The dominant source today of heavy oils is Canadian tar sands, and this will continue to be the case for at least a decade. (Note that we prefer to call this resource “tar sands”, as this is more accurate than “oil sands”. Bitumen is much more like tar chemically and physically than like oil.) There are even larger reserves of extra heavy oil in Venezuela, and China is making very large investments into developing this enormous resource. Venezuelan extra heavy oil production – currently about 0.3 Mbb/day – could reach 0.5 Mbbl/day in 2012 and twice that by 2016.

The order-of-magnitude increase in the price of oil in the past decade is not just from the effects of supply-and-demand on a simple commodity. It is also partly a result of a dramatic change in that commodity. The average crude oil todayis much harder to produce, has 30% higher sulfur and nitrogen contents, and it is 40% heavier (in viscosity) than the mean 12 years ago. Of course, most of the oils today are actually about the same as a decade ago. The decrease in the mean quality is because of the very low quality of most of the new oil – the extra heavy oils, mostly tar sands – that are being added to the mix. In 1995, heavy oil made up only 1% of the total. As of late 2010, extra heavy oil comprised 5%. Its share may grow to 10% by 2020 and 20% by 2030, depending mostly on how quickly the Venezuelan tar sands are developed.

Heavy oil is much more expensive to extract from the natural reservoir, to process, and to distribute. The primary addition to its cost comes in the refining, much of which must be done near the source. One of the major cost components is the hydrogen required. It is needed both for hydrocracking and for sulfur removal. Making usable transportation fuels from heavy oils typically requires about 0.05 tons of hydrogen per ton of heavy oil. The hydrogen normally comes from reformation of natural gas (NG), and its cost today is about twice (in constant dollars) what most refineries were paying in 1995. That price is likely to increase by another factor of four by 2020. (Some support for this projection may be found in the section on LNG.)

All heavy oils also are very high in deleterious nitrogen compounds (pyridines, diazas, carbazoles, and amides) which must be removed at the site, as they make the oil too unstable for distribution and long-term storage – especially because of exacerbated sedimentation. Most heavy oils are also very high in heavy metals that must be removed prior to most catalytic upgrading processes. The nitrogen and metal removal costs are often even greater than the hydrogen costs. Extraction costs of the heavy oil from the reservoir are also proving to be much greater than anyone expected evenin 2005. One factor is that labor costs in the boom towns around the reservoirs are three times what is generally seen in more normal manufacturing settings.

With most current processes, about 50% of the heavy oil has generally ended up as bottoms product and petcoke, which have high carbon content and very low value. Eastman and others are building large plants for gasification of petcoke, and these will improve its market value. Some of the recent tar sands projects plan to gasify petcoke (using partial oxidation and the water gas shift reaction) and thus eliminate their need for natural gas. (They have been building mountains of petcoke.)

Another significant factor in the future will be the cost of the carbon release associated with petcoke gasification and the reformation of NG to hydrogen. Typically, 3 tons of NG, 2 tons of water, and 4 tons of oxygen are used to produce a ton of H₂ and 8 tons of CO₂. At some point, it will become necessary to separate and sequester that CO₂ or pay an emissions tax of perhaps $80/ton.

The oil optimists are correct in saying that we will not reach the half-way point in our utilization of available “petroleum” for at least another three decades, but they have grossly underestimated its cost – partly because they have consistently, underestimated the future cost of natural gas and the cost associated with CO₂ release within another decade. The hydrogen cost alone may add $40/bbl to the cost of Canadian tar sands by 2020, and the additional oil clean-up costs could be similar. With sequestration of the co-produced CO₂, the production costs alone of the cleaned syncrudes may be $100/bbl by 2020, though the new plants that use gasified petcoke rather than natural gas may see a 30% savings in production costs.

A decade ago, tar sands projects were expected to be profitable with oil above $30/bbl. A recent assessment from FirstEnergy Capital is that oil needs to be above $115/bbl for some current projects to be competitive.

There are recent reports (WikiLeaks, Dec 2011) that China is getting some heavy oil from Venezuela for as little as $5/bbl. These sweet deals are a direct result of China having loaned about $20B in early 2010 to Venezuela – and invested another $20B since then, mostly in a CNPC-PDVSA joint venture and in several other smaller deals.

Within five years, as it becomes clear in most first-world countries, that mandatory emissions constraints are coming, initial capital development costs for tar sands will likely be over $40B per 100,000 bbl/day capacity (no cheaper than WindFuels). Amortization of the initial development costs plus site restoration may contribute $90/bbl to the product costs. Fuel products from many Candian tar sands projects begun after 2015 could cost over $170/bbl, though the production cost of Chinese-Venezuelan syncrudes could be under $70/bbl.

We have mostly discussed how the costs of oil from tar sands compares (or fails to compare) and it's CO₂ enviornmental impact. The following presents other concerns - the local enviornmental price that is paid for oil from tar sands. It is worth noting.

Best References:

Chinese global investments in development of heavy oil resources
http://www.bloomberg.com/news/2010-08-05/venezuela-cuts-20-billion-china-debt-with-200-000-barrel-shipments-of-oil.html


http://www.americanprogress.org/issues/2010/04/china_oil_map.html

http://www.pdvsa.com/

http://en.wikipedia.org/wiki/Orinoco_Belt

http://en.wikipedia.org/wiki/Oil_sands

StatOil Canada Tar Sands Production
http://www.statoil.com/en/NewsAndMedia/News/2011/Pages/27Jan_LeismerFirstOil.aspx

Canadian production likely to be 3 Mbbl/day by 2020 and 5 Mbbl/day by 2035. http://www.globalforestwatch.ca/climateandforests/TarsandsPollute/Timoney_and_Lee_TOConBJ.pdf

Elizabeth Kolbert, “Unconventional Crude”, Annals of Ecology, Nov. 12, 2007.

Tar Sands costs, 9/2008:
http://www.upstreamonline.com/live/article163609.ece

Everything by the Berkeley Energy and Resources Group
http://erg.berkeley.edu/index.shtml

Especially, the late Prof. Alex Farrel
http://erg.berkeley.edu/people/faculty/farrell.shtml

Visit the Farrel memorial blog.
http://inmemoriamalex.blogspot.com/2008/04/remembering-alex-farrell.html

OI Ogunsola and IK Bamwo, editors, Ultraclean Transportation Fuels, ACS Symposium Series 959, ACS, Wash, DC, 2007.