Newest hot spot for oil production: Canada

Last month, a Texas-Illinois pipeline built to bring oil north reversed direction to take Alberta oil south.

More expensive to process than the light crude oil of the Middle East, Alberta's oil sands have long remained a largely untapped resource. But with oil at $70 a barrel, it has become economically feasible to extract the thick, sticky bitumen that in former years was used to seal native people's canoes - not fuel a global economy.

Only Saudi Arabia, with 259 billion barrels, has larger oil reserves than the Florida-sized patch that surrounds this Canadian outpost. And a pipeline already exists to carry the oil to a key market: the United States.

Over the next five years, oil companies from Exxon Mobil to France's Total are expected to invest C$60 billion in oil sands. Earlier this week, Shell Canada announced a takeover of Canadian oil-sands producer BlackRock Ventures, valued at $2.4 billion Canadian ($2.17 billion).

Production in Alberta is up 61 percent over the past four years. This year, Alberta's oil sands are expected to produce 1.2 million barrels a day, roughly equal to the production of Texas.

"The oil sands ... represent a turning point in the history of energy, and a switch to synthetic [chemically processed] sources of oil," says Peter Tertzakian, chief energy economist at the Calgary-based energy consultancy ARC Financial.

Industry experts say new technology could greatly increase output, providing a significant source of secure oil for the United States. Just last month, a pipeline built to carry oil north from the Gulf of Mexico to Midwest refineries, reversed direction to take Alberta oil south.

"We can double our production and go for another 45 years," says Jim Carter, president of Syncrude Canada Ltd., the world's largest oil sands operator. "There is relatively new technology that could expand production, but there is still a lot to be mined by surface methods."

From natural resource to final product

Huge swaths of the boreal forest cover Alberta's deposits, concentrated in three locations: Peace River to the west of Fort McMurray; Cold Lake to the southeast, on the Saskatchewan border; and - by far the largest - the Athabasca region surrounding Fort McMurray, the town at the center of oil sands production.

Syncrude - a joint venture of seven firms - estimates that those deposits contain 175 billion recoverable barrels of oil.

Optimists such as the Alberta Energy and Utilities Board say the reserves could be 10 times that if new technology succeeds in separating the oil from the sand in hard-to-reach underground deposits.

Syncrude and other companies, from Shell to Suncor, are stripping away the top layer of the earth to get at the bitumen that contains oil. They use giant shovels that scoop up 80 to 90 tons at a time, dropping the earth into the giant yellow Caterpillar 797B, the largest truck in the world. It is as tall as a two-story house and its tires cost $60,000 each. It never leaves the property; its weight would wreck the local roads.

Each 400-ton load will produce 200 barrels of oil once it's been put through the crusher. Other sites in Alberta use more complex methods of getting at the bitumen that is too deep to mine. High-temperature steam is pumped down into the oil sands deposits to liquefy the bitumen, which is then pumped to the surface.

However it's extracted, all bitumen has to be transformed into oil in a process called upgrading. There are several different steps in upgrading, all of them using a lot of energy, usually natural gas. Itcosts $23 to $26 a barrel - depending on the project - to produce light oil from sticky goo of the oil sands.

With oil at current prices, the shares of firms such as Canadian Natural Resources and Suncor have been soaring on the Toronto Stock Exchange. Some investment analysts warn there could be problems for the oil-sands operators, since their costs - natural gas to "cook" the bitumen during the refining process and diesel fuel to run their equipment - are rising.

Environmental concerns

Environmentalists, meanwhile, are concerned about the effects of oil-sands production, though oil sands firms say they will return it to pristine condition in the long run.

"With projections that oil-sands production will grow from 1 million to more than 5 million barrels per day over the next 25 years, the air, land, and water of Alberta's northeastern boreal forest is at risk of severe environmental degradation," said the Pembina Institute, an Alberta-based environmental organization, in a statement on its website.

The giant smokestacks at the refineries send black smoke into the air that stretches for miles in the clear blue sky above the forest.

"The proposed tar-sands developments will tear a hole in Canada's lungs - our vital boreal forest ecosystem," said Lindsay Telfer of Canada's Sierra Club.

And a native group that lives just north of the project has said it isn't safe to fish in the Athabasca River, due to pollution from not just the oil sands but also paper mills.

No gold-rush exodus ... yet

But the oil-sands operators and local government leaders are focused on another problem: labor shortages.

"Our biggest problem is finding housing for the people who are coming here," says Melissa Blake, mayor of Fort McMurray.

On average, 100 people a week arrive in this town of 61,000 looking for work.

There is also a transient population of as many as 12,000 that commutes to work from other parts of Canada, staying in rented space for weeks on end.

Workers are so hard to come by that unskilled people in fast-food restaurants are paid C$14 ($12.70) an hour, double the minimum wage.

The Fort McKay Group, run by a Indian tribe, pays trained cooks in its catering service as much as C$40 ($36.30) an hour.

The average cost of a small house - 1,200 square feet - in Fort McMurray is C$418,000 ($380,000), more expensive than most big cities.

Rents for small apartments can be C$1,000 ($900) a month.

"The price of oil drives growth in Fort McMurray. And at these prices we expect our [permanent] population to grow to 100,000 by 2012," says Mayor Blake.

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