Canadian Energy Research Institute Oilsands Report - 2011

8 l C
Canadian Energy Research Institute

Canadian Oil Sands Supply Costs and
Development Projects (2010-2044)

Dinara Millington
Mellisa Mei

Study No. 122

May 2011

CANADIAN OIL SANDS SUPPLY COSTS AND
DEVELOPMENT PROJECTS (2010-2044)

Canadian Oil Sands Supply Costs and Development Projects (2010-2044)

Copyright Canadian Energy Research Institute, 2011
Sections of this study may be reproduced in magazines and newspapers with acknowledgement
to the Canadian Energy Research Institute

Study No. 122
ISBN 1-896091-94-4

Authors: Dinara Millington
Mellisa Mei

Acknowledgements: The authors of this report would like to extend their thanks and gratitude
to everyone involved in the production and editing of the material, including, but not limited to
Megan Murphy and Peter Howard

CANADIAN ENERGY RESEARCH INSITTUTE
150, 3512 33 Street NW
Calgary, Alberta T2L 2A6
Canada
www.ceri.ca

May 2011
Printed in Canada
Canadian Oil Sands Supply Costs and Development Projects (2010-2044) iii
May 2011
Table of Contents

LIST OF FIGURES .............................................................................................................................. v
LIST OF TABLES ................................................................................................................................ vii
EXECUTIVE SUMMARY .................................................................................................................... ix
Assumptions and Scenarios ............................................................................................................ ix
Supply Cost Results ........................................................................................................................ xii
Projection Results ........................................................................................................................... xiii
CHAPTER 1 INTRODUCTION ....................................................................................................... 1
Background..................................................................................................................................... 1
Approach and Methodology .......................................................................................................... 2
Organization of the Report ............................................................................................................. 2
CHAPTER 2 OIL SANDS REVIEW ................................................................................................. 3
Oil Sands, Background .................................................................................................................... 3
Oil Sands Development Scenarios ................................................................................................. 5
CHAPTER 3 OIL SANDS OVERVIEW SUPPLY COSTS .................................................................. 13
Methodology and Assumptions ..................................................................................................... 13
Light-Heavy Differential.................................................................................................................. 16
Estimating Inflation ........................................................................................................................ 18
Supply Cost Results ........................................................................................................................ 25
CHAPTER 4 OIL SANDS PROJECTIONS ........................................................................................ 29
Methodology .................................................................................................................................. 29
Oil Sands Projections Results and Analysis .................................................................................. 31
CHAPTER 5 TRENDS AND CHALLENGES IN THE OIL SANDS DEVELOPMENT ................................ 43
Environmental Issues ..................................................................................................................... 43
Tailings Management ..................................................................................................................... 50
Technology Options and Efficiency Improvements ........................................................................ 53
Oil Sands Merger and Acquisition Revival ...................................................................................... 59
CHAPTER 6 TRANSPORTATION .................................................................................................. 61
Current Transportation (Pipeline) Capacity.................................................................................... 61
Transportation Capacity Expansions .............................................................................................. 63
CHAPTER 7 CONCLUSION ........................................................................................................... 67

iv Canadian Energy Research Institute
May 2011

Canadian Oil Sands Supply Costs and Development Projects (2010-2044) v
May 2011
List of Figures

Figure 1 US and BRIC Oil Consumption Shares .............................................................................. xi
Figure 2 Realistic Emissions Compliance Costs .............................................................................. xii
Figure 3 Realistic Oil Sands Supply Costs ....................................................................................... xiii
Figure 4 Bitumen Production Projections ...................................................................................... xiv
Figure 5 Initial Capital Requirements ............................................................................................. xv
Figure 6 Greenhouse Gas Emissions .............................................................................................. xvi
Figure 7 Industry Compliance Costs ............................................................................................... xvii
Figure 8 Provincial Bitumen Royalties............................................................................................ xviii
Figure 2.1 A C S ........................................................................................................... 3
Figure 2.2 Firebag, In Situ ................................................................................................................. 4
Figure 2.3 Suncor Mining Operations ............................................................................................... 5
Figure 2.4 US and BRIC Oil Consumption .......................................................................................... 6
Figure 2.5 Realistic Oil Prices ............................................................................................................ 7
Figure 2.6 Realistic Emissions Compliance Costs .............................................................................. 8
Figure 2.7 Protracted Slowdown Oil Prices ....................................................................................... 8
Figure 2.8 Protracted Slowdown Emissions Compliance Costs ........................................................ 9
Figure 2.9 Energy Security Oil Prices ................................................................................................. 10
Figure 2.10 Energy Security Emissions Compliance Costs .................................................................. 10
Figure 3.1 Electricity Price Projections .............................................................................................. 15
Figure 3.2 Natural Gas Price Projections ........................................................................................... 15
Figure 3.3 Light-Heavy Differential ................................................................................................... 17
Figure 3.4 Bitumen Royalty Rates ..................................................................................................... 18
Figure 3.5 Effect of the Oil Price on Refinery Construction Costs ..................................................... 20
Figure 3.6 Historic and Projected WTI Prices and Construction Cost Inflation Rates, 2007-2044 .... 20
Figure 3.7 Effect of the Oil Price on the Canadian-US Exchange Rate .............................................. 22
Figure 3.8 Historic and Projected WTI Prices and the Canadian-US Exchange Rate, 2007-2044...... 22
Figure 3.9 Effect of the Oil Price on Refinery Operating Costs ......................................................... 24
Figure 3.10 Historic and Projected WTI Prices and Operating Cost Inflation Rates, 2007-2044 ........ 25
Figure 3.11 Natural Gas and Oil Price Projection ................................................................................ 25
Figure 3.12 Realistic Oil Sands Supply Costs ....................................................................................... 26
Figure 3.13 Realistic Oil Sands Supply Costs (Contribution) ............................................................... 27
Figure 4.1 Bitumen Capacity Projections .......................................................................................... 31
Figure 4.2 Bitumen Production Projections ...................................................................................... 33
Figure 4.3 Initial Capital Requirements ............................................................................................. 34
Figure 4.4 Sustaining Capital Requirements ..................................................................................... 35
Figure 4.5 Natural Gas Requirements ............................................................................................... 35
Figure 4.6 Greenhouse Gas Emissions .............................................................................................. 36
Figure 4.7 Industry Compliance Costs ............................................................................................... 37
Figure 4.8 Provincial Bitumen Royalties............................................................................................ 38
Figure 4.9 Realistic Bitumen Production Projections ........................................................................ 39
Figure 4.10 Project Distribution .......................................................................................................... 40
Figure 4.11 Realistic Scenario Initial Capital Requirements ............................................................. 41
Figure 4.12 Realistic Scenario Sustaining Capital Requirements ..................................................... 41
Figure 4.13 Realistic Scenario Total Cost Requirements .................................................................. 42
Figure 5.1 States with GHG Emission Reduction Targets .................................................................. 46
Figure 5.2 Regional Cap-and-Trade Schemes.................................................................................... 47
Figure 5.3 Sources of Emissions Reductions Under the Cap
Main Policy Case Relative to the Reference Case, 2012-2020 ......................................... 50
Figure 5.4 MFT Surface after 14 Days ............................................................................................... 51
vi Canadian Energy Research Institute
May 2011
Figure 5.5 Well-to-Wheels GHG Emissions for Oil Sands and Other Crudes .................................... 53
Figure 5.6 8 L v L1-DSP Well Configuration ........................................................ 55
Figure 5.7 ET-DSP A ................................................................................................ 56
Figure 5.8 1PAl L ................................................................................................ 57
Figure 5.9 CA8l L .................................................................................................................... 58
Figure 5.10 Oil Sands Mergers and Acquisitions ................................................................................. 60
Figure 6.1 Alberta Existing and Proposed Regional Pipelines ........................................................... 64
Figure 6.2 Existing and Proposed Export Pipelines ........................................................................... 64

Canadian Oil Sands Supply Costs and Development Projects (2010-2044) vii
May 2011
List of Tables

Table 2.1 In-Place Volumes and Established Reserves of Crude Bitumen in Alberta ...................... 5
Table 3.1 Design Assumptions by Extraction Method ..................................................................... 14
Table 3.2 Crude Oil Characteristics .................................................................................................. 16
Table 4.1 Constraints by Scenario and Extraction Method ............................................................. 30
Table 5.1 Annual GHG Emission Caps .............................................................................................. 48
Table 6.1 Alberta Regional and Export Pipelines ............................................................................. 62
Table 6.2 Potential Pipeline Expansions .......................................................................................... 63

viii Canadian Energy Research Institute
May 2011

Canadian Oil Sands Supply Costs and Development Projects (2010-2044) ix
May 2011
Executive Summary
The oil sands development exhibited moderate growth in 2010 relative to prior years, reflecting the
resumption of the many oil sands projects that were deferred during the 2008-2009 economic recession.
Since then, economic conditions have improved 1 posting positive
economic growth, credit is becoming available to oil sands proponents, mergers and acquisitions are
ramping up, and West Texas Intermediate (WTI) oil prices increased to the US$70-85 per barrel range in
2010, a range in which oil sands greenfield projects currently become economic.
In response, several companies are now actively developing project phases that had previously been
placed on hold. However, producers remain cautious about future oil price estimates and are proceeding
at a more balanced pace in order to establish a better controlled cost environment. This approach should
help producers avoid a repeat of the high cost inflation environment that resulted from the peak
investment spending, in 2007 and 2008, associated with the concurrent development of several large oil
sands projects. The past cancellation and deferral of projects should keep 2010 costs low, relative to the
past few years.
The oil sands industry has attracted the attention of environmental activists who are concerned about the
negative impact that oil sands development would have on land, water and air quality. All parties involved
are currently working on minimizing these impacts through environmental policies, technological
advancements and their implementation with one goal in mind: sustainable and socially acceptable
development of an oil sands industry that is an integral part of the Canadian economy. The development,
no matter how transparent, will be carefully monitored by other governments and environmental activists
as this vast Canadian resource is developed.
The purpose of this report is twofold. First, modeling results for the potential paths of oil sands
development and supply costs, out to 2044 are presented. T C L 8 l
(CERI) oil sands projections and supply cost analysis have been valuable to industry, governments, and
other stakeholders as part of their market analysis. This report relies upon the most up-to-date
information available on project announcements (updated to November 3, 2010) and market intelligence
CL8l .
Secondly, CERI reviews the trends and challenges mostly on the environmental front, with GHG emissions,
water use and tailings ponds being the most visible issues. These challenges are of critical importance
because it is imperative to maintain a sustainable environment, regionally and globally, for present and
future generations. It is also apparent that adequate pipeline infrastructure must be in place in order to
move the bitumen to markets. Existing and potential pipeline systems are analyzed in the report as well.
Assumptions and Scenarios
The current CL8l oil sands update analyzed four Scenarios. The Unconstrained Scenario, in
which all oil sands projects proceeded on schedule, and as planned, was viewed as implausible, and hence
was not evaluated in great detail. The three plausible scenarios are: Energy Security, Realistic, and
Protracted Slowdown.
x Canadian Energy Research Institute
May 2011
The Protracted Slowdown Scenario represents a world in which the economic recovery is stalled in 2011,
driven by protectionist policies, and aggressive emissions compliance costs that put an overly onerous
burden on various hydrocarbon-based industries. Environmental activism pushes environmental policies

product restrictions across a wide variety of industries.
In the Energy Security Scenario, countries compete and try to secure the hydrocarbon resources as the
world recovers from the recent economic recession. Specifically, the BRIC (Brazil, Russia, India and China)
nations experience rapid economic growth. These countries expand exports of products, which drives up
the demand for crude oil in those nations. The major demand centres for the 88lC exports, the
US and other developed countries, also experience a period of rapid economic growth, and rising crude oil
demand.
W
significantly offset the increase in demand for crude oil from the emerging economies. Faced with a surge
in demand, the BRIC and other developed nations seek to secure access to physical supplies of oil,
resulting in a bidding-up of the global oil price and a period of sustained growth in the oil sands. While
plausible, both the Protracted Slowdown and the Energy Security Scenario are not likely to develop, which
is why a Realistic Scenario was considered.
The Realistic Scenario assumes that the developed nations emerged from the recession and their
economies continue to recover, experiencing modest economic growth in 2011, and bringing about a slow
and steady growth in demand for crude oil. The growth is tempered somewhat by geopolitical concerns in
the Middle East and economic setbacks in some European nations. The economic recovery in the
developed nations coincides with that of BRIC nations, as well as other Asian countries. In this Scenario,
oil prices begin a slow and steady climb, approaching $200/bbl of WTI,
1
by the end of the projection
period, 2044.
2

1
1 8u
2
All values contained in this report are real dollars, unless otherwise stated.
Canadian Oil Sands Supply Costs and Development Projects (2010-2044) xi
May 2011
Figure 1
US and BRIC Oil Consumption Shares

Source: BP Statistical Review, 2010
The demand growth will be tempered by an ongoing push toward environmental protection, through
modest emissions compliance costs. These emissions costs will be driven not by a global market, but a
North American emissions pact that harmonizes compliance costs across the region.
3
The November 2010
political shift in the US House of Representatives, along with a slow recovery from the recent recession
has postponed the advancement of federal climate change legislation. As Canadian emissions compliance
costs will be harmonized with the US, the compliance cost estimates used in this report have been
adjusted, since the CERI 2009 update, to reflect a delay in the adoption of US climate change policy.

3
Currently compliance costs are collected, set, and administered by the Government of Alberta. The costs are royalty
deductible. In other words, the higher the compliance costs that are paid the lower is the provincial royalty income.
This has a minimal impact on the costs of oil sands operators and total provincial income.
14%
16%
18%
20%
22%
24%
26%
28%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Shares of world oil consumption by the US and BRIC
BRIC US
xii Canadian Energy Research Institute
May 2011
Figure 2
Realistic Emissions Compliance Costs

Source: CERI.
Supply Cost Results
Over the past year, CERI estimates that the capital costs for constructing oil sands projects have declined
by 3.6 percent, while operating costs have increased by 5.8 CL8l
assumed a three year construction period for oil sands projects, with construction commencing in 2011.
Over the construction period (2011 to 2014), construction and operating costs are expected to rise by 19
percent, and slowly thereafter.
Under the Realistic Scenario, the oil sands are shown to be highly profitable, and an extremely good
investment for oil sands operators, as well as the provincial and federal governments.
8 CL8l of oil prices, rates of return (ROR) for oil sands projects will range from 6 to
19 percent. Supply costs, illustrated in Figure 3, reflect a WTI equivalent price for steam assisted gravity
drainage (SAGD) projects of $123/bbl, $128/bbl for integrated mining and upgrading projects, and
$123/bbl for stand-alone mining projects; SAGD projects receive the highest ROR.
4
The plant gate supply
costs, which exclude transportation and blending costs, are $93/bbl, $100/bbl, and $93/bbl for SAGD,
integrated mining and upgrading, and stand-alone mining, respectively. While capital costs and the return
on investment
5
account for a substantial portion of the total supply cost, the provinces per barrel take is
estimated at 18 to 22 percent.

4
The calculated supply costs are for greenfield projects. The projects that are already on stream can be profitable at
much lower costs, in the range of $40-$75/bbl.
5
A substantial portion of the fixed capital includes the return on the investment.
$0
$10
$20
$30
$40
$50
$60
$70
$80
2010 2020 2030 2040
$/T
Realistic Compliance Cost Projection
Expect costs to rise in 35 years
Canadian Oil Sands Supply Costs and Development Projects (2010-2044) xiii
May 2011
Figure 3
Realistic Oil Sands Supply Costs
SAGD
(Realistic Oil Price
Projection
19% ROR)
Mining & Upgrading
Projection
6% ROR)
Mining
Projection
14% ROR)
Fixed Capital (Initial &
Sustaining)
$39 $38 $44
Other $33 $43 $29
Royalties $20 $18 $20
Emissions Compliance Costs $1 $1 $1
-$10
$10
$30
$50
$70
$90
$110
$130
$/bbl
Fixed Capital (Initial & Sustaining)
Other
Royalties
Emissions Compliance Costs
Supply Cost at the field $93 $100 $93
WTI Equivalent Supply Cost $123 $128 $123

Source: CERI.
Projection Results
CL8l synthetic crude oil (SCO) production remains unchanged
from past reports. The projections are based upon the summation of all announced projects, with a wide
variety of assumptions pertaining to the projects schedule and delays, technology, and state of
development. The method by which projects are delayed, or the rate at which production comes on
CL8l
The bitumen capacity projections are adjusted to account for the production profile of each extraction
method, resulting in a peak production volume of 5.1 million barrels per day (MMBPD) by 2042, under the
Realistic Scenario. By 2015, production under the Realistic Scenario is projected to reach 2.1 MMBPD,
and by 2030 it is projected to increase to 4.8 MMBPD.

xiv Canadian Energy Research Institute
May 2011
Figure 4
Bitumen Production Projections
0
2,000
4,000
6,000
8,000
2010 2020 2030 2040
10^3 bpd
Bitumen Production Volumes
By 2020 bitumen production could reach 2.5 MMBPD, under a
Realistic Scenario
Energy Security Realistic Protracted Slowdown

Source: CanOils, CERI.
Achieving any of the levels of production in the three scenarios requires a substantial number of inputs, of
which capital (both strategic and sustaining) is critical. Illustrated in Figure 5 are initial capital costs.
Over the 35-year projection period, the total initial capital required is projected to be $302 billion under
the Energy Security Scenario, $257 billion under the Realistic Scenario, and $213 billion under the
Protracted Slowdown Scenario.
By 2044, natural gas requirements will increase by 2 to 3 times the current level. The Realistic projection
indicates natural gas requirements of almost 4.5 billion cubic feet per day (BCFPD) by 2044. In such a
scenario, Canada and the US could be engaged in an energy exchange Canadian oil for the US natural
gas that further enhances the trade relationship between the two countries. The prospects for
technology switching and efficiency improvements are substantial, and will likely put downward pressure

Canadian Oil Sands Supply Costs and Development Projects (2010-2044) xv
May 2011
Figure 5
Initial Capital Requirements

Source: CERI.
One of the by-products of natural gas consumption is the production of greenhouse gas (GHG) emissions.
Without equipment to separate the emissions streams, the GHGs will be released into the atmosphere.
While technological innovation within the oil sands industry (in addition to carbon capture and storage) is
expected to help reduce these emissions, the figure below illustrates rising GHG emissions under CL8l
current design assumptions.

$0
$10
$20
$30
$40
2010 2020 2030 2040
billions
Initial, or Strategic, Capital Requirements
xvi Canadian Energy Research Institute
May 2011
Figure 6
Greenhouse Gas Emissions

Source: CERI.
GHG emissions are expected to rise in tandem with natural gas requirements. The emissions presented
above reflect point source emissions, and do not take into account emissions associated with electricity
purchases, or the benefits of cogeneration. In other words, these are the absolute GHG emissions that
result from the production of marketable bitumen, and SCO, from the oil sands industry.
Based upon the emissions compliance cost projection, the industry would pay $142 billion in compliance
costs over the next 35 years.
6

6
The estimation of these compliance costs is based upon the per barrel costs. As such, this will overestimate the initial
years and underestimate the later years of the projection. Figure 7 should be used as an illustrative guide, with those
caveats in mind.
0
20
40
60
80
100
120
2010 2020 2030 2040
MT/y
Without new technologies and carbon capture, emissions
are expected to rise to 91 million tonnes by 2044
Canadian Oil Sands Supply Costs and Development Projects (2010-2044) xvii
May 2011
Figure 7
Industry Compliance Costs

Source: CERI.
Based upon the assumed oil price, as stated earlier, bitumen royalties collected by the province, under
the Realistic Scenario, will exceed $1 trillion over the projection period.
7

7
The estimation of the royalties are based upon the per barrel costs. As such, this will overestimate the initial years
and underestimate the later years of the projection. Figure 8 should be used as an illustrative guide, with those
caveats in mind.
$0
$1
$2
$3
$4
$5
$6
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
2008 2018 2028 2038
billions
billions
Without improvments in technology/efficiency, industry will
have paid $142 billion by 2044
Cummulative Annual Compliance Costs
xviii Canadian Energy Research Institute
May 2011
Figure 8
Provincial Bitumen Royalties

Source: CERI.
Trends and Challenges
W great economic potential, they also present
environmental challenges in the areas of greenhouse gas (GHG) emissions, air pollution, water, tailings
ponds and land. In fact, many observers consider them impossible to overcome and advocate for a
moratorium, if not a shutdown, of the industry. However, the oil sands experience has demonstrated that
technology has the potential to "change the game". Today, a large number of concepts and technologies
are under active development to address oil sands challenges. The portfolio is broad and diverse,
addressing various sectors of the industry and allows a reasonable expectation that the next 35 years will
see vast improvements in oil sands exploitation in a way that increases the size of the economic
opportunity, creates high value local employment and dramatically reduces environmental impact.
Pipelines and Markets
The existing crude oil pipeline infrastructure underwent a much needed expansion recently in order to
accommodate the growing volumes of oil sands production. A number of pipeline expansions were
completed in 2009, and 2 major additional pipelines became operational at the end of 2010, including
TransCanada Keystone and Enbridge Alberta Clipper. Furthermore, additional pipeline capacity, to major
traditional markets and the US Gulf Coast, will become available once other scheduled pipeline projects
are built and begin operating in the next few years.

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Royalties Collected from the Oilsands Industry ($ Millions), 2006 - 2044
Cumulative Royalties
In Situ (Solvent) Projects
In Situ Projects
Mining Projects
Total Annual Royalties
Canadian Oil Sands Supply Costs and Development Projects (2010-2044) 1
May 2011
Chapter 1
Introduction

Background
The oil sands development exhibited moderate growth in 2010 relative to prior years, reflecting the
resumption of themany oil sands projects that were deferred during the 2008-2009 economic recession,
which resulted in lower oil prices. Since then, economic conditions have improved. 1
economies are posting positive economic growth, credit is becoming available to oil sands proponents,
mergers and acquisitions are ramping up, and WTI oil prices increased to the US$70-85/bbl range in 2010,
a range in which oil sands Greenfield projects currently become economic.
In response, several companies are now actively developing project phases that were previously placed
on hold. However, producers remain cautious about future oil price estimates, and are proceeding at a
more balanced pace in order to establish a better controlled cost environment. This approach should help
producers avoid a repeat of the high cost inflation environment that resulted from the peak investment
spending in 2007 and 2008 associated with the concurrent development of several large oil sands
projects. The past cancellations and deferrals of projects should keep 2010 costs low, relative to the past
few years.
1

The oil sands industry has attracted the attention of environmental activists who are concerned about the
negative impact the oil sands development would have on land, water and air quality. All parties involved
are currently working on minimizing these impacts through environmental policies, technological
advancements and their implementation with one goal in mind: sustainable and socially acceptable
development of oil sands industry that is an integral part of the Canadian economy.
2
The development, no
matter how transparent, will be carefully monitored by other governments and environmental activists as
this vast Canadian resource is developed.
This is the sixth annual edition of the Canadian Energy Research Institute CERI) oil sands supply cost and
development projects update report. Similar to past editions of the report, several scenarios for oil sands
developments will be explored. In addition, given the assumptions for the current cost structure, an
outlook for future supply costs will be provided.
The purpose of this report is to:
x Provide the reader with a better understanding of the current status of Canadian oil sands projects,
both existing and planned. The status assessment will cover the full spectrum of activities and

1
A Cn8L P C
Sands project. The project has been broken into 5 separate categories -
development and to break the overall expansion into smaller, more manageable pieces that will lead to enhanced
project and cost control. Current expansion and debottlenecking will be very deliberate and flexible to ensure
projects can be started or stopped based on market conditions. Another example is Suncor entering into a strategic
partnership with Total E&P Canada Ltd., to jointly develop the Fort Hills and Joslyn oil sands mining projects and
restart construction of the Voyageur upgrader. This partnership promises to keep costs down while jointly developing
the mines then going separate and bidding for same contractors.
2
CERI Study No. 120, L l of the Petroleum Industry in Canada, July 2009.
2 Canadian Energy Research Institute
May 2011
technologies, such as in situ, mining, and integrated production; and facilities for upgrading crude
bitumen to SCO.
x Explore the future direction of oil sands developments, including a projection of investments and
production.
x Understand the natural gas requirements of the industry, and the GHG emissions associated with the
natural gas consumption.
x Estimate the supply cost, including costs associated with carbon emissions, for greenfield projects
consistent with in situ, mining and integrated production.
x Review the current industry trends and challenges.
x Provide an overview of the existing and proposed pipeline infrastructure.
Approach and Methodology
CERI has established itself as a leader in oil sands related market intelligence. CL8l oil sands projections
and supply cost analysis are used by industry, governments, and other stakeholders as part of their
market analysis. This report relies upon the most up-to-date information available on project
announcements (updated to November 3, 2010), CL8l
team.
The 2010 report presents project vintages and production capacities of existing and planned projects.
W CL8l
upgrading), location, and extraction technologies (including pilot projects). Similarly, upgrading facilities
are characterized by technology, and by type (i.e., stand-alone facilities, or integrated with crude bitumen
extraction facilities).
All of the above information for both existing and future projects is presented at the aggregate industry
level (i.e., oil sands industry as a whole) throughout this report. The oil sands projects are classified to
reflect the stage of development.
This report also presents greenfield supply costs by type (i.e., mining, in situ and upgrading), and by
technology (i.e., SAGD for in situ operation and integrated vs. stand-alone for upgrading facilities).
Organization of the Report
Chapter 1 highlights the background of the study and presents the objective, scope and the methodology.
Chapter 2 introduces the oil sands upstream activities, and the scenarios developed for this report.
Chapter 3 presents the assumptions and methodology used in the supply cost assessment. Results for
supply costs are presented.
Chapter 4 highlights the barriers and challenges to the oil sands industry, through the examination of
several production projection scenarios.
Chapter 5 describes the current issues facing the oil sands industry, including the environmental concerns,
and mergers and acquisitions.
Chapter 6 discusses existing and proposed pipeline infrastructure.
Chapter 7 draws key conclusions from the study.
May 2011
Chapter 2
Oil Sands Overview

Oil Sands, Background
Decades of research and development from all levels of government in Canada, in addition to industry,
have transformed the oil sands from a worthless mixture of sand and oil (only good for paving roads), into
one of the most sought after commodities on the 1 C
A
which the Alberta Energy Resources Conservation Board (ERCB) will play an integral role. Eventually, the
development of the resource will extend into the neighboring province of Saskatchewan. The
development of the oil sands in both provinces, no matter how transparent, will be carefully monitored
by other governments and environmental activists that are sure to keep the industry on its toes, as they
wage an ongoing battle with the industry over the development of this extraordinarily valuable Canadian
resource.
While the resources in Saskatchewan are not fully delineated, CERI is monitoring the ongoing
S 1
resources that exist in Alberta are contained within three oil sands areas (Peace River, Athabasca, and
Cold Lake), as designated by the Government of Alberta, and illustrated in Figure 2.1.
Figure 2.1
K^

SOURCE: ERCB.
May 2011
Together these regions cover an area over 14.5 million hectares (ha), with the remaining established
reserves at 169.9 billion barrels of an extremely heavy crude oil, referred to as bitumen.
1
Approximately
16 percent of 169.9 billion barrels is currently under active development.
2

Mining and in situ production methods, both of which will be discussed later in the report, are the most
widely accepted bitumen recovery methods that are currently employed in the oil sands. It is perceived in
Canada, and internationally, that mining of the oil sands represents a substantial portion of the total
surface area devoted to bitumen production. This perception is likely based upon the widely publicized
images of oil sands mine sites and equipment (illustrated in Figure 2.3). More importantly, but less
publicized however, is the fact that in situ production (illustrated in Figure 2.2) does not have the same
visual impact, given the smaller footprint on a per project basis. The amount of surface area devoted to
mining is only 374,000 ha (or 2.6 percent of the total surface area), which pales in comparison to the
14,170,000 ha that could be recovered using in situ methods.
Figure 2.2
Firebag, In Situ

SOURCE: Suncor Energy Inc. (Firebag).

1
C 1
includes the crude bitumen, minerals, and rocks that are found together with the bitumen (Source ERCB, 2010 ST98).
2
The initial volume-in-place of bitumen has been estimated by the Alberta Energy Resources Conservation Board
(ERCB) and is used to estimate the initial established reserves of bitumen bitumen that is estimated to be
recoverable given current technology and knowledge. (While the ERCB made significant changes to the in-place
resource in 2009, there are no changes to the estimate of the initial established reserves of crude bitumen. The
L8C8 nitial established reserves are used throughout this report as our estimates for the
resource size.) Source: Alberta Energy Resources Conservation Board. A L 8
Supply/Demand Outlook 2010-
May 2011
Figure 2.3
Suncor Mining Operation

SOURCE: Suncor Energy Inc.
Of the recoverable bitumen remaining, 80 percent is estimated to be recoverable using in situ methods,
which target deposits that are too deep for mining. The remaining recoverable bitumen is anticipated to
be recovered using mining techniques.
Table 2.1 provides a breakdown of the initial volume-in-place, initial established reserves, cumulative
production, as well as the remaining established reserves, to help further illustrate the vast potential in
the area.
Table 2.1
In-Place Volumes and Established Reserves of Crude Bitumen in Alberta
(10^9 barrels)
3

Recovery Method
Initial
Volume-in-Place
Initial Established
Reserves
Cumulative
Production
Remaining
Established
Reserves
Total 1,802.7 176.7 6.9 169.8
Mining 130.8 38.7 4.5 34.2
In situ 1,671.9 138.0 2.4 135.5

Oil Sands Development Scenarios
The extraction of bitumen from the oil sands will be driven by the forces of supply and demand, with
extraction technologies being an integral component in ensuring that the oil sands remain competitive
with other sources of crude oil. While there are indications that the developed economies have emerged
from the recession, the rate at which they are recovering remains uncertain. Furthermore, there is

3
Alberta Energy Resources Conservation Board. A L 8 Su C -

May 2011
uncertainty as to how the speed of their recovery could help, or hinder, the ongoing development of
other nations. While the US share of world oil demand has been decreasing over the last ten years, the
BRIC nations of Brazil, Russia,
4
India and China have become the primary drivers of incremental non-OECD
crude oil demand, as shown in Figure 2.4.
Figure 2.4
US and BRIC Oil Consumption

Source: BP Statistical Review, 2010

This report is based on three plausible scenarios that take into account possible paths for the
economic recovery (and demand for oil), emissions legislation, and lastly the impact that the
emerging economies could have on energy security.
The projection period for this analysis extends from end of year 2010 to end of year 2044, and in each
scenario it has been assumed that the Canadian and the US
other.
5
For this reason, all monetary values in this report are assumed to be in Canadian dollars, unless
otherwise stated. Lastly, all values in this report are presented as real dollars.
The first scenario is CL8l Realistic Scenario,
6
which assumes that the developed nations emerged from
the recession and continue to recover, experiencing modest economic growth in 2011, bringing about a
slow and steady growth in the demand for crude oil. The growth is tempered somewhat by geopolitical
concerns in the Middle East and economic setbacks in some European nations. In this scenario oil prices

4
Even though Russia and Brazil are energy exporters, their domestic energy consumption has been increasing, just like
China and India.
5
While it is highly probable that the Canadian dollar will trade above par with the U.S. dollar, it is assumed that the
Bank of Canada would intervene, to put downward pressure on the relative value of the Canadian dollar. More will be
discussed in the next Chapter, as it relates to this assumption.
6
1 CL8l 8 S
14%
16%
18%
20%
22%
24%
26%
28%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Shares of world oil consumption by the US and BRIC
BRIC US
May 2011
begin a slow and steady climb (see Figure 2.5), thus sending a signal to oil sands proponents to develop
their projects to meet the demand for crude oil, which is assumed to be returning to its pre-recession
growth, and a period of ongoing growth for the foreseeable future ensues.
Figure 2.5
Realistic Oil Prices

Source: EIA, CERI
The growth will be tempered, albeit modestly, by an ongoing push toward environmental protection,
through modest emissions compliance costs. These costs are designed to stimulate the development, and
use, of new oil sands technologies, and are
The emissions costs will be driven not by a global market, but by a North American emissions pact, that
harmonizes compliance costs, and seeks to reduce emissions, while not being overly onerous to the public
and industry which will pay a higher price for all goods and services. Furthermore, the emissions
compliance costs could potentially slow down the economic recovery, and therefore are gradually
implemented over the next 35 years (see Figure 2.6). While this might not satisfy international climate
change activists, the modest emissions compliance costs act as a stimulant for technology development,
as oil sands companies seek to differentiate themselves from the
barrel.
7

7
T A C 8 C C
L M A A 1
per tonne of carbon dioxide equivalent emissions. A 2008 amendment to the Act outlines the potential investment
areas for the tax, or compliance cost, revenues. Information on the Act and all amendments to it can be found by
A L http://www.environment.alberta.ca/.

$40
$80
$120
$160
$200
2010 2020 2030 2040
$/bbl
WTI Oil Price Projection
Expect prices to triple over the next 35 years
May 2011
Figure 2.6
Realistic Emissions Compliance Costs

The next two scenarios provide alternative views of how the world could develop over the next 35 years.
The Protracted Slowdown Scenario represents a world in which the economic recovery is stalled in 2011,
driven by protectionist policies and aggressive emissions compliance costs that put an overly onerous
burden on various hydrocarbon-based industries. Environmental policy trumps economic growth (and

variety of industries. These policies do not initially drive up oil prices, as seen in Figure 2.7, but instead
raise the cost of living in developed economies, and negatively impact imports from the BRIC nations. This
Scenario results in a minimal economic growth, until 2021, as trade is restricted.
Figure 2.7
Protracted Slowdown Oil Prices

$0
$10
$20
$30
$40
$50
$60
$70
$80
2010 2020 2030 2040
$/T
Expect costs to rise in 35 years
40
80
120
160
200
2010 2020 2030 2040
$/bbl
Stagnant oil prices until 2021 when economic growth
resumes
May 2011
With high compliance costs, as illustrated in Figure 2.8, and limited economic growth, the oil sands
development becomes stagnant over the next decade. Eventually, protectionist policies are relaxed,
which helps spur a period of economic growth, and in turn, brings forth the resumption in oil sands
developments. The high compliance costs remain, which drive the overall costs for oil sands producers
and hence have a negative impact on oil sands development over the projection period.
Figure 2.8
Protracted Slowdown Emissions Compliance Costs

The last scenario is driven by energy security concerns, where security for energy undermines
environmental policies. Under the Energy Security Scenario , both developed and
emerging, compete for hydrocarbon resources. The BRIC nations expand exports of products, which
drives up their demand for energy, notably crude oil. The major demand centres for the 88lC
exports, the US and other developed countries, also experience a period of rapid economic growth, and
rising crude oil demand.
W those policies do not
offset the increase in demand for crude oil from the emerging economies. Faced with rising oil prices, and
a surge in demand, the BRIC and other developed nations seek to secure access to physical supplies of oil.
For instance, the US of crude oil, aggressively seeks to secure reliable
sources of oil, and provides expedited approvals for pipeline expansions from Canada. While US demand
for refined products does not increase, refineries are slowly being converted to process heavy oil, and
those refineries that previously accepted heavy oil, i.e., Venezuelan heavy oil, turn to Canadian oil sands.
Venezuela is not curtailed, but instead displaced from the US Gulf of Mexico market. It is
assumed that BRIC nations, notably China, absorb the displaced oil. Similarly, other heavy oils are
displaced to other parts of the world.

$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
2010 2020 2030 2040
$/T
Protracted Slowdown Compliance Cost Projection
Compliance costs will rise rapidly until 2044
May 2011
Figure 2.9
Energy Security Oil Prices

L extraction technologies, are not the
primary concerns in this Scenario. Environmental opposition to oil sands development continues, but
environmental concerns are offset by concerns over energy security. This is not to say that environmental
policies take a back seat. Moderate emissions compliance costs (see Figure 2.10) are introduced in North
America, and new technologies are developed to reduce the environmental footprint of oil sands
operations. The application of new technologies is driven by economics, and no subsidies are required.
Carbon capture equipment is installed on some facilities, for the primary purpose of supporting enhanced
oil recovery rather than to reduce emissions.
Figure 2.10
Energy Security Emissions Compliance Costs

$40
$80
$120
$160
$200
$240
$280
2010 2020 2030 2040
$/bbl
Rapid rebound from recession results in oil prices reaching
$200 by 2035
$0
$10
$20
$30
$40
$50
$60
2010 2020 2030 2040
$/T
Energy Security Compliance Cost Projection
Compliance costs slowly rise over the next 35 years
May 2011
Each of the three scenarios is important in understanding some of the drivers of oil sands developments.
What will ultimately drive the development of the oil sands are the long-run global oil prices (driven by
supply and demand), and development and production costs (including emissions compliance costs). The
next Chapter of this report will explore the oil sands supply costs under the conditions described in the
Realistic Scenario. This will set the stage for an examination of the paths for oil sands development under
each of the three scenarios.

May 2011

May 2011
Chapter 3
Oil Sands Overview Supply Costs

1 A L
method utilizes various technologies to extract valuable bitumen from the oil sands. The focus of this
report is on commercial extraction technologies, which are defined as technologies being used in two or
more oil sands projects, and by more than one oil sands operator. These technologies are mining and
extraction,
1
steam assisted gravity drainage (SAGD), and cyclic steam stimulation (CSS).
2

This Chapter is organized as follows: a brief discussion of CL8l supply cost methodology will be followed
by the assumptions used to support the CERI model. Once the assumptions have been provided, the
supply costs are presented in a manner that is comparable to previous CERI results, followed by supply
costs that reflect the Realistic Scenario. These results will be discussed in detail, along with their
implication on oil sands development.
Methodology and Assumptions
CL8l that used by industry, government, and
non-governmental organizations. The supply cost represents the constant dollar price needed to recover
all capital expenditures, operating costs, royalties, taxes, and earn a realistic return on investment.
In past reports, CL8l (ROR) on an investment (10 percent, real), thereby,
allowing the price of oil to vary by extraction method. This approach allowed CERI to estimate the price of
oil required to bring forth new oil sands projects, by extraction method. When the Government of Alberta
moved away from a royalty system that was fixed (by pre-and post-payout periods), to a system that
takes into account oil prices, W1l CL8l The new supply cost
methodology takes into account oil prices, and solves for the constant real ROR that is needed to recover
all capital expenditures, operating costs, royalties, and taxes, given an oil price projection. A forecast of
W1l u S L l A A L
Outlook 2010 (EIA AEO 2010) and extended, at a rate of 3 percent per year, to cover the projection period
(see Figure 3.2). As was the case in the previous model, the new model provides a constant dollar price
that reflects the RORs.
The supply costs calculated in this report are presented as supply costs at the field, in addition to WTI
equivalent supply costs. The WTI equivalent supply costs take into account transportation costs for either
SCO or blended bitumen, in addition to an assumed light-heavy differential.

1
Within mining and extraction various technologies are used to support the extraction process and transportation of
oil sands. While each technology has some advantages and disadvantages, they have all been categorized as mining
and extraction for this report and are treated as one technology type.
2
The reader is assumed to have some familiarity with each extraction method. Detailed descriptions of the extraction
technologies are available from CERI as part of previous public reports.
May 2011
The assumptions that underpin each production method are presented in Table 3.1. The project design
parameters and energy requirements remain the same as in the 2009 report, however, capital and
operating costs have been adjusted to reflect for deflation in capital and inflation in operating costs from
2009 to 2010.
Table 3.1
Design Assumptions by Extraction Method
Measurement Units SAGD
Mining and
Extraction
Integrated Mining
and Extraction
and Upgrading
Stand Alone
Upgrading
Project Design Parameters
Stream day capacity bbl of bitumen per day 30,000 100,000 115,000
Stream day capacity bbl of SCO per day 100,000
Production Life years 30 30 30 30
Average Capacity Factor
(over production life) percent 77.00% 92.00% 92.00% 92.00%
Capital Expenditures (2010 Constant Dollars)
Initial Millions of dollars 1,091.4 7,988.0 11,238.9 5,131.9
Initial Dollars per bbl of capacity 36,381.0 79,879.8 97,729.9 51,319.1
Sustaining
(Annual Average) Millions of dollars 50.9 269.6 379.3 169.9
Operating Working Capital Days payment 45 45 45 45
Operating Costs
Fixed (Annual Average) Millions of dollars 75.0 177.4 362.7 198.7
Variable Dollars per bbl of capacity 7.2 8.9 14.0 5.1
Energy Requirements
Natural Gas
Royalty Applicable GJ per day 32,100 54,000 62,100
Non-Royalty Applicable GJ per day 20,871 81,436
Electricity Purchased
Royalty Applicable MWh/d 300 0 1,128
Non-Royalty Applicable MWh/d 448
Electricity Sold MWh/d 0 728 0 0
Other Project Assumptions
Abandonment and
Reclamation percent of total capital 2% 2% 2% 2%

Notes:
- Capital costs for SAGD operations are an average of AOSC's Mackay project, Devon Energy Jackfish Phase 3 and
Meg Energy Christina Lake Phase 2B. Other capital and operating CL8l oil sands study,
and have been adjusted for deflation in capital and inflation in operating costs from 2009 to 2010.
- SCO = Synthetic crude oil

It has been assumed that on-site cogeneration is in place for mining and upgrading projects. Any
excess electricity is sold into the Alberta system. In situ projects are assumed to purchase
electricity from the Alberta grid. Within the next decade, it is anticipated that most in situ
proj
electricity load. In other words, most new in situ projects, within the next decade, are not likely
to produce excess amounts of electricity.
May 2011
As illustrated in Figure 3.1, electricity prices are assumed to increase over the next three decades, at an
average annual inflation rate of 2.5 percent, as higher fuel prices and emissions compliance costs results
in a different generation mix within the province of Alberta.
Figure 3.1
Electricity Price Projection

Source: Clean Air Strategic Alliance (CASA), CERI
While oil sands production methods are continually improving, natural gas is still the primary fuel source
for the oil sands industry. A forecast of natural gas prices was obtained from the US LlA AEO 2011 Early
Research Overview, and extended, at a rate of 3 percent per year, to cover the projection period. The
natural gas prices as related to the Z^ oil price projection are presented in Figure 3.2.
Figure 3.2
Natural Gas Price Projections

Source: EIA, CERI.
$80
$100
$120
$140
$160
$180
$200
$220
$240
2010 2020 2030 2040
$/MWh
Electricity Price Projection
Expect prices to more than double in 35 years
$40
$80
$120
$160
$200
$3
$7
$11
$15
$19
$23
2010 2020 2030 2040
$/bbl
$/GJ
Natural Gas & WTI Oil Price Projections
May 2011
Light-Heavy Differential
1 CL8l
of the light-heavy differential. This differential reflects the price spread between a barrel of light oil, as
measured by the benchmark WTI, and a barrel of heavy oil. One of the most widely accepted measures of
the heavy oil price is the Western Canadian Select (WCS) price.
Launched in 2004 by EnCana Corporation (Cenovus Energy), Canadian Natural Resources Limited,
Talisman, and Petro-Canada (Suncor), the WCS consists of conventional Western Canadian heavy oil, and
bitumen that has been blended with sweet SCO and diluents. This heavy oil benchmark crude is used as a
tool for hedging risks against North American heavy crude oil grades, and its benefits include: reduced
infrastructure requirements, consistency of crude oil quality, reduced demand for conventional diluent,
and greater market liquidity.
3
The following table compares the characteristics of the WCS blend to two
other crude oils.
4

Table 3.2
Crude Oil Characteristics
WCS Target Maya Mars
Gravity (API
0
) 19-22 21.8 30.4
Carbon Residue (Wt %) 7.0-9.0 13 5.5
Sulphur (Wt %) 2.8-3.2 3.5 1.9
TAN (mo KOH/g) 0.7-1.0 0.3 0.68

Since the WCS represents a heavy sour barrel of oil, it is more difficult to refine than light sweet oil, and a
different product slate results from the heavier barrel. Because of this, the WCS prices should be lower
than the WTI price, producing a positive light-heavy differential (WTI minus WCS). The average daily light-
heavy differential, for the period January 2, 2008 to January 18, 2011 was US$14.82. Movements in this
differential tend to correlate positively, though not perfectly, with changes in the WTI price. Figure 3.3
displays changes in the light-heavy differential over this period.

3
Western Canadian Select (WCS) fact sheet, Cenovus Energy, http://www.cenovus.com/operations/doing-business-
with-us/marketing/western-canadian-select-fact-sheet.html.Accessed on January 10, 2011.
4
S 8 C P C M 1 C L P C S LC
Corporation presentation to the Canadian Heavy Oil Association, February 3, 2005, http://www.choa.ab.ca/
documents/Feb0305.pdf. Accessed on January 11, 2011.
May 2011
Figure 3.3
Light-Heavy Differential

Source: Nickles, CERI
Based on the historical data, the light-heavy differential is assumed to be constant at US$15.00/bbl. This
assumption reflects a scenario in which bitumen and SCO continue to penetrate the market
proportionately, and refineries adjust accordingly. Per barrel transportation costs from the field to
Hardisty, and Edmonton to Cushing, Oklahoma, are assumed to rise at an annual inflation rate of 2.5
percent. In 2010, transportation costs from the field to Hardisty were $1.00/bbl, and $0.80/bbl to
Oklahoma.
Within the supply cost model, federal and provincial corporate income taxes have been assumed constant
at 19 percent and 10 percent, respectively. The provincial royalty rate, which applies to both pre- and
post-payout periods, is linked to the WTI (Canadian dollars), and is maximized when the oil price reaches
$120/bbl. During the pre-payout period, oil sands projects are levied a royalty, based on gross revenue,
while post-payout projects are levied a royalty that is CL8l
allowable ROR before payout of 5.5 percent.
The royalty rates that are applied under the Realistic Scenario are illustrated in Figure 3.4.

$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
$55
May 2011
Figure 3.4
Bitumen Royalty Rates

Source: Government of Alberta
The construction and operation periods for an oil sands project have been slightly adjusted from previous
studies, in order to reflect somewhat longer construction periods. Oil sands operations are assumed to
commence construction on January 1, 2011, and begin operating on January 1, 2014. The projects will
continue to operate until end of year 2044.
Estimating Inflation
Nelson-Farrar Inflation Refinery-Construction Cost Index (1946=100) and the WTI
A critical component in determining future oil sands supply costs is the cost of construction. Within the
design assumptions are the capital and operating costs for each oil sands extraction method. These costs
CL8l
Methodology
Estimating the inflation in oil sands construction costs can be a difficult endeavour due to the lack of
available historical cost data. In order to approximate construction cost inflation in the oil sands, CERI
studied the changes in the Nelson-Farrar Inflation Refinery-Construction Cost Index. There are two main
reasons for using the Construction Cost Index in CL8l analysis. First, such a cost index is not currently
produced by any organization for the oil sands. Second, many of the costs associated with the
construction of refineries are also applicable to the construction of oil sands projects. Labour costs (skilled
and common labour) make up 60 percent of the Construction Cost Index, while materials and equipment
(iron and steel, building materials, and miscellaneous equipment) account for the remaining 40 percent of
the Construction Cost Index.
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
2010 2020 2030 2040
Royalty
Rate
Provincial Bitumen Royalty Rates
By 2024 projects pay maximum rates on Gross and Net
Revenues
Net Revenue
Gross Revenue
May 2011
The Nelson-Farrar Construction Cost Index was first introduced CL8l as a
methodto estimate future oil sands construction cost inflation. This section will outline the process of
estimating the inflation.
CERI hypothesized that a direct, and positive relationship exists between the price of oil and construction
costs. Qualitatively, this is plausible because the strength of oil prices is dependent on robust economic
activity, and economic growth has a tendency to lead to capital cost inflation. To test this theory
quantitatively, a simple univariate statistical model was created using historical WTI spot prices and the
Nelson-Farrar Inflation Refinery-Construction Cost Index.
If such a relationship is shown empirically, then a forecast of the value of the Construction Cost Index, and
thus oil sands construction costs, can be produced, using an oil price projection. The change in the
construction cost index over time can be interpreted as the inflation in oil sands construction costs.
Data
Monthly Cushing, Oklahoma WTI spot price data (US$/bbl) and Nelson-Farrar Inflation Refinery-
Construction Cost Index data were obtained from the EIA, and the Oil and Gas Journal, respectively, for
the period March 1996 to July 2010.
Annual projections of the WTI price were obtained from the EIA, for the period 2010 to 2035. Between
2035 and 2044, it is assumed that the WTI price increases at an annual rate of 3 percent. Because the data
is annual, we assume that it is an average value for the year, and set the monthly value equal to the
annual WTI price over the projection period.
Results
The analysis revealed a strong, positive, and statistically significant relationship between the WTI spot
C C l A CL8l 80 percent of observed changes in the
Construction Cost Index can be explained by changes in the price of oil. A US$1/bbl increase (decrease) in
the WTI spot price is estimated to increase (decrease) the Construction Cost Index by 10. Figure 3.5 shows
a scatter plot of historical WTI prices, and the Nelson-Farrar Refinery Construction Cost Index.

May 2011
Figure 3.5
Effect of the Oil Price on Refinery Construction Costs

Source: CERI, US EIA, Oil and Gas Journal
The Nelson-Farrar Refinery Construction Cost Index was projected to the end of the outlook period
(2044), assuming that no future structural breaks occur in the relationship between the price of oil and
construction costs. The model indicates that year-over-year (October 2009-October 2010) refinery
construction costs have experienced a deflation of 3.6 percent. Between the end of 2010 and 2044,
construction costs are estimated to increase by 51 percent. The average annual construction cost inflation
rate, forecasted between October 2011 and October 2044, is 1.1 percent. Figure 3.6 displays projections
of the WTI price, and the annual inflation in refinery construction costs.
Figure 3.6
Historic and Projected WTI Prices and Construction Cost Inflation Rates, 2007-2044

0
500
1,000
1,500
2,000
2,500
3,000
0 20 40 60 80 100 120 140 160
Construction Cost Index
WTI (US$/barrel)
-6
-4
-2
0
2
4
6
8
10
0
20
40
60
80
100
120
140
160
180
200
WTI (US$/barrel)
Construction Cost
Inflation (%)
WTI
Inflation
May 2011
Canadian-US Exchange Rate(C$/US$) and the WTI
The purpose of this section is not to provide a detailed forecast of Canadian-US exchange rates over the
long projection period covered in this study, but rather to simply illustrate the effect that one variable
could have on the exchange rate, ignoring all other factors, and left unconstrained by government policy.
It is true that many factors can have an impact on the exchange rate, including political changes,
productivity, and debt. However, there is one factor that has had an undeniable influence on the
Canadian-US exchange rate, and has become more important over time. This factor is the price of crude
oil.
Methodology
The statistical relationship between crude oil prices and the Canadian-US exchange rate is estimated with
an ordinary least squares approach. A simple exchange rate forecast is then produced using a forecast of
crude oil prices. In this exercise, it is assumed that the exchange rate is left unconstrained by central bank
interventions.
Data
The statistical analysis required data on historic and projected crude oil prices, and historic exchange
rates. Monthly Cushing, Oklahoma WTI spot price data (US$/bbl) was obtained from the EIA for the period
March 1996 to July 2010. Historical exchange rate data (C$/US$) was obtained for the same period from
S C A W1l LlA A L C
extended, at a rate of 3 percent per year, to cover the projection period.
Results
There exists a negative and statistically significant relationship between the Canadian-US exchange rate
and the price of crude oil, as illustrated in Figure 3.7 CL8l
factors, 78 percent of the variations in the exchange rate can be explained by changes in the price of
crude oil.

May 2011
Figure 3.7
Effect of the Oil Price on the Canadian-US Exchange Rate

Source: CERI, US EIA, Statistics Canada
For each $1/bbl increase in the WTI price, the value of the US dollar, relative to the Canadian dollar, is
estimated to decrease by 0.0061. That is, for every US$1/bbl increase in the price of oil, each US$1 can
purchase 0.0061 fewer Canadian dollars. Figure 3.7 shows that over time, and left unconstrained by fiscal
and monetary policies, the exchange rate declines to C$0.99/US$1 (US$1.01/C$1) in 2015, C$0.81/US$1
(US$1.23/C$1) in 2030, and C$0.50/US$1 (US$2.00/C$1) by 2044.
Figure 3.8
Historic and Projected WTI Prices and the Canadian-US Exchange Rate, 2007-2044

Source: CERI, US EIA, Statistics Canada
As the Canadian-US exchange rate ($C/$US) decreases, Canadian goods and services become relatively
more expensive to purchase with US dollars, and Canadian exports to the US decline correspondingly.
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
0 20 40 60 80 100 120 140 160
C$/US$
WTI
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
0
20
40
60
80
100
120
140
160
180
200
J
a
n
-
0
7
M
a
r
-
1
1
M
a
y
-
1
5
J
u
l
-
1
9
S
e
p
-
2
3
N
o
v
-
2
7
J
a
n
-
3
2
M
a
r
-
3
6
M
a
y
-
4
0
J
u
l
-
4
4
WTI (US$/barrel)
C$/US$
WTI
Exchange Rate
May 2011
Between 2004 and 2009, the value of Canadian exports to the US declined by approximately 23 percent.
Over the same period of time, the Canadian-US exchange rate declined by 12 percent. In 2009, Canadian
uS
5

The simple univariate model utilized in this exercise ignores important factors that could have an impact
on the Canadian-US exchange rate, and therefore suffers from under-specification bias. To better
determine the effect of crude oil prices on the exchange rate, other relevant variables should also be
considered. One such variable, as suggested by recent Bank of Canada research, is the US debt to gross
domestic produc Cu C Cu .
6

Exchange rate parity will be assumed throughout the projection period, as fiscal and monetary
policies would likely be implemented, over the long-term, to prevent excessive appreciation of
the Canadian dollar against the US dollar.

Nelson-Farrar Refinery-Operating Cost Index (1956=100) and the WTI
Methodology
The operating costs of an oil sands project contribute significantly to the total supply cost. As with capital
costs, however, no index currently exists to capture changes in oil sands operating costs over time. In
order to estimate the inflation rate of oil sands operating costs, a feasible alternative measure must be
obtained. While the operating costs of an oil refinery do not mirror those of an oil sands upgrader exactly,
the two facilities are similar in that each consists of very energy intensive processing units.
7
For this
reason, the Nelson-Farrar Refinery Operating Cost Index is used in the examination of oil price impacts on
oil sands operating costs. The Operating Cost Index accounts for the following refinery operating costs:
fuel, power, labour, investment, maintenance, and chemicals.
With a linear estimation approach, CERI is able to test the impact of changes in the price of oil on refinery
operating costs. Given a statistical relationship between refinery operating costs and the price of oil, a
forecast of the value of the Nelson-Farrar Refinery Operating Cost Index can be produced, using an oil
price projection. Year-over-year changes in the Operating Cost Index could then be used as a rough proxy
for the rate of inflation in oil sands operating costs.
Data
Monthly Cushing, Oklahoma WTI spot price data (US$/bbl), and Nelson-Farrar Refinery Operating Cost
Index data were obtained from the EIA, and the Oil and Gas Journal, respectively, for the period March
1996 to July 2010. Projections of the WTI price from the US EIA, and CERI are used to estimate exchange
rates to 2044.

5
Imports, exports and trade balance of goods on a balance-of-payments basis, by country or country grouping,
Statistics Canada, http://www40.statcan.gc.ca/l01/cst01/gblec02a-eng.htm, Accessed on December 31, 2010.
6
Cayen, Jean- u C 8 L M W u L 8 n L
uS u 8 L 8 C L A u 8 C
February 2010.
7
While this relationship is weaker for an oil sands operation, it is still a relevant comparison until an alternative
method is developed.
May 2011
Results
WTI spot prices have a positive and statistically significant effect on the value of the Nelson-Farrar
Refinery Operating Cost Index. Eighty-two percent of observed changes in the Operating Cost Index can
be explained by changes in the price of oil. A US$1/bbl increase (decrease) in the WTI spot price is
estimated to increase (decrease) the Operating Cost Index value by 3.3. Figure 3.9 shows a scatter plot of
historical WTI prices, and the Nelson-Farrar Refinery Operating Cost Index.
Figure 3.9
Effect of the Oil Price on Refinery Operating Costs

The forecast of the Nelson-Farrar Refinery Operating Cost Index estimates that refinery operating costs
have increased by 5.8 percent, year-over-year (October 2009-October 2010).
Between December 2010 and December 2044, operating costs are estimated to increase by 58 percent.
The annual average operating cost inflation rate forecasted between October 2011 and October 2044 is
1.2 percent. Figure 3.10 displays a projection of the WTI price, and the annual rate of inflation in refinery
operating costs.

0
100
200
300
400
500
600
700
800
900
0 20 40 60 80 100 120 140 160
Operating Cost Index
WTI (US$/barrel)
May 2011
Figure 3.10
Historic and Projected WTI Prices and Operating Cost Inflation Rates, 2007-2044

Supply Cost Results
To better understand th , a price projection was required in order to accurately
account for the new royalty system. The Realistic Scenario is essential, as it allows CERI to compare each
extraction method against the other with the same oil and natural gas price assumptions.
The oil price is again illustrated in Figure 3.11 to provide context to these results. Under the price
projection, the oil sands are shown to be highly profitable, and an extremely good investment for oil
sands operators, as well as the provincial and federal governments.
Figure 3.11
Natural Gas and Oil Price Projection

Source: EIA, CERI.
-15
-10
-5
0
5
10
15
0
20
40
60
80
100
120
140
160
180
200
WTI (US$/barrel)
Operating Cost
Inflation (%)
WTI
Inflation
$40
$80
$120
$160
$200
$3
$7
$11
$15
$19
$23
2010 2020 2030 2040
$/bbl
$/GJ
Natural Gas & WTI Oil Price Projections
May 2011
Figure 3.12
Realistic Oil Sands Supply Costs
SAGD
(Realistic Oil Price Projection
19% ROR)
Mining & Upgrading
6% ROR)
Mining
14% ROR)
Electricity Sales 0.0 0.0 0.7
Emissions Compliance Costs 1.4 1.2 0.8
Income Taxes 8.3 5.1 8.6
Royalties 19.6 18.0 20.1
Abandonment Costs 0.0 0.2 0.0
Electricity 1.0 0.8 0.0
Other Operating Costs (Fixed & Variable) 16.2 31.5 15.9
Fuel (Natural Gas) 5.5 4.6 2.8
Operating Working Capital 1.5 0.6 1.3
Fixed Capital (Initial & Sustaining) 39.3 38.1 43.9
$0
$20
$40
$60
$80
$100
$120
$/bbl

In situ projects reach payout in 4 years, mining projects in 5 years, and integrated projects in 5 years. The
result is a substantial increase in oil sands royalties collected by the province, and in some cases, RORs for
oil sands operators.
Figure 3.12 illustrates the supply costs for SAGD, mining and integrated mining. The plant gate supply
costs, which exclude transportation and blending costs, are $93/bbl, $100/bbl, and $93/bbl for SAGD,
integrated mining and upgrading, and stand-alone mining, respectively. The WTI equivalent supply cost
for SAGD projects is $123/bbl, $128/bbl for integrated mining and upgrading projects, and $123/bbl for
stand-alone mining projects. While capital costs and the return on investment account for a substantial
portion of the total supply cost, the province stands to gain $18 to $20 in royalty revenues for each barrel
of oil produced on average, over the life of an oil sands project. On a percentage basis, this ranges from
18 to 22 percent (see Figure 3.13).

May 2011
Figure 3.13
Realistic Oil Sands Supply Costs (Contribution)
SAGD
19% rate of return)
Mining & Upgrading
6% rate of return)
Mining
14% rate of return)
Electricity Sales 0.0% 0.0% 0.8%
Emissions Compliance Costs 1% 1% 1%
Income Taxes 9% 5% 9%
Royalties 21% 18% 22%
Abandonment Costs 0% 0% 0%
Electricity 1% 1% 0%
Other Operating Costs (Fixed & Variable) 18% 31% 17%
Fuel (Natural Gas) 6% 5% 3%
Operating Working Capital 2% 1% 1%
Fixed Capital (Initial & Sustaining) 42% 38% 47%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%

Over the life of the oil sands project, in situ operations would appear to provide the highest RORs, at 19
percent. Stand-alone mining projects have a respectable ROR of 14 percent, while integrated operations
would appear to have the lowest ROR, at 6 percent. In addition, the high ROR will be pushed down, as
vendors raise prices (to capture the economic rent), and refineries may become more aggressive in
contract negotiations.
Under CL8l Realistic Scenario, a harmonized emissions compliance cost projection has been included.
Beyond harmonizing emissions costs with the US CL8l
that the compliance costs are harmonized with A W
not intended to indicate that a technology fund would exist under the harmonized plan, it does assume
that compliance costs are royalty deductible, as is currently the case.
When compliance costs are royalty deductible, collected by the province, and spent entirely within the
province, a transfer of wealth outside of Alberta does not take place. Under a harmonized system the $1
to $1.5/bbl in emissions compliance costs would be collected by the federal government, and represents
a wealth transfer from Alberta to Ottawa. As will be discussed in the next Chapter, this lost royalty
revenue could amount to billions of dollars a year.

May 2011

Canadian Oil Sands Supply Costs and Development Project (2010-2044) 29
May 2011
Chapter 4
Oil Sands Projections

Based upon CL8l Realistic Scenario C C
profitable long-term investment that is worth nurturing. This does not imply that every oil sands project
will move from concept to reality. Nor does it imply that every oil sands project should go forward. The
estimates are based upon a high quality oil sands project (either mining or in situ). Inevitably, some
projects will experience delays from financing, and possibly regulatory hurdles.
1 C CL8l A
develop the projections will be followed by the assumptions used to delay, and/or cancel oil sands
CL8l l sands projections for bitumen, SCO, natural gas requirements, GHG emissions,
strategic and sustaining capital, and provincial royalty revenues will then be provided.
Methodology
CL8l bitumen and SCO production volumes remains unchanged from past
reports. Projections are based on the summation of all announced projects, with a wide variety of
assumptions pertaining to the project schedule and delays, technology, and state of development. The
method by which projects are delayed, or the rate at which production comes on stream, is based upon
CL8l
A CL8l
unconstrained projections in past CERI l
will only be shown to provide context to the constraints, and represents a
production, as currently defined by the collective announcements from the oil sands industry.
The three scenarios that were presented in the previous Chapters are used to guide CL8l oil sands
development projections. To summarize, the scenarios are the Realistic, Protracted Slowdown, and
Energy Security; the Unconstrained Scenario is not considered as a full scenario in this report. Each
scenario contains an oil price and emissions compliance cost projection that underpins the potential
expansion path for oil sands development.
The impact that these scenarios could have on oil sands developments was translated into two
constraints: project startup delays, and capacity curtailments. These constraints were a function of the
scenarios and their impact on a projects ability to move through the regulatory and internal corporate
approval processes.
Projects further along the regulatory process are given shorter delays, and have higher probabilities of
proceeding to their announced production capacity. Projects that have been announced, but have not yet
entered the regulatory process with a disclosure document receive lower probabilities of proceeding and
longer delays. Projects that are suspended are assumed to be already approved but not yet constructed.
May 2011
W CL8l al projects, the probabilities are used to
proxy project cancellations at the aggregate extraction method level.
Delays and probabilities, as measured by a probability fraction, for each phase of the regulatory approval
process, are based upon reasonable estimates of the length of time each phase could take, and are
illustrated in Table 4.1.
Table 4.1
Constraints by Scenario and Extraction Method
Probability Delay Probability Delay Probability Delay
Fraction Years Fraction Years Fraction Years
Onstream 1.00 0 1.00 0 1.00 0
Under Construction 1.00 1 1.00 1 1.00 1
Suspended 1.00 2 1.00 2 1.00 2
Approved 1.00 3 1.00 3 1.00 3
Awaiting Approval 1.00 5 1.00 5 1.00 5
Announced 1.00 9 1.00 9 1.00 9
Cancelled 1.00 0 1.00 0 1.00 0
Onstream 1.00 0 1.00 0 1.00 0
Suspended 0.90 3 0.90 3 0.90 3
Approved 0.90 4 0.90 4 0.90 4
Announced 0.70 12 0.65 14 0.70 12
Cancelled 1.00 0 1.00 0 1.00 0
Onstream 1.00 0 1.00 0 1.00 0
Suspended 0.85 7 0.85 8 0.85 5
Approved 0.85 8 0.85 10 0.85 6
Announced 0.40 24 0.25 30 0.50 24
Cancelled 1.00 0 1.00 0 1.00 0
Mining Upgrading
Energy Security Scenario
Realistic Scenario
Protracted Slowdown Scenario
In Situ Mining Upgrading
In Situ Mining Upgrading
In Situ

May 2011
Oil Sands Projections Results and Analysis
Based upon current announcements from oil sands proponents, capacity could peak at 6.8 MMBPD by the
end of 2027 without delays or curtailments; for comparison, CL8l 2009 oil sands update under the
Unconstrained Scenario, the peak was achieved in 2034 with 7.2 MMBPD. While this represents a bold
target for the oil sands industry, the path towards the peak is not possible, given the wide array of
constraints faced by industry (e.g., labour, capital, and oil demand). The three scenarios developed by
CERI provide three plausible paths of oil sands and SCO development.
Illustrated in Figure 4.1 are the three scenarios, in addition to the Unconstrained Scenario. In each
scenario, oil sands capacity exceeds 4MMBPD by 2044. However, the paths of development differ for
each scenario.
Figure 4.1
Bitumen Capacity Projections

Source: CERI, CanOils
Under the Protracted Slowdown Scenario, the oil sands experience almost no capacity growth over the
next decade, a direct result of low oil prices, and high emissions compliance costs, which lock the oil sands
out of the market. The slight drop in production in 2017 is a result of the earliest mining projects in the oil
sands reaching the end of the assumed production life. This dip is noticeable in each projection at various
times as projects are retired. By 2020, the industry begins to anticipate higher oil prices, as trade barriers
are reduced, and emissions compliance costs become more manageable. While the oil sands recover from
the stagnation, capacity expansions do not CL8l Realistic Scenario before the end of the
projection period.
0
2,000
4,000
6,000
8,000
2010 2020 2030 2040
10^3 bpd
Bitumen Capacity
Beyond 2021, each projection experiences substantial
capacity growth
Total Bitumen (Unconstrained Capacity Scenario)
Total Bitumen (Capacity, Energy Security Scenario)
Total Bitumen (Capacity, Realistic Scenario)
Total Bitumen (Capacity, Protracted Slowdown Scenario)
May 2011
In a world where energy security trumps all other concerns, driven by a robust economic growth in 2011,
the oil sands return to a period of rapid and aggressive development. The Energy Security Scenario
implicitly assumes that the rise in oil prices more than offset the inflation that would be experienced in
Alberta, as oil sands developments grow at unprecedented rates. By 2020, bitumen capacity would reach
3.9 MMBPD, but not as bitumen capacity reaches 6.2 MMBPD
by 2044.
While some may be skeptical about this Scenario coming to fruition, it is plausible that, by 2044, the oil
sands could be the exclusive supplier of crude oil to the US, and become an important supplier of crude oil
to other nations as well. This scenario does face immense hurdles, the least of which is finding the labour
and capital to commission new oil sands projects at such a rate, in addition to the requirements for
pipelines and refineries.
1 CL8l Realistic Scenario, where oil sands
development is slow to rebound. It is not until 2016 that the oil sands industry experiences its first spike in
bitumen capacity. Following this spike is a period of relatively steady capacity growth from 2018 to 2034,
eventually slowing down by 2044. In 2016, capacity reaches 2.7 MMBPD, and by the end of 2030 the
capacity increases to 5.3 MMBPD.
This scenario is in line with expectations for pipeline capacity additions, and it is quite possible that the
labour and capital markets in Alberta will be capable of handling this expansion without causing undue
stress on the local economy. The pace of pipeline expansion will depend on decisions with respect to the
markets to be served and the necessary regulatory approvals. The period of sustained growth (2018 to
2034) will introduce challenges to the Alberta economy, similar to those faced during the 2004 to 2008
period.
Figure 4.2 illustrates the possible paths for production under the three scenarios. Despite the recent
slowdown, the prevailing view in the industry appears to be that, while a recessionary economic
environment dictates caution on investment decisions, the future continues to look bright. All three
scenarios show a significant growth in oil sands production for the 35-year projection period.

The bitumen capacity projections are adjusted to account for the production profile, resulting in
a peak production volume by 2042 of 5.8 MMBPD under the Energy Security Scenario, or 5.1
MMBPD by 2042 under the Realistic Scenario. Under the Protracted Slowdown Scenario, peak
production of 4.2 MMBPD is reached by 2044. Production under the Realistic Scenario is
projected to reach 2.1 MMBPD by 2015, and 4.8 MMBPD by 2030.

May 2011
Figure 4.2
Bitumen Production Projections

Achieving any of the levels of production outlined in the three scenarios requires a substantial number of
inputs, of which capital (both strategic and sustaining), and natural gas are critical. Without the required
capital, an oil sands project cannot be constructed. The project, with current technologies, cannot operate
without an abundant and affordable supply of natural gas. And lastly, once the facility is operating there is
an ongoing need for sustaining capital to ensure that production volumes stay at their design capacities.
Relying on the previously stated design assumptions, and the associated capital required to construct a
facility and sustain operations, CERI has estimated the total and annual financial commitments required
for the oil sands. Initial capital costs, under the three scenarios, are illustrated in Figure 4.3.

0
2,000
4,000
6,000
8,000
2010 2020 2030 2040
10^3 bpd
Bitumen Production Volumes
By 2020 bitumen production could reach 2.5
MMBPD, under a Realistic Scenario
May 2011
Figure 4.3
Initial Capital Requirements

Over the 35-year projection period, the total initial capital required is projected to be $302 billion
under the Energy Security Scenario, $257 billion under the Realistic Scenario, and $213 billion
under the Protracted Slowdown Scenario.
l CL8l required capital investment is 20.1 percent lower under the
Energy Security Scenario, 16.8 percent lower under the Realistic Scenario and 13.4 percent lower under
the Protracted Slowdown Scenario. With the exception of the Protracted Slowdown Scenario, new
investment dollars start declining by 2030, and approach zero by the end of the projection period. This
does not reflect a slowdown in the oil sands, merely a lack of new capacity coming on stream, and relates
back to CL8l assumptions for project start dates, and announcements from the oil sands proponents.
With careful planning, the Realistic Scenario could be a viable target. By 2015, $13.5 billion in capital
investments will be required, and by 2030 the required investment reaches $3.4 billion, or a total of $241
billion between 2010 and 2030. Ongoing investment, in the form of sustaining capital will take place on an
annual basis.
In each of the three scenarios, the annual sustaining capital required for the oil sands (excluding royalty
revenues, taxes, and fixed and variable operating costs) exceeds $2 billion by 2044. The Realistic
projection shows an annual investment, by 2040, of $2.9 billion, and is estimated to average $2.3 billion
over the projection period. Figure 4.4 presents the sustaining capital costs under the three scenarios.

$0
$10
$20
$30
$40
2010 2020 2030 2040
billions
May 2011
Figure 4.4
Sustaining Capital Requirements

The amount of natural gas required to sustain the oil sands industry is substantial, and is illustrated in
Figure 4.5.
Figure 4.5
Natural Gas Requirements

$0
$1
$2
$3
$4
2010 2020 2030 2040
billions
Under the Realistic Scenario, sustaining capital averages
$2.1 billion per year (vs. 2.4 in 2009)
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
2010 2020 2030 2040
mmcf/d
Natural Gas Requirements
Expect natural gas requirements to surge, unltil
alternatives are brought to market
May 2011
By 2044, natural gas requirements will increase by 2 to 3 times the current levels. The Realistic Scenario
indicates natural gas requirements of almost 4.5 BCFPD by 2044. Considering how aggressively shale gas
production in the US has come on stream, and the potential for shale production in Canada, meeting the
In such a scenario, Canada and
the US could be engaged in an energy exchange Canadian oil for US natural gas that further enhances
the trade relationship between the two countries.The prospects for technology switching and efficiency

requirements.
One of the by-products of natural gas consumption is the production of GHG emissions. Without
CPC
released into the atmosphere. While technological innovation within the oil sands industry (in addition to
carbon capture and storage) is expected to help reduce these emissions, Figure 4.6 below illustrates the
CPC CL8l
Figure 4.6

GHG emissions are expected to rise in tandem with natural gas requirements. The emissions presented
above reflect point source emissions, and do not take into account emissions associated with electricity
purchases, or the benefits of cogeneration. In other words, these are the absolute GHG emissions that
result from the production of marketable bitumen, and SCO, from the oil sands industry.
Large industrial emitters within Alberta that exceed their emissions reduction target, have the option to
purchase Alberta-based carbon offset credits, or contribute $15 per tonne of carbon dioxide equivalent
0
20
40
60
80
100
120
2010 2020 2030 2040
MT/y
Without new technologies and carbon capture, emissions
are expected to rise to 91 million tonnes by 2044
May 2011
(CO
2
e) exceeding the target into the Climate Change and Emissions Management Fund. Within the supply
cost model, it is assumed that the oil sands projects pay the $15 compliance cost in full.
Using the previously presented emissions compliance cost projection from the Realistic Scenario, a
projection of annual and total compliance costs paid to the Alberta Government can be calculated. The
revenues collected from this compliance cost are distributed by the Climate Change and Emissions
Management Corporation, an organization that is independent of the Government of Alberta, to projects
or initiatives that support GHG reducing technologies.
As illustrated in Figure 4.7, the compliance costs increase over the projection period. By 2044, it is
estimated that the industry will pay $5.2 billion per year in compliance costs, a rather hefty incentive to
innovate. Over the projection period the industry is projected to pay almost $145 billion in compliance
costs.
The estimation of these compliance costs is based upon the per barrel cost. As such, this will overestimate
costs in the initial years, and underestimate costs in the later years of the projection. The figure below
should be used as an illustrative guide, with those caveats in mind.
Figure 4.7
Industry Compliance Costs

$0
$1
$2
$3
$4
$5
$6
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
2008 2018 2028 2038
billions
billions
Without improvments in technology/efficiency, industry
will have paid $142 billion by 2044
Cummulative Annual Compliance Costs
May 2011
The previous Chapter concluded with a brief discussion about the possibility of a compliance cost program
functioning as a wealth transfer mechanism, moving funds from the Government of Alberta to the
Government of Canada. Under the current system, royalties are calculated after accounting for the
compliance costs on a per project basis, resulting in a lower royalty paid to the provincial government.
However, since the lower royalty is partially offset by collecting the compliance costs, this may not be that
serious of an issue; the provincial government has decided how to use those revenues as part of a clean
technology fund.
If the compliance costs were levied by the federal government, and the province continues to allow
compliance costs to be deductable from royalties, then the 145 billion dollars collected could be
transferred from the province of Alberta to the federal government. On the other hand, if the compliance
costs are not deductable, but calculated on after tax income (or after provincial taxes), the wealth transfer
would be mitigated, but A liance cost
program in favour of a federal program.
Based upon the assumed oil price, as stated earlier, the cumulative amount of bitumen royalties collected
by the province is estimated to reach over one trillion over the projection period. By 2044, the royalties
collected annually could reach $67.5 billion, as illustrated in Figure 4.8.
Figure 4.8
Provincial Bitumen Royalties

Illustrated in Figure 4.9 are the production projections under the Realistic Scenario, by extraction type,
used to estimate royalty revenues, emissions, and natural gas requirements. Mined bitumen maintains a
majority status of oil sands volumes until 2025, when in situ production volumes overtake mined
bitumen. By the end of the projection period, in situ bitumen accounts for 57 percent of total production
volumes, or just fewer than 3 MMBPD, as compared to mined bitumen which produces 2.2 MMBPD.
$
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6
,
4
1
9

$
5
8
,
5
6
8

$
6
0
,
8
1
7

$
6
2
,
9
3
5

$
6
5
,
3
3
4

$
6
7
,
4
7
7

$-
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$-
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
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1
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0
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4
C
u
m
u
l
a
t
i
v
e
A
n
n
u
a
l
Royalties Collected from the Oilsands Industry ($ Millions), 2006 - 2044
Cumulative Royalties
In Situ (Solvent) Projects
In Situ Projects
Mining Projects
Total Annual Royalties
May 2011
Figure 4.9
Realistic Bitumen Production Projections

Given the production projection under the Realistic Scenario, the distribution of projects across various
development stages is shown in Figure 4.10. The Figure illustrates that a large proportion of total projects
are made up of projects that are currently on stream, approved and awaiting approval. As the proportion
of on stream projects starts to decline from 86 percent in 2015 to 24 percent by 2044, the total
proportion of approved and awaiting approval projects increases from 3 percent in 2015 to just over 50
percent by the end of the projection period.

0
500
1,000
1,500
2,000
2,500
3,000
3,500
2010 2020 2030 2040
10^3 bpd
Realistic Production Volumes
In situ volumes grow to 57% of total bitumen by 2044
Total In Situ Bitumen Volumes Total Mined Bitumen Volumes
May 2011
Figure 4.10
Project Distribution

Currently, all mined bitumen and a portion of in situ production is upgraded to SCO. In 2009, 12 percent
of in situ production was upgraded to SCO. Given the suspension of five upgrader projects with total
capacity of 710,000 barrels per day (BPD), it is uncertain what amount of bitumen will be upgraded to
SCO. This supports CL8l supply cost analysis, which indicates strong support for bitumen production;
while upgrading did not appear to generate a substantial ROR.
Initial (or strategic), and sustaining capital requirements are broken down by extraction method under the
Realistic Scenario, and are illustrated in Figures 4.11 and 4.12, respectively. Integrated projects include
integrated in situ operations, which make up, on average, 11 percent of total integrated projects.
Compared to figures from the 2009 update, the capital investment for stand-alone upgrading has
decreased by 40 percent, and has increased by 38 percent for in situ projects, on average.
Total cost requirements for the oil sands industry are presented in Figure 4.13. These include the initial
and sustaining capital and operating costs for all types of projects. Under the Realistic Scenario, the total
costs will peak in 2023 at $53.4 billion.

0
1,000
2,000
3,000
4,000
5,000
6,000
Onstream Under Construction Approved Suspended Awaiting Approval Announced
'000 b/d
May 2011
Figure 4.11
Realistic Scenario Initial Capital Requirements

Figure 4.12
Realistic Scenario Sustaining Capital Requirements

$0
$5
$10
$15
$20
$25
2010 2020 2030 2040
billions
In situ expansions take place throughout the projection
period
In Situ Mining
Integrated Projects Stand Alone Upgrading
$0
$1
$2
$3
$4
2010 2020 2030 2040
billions
In situ expansions take place throughout the projection
period
In Situ Mining
Integrated Projects Stand Alone Upgrading
May 2011
Figure 4.13
Realistic Scenario Total Cost Requirements

Source: CAPP, CERI

0
10
20
30
40
50
60
2007 2012 2017 2022 2027 2032 2037 2042
billions
Initial and Sustaining Capital and Operating
Requirements
Initial Operating
Sustaining Historical Capital
Historical Operating
May 2011
Chapter 5
Trends and Challenges in the
Oil Sands Development

North America has returned to positive economic growth, and oil sands developers are returning to pre-
recession activity levels. As the activity slowly ramps up, current trends and challenges in the oil sands
development need to be considered by governments and industry. The scope of this chapter is to review
four such trends and challenges in the oil sands industry. They are: uncertainty surrounding future
environmental policies; the management of tailings ponds associated with mining operations; the
technological advancements that are currently being developed and/or tested in pilot projects; and the
revival of mergers and acquisitions. These topics are addressed here solely to provide context, hence this
work does not represent an analysis of economic, social, environmental or public health impacts.
Environmental Issues
C
reput A
CPC C CPC
and are insignificant when compared in a global context. GHG emissions from the oil sands only exceed
that of other crude oils, refined in the US, by 6 percent, on average.
1
Additionally, on a per-barrel of oil
basis, GHG emissions from the oil sands have declined by an average of 39 percent since 1990.
2

Advancements in technology will continue to improve the energy efficiency, and thus reduce GHG
C
A C uS C
policies. The Government of Canada has stated that federal climate change policy will follow that of the
US. In 2010, Canada harmonized its GHG emissions reduction target with the US, committing to reduce
GHG emissions by 17 percent below 2005 levels by 2020.
3

Future climate change legislation will increase the cost of production for oil sands operators. The cost
associated with any potential climate change policy, however, is an unknown element given the current
uncertainty in federal policy development, and this presents a risk to oil sands investments. Although
Alberta has GHG emission regulations in place, industry could face a host of new regulations if the
l
circumstance, Alberta may have no choice but to adopt the federal standards.

1
lPS CL8A C S C C uS C S C n 8
2
A C S A C A u http://environment.alberta.ca/
documents/Oilsands_provincial_action_December17_2010.pdf. Accessed on December 31, 2010.
3
News Release, Canada Lists Emissions Target under the Copenhagen Accord, Environment Canada, February 1, 2010,
http://www.ec.gc.ca/default.asp?lang=En&n=714D9AAE-1&news=EAF552A3-D287-4AC0-ACB8-A6FEA697ACD6.
Accessed on December 31, 2010.
May 2011
To provide a better idea of the direction that federal climate change policy may follow, this section of the
report will discuss climate change developments from recent international negotiations, as well as the US.
United Framework Convention on Climate Change
The goal of the 16
th
annual United Nations (UN) Climate Change Conference in Cancun, Mexico
(November 26, 2010 to December 10, 2010) was to tackle some of the outstanding issues from the
Copenhagen Conference, and to set the groundwork for what may lead to a post-2012 agreement.
Although the decision of whether or not to extend the Kyoto Accord beyond the first commitment period
(2008-2012), a contentious issue for many nations, including Australia, Canada, Japan, and Russia, was
deferred to the 2011 UN Conference in Durban, South Africa, successful multilateral negotiations between
developed and developing nations led to the advancement of key aspects of the Copenhagen Accord, and
the inclusion of the pillars of the Copenhagen Accord in the official UN process.
The Cancun Agreements encompass a balanced package of decisions from the Ad Hoc Working Group on
Long-Term Cooperative Action under the Convention,
4
and the Ad Hoc Working Group on Further
Commitments for Annex I Parties under the Kyoto Protocol.
5
Achievements of the Cancun Agreements
include: the incorporation of emission reduction pledges from the Copenhagen Accord into the United
Nations Framework Convention on Climate Change (UNFCCC) process; progress in the area of reducing
emissions from deforestation and forest degradation, conservation of forest carbon stocks (REDD+);
establishing a process to design a Green Climate Fund, through which long-term funding of US$100 billion
per year may be distributed; the establishment of a technology mechanism to facilitate cooperation in the
development and deployment of new adaptation and mitigation technologies to developing countries;
the expansion of the Clean Development Mechanism (CDM) to include carbon capture and storage (CCS)
projects; and improved transparency measures that call for the monitoring, reporting, and verification of
emission reductions in countries that receive financial support for emissions mitigation efforts.
1 ed in
Copenhagen, was reiterated at the Cancun conference.
6
The concept of recognizing national
circumstances is as significant for developing nations as it is for developed energy exporting nations, and
will no doubt be included in the next round of negotiations, which are scheduled to take place between
November 28, 2011 and December 9, 2011.
By focusing on areas that developed and developing nations were willing to compromise, international
climate change negotiators were able to make meaningful progress at the UN Conference in Cancun. With

4
Outcome of the work of the Ad Hoc Working Group on long-term Cooperative Action under the Convention, The
Conference of the Parties, United Nations Framework Convention on Climate Change, December 11 2010,
http://unfccc.int/files/meetings/cop_16/application/pdf/cop16_lca.pdf, Accessed on December 15, 2010.
5
Outcome of the work of the Ad Hoc Working Group on Further Commitments for Annex I Parties under the Kyoto
Protocol and its fifteenth session, The Conference of the Parties, United Nations Framework Convention on Climate
Change, December 11, 2010, http://unfccc.int/files/meetings/cop_16/application/pdf/cop16_kp.pdf. Accessed on
December 15, 2010.
6
Outcome of the work of the Ad Hoc Working Group on long-term Cooperative Action under the Convention, The
Conference of the Parties, United Nations Framework Convention on Climate Change, December 11 2010,
http://unfccc.int/files/meetings/cop_16/application/pdf/cop16_lca.pdf. Accessed on December 15, 2010.
May 2011
that being said, however, it remains unlikely that the world will reach a new agreement on legally binding
GHG emission targets next year.
The United States
As the UNFCCC conference in Copenhagen came to a close in 2009, it was questionable whether or not
the US Congress would be able to pass climate change legislation, and meet its stated GHG emission
reduction pledge of 17 percent below 2005 levels by 2020. As expected, proposed energy and climate
change bills, which included cap-and-trade programs, were not passed in 2010 as such legislation would
have increased operating costs and impeded job creation while the US remained in a delicate economic
situation. Furthermore, it is not expected that federal climate change legislation will be enacted during
the 112th Congressional session, given the results of the November 2010 US mid-term elections. This will
likely prevent the US from entering into a potential legally-binding international agreement at the 2011
UN Conference in Durban, South Africa.
On December 7, 2009, the EPA issued two findings which stated that the emissions of 6 GHG emissions
(carbon dioxide (CO
2
), methane (CH
4
), nitrous oxide (N
2
O), hydro fluorocarbons (HFCs), per fluorocarbons
(PFCs), and sulfur hexafluoride (SF
6
)), and the combination of the 6 GHG emissions from new motor
vehicle and motor vehicle engines, endanger the health and welfare of current and future generations.
7

With these findings, the EPA is obliged, under the Clean Air Act, to regulate the emissions of the 6
aforementioned GHGs, according to a 2007 US Supreme Court ruling.
As the EPA is attempting to show, through GHG standards, mandatory GHG reporting, and permitting
rules, the regulation of GHG emissions need not result from federal legislation. In July 2011 and December
2011, the EPA is anticipated to propose new GHG emission standards for fossil fuel-fired power plants and
oil refineries, respectively, and issue final emission standards in 2012.
8

Circumventing the US Congress, however, may not be an easy task for the EPA, as the Republican
controlled US House of Representatives could simply restrict the activities of the EPA through budgetary
constraints. Additionally, members of the US Congress have called for a delay of the EPA regulations for
two years,
9
uS C A uC C LA
endangerment finding and proposed rules.
10
A previous attempt to prevent the EPA from regulating GHG

7
Environmental Protection Agency 40 CFR Chapter 1 Endangerment and Cause or Contribute Findings for Greenhouse
Gases Under Section 202(a) of the Clean Air Act; Final Rule, Federal Register, Vol. 74, No. 239, December 15, 2009,
http://www.epa.gov/climatechange/endangerment/downloads/Federal_Register-EPA-HQ-OAR-2009-0171-Dec.15-
09.pdf. Accessed on December 27, 2010.
8
EPA to Set Modest Pace for Greenhouse Gas Standards/Agency stresses flexibility and public input in developing
cost-effective and protective GHG standards for largest emitters, United States Environmental Protection Agency,
December 23, 2010, http://yosemite.epa.gov/opa/admpress.nsf/d0cf6618525a9efb85257359003fb69d/
d2f038e9daed78de8525780200568bec!OpenDocument. Accessed on December 27, 2010.
9
West Virginia Senator Jay Rockefeller, Press Release, December 17, 2010, http://rockefeller.senate.gov/press/
record.cfm?id=300339&. Accessed on December 27, 2010.
10
Upton, Frank a 1 P C C S LA C W u
2010, http://online.wsj.com/article/SB10001424052748703929404576022070069905318.html. Accessed on
December 28, 2010.
May 2011
A 8 S L M -47) in the U.S.
Senate in June 2010.
11

Although climate change legislation may be stalled at the federal level, efforts to reduce GHG emissions at
the state and regional levels are moving full steam ahead. At the state level, GHG emission reduction
targets have been established in 24 states,
12
including California, where an economy wide cap-and-trade
program was approved on December 16, 2010, to aid the state in reaching GHG emission reduction
C C W S A A8
32).
13
C -and-trade scheme will begin in 2012, and cover electricity (including imports), and
large industrial facilities, and will be extended to cover distributors of transportation fuels, natural gas and
other fuels in 2015.
14
Figure 5.1 displays the states that have set GHG emission reduction targets.
15

Figure 5.1
States with GHG Emission Reduction Targets

Source: Pew Center on Global Climate Change
With the exception of Hawaii and Florida, states with GHG emission reduction targets are also either
participants or observers in regional climate change programs. There exist three regional programs, which
include Canadian provinces and one territory, that have established, or intend to establish, GHG emission
reduction targets, and supporting cap-and-trade schemes to enable participating states and provinces to
meet those targets. Additionally, the three regional programs (Regional Greenhouse Gas Initiative,
Midwestern Greenhouse Gas Reduction Accord, and Western Climate Initiative) have developed a forum,
referred to as the Three-Regions process, to discuss regional cap-and-trade design and implementation

11
C 1 8 C uuA1L -US Senate defeats move to stop EPA CO2 regulation, Reuters,
June 10, 2010, http://www.reuters.com/article/idUSN1012304420100610. Accessed on December 27, 2010.
12
C C L 1 C C C C !
http://www.pewclimate.org/sites/default/modules/usmap/pdf.php?file=5902. Accessed on December 21, 2010.
13
Under AB 32, GHG emissions are to be reduced to 1990 levels by 2020.
14
A88 L 1 C C L A A 8 Board,
October, 27, 2010, http://www.arb.ca.gov/newsrel/2010/capandtrade.pdf. Accessed on December 21, 2010.
15
Greenhouse Gas Emission Targets, Pew Center on Global Climate Change, June 24, 2010,
http://www.pewclimate.org/what_s_being_done/in_the_states/emissionstargets_map.cfm. Accessed on December
21, 2010.
May 2011
issues, as well as the possibility of integrating the regional programs in the future.
16
Figure 5.2 displays the
states and provinces that are involved in existing or proposed cap-and-trade schemes.
17

Figure 5.2
Regional Cap-and-Trade Schemes

Source: Pew Center on Global Climate Change

Regional Greenhouse GasInitiative
The Regional Greenhouse Gas Initiative (RGGI) was the first mandatory cap-and-trade scheme
implemented in the US to reduce GHG emissions from power plants. The 10 Northeast and Mid-Atlantic
member states of the RGGI (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire,
New Jersey, New York, Rhode Island, and Vermont) have committed to reduce GHG emissions by 10
percent below 2009 levels by the end of 2018.
18
Observing states and provinces include New Brunswick,
Ontario, Pennsylvania, and Quebec. Table 5.1 displays annual GHG emission limits for each of the
participating states between 2009 and 2018.

16
L C C u l C P-C C 1-Regions
Offset Working Group, May 2010, http://www.rggi.org/docs/3_Regions_Offsets_Announcement_05_17_10.pdf.
17
North American Cap-and-Trade Initiatives, Pew Center on Global Climate Change, June 24, 2010,
http://www.pewclimate.org/what_s_being_done/in_the_states/NA-capandtrade. Accessed on December 21, 2010.
18
C M l S 1 8 C C l 8CCl C
http://www.rggi.org/docs/RGGI_Fact_Sheet.pdf. Accessed on December 27, 2010.
May 2011
Table 5.1
Annual GHG Emission Caps
Annual GHG Emissions Cap (Tons/Year)
2009-2014 2015 2016 2017 2018
Connecticut 10,695,036 10,427,660 10,160,284 9,892,908 9,625,532
Delaware 7,559,787 7,370,792 7,181,798 6,992,803 6,803,808
Maine 5,948,902 5,800,179 5,651,457 5,502,734 5,354,012
Maryland 37,504,000 36,566,400 35,628,800 34,691,200 33,753,600
Massachusetts 26,660,204 25,993,699 25,327,194 24,660,689 23,994,184
New Hampshire 8,620,460 8,404,949 8,189,437 7,973,926 7,758,414
New Jersey 22,892,730 22,320,412 21,748,094 21,175,775 20,603,457
New York 64,310,805 62,703,035 61,095,265 59,487,495 57,879,725
Rhode Island 2,659,239 2,592,758 2,526,277 2,459,796 2,393,315
Vermont 1,225,830 1,195,184 1,164,539 1,133,893 1,103,247

Individual states auction a majority of RGGI CO
2
allowances, and invest the proceeds in programs that
improve energy efficiency, increase renewable energy, and develop clean energy technologies. During the
8CCl S ded
the supply by 39.2 million allowances. Allowances sold at a market clearing price of US$3.07, generating a
total of US$38.6 million.
19
l u 8CCl 10
th
quarterly carbon credit auction generated
US$48.2 million from the sale of 24.8 million CO
2
allowances for the current three-year compliance period
(2009-2011), and 1.2 million allowances for the following compliance period (2012-2014).
20
All CO
2

allowances were sold at the minimum reserve price of US$1.86 per allowance.
21

In June 2010, RGGI member states, along with the state of Pennsylvania and the District of Columbia,
established the Transportation and Climate Initiative, with the intent to develop regional low carbon fuel
standards, in order to reduce GHG emissions from fuels used in the transportation sector.
22

Midwestern Greenhouse Gas Reduction Accord
Illinois, Iowa, Kansas, Manitoba, Michigan, Minnesota, and Wisconsin signed an agreement the
Midwestern Greenhouse Gas Reduction Accord (MGGRA) in November 2007, to set GHG emission
reduction targets in participating states and provinces. To meet these targets, a regional multi-sector cap-
and-trade scheme is to be developed, along with various supporting climate change policies (e.g., energy
efficiency, renewable electricity, advanced CCS, low carbon fuel standards), and a GHG registry to ensure
compliance. Observing states and provinces include Indiana, Ohio, Ontario, and South Dakota.

19
S ! 8CCl S l CC A C S S S
http://www.rggi.org/docs/rggi_press_9_29_2008.pdf. Accessed on December 27, 2010.
20
Pierce Emilee, 8CCl A ? M l L S C L u
2010, http://www.rggi.org/docs/Auction_10_Release_Report.pdf. Accessed on December 27, 2010.
21
L 8CCl A ? M l L S C L u
2010, http://www.rggi.org/docs/Auction_10_Release_Report.pdf, Accessed on December 27, 2010.
22
Regional Low Carbon Fuel Standard Program, State of New Jersey, December 30, 2009,
http://www.nj.gov/globalwarming/pdf/lcfs_factsheet.pdf. Accessed on December 26, 2009.
May 2011
In May 2010, the MGGRA Advisory Group, consisting of representatives from government, industry,
academia, and environmental groups, released its final recommendations for introducing regional GHG
MCC8A -and-trade scheme. GHG emission reduction targets of
20 percent below 2005 levels by 2020 and 80 percent below 2005 levels by 2050 have been
recommended by the MGGRA Advisory Group.
23
Sectors covered by the cap-and-trade scheme will
include: electricity generators and importers; industrial combustion sources; industrial process sources;
fuels serving residential, commercial, and industrial buildings, with some exceptions, and excluding
Manitoba until the second compliance period; and transportation fuels, excluding Manitoba until the
second compliance period.
24
It was recommended that the cap-and-trade scheme begin at least twelve
months after an implementation memorandum of understanding is signed by the seven participating
members.
25

Western Climate Initiative
The Western Climate Initiative (WCI) is a collaboration between 7 US states (Arizona, California, Montana,
New Mexico, Nevada, Utah, Washington), and 4 Canadian provinces (British Columbia, Manitoba, Ontario,
C CPC 1 WCl
WCl 8 Cap-and-Trade Program and complimentary climate change
policies in each of the participating jurisdictions. The multi-sector cap-and-trade scheme, which is set to
commence in January 2012, will cover 90 percent of total GHG emissions in WCI member states and
provinces by the time the program is fully implemented in 2015.
26
Cumulative GHG emissions reductions,
over the three compliance periods, have been estimated at 719 million metric tonnes of CO
2
e.
27
Carbon
allowance prices were forecast by the WCI to reach US$33 per metric tonne of CO
2
e by 2020, under the
M C A -and-trade scenarios produced 2020 carbon allowance prices ranging
from a minimum of US$13 per metric tonne of CO
2
e to more than US$50 per metric tonne of CO
2
e.
28
As
shown in Figure 5.3, 32 percent of total GHG emissions reductions are expected to result from GHG
offsets, while the remaining 68 percent of reductions will be sourced from the covered sectors.
29

23
Advisory Group Final Recommendations, Midwestern Greenhouse Gas Reduction Accord, May 2010,
http://midwesternaccord.org/Accord_Final_Recommendations.pdf. Accessed on December 26, 2010.
24
Ibid.
25
Ibid.
26
The WCI Cap & Trade Program, The Western Climate Initiative, http://www.westernclimateinitiative.org/the-wci-
cap-and-trade-program. Accessed on December 27, 2010.
27
Updated Economic Analysis of the WCI Regional Cap-and-Trade Program, Western Climate Initiative, July 2010.
28
Ibid.
29
Ibid.
May 2011
Figure 5.3
Sources of Emissions Reductions Under the Cap
Main Policy Case Relative to the Reference Case, 2012-2020

Source: WCI
Observing US states, Canadian provinces, and Mexican states in the WCI are Alaska, Baja California,
Chihuahua, Coahuila, Colorado, Idaho, Kansas, Nevada, New Brunswick, Nova Scotia, Nuevo Leon,
Saskatchewan, Sonora, Tamaulipas, Wyoming, and the Yukon Territory.
Tailings Management
Water plays a crucial role in the development of the oil sands. Mining operations use approximately 4
barrels of fresh water per barrel of bitumen produced (about 2 to 3 barrels of which are sourced from the
Athabasca River), and about 1/2 a barrel of fresh water per barrel of oil produced is required by in situ
operations (none of which is sourced directly from the Athabasca River). Current oil sands fresh water use
is approximately 171 million cubic meters (m
3
) per year.
30

Tailings ponds are a part of operations common to various types of surface mining, including oil sands,
coal, metals, diamonds and others. With oil sands mining, once the oil sands have been mined, it is
separated from the sand and clay by mixing it with water. The oil is sent for further processing, and the
leftover mixture of water, sand, clay, and residual oil (referred to as tailings) is transported for storage in
large ponds often built in discontinued mine pits, where solids will settle and water will be recycled.
Coarse solids settle rapidly, while the fine solids remain suspended in the pond.
31
These fine solids, also
known as mature fine tailings (MFT), represent a significant challenge to the reclamation of tailings ponds.
As a result, mining operators have needed more, and larger, oil sands tailings ponds over the years.

30
CA W u C C S
31
L8C8 8 u u 1 C 8 C S M
S
May 2011
Existing tailings ponds cover an area of 170 square kilometers (km
2
)
32
and can have a long life, remaining
part of an active tailings management system for up to 30 or 40 years, either for tailings deposits, or for
storage and water recycling. Given this long life cycle, no tailings ponds have yet been reclaimed.
33

Presently, consolidated tailings (CT) technology is being used at existing oil sands operations to solidify
fluid tailings.
34
With the CT process, fluid fine tailings are mixed with coarse sand, and a chemical agent
(e.g., gypsum), forming a non-segregating mixture in order to transform the fluid tailings into a solid
deposit. Extensive research on tailings has been conducted, with the goal of developing technologies and
approaches that reduce the volume of fine tailings generated, and increase the rate of solidification.
One such innovation is the Tailings Reduction Operation (TRO) process, introduced by Suncor Energy,
and approved in June 2010 by the ERCB.
35
During the TROprocess, MFT are mixed with a polymer
flocculent before it is deposited, in thin layers, over sand beaches with shallow slopes. This drying process
occurs over a matter of weeks, allowing reclamation to occur more rapidly. The resulting product is a dry
material that can be reclaimed in place, or moved to another location for contouring, and replanting with
native vegetation. The new process is expected to improve tailings management in the future, and can
also be used to reduce S existing tailings inventory. Figure 5.4 shows MFT that have been
converted to a dry, solid surface after only 14 days.
Figure 5.4
MFT Surface after 14 Days

Source: Suncor Energy

32
ERCB, April 2010.
33
Simieritsch, 1 C ! u S1 8 A A C S C S
C L8C8 u 1 C 8 C S M S
December 2009.
34
L8C8 8 u Directive: Tailings Performance Criteria and Requirements for Oil Sands Mining
S
35
S L S L
http://www.suncor.com/en/newsroom/2418.aspx?id=1278055, Accessed on December 27, 2010.
May 2011
Another example of an innovative tailings practice is being fine-tuned at Canadian Natural Resources
L P project. CO
2
is captured from the facility, and mixed with silts in the tailings, which
causes a reaction that forms a solid, and allows the silts to settle more quickly. This process reduces GHG
emissions in two ways: the CO
2
is permanently trapped in the silts, and most of the water can be recycled
while it is still hot which reduces the energy required to reheat the water.
ERCB Directive 74
Reducing the volume and accelerating the solidification of fine tailings are essential to improving the pace
of the tailings pond reclamation process. Achieving this objective is precisely the intent of the new Tailings
Performance Criteria Directive 074, issued by the ERCB in February 2009.
36

The Directive outlines performance criteria for the reduction of fluid tailings, and the formation of
.
37
These criteria are required to ensure that the ERCB can hold mineable oil sands
operators accountable for tailings management. Companies were required to submit a tailings
management plan to the ERCB on September 30, 2009, indicating plans to meet the D
requirements.
The ERCB allows companies to phase-in the implementation of the proportion of fluid tailings that must
be sent to Dedicated Disposal Areas (DDAs).
38
The percentage of total fines in the tailings feed that must
be reported to the DDAs is:
x 20 percent from July 1, 2010, to June 30, 2011
x 30 percent from July 1, 2011, to June 30, 2012
x 50 percent from July 1, 2012, to June 30, 2013, and annually thereafter.
These percentages are in addition to the fines that will be captured in coarse sand deposits, which are
used to build dikes and beaches. Companies are to provide the ERCB with progress reports on a quarterly
and annual basis.
Although the above criteria must be met by all oil sands mining operators, the ERCB recognizes that fluid
tailings management is still in the development stages, and that operators may need flexibility to apply
technologies and techniques that best suit the circumstances of particular projects. As such, the ERCB will
consider submissions by operators, and determine project-specific requirements related to the
Directive.
39

36
L8C8 u 1 C 8 C S M S l
2009.
37
1 t have been created through consolidation, drying, drainage and
or capping must have a minimum shear strength.
38
L8C8 uuA
technologies. The material deposited each year must achieve minimum undrained shear strength of 5 kPa

39
L ! S Cn8L u
http://www.edmontonjournal.com/business/Shell+CNRL+miss+target+tailings+standards/3995941/story.html.
May 2011
Technology Options and Efficiency Improvements
When the oil sands resource is considered in a global context, the myth that it is the dirtiest resource
becomes blurred, as evidenced by a host of lifecycle analyses (LCAs) that have been performed. In 2010,
Cambridge Energy Research Associates (CERA) provided an excellent summary analysis of approximately
13 LCA studies, which examined oil sands production methods, in addition to other oil extraction
techniques and locations.
40
The results further confirm that, while the oil sands extraction is energy
intensive, it is by no means the most energy intensive. Furthermore, the vast majority of GHG emissions
come from the end user.
While this information could allow the industry to become complacent, it is continuing to explore new
extraction techniques which, if successful, could transform the oil sands industry from an emissions
hat generates lower GHG emissions per barrel of output, relative to current
production methods.
Figure 5.5
Well-to-Wheels GHG Emissions for Oil Sands and Other Crudes

Source: IHS CERA
l C CL8l bitumen extraction technology options
with improved energy efficiency and/or reduced GHG emissions. This section will provide a brief overview
of some of these technology options, excluding SAGD and CSS, in addition to an update on the status of
the technologies. Unfortunately, due to the proprietary nature of new technology research and
development, there is insufficient data available to perform a detailed cost analysis on each technology.

40
lPS CL8A C S C C uS C S C n 8
May 2011
Nuclear
Although the low natural gas prices environment has effectively muted the discussion on nuclear energy
in the oil sands, it is still worth commenting on from a steam generation perspective. Nuclear energy can
act as an excellent hedge against high natural gas prices, and GHG emissions compliance costs. However,
it is a technology option that would require a long-term commitment from an oil sands operator. Such a
commitment introduces substantial financial risks that may not be offset, given the current abundance of
natural gas in North America. With the low price of natural gas, nuclear energy is not viewed as a viable
option for the oil sands within the projection timeframe of this report.
Solvent Based Extraction
Solvent based extraction has been widely tested, and is considered a viable alternative to traditional in
situ extraction methods for reducing the viscosity of the bitumen.
41
There are a wide variety of processes
that utilize a mixture of different types of solvents and quantities of steam.
With the vapour extraction process (VAPEX), which relies upon the basic principle that the viscosity of
bitumen can be reduced not only by heat, but by solvents as well,
42
the solvents are selected by molecular
weight (lower than bitumen), the reservoir temperature and pressure, the ability of the solvent to remain
as a vapour during extraction, the ability of the solvent to partially upgrade the bitumen, the availability
and cost of the solvent, the solubility of the solvent, and the solvents ability to generate high extraction
rates.
43
In other words, it is unlik 1
reservoir specific.
A vapourized solvent is injected through an upper injection well to dissolve the oil sands, separating the
bitumen from the sand, without the use of steam. The solvent-diluted bitumen drains, by gravity, to the
lower production well, where it is then pumped to the surface.
The VAPEX process holds several potential advantages over traditional thermal processes: reduced capital
cost by eliminating steam generating facilities (estimated to be 30 percent of capital costs);
44
a complete
or partial elimination of water recycling and disposal facilities; an ability to recover larger quantities of the
original oil/bitumen in place (SAGD recovery factors are close to 45 percent, while the recovery factors
with CSS at least 25 percent);
45
and a substantial (if not complete) elimination of GHG emissions
associated with the production (and partial upgrading) of the bitumen.
Conventional produced bitumen contains large quantities of asphaltenes, which can reach approximately
22 percent by weight.
46
The VAPEX process has the ability to partially upgrade the bitumen in place by
deasphalting the bitumen if the solvent is of a sufficiently low molecular weight. This results in partially

41
L n 8 M ! A S-A C C C
International Petroleum Conference June 16-18, 2009, Petroleum Society of Canada, 2009, Paper No. 2009-115.
42
u Sk v A L 8 P C 8 S L
(SPE), Petroleum Recovery Institute, September 1998.
43
Ibid.
44
Ibid.
45
Athabasca Oil Sands Corp. Preliminary Prospectus. Calgary: Athabasca Oil Sands Corp., 2010.
46
u Sk v A L 8 P C 8 S L
(SPE), Petroleum Recovery Institute, September 1998.
May 2011
upgraded bitumen with a higher value than non-upgraded bitumen, and could be of sufficient quality to
meet pipeline specifications. Therefore, VAPEX could offer a regional benefit of reduced demand for
diluents (such as condensate). The most notable drawback is that the deasphalting process leaves
asphaltenes in the reservoir, which could plug the reservoir, and dramatically curtail production.
Electric Thermal Dynamic Stripping Process
E-1 L L-Thermal Dynamic Stripping Process (ET-DSP
TM
) is an in situ technology that uses
electromagnetic energy to heat the bitumen, causing the viscosity to decrease. Electricity and water travel
down the electrodes, which are inserted into vertical wells, in a grid-like pattern. The heated bitumen is
then produced through vertical extraction wells, which follow the same configuration as the electrode
wells. Figure 5.6 illustrates the ET-DSP
TM

well configuration.
Figure 5.6
sd-DSP
TM
Well Configuration

Source: E-T Energy Ltd.
E-T Energy is currently conducting a field test of the ET-DSP
TM
technology in the McMurray Formation of
the Athabasca oil sands region, and has applied to expand the field test. In the initial field test, 25 wells
(16 electrode wells and 9 extraction wells) were drilled 8 meters apart. The expanded field test, lasting
between 1 to 2 years, will focus on optimal well spacing and reducing the ratio of extraction wells to
electrode wells. Once approved, the E-T Energy will drill a total of 64 wells (46 electrode wells and 16
1
May 2011
be the Polar Creek ET-DSP
TM

Project, expected to commence operation sometime after 2011. This project
has planned production volumes of 10,000 BPD, expanding in phases to 110,000 BPD beyond 2013.
As shown in Figure 5.7, the majority of the Athabasca oil sands resource is located at depths that are
1
accessed and produced using E-1 L L1-DSP
TM

technology. The potential implications on the total
size of the oil sands resource could be staggering if this technology can unlock the vast potential in the
Athabasca region that is currently not amenable to SAGD, CSS, mining, and likely solvent extraction.
Figure 5.7
ET-DSP
TM
Production Area

Source: E-T Energy Ltd.
A range of potential benefits exists with this new technology. Unlike other production methods, natural
gas is not needed with the ET-DSP
TM
production process. Though the company expects a bitumen
recovery rate of 75 percent, the thermal efficiency of the ET-DSP
TM

process could reduce GHG emissions
compared to other extraction methods, but this is highly dependent upon the source of electricity.
The water requirements are minimal, as produced water is recycled, heated, and re-injected into the
reservoir. E-T Energy has reported the reservoir energy oil ratio to be 62 kWh/bbl, equivalent to a steam
oil ratio (SOR) of 0.56,
47
which is 37 percent lower than the SOR from solvent extraction. The CO
2
e
emissions, on a per barrel basis, are estimated to be 31.9 kg of CO
2
e/bbl of bitumen produced. However,
if the majority of the electricity is generated with coal, the emissions from the project would be about
twice as much.

47
E-T Energy Ltd., http://www.e-tenergy.com/London January2009.pdf, Accessed on March 17, 2009.
May 2011
Toe-to-Heel Air Injection
Petrobank Energy and Resources Ltd. has introduced a thermal in situ combustion technique, referred to
as Toe-to-Heel Air Injection (THAI
TM
), which combines a vertical injection well with a horizontal production
well to recover the bitumen. The company is continuing to report successful THAI operations, and the
possibility that higher reserve estimates could be provided, based upon higher THAI recovery rates,
relative to conventional thermal in situ production methods. In November 2010, a month after receiving
L8C8 A L 1PAl Dawson
project.
48

During the Pre-Ignition Heating Cycle (PIHC) phase, 80 percent quality steam is injected into both the
vertical injection well and the horizontal production well, in order to heat and mobilize the bitumen
between the two wells.
49
Once the PIHC phase is complete, air is injected into the vertical well, and a
combustion front is created, with peak temperatures of more than 700 degrees Celsius.
50
Ahead of the
combustion front is the coke (fuel) zone, where the high temperature coke oxidization occurs. The hot
combustion gases, coming into contact with the bitumen, result in thermal cracking and upgrading of the
bitumen. With reduced viscosity, the bitumen is able to drain, by gravity, to the horizontal production
well. The remaining coke functions as a fuel source for further combustion as the process moves through
the reservoir. Figure 5.8 depicts the THAI
TM
extraction process.
Figure 5.8
THAI
TM
Extraction Process

Source: Petrobank Energy and Resources Ltd.

48
News Release: Petrobank Receives Final Regulatory Approval for Dawson, Petrobank Energy and Resources Ltd.,
November 29, 2010.
49
WHITESANDS Insitu Ltd., WHITESANDS Project Expansion Integrated EUB/AENV Application, December 2007,
http://www.petrobank.com/webdocs/whitesands/WHITESANDS_Project_Expansion_Application.pdf, Accessed on
March 10, 2009.
50
L 8 L n 8 S L L
Combustion Operations at Whitesands THAI
TM
Project. http://www.petrobank.com/webdocs/news_2006/
2006_09_12_WHITESANDS_Update.pdf, Accessed on March 10, 2009.
May 2011
The combustion front sweeps the bitumen from the toe to the heel of the horizontal production well,
efficiently recovering an estimated 70 to 80 percent of the bitumen in place, while partially upgrading the
bitumen in situ. Other potential benefits of the THAI
TM
production process include minimal natural gas
and fresh water usage, partially upgraded oil quality, lower capital and operating costs, 50 percent less
GHG emissions, reduced diluent requirements for transportation, and the ability to operate in lower
pressure, lower quality, thinner, and deeper oil sands reservoirs than current steam-based production
methods.
51
Assuming a 50 percent reduction in emissions, THAI
TM
would emit approximately 26.5 kg of
CO
2
e/bbl, slightly more than emissions from solvent extraction. Given the lack of data available to provide
a more detailed estimate, this should be viewed as illustrative in terms of its relative ranking in emissions
reductions, versus solvent extraction and ET-DSP
TM
.

CA8l
TM
process applies a layer of catalysts to the horizontal production well in a second
W 1PAl
TM
bitumen, which is already partially upgraded with the THAI
TM

technology to an API of 11.5 degrees,
52
passes through the sleeve of catalysts (hydrodesulphurization
catalysts), further cracking occurs, and the resulting oil that is produced is ready for transportation
through standard oil pipelines, following water separation. The CAPRI
TM

process was able to improve the
API by 7 degrees, according to laboratory tests.
53
Figure 5.9 CA8l
TM

liner.
Figure 5.9
CAPRI Liner

Source: Petrobank
One of the shortcomings of bitumen recovery with the THAI
TM
process is the associated sand production. A
buildup of sand at the bottom of the reservoir can have an adverse impact on the combustion front. This

51
L 8 L 1he THAI
TM
http://www.petrobank.com/hea-thaiprocess.html.
Accessed on March 13, 2009.
52
L 8 L n 8 A l 1PAl
TM
/CAPRI
TM
Production
September 22, 2008. http://www.petrobank.com/webdocs/ news_2008/PBG_2008_09_22.pdf. Accessed on March
13, 2009.
53
Ibid.
May 2011
CA8l
TM
/THAI
TM
test well, the P-3B. The
narrow slotted liner that was introduced significantly decreased the amount of produced sand. Any
additional sand will be removed at the on-site processing facility, which also separates the water from the
oil.
Oil Sands Merger and Acquisition Revival
Although the US recession officially came to an end in June 2009, the ramifications of the global recession
are still being felt, as countries such as Spain and Ireland are starting to come to grips with troubling
balance sheets. Since the last edition of the oil sands update in 2009, CERI has stated that the resumption
in oil sands activity was marke l C k C S M
and that it would still take a couple of years for capital spending in the oil sands to return to pre-recession
levels.
When 2010 came to a close, the level of activity in the oil sands began to pick up, as indicated by
increased oil sands related capital spending announcements in 2011 capital budgets. While this increase
in capital spending will produce positive economic benefits in Alberta, and across Canada, the focus of this
section is on the level of merger and acquisition (M&A) activity (including joint ventures). After reaching a
peak of $12.4 billion in 2006, M&A activity declined to a mere $2.0 billion in 2008.
54
The merger of Royal
Dutch Shell and Shell Canada is estimated to add an additional $5.5 billion to the 2007 oil sands M&A
activity, pushing the 2007 total to $9.1 billion.
55

As the recession took hold, M&A activity remained weak during the 2008 to 2009 trough, at an average of
$2.4 billion, or just below 2005 levels.
56
While the Suncor/Petro-Canada merger created a significant
increase in the value of M&As in 2009, it was an outlier, and reflects the undervalued nature of Petro-
Canada. Including the Suncor/Petro-Canada merger, M&A activity in 2009 is estimated at $12.1 billion.
Oil sands M&A activity surged in 2010 to $13.2 billion, as a result of over a dozen mergers and joint
ventures announced, including the PTT Exploration and Production (Thailand) joint venture with Statoil,
S l with Total, the S C C S 1
of UTS Energy, and other sub $1 billion transactions.
57
Additionally, the level of activity in 2010 has set
new pricing points for oil sands resources, estimated at $1.37/bbl of recoverable reserves (Statoil deal),
58

as companies seeking a position in the oil sands are willing to pay a premium to secure one of the most
politically stable oil resources in the world. Although it is difficult to estimate the level of activity in 2011,
it is expected that the oil sands may take center stage in North American non-shale gas related M&A
activity.

54
CanOils
55
Peters, Terry, Asad Rawra, Canaccord Adams, Daily Letter, October 24, 2006.
56
CanOils, CERI
57
CanOils
58
Ibid.
May 2011
Figure 5.10
Oil Sands Mergers and Acquisitions
$0
$2
$4
$6
$8
$10
$12
$14
$16
2005 2006 2007 2008 2009 2010
Total 2010 - Q4 2010 - Q3 2010 - Q2 2010 - Q1 Petro-Canada
Oil Sands
Shell Canada
Oil Sands
C$ Billions
Source: CanOils, CERI

May 2011
Chapter 6
Transportation

The existing crude oil pipeline infrastructure underwent a much needed expansion recently, in order to
accommodate the growing volumes of oil sands production. A number of pipeline expansions were
completed in 2009, and 2 major additional pipelines became operational at the end of 2010. Furthermore,
additional capacity to major traditional markets and the US Gulf Coast will be available once other
scheduled pipeline projects are built and operating in the next few years. This chapter describes the
existing major crude oil pipeline network, and proposed expansions on the major pipeline routes (export
and domestic).
Current Transportation (Pipeline) Capacity
Given the production projection under the Realistic Scenario, the current pipeline infrastructure in
Alberta will not be sufficient to transport the forecasted oil sands volumes by 2024, and will need to be
expanded. Capacity additions are needed to both transport blended or upgraded bitumen to refineries,
and supply diluent/condensate necessary to operate the oil sands projects. Currently, as shown in Table
6.1, the capacity of regional oil pipelines that transport SCO and non-upgraded bitumen out of the Cold
Lake and Athabasca regions is almost 3.0 MMBPD.
1
The Cold Lake pipeline system delivers SCO and heavy
oil from the Cold Lake region to Edmonton, Lloydminster and Hardisty with a capacity of 1.0 MMBPD. The
capacity of the Fort McMurray pipeline system, which delivers crude oil from the Fort McMurray region to
Hardisty and Edmonton, is greater than that of the Cold Lake system, at 1.9 MMBPD.
There are 5 major pipelines that are directly connected to the Canadian supply hubs, which are located in
Edmonton and Hardisty, Alberta: Enbridge Mainline, Kinder Morgan Trans Mountain, Kinder Morgan
Express, Enbridge Alberta Clipper and the TransCanada Keystone pipeline. The Alberta Clipper and
Keystone pipelines commenced operations in 2010, adding 885,000 BPD of pipeline capacity out of
western Canada, and bringing the total export capacity to 3.5 MMBPD of crude oil, as shown in Table 6.1.
The bitumen production forecast, under the Realistic Scenario, suggests that excess pipeline capacity will
exist until 2024.

1
L8C8 A L 8 Su C - S1-2010, June 2010.
May 2011
Table 6.1
Alberta Regional and Export Pipelines
Name Type Destination
Capacity
(10
6
bbl/d)
Cold Lake Area pipelines
Cold Lake Pipeline Heavy Oil Hardisty 459.3
Edmonton
Husky Oil Pipeline Heavy Oil and SCO Hardisty 490.8
Lloydminster
Echo Pipeline Heavy Oil Hardisty 75.5
TOTAL 1,025.6
Fort McMurray Area pipelines
Athabasca Pipeline Semi-processed
product & bitumen
blends
Hardisty 390.1
Corridor Pipelines Diluted bitumen Edmonton 300.1
Syncrude Pipeline SCO Edmonton 388.8
Oil Sands Pipeline SCO Edmonton 144.7
Access Pipeline Diluted bitumen Edmonton 149.7
Waupisoo Pipeline Blended bitumen Edmonton 349.8
Horizon Pipeline SCO Edmonton 249.8
TOTAL 1,973.2
Export Pipelines
Enbridge Pipeline Crude oil Eastern Canada 1,868.0
U.S. East coast
U.S. Midwest
Kinder Morgan (Express) Crude oil U.S. Rocky
Mountains
280.0
U.S. Midwest
Kinder Morgan (Trans Mountain) Crude oil & Refined
Products
British Columbia 300.0
U.S. West Coast
Offshore
Enbridge Alberta Clipper Heavy crude US Midwest 450.0
TransCanada Keystone Light/heavy crude US Midwest 435.0
Milk River Pipeline Light oil U.S. Rocky
Mountains
118.3
Rangeland Pipeline Cold Lake blend U.S. Rocky
Mountains
84.9
TOTAL 3,536.2

Sources: (1) L8C8 A L 8 Su C -
ST98-2010, June 2010. CA C C l M !

May 2011
Transportation Capacity Expansions
Future plans include the expansion of diluent and feeder pipelines, as well as export pipelines, to carry
crude oil to various markets. Diluent and feeder pipelines in Alberta are expanding to transport diluent to
the region and growing bitumen volumes to the major hubs of Edmonton and Hardisty. These proposed
pipelines are shown in Table 6.2.
By 2016, the additional export pipeline capacity could reach approximately 2.3 MMBPD of crude oil, on
top of the current capacity of 3.5 MMBPD. The rate of expansion will greatly depend on market conditions
and regulatory approvals. In the end, producers will support the pipeline projects that will provide the
highest netbacks.
It is possible that pipeline companies may take on excess throughput risk in order to advance the
development of individual projects, and to provide shippers with attractive terms, thus reducing the
return on the project beyond an acceptable risk-adjusted level. Hence, not all of the proposed projects
will be completed.
Table 6.2
Potential Pipeline Expansions
Pipeline Type

Capacity
Increase
(MBPD)
W
Estimated
Completion
Date Market
Proposed Alberta Pipeline
Projects

Inter Pipeline Corridor Dilbit 165 2010-2011 Edmonton
Enbridge Fort Hills Diluted bitumen 250 N/A Sturgeon
Diluent 70 Edmonton
Total 485
Proposed Export Pipeline
Projects

Kinder Morgan
TMX2
Crude oil &RPPs
80 2015
US West coast/Offshore/Far
East
TMX3
320 2016
TMX Northern leg expansion Crude oil &RPPs 400 2015
British Columbia/US West coast/
Far East
Enbridge Gateway Crude oil 525 2015-2016
US West coast/Offshore/Far
East
TCPL Keystone XL expansion

700 2012 US Midwest/US Gulf Coast
Altex Energy Crude oil 252 2013-2014 US Gulf Coast
Total
2,277

Sources: L8C8 A L 8 Su C - S1-2010,
June 2010. CA C C l M !

May 2011
Figure 6.1
Alberta Existing and Proposed Regional Pipelines

S L8C8 As Energy Reserves 2009 and Supply/Demand Outlook 2010- S1-2010, June 2010.
Figure 6.2
Existing and Proposed Export Pipelines

S L8C8 A L 8 Su C - S1-2010, June 2010.
May 2011
Canadian crude oil supplies will continue to serve traditional markets in the US and Canada. The demand
for Canadian crude oil the US Midwest market will grow, as heavy oil refining capacity in the region is
added. However, growing volumes of Canadian bitumen supply means that new markets for these
volumes must be found. The US Gulf Coast is one such market, and the TransCanada Keystone XL pipeline
project, which is expected to be in service in 2012, will provide Canadian producers with increased access
to this market. The growing demand for crude oil in Asia could potentially create a new market for
Canadian crude oil. The Northern Gateway Project from Edmonton, Alberta to the deepwater port located
in Kitimat, British Columbia is being designed to provide 525,000 BPD of crude oil export capacity. Crude
oil would be loaded on tankers for delivery to the US West coast and Far East markets. Enbridge
submitted an application to the National Energy Board at the end of May 2010.

May 2011

May 2011
Chapter 7
Conclusion

t great economic potential, they also present
environmental challenges in the areas of greenhouse gas (GHG) emissions, air pollution, water, tailings
ponds and land. This may result in greater regulatory oversight, and an attempt to balance the economic
benefits associated with oil sands development, and the environmental impacts. Of the environmental
impacts, GHG emissions have received significant attention over the past few years, as projections of
natural gas use rise with production estimates. Applying emissions compliance costs to oil sands projects
can be viewed as one way to balance the environmental concerns and economic benefits associated with
the oil sands development. Another environmental impact, which has received negative media attention,
is the management of tailings ponds at mining operations. Environmental opposition to the oil sands
could potentially create a barrier to investment, and interfere with its future development prospects,
however, this is unlikely, as oil sands investments have been shown to be extremely profitable for oil
sands operators, as well as the provincial and federal governments. Additionally, given the growing

robust.
CERIRealistic Scenario strikes a balance between the environment and oil sands development, through
the inclusion of a modest emissions compliance cost. However, under the current method for calculating
compliance costs, the costs have little impact on total supply costs since they are royalty deductible.
Natural gas costs, construction, and other operating costs are estimated to have a significant impact on oil
sands developments. These costs, however, will be offset by higher oil prices which will ensure
profitability for most oil sands ventures, and substantial royalty revenues for the Government of Alberta.
Z/ ZKZ 10 percent,
with the exception of integrated mining and upgrading projects, and as high as 19 percent. The WTI
equivalent price for SAGD projects is $123/bbl, $128/bbl for Integrated Mining and Upgrading projects,
and $123/bbl for stand-alone Mining projects; SAGD projects receive the highest ROR. The plant gate
supply costs, which exclude transportation and blending costs, are $93, $100, and $93/bbl for SAGD,
Integrated Mining and Upgrading, and stand-alone Mining, respectively. While capital costs and the
return on investment account for a substantial portion of the total supply cost, the provinces per barrel
take is estimated at 18 to 22 percent.
The favourable project economics are expected to continue well into the future, and help drive oil sands
investment dollars by 2044. The investment will support the expansion of the oil sands, such that
production volumes will reach 2.1 MMBPD by 2015, and 4.8 MMBPD by 2030. By the end of the
projection period, raw bitumen production from the oil sands could exceed 5.0 MMBPD.
The environmental challenges to the oil sands have come into focus during the last 10 years. In that short
time span, the industry has started to implement gradual changes towards lowering GHG emissions,
May 2011
water consumption and minimizing the tailings ponds. Uncertainty and time remain key characteristics of
research and innovation. It is not known when and which of the technologies presently in the pilot stage
will become commercial successes. Given time, a continued steady pace of investments in research and
innovation, and sound government policy, it is reasonable to expect that the next 35 years will see the
implementation of new oil sands technologies that will dramatically reduce the environmental impact
while maintaining economic growth and the creation of high value employment in Alberta and Canada.
Canadian crude oil supplies will continue to serve traditional markets in the US and Canada. The demand
for Canadian crude oil in the US Midwest market will grow, as heavy oil refining capacity in the region is
added. However, growing volumes of Canadian bitumen supply means that new markets for these
volumes must be found. The US Gulf Coast is one such market, and the TransCanada Keystone XL pipeline
project, which is expected to be in service in 2012, will provide Canadian producers with increased access
to this market.
The growing demand for crude oil in Asia could potentially create a new market for Canadian crude oil.
The Northern Gateway Project from Edmonton, Alberta to the deepwater port located in Kitimat, British
Columbia is being designed to provide 525,000 BPD of crude oil export capacity. Crude oil would be
loaded on tankers for delivery to the US West coast and Far East markets.

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