In late October, Gary Huston and I traveled to Fort McMurray to see first-hand the ongoing development of the Athabasca Tar Sands, which is destined to occupy a central role in the Canadian economy for the foreseeable future. A fluke of Alberta’s geology, oil-rich sands called “bitumen” ooze under almost one-tenth of the province, both north and south of this increasingly pros-perous and emerging city. We received a warm welcome from Fort McMurray Mayor, Melissa Blake, and learned much about the fu-ture economic opportunities and the challenges they can bring.

Peak Production Theory, Geo-Political Risk and the Tar Sands

Most Canadians grossly underestimate the importance of the oil sands. With proven recoverable reserves of 175 billion barrels, Alberta’s oil sands production can increase significantly far into the future. At current production rates, these reserves would last over 400 years! Large-scale development and significant increases in production rates are going to dwarf anything we have seen to date. Just as the Canadian Prairie was once touted as “the bread basket of the world”, this area is ramping up to deliver the crucial lifeblood of energy to both developed and rapidly developing world economies.

A theory first advanced in the late 1950’s by Dr. M. King Hubert (1903–1989) stated that all oil-producing nations would reach peak oil production from conventional reserves and then face an inevitable decline. Current research and experience indicate that this is already happening, on schedule, today. Canada’s oil sands reserves are one of very few supplies (along with Saudi Arabia’s giant Ghawar field) that can grow production over many decades to come. Canada has two significant advantages over our Saudi Arabian counterpart: proximity to the greatest oil consumers in the world, the Americans, and greater political stability. Most other oil-producing nations are already experiencing declining oil production, while global oil demands are increasing, fueled by general world economic growth and thirsty emerging economies in Asia (most notably China and India). China, France and other nations have already pur-chased a piece of the action in Fort McMurray to keep pace with anticipated demand.

Syncrude began producing oil 27 years ago, in 1978, and its production, currently at about 225,000 barrels per day, is expected to grow to over 500,000 barrels per day by 2015. We were fortunate to have a personal tour of their Mildred Lake project. “797” trucks the size of houses (the world’s largest truck, the 797 is capable of hauling 425 tons of bitumen) are loaded with bitumen by enormous shovels in just three scoops. The operation runs 24 hours a day, seven days a week, 365 days a year. Suncor, a pioneer in the oil sands business, began work there in 1967. Current capacity is 225,000 barrels per day, with a goal of over 500,000 barrels per day by 2010–2012. There are literally dozens of projects planned to start up or increase production over the next 20 years.

Concern over a shortage of both skilled and trainable workers has brought forth some unique solutions. Canadian Natural Re-sources Ltd., which just announced another major project initiative, has built its own Boeing 737-capable runway. The company is considering flying workers directly from the Maritimes to their Horizon oil sands mining project. The company’s oil sands leases con-tain between 9 and 10 billion barrels of recoverable oil, almost half of which rests under Horizon’s surface. The project is expected to generate 232,000 barrels per day of synthetic crude by 2012, with the first phase coming on stream in 2008. And so it goes.

World oil demands are not static; they’re accelerating while production is declining, presenting “the perfect storm” for an oil showdown in the coming decades. If the world suffers a conservative 2% annual decline in oil production from existing wells, 1.7 million barrels per day of new oil production will be required to maintain even current production levels.

Alberta’s tar sands development is rushing forward to meet this demand like no other world supplier, rewarding both investors’ and governments’ coffers. Our Fraser Financial Group “Preferred List” (see article in Vol. 14, No. 3 of The Fraser Report) includes a number of funds that provide direct exposure to the oil sands. See your advisor for a review of these.

If world oil prices rise too high, perhaps to $100 per barrel, global economies would be hit hard and economic recessions would dampen demand. World oil prices in the $50 to $60 barrel range are still well below the inflation-adjusted prices we saw in the supply-controlled oil market set by OPEC in the late 1970’s. At these prices, world economies can continue to afford to develop. At the same time, price levels in excess of only $40 are certainly high enough to make oil sands developments lucrative and to provide stimulus for development of alternative energy sources. Conclusion: We are well within the price range that makes oil sands development profit-able and sustainable.

The Bison

Development on the scale required to unlock these vast reserves creates enormous potential for environmental impact and will require constant attention from all of the players. Land reclamation and respect for the environment must remain a cornerstone of all development projects. The best scientific and engineering minds in the world are currently working on solutions.

Syncrude and other involved corporations have committed to returning this enormous chunk of Northern Alberta to its previous state, once oil sands production is exhausted many decades from now. Reclamation work is already well underway. More than three million tree and shrub seedlings dot the recovering landscape. Approximately 4,000 hectares of reclaimed land that has already given up its oil wealth is now home to 300 roaming “Syncrude” bison.

Let us hope that these efforts continue, and multiply, going forward.