured, a fleet of heavy haul trucks and power shovels, the first generation of machines still in use. The cost was enormous, at $120 million. But it was money well spent.
"By 1997, we were settled in Calgary, and the move to trucks and shovels at the oilsands, along with installation of a new vacuum tower to expand our upgrading capacity, was paying dividends. After years of fires, mechanical breakdowns and multiple losses, Suncor was on solid ground financially."
Syncrude also made technological leaps of faith, not only with trucks from Carterpillar and Komatsu and hydraulic and electric shovels, but with game-changing hydro-transport that moved bitumen from mine to upgrader by pipeline.
"As long as you pump it over a kilometre or more, you get enough mechanical energy put in through the mixing to break the bond (between bitumen and sand), so that you can go into the primary separation vessels. That enabled us to get away from conveyor belts and all that," said Newell.
They were able to pump bitumen from their Aurora operation, 35 kilometres north of Fort McMurray, to the Syncrude plant.
"The magic there is you can go where the best bitumen is, the thinnest overburden and richest ore, so that's a big plus, and you can keep the major part of your capital investment in the upgrader," said Newell.
According to 2011 estimates, Alberta's proven or accessible oilsands reserves, that is to say those within 75 metres of the surface, amount to 168 billion barrels, and 80 per cent will be developed in situ, mainly through steam assisted gravity drainage (SAGD), while only 20 per cent will come from surface mining.
"Now we're in the in-situ era, and that has a history all its own," said McClements.
That history was championed by Roger Butler, the so-called father of SAGD. He discovered and patented the process for Imperial Oil and often lamented that the company did not take full advantage.
"When he first proposed the SAGD method in the late 1970s for the recovery of heavy oil and bitumen, he often faced doubt and disbelief about its practicability from colleagues who viewed the idea with amusement," wrote Qi Jiang, a student and colleague of Butler's at the University of Calgary, in endorsing Butler's enshrinement in the Canadian Heavy Oil Association Hall of Fame.
"Roger persisted until his theoretical prediction of the commercial SAGD rates was verified at the Underground Test Facility in the late 1980s. And to date, billions of barrels of bitumen have been produced from a number of commercial SAGD projects by drilling two horizontal wells in close proximity to one another, injecting steam into the upper well and collecting oil in the lower one," wrote Jiang.
The technology is readily available to smaller oilsands players who produce modest output of 10,000 to 15,000 barrels per day. Modest by today's megaproject standards anyway. But light years removed from the 350 bpd pilot plants that spawned this mammoth enterprise in the early part of the last century.
"We're not a mature industry," said Newell, looking back on 150 years of oilsands history. "We're still by comparison very young. The advantage to that is that there are technology breakthroughs to be made. It was technology that got us to where we are today. It will be technology that gets us to where we need to be tomorrow."