According to Time Magazine, Alberta's oil sands deposits "could satisfy the world's demand for petroleum for the next century". That’s one mighty claim…

Canadian oil sands definitely hold great potential, but there has been talk of their promise doing the rounds for more than 30 years. However, with the oil price in the late $60-dollars a barrel arena, the economics of oil sand has undergone a paradigm shift. So, it is worth looking at the major players in the industry.

Oil sands are deposits of bitumen, which is a thick tar-like substance which is highly viscous. That means it needs heat to make it flow – or dilution with a solvent. The oil sands are found in north-eastern Alberta in Canada - an area larger than the state of Florida.

There are three sites where oil sands are found, but the only one suitable for surface mining is the Athabasca deposit. Around 10% of the Athabasca oil sands are covered by less than 75 metres of rock and earth.

The Alberta regional government says that around 174bn barrels of crude bitumen are economically recoverable from the three Alberta oil sands areas at current prices using current technology. These reserves are second only to those in Saudi Arabia.

Improving economics

The oil sands were uneconomically viable for decades, but as extraction technology improved and the oil price soared, the economics have become much more attractive. It is, however, more expensive than traditional extraction techniques.

The National Energy Board of Canada has calculated that it would cost between $9-$12 a barrel to extract oil from the oil sands. Extracting a barrel of oil in the US in the traditional way costs around $6. The Saudi’s have it really easy; their oil costs $1 a barrel to get out of the ground.

So, with the oil price being close to $70 a barrel, it does not take a Nobel Prize in Economics to realise that these sands are economically viable, even if significant capital costs are taken into consideration to start up the operation. And remember, there are no exploration costs as there are with traditional oil production. We know where the oil is.

So, which companies are involved in oil sand extraction – and will the licenses granted to these companies by the Canadian government be a license to print money in the future?

Companies currently mining the Alberta oil sands include:

Suncor Energy (NYSE: SU): Suncor pioneered the world’s first commercially successful oil sands operation in 1967. In 2006 the company produced its billionth barrel of oil. In 2006, production at the oil sands facility averaged 260,000 barrels per day.
Shell Canada (60%), Chevron Canada (20%) and Western Oil Sands (20%) are joint venture owners of the Athabasca Oil Sands Project. Shell Canada is majority owned by Shell and Chevron Canada is a wholly-owned subsidiary of Chevron. Western Oil Sand is listed in Toronto under the symbol WTO.
EnCana Oil (NYSE: ECA); EnCana is in a joint venture with ConocoPhilips. There has been speculation that the group may spin off its oil sands operations.
Nexen (NYSE: NXY): The group has approximately 5.5bn barrels of bitumen resource on 240,000 net acres of bitumen-prone lands in the Athasbasca region. It plans to continue acquiring more acreage.
Imperial Oil (US: IMO): Its Kearl Oil Sands Project is projected to start construction in 2008 and produce 100,000 bpd by 2010.

The big risk with any of these companies is a fall in the oil price which would make extraction uneconomic. As regular readers will know, I do not believe that this is going to happen. Cheap oil has gone for good.

However, no investment is ever a one-way bet. There is actually a lack of infrastructure in the region and skilled workers are in short supply. This could be very difficult in the next few years and the weight of easy-profit hopes that have been supporting the sector really could start to evaporate. But I have every hope that they won’t… P.S. If you enjoyed this article then sign up for Smart Commodities UK. It’s dedicated to searching out the investment trends that could provide our biggest profit opportunities for the next decade…

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