Turning Tar into Oil: An Economic and Environmental Disaster Looms

The invasion of Iraq has set off what could be the largest oil boom in history. All the signs are there: multinationals free to gobble up national firms at will, ship unlimited profits home, enjoy leisurely "tax holidays" and pay a laughable 1 percent in royalties to the government.

This isn't the boom in Iraq sparked by the proposed new oil law -- that will come later. This boom is already in full swing, and it is happening about as far away from the carnage in Baghdad as you can get, in the wilds of northern Alberta.

For four years now, Alberta and Iraq have been connected to each other through a kind of invisible seesaw: As Baghdad burns, destabilizing the entire region and sending oil prices soaring, Calgary booms.

Here is how chaos in Iraq unleashed what the Financial Times recently called "north America's biggest resources boom since the Klondike gold rush." Albertans have always known that in the northern part of their province, there are vast deposits of bitumen -- black, tarlike goo that is mixed up with sand, clay, water and oil. There are approximately 2.5 trillion barrels of the stuff, the largest hydrocarbon deposits in the world.

It is possible to turn Alberta's crud into crude, but it's awfully hard. One method is to mine it in vast open pits: First forests are clear-cut, then topsoil scraped away. Next, huge machines dig out the black goop and load it into the largest dump trucks in the world (two stories high, a single wheel costs $100,000). The tar is diluted with water and solvents in giant vats, which spin it around until the oil rises to the top, while the massive tailings are dumped in ponds larger than the region's natural lakes.

Another method is to separate the oil where it is: Large drill-pipes push steam deep underground, which melts the tar, while another pipe sucks it out and transports it through several more stages of refining, much of it powered by natural gas.

Both techniques are costly: between $18 and $23 per barrel, just in expenses. Until quite recently, that made no economic sense. In the mid-1980s, oil sold for $20 a barrel; in 1998-99, it was down to $12 a barrel. The major international players had no intention of paying more to get the oil than they could sell it for, which is why, when global oil reserves were calculated, the tar sands weren't even factored in.

Everyone but a few heavily subsidized Canadian companies knew that the tar was staying put. Then came the US invasion of Iraq. In March 2003, the price of oil reached $35 a barrel, raising the prospect of making a profit from the tar sands (the industry calls them "oil sands").

That year, the United States Energy Information Administration "discovered" oil in the tar sands. It announced that Alberta -- previously thought to have only 5 billion barrels of oil -- was actually sitting on at least 174 billion "economically recoverable" barrels. The next year, Canada overtook Saudi Arabia as the leading provider of foreign oil to the United States.

All this has meant that Iraq's oil boom has not been delayed; it has been relocated. All the majors, save BP, have rushed to northern Alberta: ExxonMobil, Chevron and Total, which alone plans to spend $9-$14 billion. In April, Shell paid $8 billion to take full control of its Canadian subsidiary.

The town of Fort McMurray, ground zero of the boom, has nowhere to house the tens of thousands of new workers, and one company has built its own airstrip so it can fly in the people it needs. Seventy-five percent of the oil from the tar sands flows directly to the United States, prompting Brian Hall, an energy consultant with Colorado-based IHS, to call the tar sands "America's energy security blanket."

There is a certain irony there: The United States invaded Iraq at least in part to secure access to its oil. Now, thanks partly to economic blowback from that disastrous decision, it has found the "security" it was looking for right next door. It has become fashionable to predict that high oil prices will spark a free-market response to climate change, setting off an "explosion of innovation in alternatives," as New York Times columnist Thomas Friedman wrote recently.