A Different Kind of 'Beverly Hills': Pricey A Different Kind of 'Beverly Hills': Pricey Canadian Oil Fields
by Ian McKinnon Bloomberg News International Herald Tribune Tuesday, February 21, 2006
Canada's hottest piece of real estate is not much to look at, a mix of swamp and scattered spruce and pine trees in northern Alberta. But underneath the surface lie the oil sands, by some measures the world's largest petroleum reserves outside Saudi Arabia.
To tap the deposits, Royal Dutch Shell and other companies are paying record prices for undeveloped land. Already this year, the province of Alberta has raised more money from oil sands leases than the record amount earned in all of 2005.
The oil sands have "become the Beverly Hills of the oil patch," said Gregg Scott, president of Scott Land & Lease, which is based in Calgary and is Canada's biggest land broker.
"This is the most high-profile play I've seen in my 24 years as a broker."
Producers are searching for new sites to develop oil sands as Asian countries buy more fuel and the United States seeks alternatives to supplies from the Middle East. Oil companies are expected to spend about 73 billion Canadian dollars, or $63 billion, over the next 20 years to increase output in Alberta, according to the Alberta Energy Ministry.
Synenco Energy, which is based in Calgary and is developing a 5.3 billion-dollar project with SinoCanada Petroleum, began the rush in September by paying what was then a record 75.9 million dollars for 22,773 acres, or 9,216 hectares. SinoCanada Petroleum is a subsidiary of the Chinese company Sinopec Group.
Todd Newton, president of Synenco, said that "we were quite nervous" about the bidding. Newton said he had learned of the outcome after hearing "loud whooping" from employees who were monitoring the government Web site.
That exuberance has not abated. Alberta's total for oil sand land sales has reached 846.3 million dollars from three auctions so far this year, eclipsing the record of 433.1 million dollars set in 2005 from 21 auctions, according to provincial government data.
Producers and land agents, used by some companies to disguise their identities, paid 867 dollars an acre for leases this year, almost double the amount paid last year. Some clients were stunned after losing land auctions to bids triple their offer, said Scott, the land broker. The oil sands, about 750 kilometers, or 460 miles, north of Calgary, are estimated to contain 175 billion barrels of recoverable oil, second only to the estimated 259 billion barrels in Saudi Arabia, according to the Canadian Association of Petroleum Producers. The oil sands have helped Canada become the biggest supplier of oil to the United States.
Oil sands output in Alberta is forecast to triple in the next nine years, to about three million barrels a day, according to a report in December from FirstEnergy Capital, a brokerage firm in Calgary. That level would almost equal the current output from Algeria and Libya combined.
If the deposit is less than 75 meters, or 230 feet, underground, the oil can be extracted through strip mining, which can cost 25 dollars a barrel, compared with 12 dollars for traditional pumping.
If the reserves are found to be deeper, companies inject steam into the ground to soften the heavy oil, or bitumen, to extract it, driving up the price of production.
Companies are more willing to use the expensive methods because they are confident that the projects will be profitable as rising demand lifts prices, said Wilf Gobert, vice chairman of the Calgary brokerage firm Peters.
Most oil sands deposits are economically feasible as long as oil prices are higher than $30 a barrel, or about half the current price of crude.
Even if these projects are never developed, there are clear winners from the land auctions: the Alberta government and its taxpayers.
With surging revenue from oil and natural gas, Alberta has achieved budget surpluses for the past 12 years, making the province the only debt-free region in Canada. The province's premier, Ralph Klein, this month sent each person in the province a check for 400 dollars to share the wealth.