Teck Cominco a mining pioneer in oilsands

VANCOUVER–The sky-high cover charge for entry into Alberta’s oilsands has kept most mining companies from diversifying into this rapidly expanding sector of the energy business. One notable exception is Teck Cominco (TCK. B-T, TCK-N), which increased its stake to 20% from 15% in the Fort Hills project being developed in partnership with Petro-Canada (PCA-T, PCZ-N) and UTS Energy (UTS-T, UEYCF-O) and also acquired a number of nearby leases in partnership with UTS.

Situated west of the Athabasca River, Fort Hills is expected to produce up to 280,000 barrels per day of synthetic crude oil by 2015, once both phases of the project are complete. Petro-Canada has a 60% interest in Fort Hills, its largest capital project to date and one of the largest in Canadian history.

Capital costs for the project’s first phase are estimated at $14.1 billion and are projected to climb to at least $30 billion for both phases. Initial production is planned for 2011, at 140,000 barrels of synthetic crude oil per day.

In the grand scheme of things, Fort Hills is only one of 46 existing and proposed oilsands projects, encompassing 135 individual project expansion phases in various stages of execution. The National Energy Board (NEB) estimates that it will cost $125 billion (based on 2005 cost projections) to construct all of the announced projects scheduled to come on-line before 2015.

This level of capital spending, roughly twice the board’s projections made just two years earlier, doesn’t fully reflect capital cost escalations, which have on average tripled since 2001. Almost every advanced project in development has been plagued by massive cost overruns.

Production costs are soaring too. Ten years ago, oilsands producers were fighting to keep operating costs below $12 per barrel. Today, they’re battling to keep them below $30 a barrel.

Because of a “logjam” of projects in the 2008-12 period, the NEB expects that some projects will be delayed while others may be cancelled outright for various reasons, including a tighter credit market, an appreciating Canadian dollar, capital cost escalations, chronic labour shortages and, ironically, soaring energy costs.

Another threat is growing environmental opposition to oilsands development, spurred by a recent incident in which hundreds of ducks died in an oilsands tailings pond, and concerns about Canada’s inability to meet its greenhouse-gas reduction targets under the Kyoto Protocol.

The battle for survival in the oilsands will be a battle among global giants. Most of the top-tier names are there, including Exxon Mobil (XOM-N), Imperial Oil (IMO-T, IMO-X), Chevron (CVX-N), Shell and Royal Dutch Shell (RDS. A-N), along with several national oil companies, notably from China and Korea. The Fort Hills project, in contrast, has an all-Canadian face, with Calgary-based Petro- Canada at the forefront.

Fort Hills has the right address in the Athabasca region near Fort Mc- Murray, the only district where oilsands can be mined by open-pit methods. Of the estimated 2.5 trillion barrels of bitumen contained in Alberta’s oilsands, 80% can only be (potentially) recovered by underground or in situ methods.

Current producing projects, which tap about 2% of the initial established resource, use both methods equally, but new projects will shift the balance toward in-situ extraction, which involves the use of steam to separate the sticky bitumen from the surrounding sands and lift it to collection ponds near surface. Steam-assisted gravity drainage (SAGD) is the most commonly used technique, but newly developed techniques using vertical air injection wells or solvent instead of steam are being introduced to existing mines.

Fort Hills has been extensively drilled and contains more than 4 billion barrels of recoverable bitumen resources — greater than Alberta’s remaining conventional crude reserves — sufficient for at least 40 years of continuous mining. The project also has a value-chain advantage, assuming Petro- Canada sticks to its plan to upgrade the raw bitumen into a higher-value synthetic crude oil that can then be sold to a traditional refinery.

On average, it takes 2 tonnes of mined oilsand to produce one barrel of synthetic crude oil. About 70% of bitumen is upgraded in Alberta, but that will likely change as bitumen production is expected to almost double by 2014. The oilsands pioneers of Suncor Energy (SU-T, SU-N) and Syncrude already have existing upgrading facilities, but most newcomers don’t and face the billion dollar question of whether to build one or not, as upgraders are as challenging and expensive to build as an oil refinery. They’re hugely power-intensive too, which only adds to the cost equation.

During a conference call with analysts in April, Petro-Canada president Ron Brenneman indicated that the final decision on whether to construct a proposed upgrading facility in Sturgeon Cty., northeast of Edmonton, has been pushed back from the third quarter to the fourth.

“The hearing on the Sturgeon upgrader is scheduled for late June or early July, which means we won’t know the regulatory conditions until the fall,” Brenneman said. “This is a major decision for us, so we want to make sure we have all the information we need.”

The company still expects approval of the Fort Hills mine plan in the third quarter, and therefore expects to remain on schedule for mine startup in late 2011, followed by the upgrader in 2012, assuming a green light for the project. To resolve the labour shortage problem, the company (and others) plans to tap into a government-sanctioned temporary foreign workers program.

Teck Cominco and UTS, meanwhile, have expanded their exposure to Alberta’s oilsands through the exploration drill bit. They’ve delineated significant bitumen resources on their jointly owned leases and are now drawing up plans to develop several mines.

Their proposed Equinox oilsands mine is situated directly across from Fort Hills, while their proposed Frontier mine is situated about 10-20 km northwest of Fort Hills, not far from Shell’s proposed Pierre River project.

Both projects were extensively drilled during the past three years. The 2007 drilling program at Frontier identified a significant quantity of minable sands and the 2008 program is expected to further delineate the deposit and provide data to support a detailed mine plan and the permitting process.

Scoping-level engineering and preliminary mine planning studies were also completed for both projects, based on resources delineated to date.

Initial production from Frontier is estimated at between 100,000 and 160,000 barrels of bitumen per day, with a projected start date between 2015 and 2017. Production could be expanded in the years ahead by phasing in resources from nearby leases, depending on the results of ongoing exploration.

The Equinox project is viewed as a potential standalone mine with dedicated bitumen production and extraction facilities, or a mine in which bitumen froth is exported to either the Frontier project or another nearby project. If developed as a standalone mine, production is projected at 50,000 barrels of bitumen per day, starting as early as 2014.

Once these two projects are on- Teck and UTS would have combined production of 350,000 barrels per day, including their 20% share of production from Fort Hills.

The Equinox and Frontier projects would operate for 25 to 45 years or more, respectively, depending on the ultimate extent of the resource base. While these projects have a much lower profile than Fort Hills and most other projects in the development pipeline, they strongly position Teck Cominco as a mining pioneer in an oil district that has been described as the Saudi Arabia of the North, with almost as much oil and sand as the Middle East oil giant. –The author is a Vancouver-based freelance writer specializing
in mining issues, and a former editor of The Northern Miner.