The first things you notice when you reach Canada's notorious tar sands are the mountains of fluorescent yellow: sulphur, sitting uncovered beneath the blazing sun. "The market for it collapsed," says my guide, "so it just sits here."
Then, next to belching plants, you spot black lakes of bitumen, sand, silt and water. Gunshots sound periodically, warning innocent birds away from their last bath. Prepared for the worst, you crest a hill and the panorama of the tar sands opens in front of you. It is a picture of ecological devastation on a colossal scale, the result of the world's addiction to oil combined with the gargantuan force of some of the globe's biggest energy companies brought to bear on a pristine landscape.
These are the "oil sands" of northern Alberta—rebranded from "tar sands," which makes them sound too dirty—the world's most strategically important energy development of the last decade. A mixture of bitumen, clay, sand and water, they lie beneath the surface of 140,000 km2 of "muskeg," a Canadian term for the wooded boreal bogland that stretches across much of the country's north. The bitumen is concentrated around two of Canada's biggest rivers, the Athabasca and Peace, and Cold Lake. Most of this is in the western Canadian province of Alberta (pictured, below right), although some of the bitumen stretches into Saskatchewan, to the east.
The oil reserve is the largest in the world: some estimate that beneath the muskeg lie up to 3 trillion barrels of oil. That figure is largely irrelevant, because the only oil that matters is the kind that can be extracted. But even so, proved recoverable reserves—the amount of oil that can be extracted using existing techniques—are thought to be around 175bn barrels, making them second only to Saudi Arabia's estimated 264bn barrels.
So it's no wonder that one frequent visitor to what George W Bush calls the "tar pits" has been Samuel Bodman III, the US's energy secretary. The US has spent decades scouring the planet for reserves to reduce its dependency on middle eastern hydrocarbons. As luck would have it, they are to be found just north of the 49th parallel, in a country many Americans consider a frozen, slightly quirky 51st state. "Why is our oil under their sand?" asks a popular American bumper sticker. Now the sand is Albertan, not Arabian.
But one effect of the $100 barrel is to make alternative sources of energy—and of oil—more economically viable. The discovery of the giant Tupi oil field off the Brazilian coast last November is a perfect example. Drilling in deep water to look for oil in the "pre-salt," a geological formation that has scarcely before been tapped, was only undertaken because the current high price of oil makes such expensive operations attractive to companies. Tupi could be the tip of a very large offshore field.
But the biggest beneficiary of the high oil price has been Canada and its oil sands. As an unconventional source, the oil sands were until recently simply too costly to bother with. As recently as the mid-1990s, extracting a barrel of oil from the tar cost around $35. When oil prices were hovering around $10 a barrel at the end of the last century, the few companies involved in the oil sands were making a loss. That forced the developers to cut their expenses and become more efficient.
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This wasn't easy, because extracting the bitumen from beneath the muskeg and turning it into something that fuels an engine or makes a plastic is an expensive and energy-intensive process. For now, most of the tar extraction takes place near the surface, which allows it to be mined. Huge cutters tear up the topsoil, using enough electricity to power a city of 40,000. The tar beneath is dumped into 400-tonne trucks that haul their load to nearby plants where the oil sand is mixed with hot water to create a slurry, which is then separated into sand, water and bitumen. Refineries can't handle the heavy bitumen, so first it goes to upgrading plants where its molecules are reorganised and some of the impurities—like the sulphur that gets left to rot under the open sky—are removed to leave synthetic crude. It is this "syncrude" that is then exported and refined into oil products like fuels and plastics. The oil companies have whittled this process down to one that costs them $15-20 a barrel. And with long-term oil price futures trading at over $80 a barrel, the oil sands are now very profitable.
Every major oil company is under pressure to replace its reserves. Outside of Canada, that has become tough. Operating in other big oil-producing countries has in recent years become far riskier politically, as the balance of power has shifted away from "big oil" to energy-rich governments. So now the companies are flocking to Alberta. BP, the only large western oil company that seemed wary of the oil sands, recently joined the rush. Shell has bought control of its local subsidiary.
The companies that operate in the oil sands say they will spend some C$100bn (roughly £50bn) there in the next decade. That should increase output to 4m barrels a day in 2020, compared with 1.3m barrels a day now.
The charge to the oil sands has turned Fort McMurray, once a trading post but now the centre of the boom, into the kind of frontier town northern Canada last saw during the days of the Klondike gold rush. The population of "Fort McMoney," as some call it, could grow to more than 120,000 in the next few years from around 40,000 in the early 1990s. For a town where the temperatures range from -40 degrees Celsius on a winter's day to +40 in the summer, that is some achievement.
The climate isn't the only thing that is extreme about "Murray." "It gets wild," one local told me when I was there. "Guys spend hundreds of dollars a night on booze and drugs. And they fight." Casinos and prostitutes have followed the money to the city. Property prices are among the highest on the North American continent—if somewhere to live can be found at all. Drive for long enough on the clogged roads around the oil sands and you'll see tent camps and barracks housing thousands of "roughnecks" who have doubled their money by coming to Fort McMurray.
Alberta is quickly turning into a petro-state. The energy sector directly or indirectly employs one in six workers. Farmers in the breadbasket of the country have dropped dairy and ranching to work in construction. And yet there are still skill shortages. Some oil companies have taken to flying workers in from as far away as Newfoundland, 4,000 km from Fort McMurray. The men stay for a two-week shift before flying home again in the company's charter. The companies have cut runways into the muskeg to land their planes. Alberta is pressing the federal government to relax rules on immigration to feed the talent pool. "We need welders," one executive told me. "Why don't you become a welder?"
The consequences of this boom seem scarcely to bother politicians in Alberta. It has always been a boom and bust sort of place, with a more American, laissez-faire culture than most of the rest of Canada. "We're not dirigiste," one minister told me, "but we might have managed this boom differently."
The political and business capitals of Alberta—Edmonton and Calgary—are undergoing their own booms. Calgary, once a prairie town whose chief attraction was its proximity to the ski slopes of the Rockies, is now Canada's most dynamic city. Ironically, given its role as the corporate centre of the oil sands, it is also the world's cleanest city, according to the consultant Mercer. Buildings go up with Dubai-like speed. EnCana, one of the giant companies of the sector, has commissioned Norman Foster to design "The Bow," a new 236m-high skyscraper that will be a suitable testament to Calgary's self-confidence. Torontonians still scoff at western Canadians for their backwardness. But the money, power and new immigrants are heading for Alberta, not Ontario.
Yet all this brings problems. Calgary is unlikely to stay the cleanest city on the planet for much longer. A grey pall of smog already hangs over Canada's SUV capital. And Calgary's sprawl is spreading across the prairie that lies to its east, north and south; if the city could bulldoze through the First Nations reserve that borders its west, it would. And while small government in Alberta might be good for the oil sands, it isn't getting much infrastructure built. With a $6.8bn budget surplus from oil revenues in 2005, Alberta's then premier, the Falstaffian controversialist Ralph Klein, gave each citizen of the province a C$400 "rebate," at a total cost of C$1.4bn. Critics said the money could have paid for a high-speed rail link. Or it could have been invested in the province's rainy-day fund, which stands at around $12bn, compared with Norway's $200bn.
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That would entrench Canada's steady transformation into a petro-state. But not just any petro-state: one that is, effectively, also a client state of the US. For the foreseeable future, the US is likely to be the only significant importer of Canadian oil.
That could prove politically unpopular with many Canadians, whose national identity is partly based on not being American. Moreover, Canada doesn't refine any of the oil it produces itself. This means that while Alberta sells its bitumen or syncrude at a far cheaper rate than West Texas Intermediate, the benchmark crude in New York, the buyers can upgrade and refine it into far more valuable products. With WTI trading at around $90 a barrel, Alberta's bitumen goes for less than $70 a barrel. If the bitumen were all upgraded and refined in Alberta, it could sell the products to the US at anything from $200 to $1,000 a barrel.
Alberta wants to persuade companies to build new upgrading capacity and refineries in the province, but this is unlikely to happen. American companies want their products close to market, and the prospect of buying products at the higher price is hardly attractive when the same companies who are producing the oil in Canada can refine it in the US.
With only one real buyer for its oil, Canada's international power relative to its oil production is minimal. Exporting to China could change that. One proposal is to build an export pipeline from the oil sands to the British Columbia coast. That would open up the prospect of exports to Asia. Chinese companies have become regular visitors to Calgary. One of them, Sinopec, is involved in an oil sands joint venture. But despite the Alberta government's public willingness to see Chinese companies participate in its energy sector, privately, officials say exactly the opposite. And following the takeover of assets in Alberta by Abu Dhabi's state energy company Taqa, the federal government now plans to prevent foreign state companies from buying control of "strategic" assets.
If this recalls the US's protectionist measures to stop China's CNOOC from buying the US oil company Unocal in 2005, that is no coincidence. The prospect of Chinese companies, which are already supplanting US oil interests in Africa and the middle east, encroaching on the Canadian oil sands might be too much for Washington. Stephen Harper's Conservative government in Ottawa, although no poodle of the US, is unlikely to want to challenge America on this. The real test will come if, as rumoured, CNOOC or another Chinese company seeks to buy Suncor, one of the biggest oil-sands producers and, as the original developer, the one that most symbolises the project.
However the politics of the oil sands are resolved, ecologically the sands are a disaster. Beyond the casinos and prostitutes, which will disappear the next time a drop in the price of crude sends the companies packing, is the devastation to the boreal landscape in an area twice the size of Ireland. Strip-mining for the oil, the main way to get at the tar, involves the world's biggest cutters and dump-trucks removing a whole layer of muskeg and turning the area into a giant sand pit that is, apparently, visible from the moon.
Producing the oil is very energy-intensive. According to local petroleum historian David Finch, to produce one barrel of oil involves processing two tonnes of sand. The Pembina Institute, a local environmental think tank forging a lonely path in a province that pays scant regard to ecology, says that the traditional mining methods require 750 cubic feet (cf) of natural gas to produce one barrel; that can increase to 1,500 cf using newer techniques. At current production rates, says Pembina, the oil sands consume about 600m cf a day of gas—equivalent to the daily consumption of 3.2m homes. As Dan Woynillowicz, an analyst at Pembina, points out, it means a relatively clean-burning fuel (gas) is being used to produce a relatively dirty one (oil). And Alberta is running out of gas: the province says it has just nine years left at current rates of use.
Water is another problem. Five barrels, sourced from the Athabasca river, are needed to produce one barrel of crude. Less than 10 per cent is returned to the river; the remainder sits in those lethal trailing ponds, before seeping back into the earth.
And then there is climate change. Producing synthetic oil generates three times as much greenhouse gas as production of conventional oil, and the oil sands are the largest single contributor to Canada's greenhouse gas emissions. Pembina says that Canada's "Kyoto gap"—the amount by which annual emissions must be reduced to meet the Kyoto target—had grown from 138m tonnes in 1997 to 270m tonnes in 2005. Given the contribution the oil sands make to Canada's economy, it is easy to see why Ottawa is a Kyoto sceptic, despite having ratified the treaty.
The producers have answers to all this, of course. One proposal is to build a nuclear power station that will supply the electricity to heat the steam used for much of the injection into the oil sands. Other new techniques, like one called "toe-to-heel air injection" and another that involves injecting solvents into the sands before they are mined, could also reduce the amount of natural gas and water used in the extraction process. As for the boreal landscape, the province says the oil companies must restore the land after it has been mined. Whether that is even possible is debatable. And none of the land that the companies say has been restored has yet been certified as such by the province.
Canada's oil sands are a boon to the country, and the arrival of another big producer alongside Saudi Arabia and Russia could transform international oil politics. But as a metaphor for how damaging our addiction to oil has become it is hard to beat the tar sands of Alberta.
