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Originally published Wednesday, July 6, 2005 at 12:00 AM

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Oil's diamond in the rough

Along Highway 63, the rolling hills give way to massive open pits, huge waste ponds and tangles of pipes and refining equipment that spew...

The Washington Post

FORT McMURRAY, Alberta — Along Highway 63, the rolling hills give way to massive open pits, huge waste ponds and tangles of pipes and refining equipment that spew smoke into the air.

In the pits, shovel trucks load dirt into dump trucks so gigantic that a driver has to climb a ladder attached to the front grille to get behind the steering wheel.

The changing landscape reflects an ambitious quest to develop a new source of oil. Major companies, faced with tougher prospects for developing big new oil fields, are doing what was once unthinkable: sinking billions of dollars into projects to wring oil out of deposits of petroleum buried amid sand and clay.

Until a few years ago, such projects — called "oil sands" or "tar sands" — sputtered at the industry's fringes. But since technological breakthroughs reduced costs and oil prices soared, companies have been investing heavily here. Oil-sands production is now profitable when a barrel of oil sells in the low $20s, analysts said, far below the recent $60 peak.

Just outside this boomtown, huge machines dig up the earth and remove the oil sands, whose deposits of a substance called bitumen smell something like roofing tar and are as thick and sticky as molasses.

Companies are mining hundreds of feet deep and running the unearthed deposits through a complex process to convert them into oil. They move enough dirt and oil sands in two days to fill Yankee Stadium.

Factoring in the oil sands, Canada's proven oil reserves are reported to be nearly 180 billion barrels, second only to Saudi Arabia. U.S. energy officials say Canada's oil-sands deposits are among the largest in the world. The oil sands are buried under an area about the size of New York state.

Fort McMurray, the hub of oil-sands activity, boasts on billboards: "We have the energy."

Companies here are producing increasing amounts of oil from this unconventional source, about 1 million barrels a day. If all of that oil went to the United States, it would be roughly 5 percent of daily consumption.

In 1995, oil derived from the sands was less than half the current amount.

Alberta officials expect production to triple from today's level by 2020. Oil companies have been struggling to replace aging fields whose production has tapered off. Many have been frustrated by oil-rich countries in the Middle East and elsewhere that refuse to open their doors to Western companies.

"We are all kind of fighting each other in the rest of the world where oil production is not increasing," said Michael Rodgers, a senior director of consultng firm PFC Energy. "We have to start thinking about unconventional resources. A lot of companies are saying, 'We do have this option in Canada.' "

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Canada was the top supplier of crude oil to the United States last year, providing about 16 percent of U.S. imports. Even so, development of the oil sands is not happening fast enough to significantly reduce U.S. dependence on Middle Eastern oil.

Companies such as Exxon Mobil, Chevron, the Royal Dutch/Shell Group and ConocoPhillips have oil-sands projects here. China's oil companies, eager to gain access to supplies to satisfy the country's growing energy needs, also are buying into oil-sands projects.

Though profitability has improved, producing oil from oil sands can be less lucrative than traditional oil development. Production also requires spending money in different ways.

With normal oil production, companies invest heavily in exploration and sometimes drill wells that come up dry. With oil sands, companies must devote large amounts of money to remove the deposits from the ground and change it into crude oil.

The pickup in production transformed Fort McMurray from a remote hamlet to a thriving city with more than 55,000 residents. The demand for skilled workers is so high that some companies import them from as far as South Africa.

Some companies would like to invest more but are constrained by a tight labor market, logistical complications and sophisticated machinery that takes years to build. They are lobbying for improved roads, affordable housing and other government services they say are needed to support expansion.

"The industry is growing as fast as it can," said James Carter, president of Syncrude Canada, which started producing from oil sands here in 1978.

On a recent day at Syncrude, giant trucks rumbled through pits. Fully loaded, some of the trucks weigh more than two Boeing 747s. Smaller vehicles fly bright orange flags above them so that the huge trucks don't run them over.

The trucks haul away the top layers of dirt, exposing the espresso-colored oil sands. The sands are collected and sent to processing facilities that separate the bitumen. It typically takes 2 tons of oil sands to produce one barrel of crude, which is 42 gallons.

The companies move about 1 million tons of earth a day.

In other locations, oil sands are buried too far below the surface for mining. To reach them, steam is injected underground to loosen the bitumen and allow it to flow though wells to the surface.

The companies say they plan to eventually fill all the pits and are planting trees. But they say the waste ponds — filled with water, sand and petroleum byproducts — will take years to settle.

Officials of the government agency Environment Canada said they have taken 21 enforcement actions in the past five years against oil-sands companies for such violations as releasing prohibited contaminants into the air and water.

Officials said they do not fully know what the environmental impact will be. "Nothing has been done on his scale before," said Robert Moyles, an agency spokesman. "The record to date is that it is being done in an environmentally responsible way."

Environmentalists complain that the mining pollutes the air and water and that companies use huge amounts of clean-burning natural gas to convert oil sands into crude. Natural gas is in short supply in the United States, where prices have risen in recent years.

"Why are we taking this clean fuel and using it to create something really ugly," said Stephen Hazell of the Sierra Club of Canada. "Does Canada really want to be the tar nation? That's not the way to go. Not if we want to have a livable planet in 100 years."

The Alberta provincial government could not be more pleased with oil sands. The operations are bringing thousands of high-paying jobs to the region, and the companies have to pay royalties to the government.

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