Oct 2006

Not too long ago we posed the question "Does Peak Oil Matter," in context of the fact that North America holds billions of barrels of theoretically recoverable oil… with extra emphasis on 'theoretically.'

In that piece, we debunked the notion that US oil shale deposits would be yielding their treasure any time soon. There are just too many barriers—logistical, political, and environmental—to make it happen in the near future.

But what about the Athabasca region of Canada? America's northern neighbor has Saudi-style deposits too, in the form of oil sands. Better still, these oil sands are already being exploited to the tune of one million barrels per day.

The answer to the question "Does Peak Oil Matter" is still a clear and definitive YES... just not in the direct fashion that most people assume. Canada's oil sands offer a nice illustration as to why this is true.

Energy optimists place a great deal of hope on nontraditional sources like Athabasca. The most hopeful estimates suggest Canada's oil sands output will eventually hit 10 million barrels a day - a 1,000% increase over present-day levels, and enough to wholly cover America's energy needs. But how to get from here to there?

Ah, there's the rub.

In a fascinating piece from CNNMoney titled "Curing Oil Sands Fever," energy economist Peter Tertzakian observes that "it takes 0.7 barrels of oil to create one barrel of oil sands product."

Just as it takes money to make money, it takes energy to make energy. Tertzakian's equation refers to "energy equivalents." In the process of extracting and refining the oil sands to make light sweet crude, other forms of energy get used up. The 0.7 barrel calculation represents the equivalent of how much energy it takes to turn a chunk of oil sands into a barrel of oil.

One of the biggest inputs in the oil sands recovery process is natural gas. To get oil out, you have to put natural gas in. LOTS of natural gas. Marlo Reynolds, director of a Canadian environmental group, describes this reality as "using caviar to make fake crab meat."

The process also require huge amounts of water. You've no doubt heard about the looming water crisis. Well, guess what… if oil sands are the answer, then the North American water crisis is set to get a lot worse. As Canada ramps up its oil sands production, I guarantee you they will run into water headaches.

But let's go back to natural gas for a second. In order to really ramp up oil sands production, Canada will eventually have to become a net IMPORTER of natural gas. Think about that. Natural gas is another area where the energy optimists really have their "heads in the sand," pun intended. North American natural gas wells are already in pronounced decline. If we hope to solve our oil crisis by ramping up oil sands production tenfold, we're only going to increase the burn rate of natgas dramatically. Our reliable suppliers will become our competitors.

Another technology the energy optimists pin their hopes on is liquefied natural gas, or LNG. The belief is that development of LNG infrastructure will enable us to tap large natural gas fields around the world. Russia, for example, holds a huge chunk of the world's known gas reserves.

But here again we have a problem. Russia and the United States are entering into a new cold war. That may sound like an exaggeration, but if you consider the tone and tempo of recent events, I don't think it is.

We'll go into detail as to what's happening with Russia later. The key point here is, geopolitical machinations have serious energy implications, and that reality is starting to bear fruit.

Russia's Shtokman field, a gargantuan gas deposit in the Barents Sea, was originally slated to deliver large quantities of LNG to the United States, with production ramping up in a 2008-2011 timeframe. That is no longer the plan. Russia now intends to send that gas to Europe via pipeline instead.

The reasoning is murky, and there are surface level excuses, but the bottom line is that geopolitics have become a new and serious factor, tied into Russia's growing paranoia and demographic decay. The West is being jerked around by Russia in other ways, relating to the Sakhalin as well as Shtokman fields. (Note: I don't intend to place all the blame at the feet of Russia here; the Great Bear has some legitimate reason to feel wary of, and hostile towards, the West.)

The bottom line is, it takes energy to make energy... and solving our oil headaches by way of oil sands is only going to create new headaches. Demand for natural gas is slowly and steadily increasing, not just in the United States, but elsewhere around the world, and energy intensive operations like Canada's oil sands will only magnify that affect.

It takes energy to make energy... remember that phrase. It could make you a lot of money over the next decade or two.