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Genesis of a Giant

Peter McKenzie-Brown
Email: pmbcomm@hotmail.com
languageinstinct.blogspot.com
July 05, 2008



Thirty years ago this month, Syncrude produced its first barrel of oil. This article appears in the July 2008 issue of The Oilsands Review.

Syncrude triumphed over an era which was eerily similar to the one we’re in today.

Many commentators have remarked upon the likenesses between then, the 1970s, and now. A financial crisis in the United States led it in 1971 to end the link between the dollar and gold and to adopt a wave of protectionist policies. America and its allies were mired in interminable and expensive Asian wars. Because of high liquidity in capital markets, price inflation became endemic. Stock markets flattened and employment in non-resource sectors slumped. Rapidly rising food costs contributed to great suffering in the Third World, as it was then known, and to the poor in the richer countries.

After a 20-year decline, in 1973 real oil prices rose rapidly because of new demand, declining supply from key producers, and geopolitical events focused in the Middle East. The oil industry boomed; drilling, development and construction costs skyrocketed. As the decade wore on, the belief that oil was about to “run out” became widespread. So did the view that humanity would soon choke on its own pollution. By the end of that spooky period, forecasts of oil prices tripling from their already high base were common.

Given the similarities between that era and this, it is ironic that the early 1970s were a threat to Syncrude’s existence. The giant seemed doomed until three governments agreed to serve as midwives. This largely forgotten tale is an important part of the plant’s heritage. Few people remember that today’s world beater was nearly the victim of a breached birth.

Origins: For oilsands development to make any sense at all, Alberta needed appropriate policy. This is not a new idea. A hundred years ago Canada’s Senate held hearings on how to develop them.

Having established itself in 1930 as the rightful owner of the resource (by appeal to Britain’s Privy Council), Alberta’s government intensified its efforts to create a long-term policy just after the Second World War. The effort was short-lived, however, because of important discoveries of light oil at Leduc and elsewhere, beginning in 1947. Why develop the sands when high-quality crude was there for the pumping?

The province has always understood that its long-term future lies with the sands, however. Despite gathering volumes of conventional oil production, in 1962 the government announced an oilsands policy for the long term. In response, two proposals came forward. Cities Service Athabasca Inc. proposed a 100,000 barrel per day plant at the site of its Mildred Lake pilot project – the site of the Syncrude project. Including a pipeline to Edmonton, the plant was to cost $56 million, with construction beginning in 1965 and completion in 1968.

In that round the winning bid was for the much smaller Great Canadian Oil Sands Limited (today’s Suncor plant), which initially received approval for a 30,000 barrel per day plant. By the original terms of its license, production from the plant could not exceed 5% of total volumes in markets already supplied by conventional oil from Alberta.

For its part, Cities Service got a rejection letter. Undeterred, in 1964 the company assembled the Syncrude consortium, which later applied for a much larger (140,000 barrel per day) plant. The proposal received approval in late 1969. But before the plant shipped its first barrel of oil nearly ten years later, the project experienced a financial crisis.

Crisis: The reason for the long gap between approval and completion was an alarming escalation of costs besetting major North American projects. High inflation multiplied budgets for practically every aspect of the Syncrude project.

Reviewing project costs in late 1973, the Syncrude consortium found that costs had more than doubled, from $1 billion to $2.3 billion. One of the partners, Atlantic Richfield, needed cash to develop its Prudhoe Bay interests and frankly saw its Alaskan bonanza as a far more attractive bet than investing in the oilsands. In December 1974, the company withdrew its 30 per cent participation in the project. A few days later, the three remaining partners – Gulf Oil, Imperial and Cities Service – informed the Alberta government that they were unwilling to risk more than $1 billion on the project. They would need another $1 billion of risk capital if the project were to go on.

The prospect of Syncrude collapsing was a political and economic nightmare. The world was reeling from the oil crisis of the day. Policy-makers in the rich Western countries considered it a matter of national urgency to develop stable, secure energy supplies. The rich world was experiencing the worst recession since the Second World War, and Canada desperately needed economic stimulus. Because the oilsands were so large and development was so clearly possible, getting Syncrude back on track looked like Canada's best bet for both coherent policy and economic stimulus. From coast to coast to coast, Canadians came to believe the project must not falter.

Alberta reviewed the cost estimates given by the Syncrude consortium. When it found those estimates weren’t out of line, the province helped convene, in February 1973 in Winnipeg, a historic meeting between consortium members and governments. Three governments joined the consortium as commercial partners, thereby salvaging the project. The federal government took a 15% interest, Alberta 10% and Ontario 5%. Alberta also took full ownership in the no-risk pipeline and electrical utility. The private partners agreed to take a $1.4 billion interest in the project, but gave Alberta the option to convert a $200 million loan to Gulf and Cities Service into equity.

The Billionth Barrel: Syncrude went into operation in the summer of 1978 and produced 5 million barrels of oil within a year. World oil prices leaped skyward in 1979-80 and remained high for the first half of the 1980s. This helped Syncrude become successful financially as well as technically. The collapse of oil prices in 1986 – followed by 15 years of lower prices – intensified the organization’s incentive to reduce costs per barrel while increasing production. Production rose steadily in the ensuing years and, on April 16, 1998, the plant piped its billionth barrel down the line – five years ahead of schedule.

Ten years later, a counter on the Syncrude website zips along at a rate of four barrels a second, estimating the volume the plant has produced: as this magazine goes to press, about 1.9 billion barrels. A giant since inception, Syncrude is too big and complex to easily conceptualize. The largest producer of crude oil from oilsands, 350,000 barrels of oil pour from its processing vessels every day. Every twenty-four hours, the sands wear the metallic equivalent of two full-size pickup trucks off the plant’s mining equipment.

One of the most complex industrial operations anywhere, Syncrude operates the largest network of open-pit mines. It is Canada’s largest single source of oil, producing volumes equal to 15% of total national requirements. It extracts the raw oil known as bitumen from the sand and then turns it into the sweet light crude oil known as Syncrude Sweet Blend by processing it in vast upgrading vessels. The plant’s “synthetic crude” (hence the name) moves by pipeline to refineries in Canada and the United States.

Syncrude plans to increase production to about 500,000 barrels of crude oil per day within the next decade. As it does so – and as it has done for the last three decades – the consortium will continue to introduce new technologies and processes. These will improve the plant’s efficiency and reduce its per-barrel impact on the environment. During the next decade, the consortium estimates, its sulphur dioxide emissions will decline by 60% from today's levels. Reflecting efficiencies of scale and better technology, per barrel energy consumption will drop by 1% annually.

Today the technology is proved, and oilsands development is of global rather than national interest. Many policy-makers now view oilsands development as a critical source of relief for straining international supply. Sitting in the opposition benches are environmental and public health issues. Mainstream in a way they weren’t 30 years ago, they will threaten some of tomorrow’s giants.

Peter McKenzie-Brown
Email: pmbcomm@hotmail.com
languageinstinct.blogspot.com
July 05, 2008