The SEC and Oil Sands: Is it all smoke and mirrors?
Posted July 21, 2009 at 10:33 am 
Filed in: Recent confusion regarding Exxon’s ability to replace reserves has caused many in the oil industry to take a closer look at the make-up of its resource base. Exxon’s 2008 annual report shows a 103 percent rate of output replacement-totaling 22.8 billion barrels of oil equivalent (bboe), which the Financial Times claims should have eased analyst concerns about the future of the world’s biggest publicly listed oil company. And yet, for the same year, Exxon’s 10-K filing to the U.S. Securities and Exchange Commission (SEC) shows reserves replacement reaching just 21.1 bboe.
Why the discrepancy?
The reason for this difference is the addition of oil sands, although next year’s 10-K shouldn’t convey the same disparity. SEC’s current definition of oil and gas producing activities excludes sources from non-traditional or unconventional sources, such as bitumen extracted from oil sands. As of January 1, 2010, however, the SEC’s definition will be revised to include these unconventional sources, intending to shift the focus from oil-producing activities to the final product, regardless of the extraction technology used. It looks like those oil company lobbyists have been very busy! Of course, Exxon is just one of many IOCs active in oil sands. Chevron is another key player, with a 60 percent interest in the Ells River oil sands, and 20 percent in the Athabasca basin.
Is the SEC’s modification a shift toward less transparency, or simply a better reflection of today’s extraction methods? First, let’s look at the basics. Many oil source rocks are formed from plankton deposits on the sea floor. Pressure and depth determine reservoir temperature (thermal maturity), which also influences if they are found in solid, liquid, or gaseous form. The sweet spot for this high organic carbon content lies between depths of 7 and 15 km, where we typically find liquid oil. Any shallower and you’ll find oil shale or oil sands, also known as tar sands due to their viscosity. Oil sands are a combination of sand, clay, water, and bitumen, the tar like form of petroleum. Since oil sands are not liquid they can’t be drilled like conventional oil. Those found at the shallowest depth are mined, although about 80 percent of the Canadian resources are likely to be extracted using one form or another of steam-assisted gravity drainage (SAGD). This process uses steam wells to reduce the oil sands’ viscosity, after which they drain into a nearby production well.
The complexities of the extraction process are a major concern for those considering the cost of oil sands versus conventional oil. Oil sands extraction uses more energy and more water than conventional oil production. Per barrel of bitumen, oil sands SAGD production averages .9 barrels of water, while conventional oil uses only .1-.3 barrels. With cap and trade legislation looming in the distance, there are also concerns with oil sands’ contribution to greenhouse gases (GHG). Using a well-to-pump lifecycle basis, GHG emissions from oil sands can be up to two times higher than conventional crude oil.
Taking energy and water use into account, it may come as no surprise that the threshold crude oil price for Canadian oil sands is around $60-85/bbl (see CERA report). As oil prices declined after the summer of 2008, more than 70 percent of proposed oil sands projects were postponed. Considering recent oil prices, should Exxon’s oil sands production put any analysts at ease? Probably not. Do oil sands reduce America’s dependence on oil? Certainly not-increasing supply does not reduce demand. How about OPEC oil? Well, there may be a little hope there. Our friendly democratic neighbors to the north, Canada, may increase their share in U.S. oil and petroleum product imports should oil sands grow.
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