Current issues in the Canadian oil sands

Alberta’s oil sands production is expected to increase to 3 million barrels a day in 2018. This prospect continues to attract significant investment in oil sands resources. For example, the US$2.28 billion partnership between Statoil of Norway and Bangkok-based PTT Exploration and Production in November 2010 introduced Thailand as the latest foreign player on the oil sands scene. Cenovus Energy has also been seeking suitors for a new oil sands joint venture.

Oil sands investors and prospective investors should be aware of the following issues.

Lower Athabasca Regional Plan

On 5 April this year the Alberta government unveiled its Lower Athabasca Regional Plan (LARP). The LARP has attracted the attention of oil sands operators because the Athabasca oil sands deposits contain about 80% of Alberta’s bitumen reserves.

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One of the highlights of the LARP is the proposal to set aside 20,000 square kilometres as conservation areas, which may result in the cancellation of some oil sands tenures in the region. The conservation areas are mainly limited to areas where there is no bitumen and the LARP prescribes compensation systems for affected tenure holders.

Alberta’s new premier recently announced however that she would “immediately suspend” the Alberta Land Stewardship Act, 2009, the enabling legislation for the LARP, pending public consultation.

Bitumen royalty-in-kind

Most Canadian refineries were designed to process conventional light crude oils. There has been a growing need for upgrading facilities to respond to the increase of heavy oil and bitumen production in Alberta. This need spurred the Alberta government to develop its bitumen royalty-in-kind (BRIK) initiative.

The government is entitled to take its royalty share of bitumen production either in cash or in kind. The BRIK policy was identified in 2008 as a method by which the government could use its share of bitumen strategically to supply potential upgraders and refineries in Alberta and to optimize its royalty share by marketing upgraded products.

In February this year, the Alberta government announced the first successfully negotiated contract under the BRIK initiative. Under the contract, a partnership of North West Upgrading and Canadian Natural Resources (CNRL) will construct a new upgrader in central Alberta.

Construction of phase one of the upgrader is targeted for completion in mid-2014. The phase one upgrader will process 37,500 barrels a day of government-owned bitumen in addition to 12,500 barrels a day of CNRL’s bitumen. The construction is expected to cost US$5 billion-6 billion and to be approved in early 2012.

The upgrader will be equipped to capture 1.2 million tonnes of carbon dioxide annually, which will be sold to Enhance Energy for use in the Alberta Carbon Trunk Line. Enhance is currently constructing the line to deliver carbon dioxide for enhanced oil recovery or storage in mature oil fields throughout south-central Alberta.

Keystone XL pipeline

TransCanada Corporation’s Keystone XL pipeline is a proposed expansion to the Keystone pipeline system, which transports crude oil from the Athabasca oil sands region to refineries in Illinois and Oklahoma.

The project would expand capacity by 500,000 barrels a day and extend the line to refineries along the US Gulf Coast. It is currently one of the most contentious topics in Canada-US relations and the North American energy industry.

The expansion is expected to cost US$7 billion. Reports suggest that US$1.9 billion has already been spent to secure land and equipment.

Canadian producers are eager to access alternative markets, which could narrow the spread between North American and European crude prices. Alberta industry representatives have indicated that rejection of the Keystone XL pipeline would strengthen the push for export routes to access Asian markets.

Opponents of the expansion cite environmental concerns, such as the potential consequences of a leak or spill along the route, and question the need to expand pipeline capacity between Canada and the US.

Project delayed

Canadian approvals for the project are already in place, while the US State Department has delayed its decision on the project until after the US presidential election in November 2012.

TransCanada had hoped to begin construction in January 2012 but the State Department delayed the project by ordering TransCanada to propose a new route. The previously proposed route would have run through areas of environmental concern in Nebraska.

TransCanada is now working to reroute the project in collaboration with the Nebraska government and the State Department.

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Don Greenfield is a partner and Chelsea Nickles is an associate at Bennett Jones. Bennett Jones is a leading Canadian law firm with over 400 lawyers in offices throughout Canada and in the UAE.