A Line in the 'Sands

Extracting, pumping, and piping Alberta's most important liquid: water.
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The Canadian oil sands are one of the most hotly debated environmental and economic issues in the world today. The third largest oil deposit in the world, with over 150 billion barrels of proven oil reserves, the oil sands currently produce 1.7 mil- lion barrels per day (bbl/day), and their output is forecasted to increase to 4.5 million bbl/day by 2025. At expected oil prices of US $94 per barrel the Canadian oil sands will generate over $400M in revenue every day. However, for oil sands production, a secure and sustainable water supply is vital. Many producers lack a definite, long-term plan regarding the water supplies upon which their businesses depend. Enter the Regional Water Management Initiative (RWMI), a collaborative water supply project that will revolutionize the flow of water in the oil sands, providing not only economic benefits to the stakeholders, but the environmental peace of mind sought by activists.

Oil Sands 101

Two techniques are used to develop oil sands deposits: mining and steam assisted gravity drainage (SAGD). The mining method works at sites where the oil sands are within 60m of the earth’s surface, and involves physically digging up the oil sands and processing them at a nearby facility. Water and chemicals are used to separate the bitumen, a type of heavy oil, from the sand. The chemicals are then recovered and recycled, but the water and sand (tailings) are stored in large ponds. These tail-ings ponds have high levels of sand and dissolved solids– both of which can cause environmental damage. These ponds are not removed because they serve as water reservoirs for continuing operations. Each mine has built up significant tailings reserves over the course of its operation. This is the supply of water.

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In SAGD production, steam and solvents are injected into the deeper oil sands reservoirs through a horizontal injection well. Steam heats the oil sands, decreases its viscosity, and allows the oil to drain to a lower producing horizontal well that pumps the oil out of the reservoir. Although the majority of the inject- ed steam is recovered, there are some losses to both the reservoir and the cleansing operation. This is the demand of water.

The mining process accounts for over 50% of current production, but only 20% of total oil sand reserves. As a result, future oil sands development will be primarily through SAGD extraction and will require significant additional water resources. This demand can be met by the large volumes of water from historical mining production currently residing in tailings ponds. After existing tailings ponds are depleted, the infrastructure could still be used to transport water to the SAGD sites. Mining sites are very close to the Athabasca River, a significant source of water. Mines have the ability to use clean water sources to reduce the concentration of dissolved solids in their tailings ponds. Water withdrawn from the Athabasca River would be used as process water and an equivalent volume of tailings water could be sent to SAGD facilities. This would reduce the environmental risk associated with tailings ponds, while simultaneously providing an indefinite supply of water to SAGD facilities.

The Regional Water Management Initiative is a large-scale infrastructure project, which would process water from the tailings ponds at mining sites and then transport it to the SAGD production facilities to connect water supply with demand. Two significant infrastructure components are necessary to execute RWMI: a tailings water treatment plant, to rid the water of contaminants, and a pipeline to carry the water to the SAGD facilities.

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The Rationale

Mining Sites:

In the long term, RWMI will allow the mines to remove the cost- ly tailings pond remediation liability. Over the short term, mines will be able to simplify their operations and, in some cases, be able to extract additional bitumen deposits currently submerged under tailings ponds. At the oldest mining sites, development projects are being delayed due to the presence of tailings ponds.

SAGD:

SAGD facilities benefit by securing a sustainable long-term source of water. Ground water movement is an extremely complex science, and it can take years of monitoring to understand replenishment rates. As a result, many SAGD facilities are drawing underground water sources without understanding their replenish rates of the aquifers which they draw upon. The RWMI project is a significant step towards mitigating the risks associated with water supply and, due to water’s crucial operational role, the project as a whole.

The Economics:

RWMI lowers environmental risks and operating costs for oil sands companies. The infrastructure will be built to han-dle roughly 20,000m3/day – enough to process the 150M m3 in excess tailings water expected to be available over next 20 years. RWMI’s expected cost is $350M dollars: $125M for the treatment plant and $225M for the pipeline network. The cur- rent combined price mines pay to remediate tailings water, and SAGD facilities pay to extract water ranges between $12/m3 and $15/m3. At an expected cost of capital of 10% the RWMI only needs a combined price of $8.40/m3 to break even.

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The Environment:

This project effectively eliminates water withdrawals required by SAGD facilities and reclaims tailings ponds at a much earli- er date than would otherwise be financially prudent for min- ing companies. Considering the Canadian public’s growing in- terest in oil sands’ environmental issues, this project could help ensure that producers have the social license to develop these large resources. RWMI also allows large mining sites to sig- nificantly mitigate future risk by starting the remediation pro- cess on these tailings ponds now; if a tailings pond dam fails in the future, it could lead to catastrophic environmental effects.

The Problem

The Canadian Oil Sands Innovation Alliance is gathering support and performing scoping studies for RWMI. At present, however, they are struggling to make headway. Competing oil and gas com- panies have significant intellectual property related specifically to the oil sands and unique technologies for extraction processes. These companies are hesitant to commit to RWMI at the risk of los- ing their technological advantage. Oil and gas exploration compa- nies’ high risk profile and consequently high cost of capital makes expensive and long-term projects like RWMI a poor fit for these organizations. These firms also lack experience building or operating water treatment facilities (of this type and size) or large trans- mission and distribution pipelines. Due to the inherent inertia and misalignment of firm strengths, there is an opportunity for infrastructure companies to build the water treatment plant and pipe- line, and charge the oil producers for their use. Enter third parties.sands4

The Help

Water Treatment Side

Veolia Environment is well positioned to build, own, and operate the required tailings water treatment plant because it has significant experience constructing and operating similar projects. It has a lower cost of capital than oil sands companies (6-7% vs. 8-10%), which makes it better suited to finance the project than other stake- holders. Veolia does not pose a threat to oil producers with regards to intellectual property, so such concerns would be mitigated.

The company has built 35 water treatment plants, which they currently own and operate in Canada. The required capacity for the RWMI, of 20,000m3/day, is well within Veolia’s logistical and financial capabilities, as demonstrated by the fact that Veolia built and operates a 45,000m3/day water treatment plant in Qatar.

RWMI would complement Veolia’s strategic efforts to expand its presence within Alberta and the growing oil sands industry. The project would allow Veolia to compete directly with General Electric’s (GE) Power and Water division. GE recently began a collaborative project with the Alberta Water Research Initiative to improve the treatment and reuse of water in oil sands operations. By providing this service, Veolia is able to develop relationships with some of the largest players in the oil sands. Veolia can potentially parlay these relationships into large contracts in the facilities space, where projected capital expenditures are $20B according to the Canadian Association of Petroleum Producers.

Transmission and Distribution

This opportunity is also appealing to a pipeline company such as Pembina Pipelines, Inter Pipeline, or Enbridge for its potential returns and positive public relations. These three firms all have knowledge in the oil sands space, and the ability to finance, construct, and operate a project of this scale. More importantly, each firm already has existing infrastructure, right-of- ways (a legal right to run a pipeline across a track of land), and construction knowledge that can be used to their advantage.

All three companies have a financial and strategic commitment to the Canadian oil sands, but Enbridge’s unique access to both SAGD and mining facilities make it the best candidate for involvement in RWMI. Pembina and Inter Pipeline both move bitumen from mining sites near Fort McMurray south to Edmonton where- as Enbridge’s Athabasca pipeline, serves both mining and SAGD facilities. Enbridge also has the lowest cost of capital of the three at 5.7% vs. 6.7% and 7.9% for Pembina and Inter Pipeline, respectively. Furthermore, RWMI presents an opportunity for Enbridge to bolster its public relations considering recent backlash with regards to its Northern Gateway project. The innovative RWMI has government support, meaning it has potential to be a highly publicised infrastructure project for its positive environmental benefits.

Deal Structure

For any third party, a crucial component of the RWMI project is limiting downside. Veolia and Enbridge would not commit significant capital to the project unless the service had fixed-term contracts. This is common in the oil and gas industry, though normally it applies to shipping oil and gas rather than water. Regardless of the fluid, it is realistic to expect the large mining sites and SAGD sites to commit to long-term supply and off-take contracts, respectively.

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The Solution

The RWMI has potential to deliver cost and strategic benefits to operators of mining and SAGD projects, water treatment facility producers, and pipeline companies. It is difficult for oil and gas producers to complete this project themselves. Fortunately, third parties can utilize their strengths in water treatment or pipeline transportation to fulfill the needs of the RWMI. Veolia Environmental should construct and operate the 20,000m3/day water treatment plant while Enbridge should build and operate the pipeline connecting the mines to the SAGD sites. The firms will sign agreements to control the water flow between their respective facilities, all the while negotiating contracts with their respective customers. It is clear that the RWMI presents an opportunity for a variety of play- ers to enter the lucrative oil sands industry with an innovative solution that is both economically viable and environmentally friendly.


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