Alberta’s oil sands contain roughly 170 billion barrels of oil recoverable using today’s technology, making Alberta’s reserves the second largest in the world. In 2009, production of oil sands crude was 1.3 million barrels per day (bpd). In view of renewed investment and development initiatives undertaken by a wide variety of stakeholders, it is estimated that production from oil sands will be 2.2 million bpd by 2015 and as high as 3.5 million bpd by 2025.

Oil price volatility, global economic woes and a tightening of credit markets resulted in a lull in Alberta’s oil sands development in the 12 months leading up to Q3 2009. As much as $90 billion worth of oil sands development was delayed, deferred or cancelled entirely. However, stronger oil prices, potential decreases in the capital costs of project development, and growing confidence in the consistency of operating costs have renewed oil sands investment opportunities. The Canadian Association of Petroleum Producers now estimates oil sands industry capital expenditure will increase to $13 billion in 2010 from $11 billion spent in 2009.

A revived investment climate bodes well for this sector. So too does the significant investment interest from Asia, in particular from the major Chinese companies, PetroChina, China National Offshore Oil and China Petroleum & Chemical that have all made significant investments in oil sands projects.

There has also been a resurgence in smaller scale oil sands development. Small scale "in-situ" project development, often in the form of an initial pilot project, has some advantages over truly large-scale developments in that it allows the developer to apply more innovative and potentially cost saving and environmentally friendly technologies to the proposed extraction process. The relatively short ramp-up to full capacity allows for quicker realization of the planned economies of scale resulting in potentially more predictable and sustainable earnings. Moreover, the initial small-scale development, once proven effective, will often become the first phase in the development of further “cookie-cutter” phases, with initial production from that first phase used to fund further expansion.

If bitumen production in Alberta rises rapidly and upgrading capacity does not keep pace, it follows that excess bitumen production will have to be shipped elsewhere for upgrading and refining. Further oil sands development will require the development of pipelines to the American market or to the Canadian West Coast for overseas transport. Refineries throughout the US are gearing up to receive Alberta’s bitumen, from Detroit (Marathon), to Ohio (BP/Husky), to Illinois (ConocoPhillips and Cenovus), to Texas (Shell and Valero) and Louisiana (Marathon). TransCanada Pipeline is seeking to acquire the necessary American permits to extend the existing Keystone pipeline to the Texas Gulf Coast – the so-called Keystone XL project. Meanwhile, Enbridge hopes to build a new pipeline across Northern BC to the Port of Kitimat, while Kinder Morgan intends to expand the existing Trans Mountain pipeli ne to the BC Lower Mainland.

Key to the development of the oil sands will be mitigating the political risk flowing from climate change concerns. It remains to be seen whether American public policy will balance environmental and economic concerns, and be based on perceptions, or facts. For example, while there is a widespread perception that oil sands oil is “two to three times (ie 200 to 300%) dirtier” than conventional oil, it is a fact that the production and consumption of mined bitumen generates only 2 to 3% more carbon than the heavy Mexican and American oil extracted from offshore wells in the Gulf of Mexico. It also remains to be seen whether the concerns of environmentalists and first nations in Canada will impede the ability of the industry to develop alternative markets, thereby limiting Canada’s vulnerability to American monopsomistic power.

A number of realities, such as the high rate of unemployment in the US, the continuing rapid growth of Chinese GHG emissions, the rapid decline in Mexican oil production, and the inevitability that oil will be the dominant source of transportation fuel for decades to come, make it likely that American energy security and economic concerns will continue to trump the longer-term environmental perspective. It would also appear reasonable to assume that greenhouse gas reduction will be more a function of time, technology and clean energy supply than has been envisaged-to-date by environmental activists who have sought to induce a substantial and immediate reduction in demand for fossil fuels through rapidly escalating electricity and fuel prices.