Savour International

Oil has been a source of wealth and prosperity for decades. Thus far, it has been pumped up out of the ground, but oil sands are now giving rise to a fresh gold rush in Canada - this time for black gold - and presenting an exciting investment story in the commodities sector.

The source of our prosperity

Oil is probably the most important commodity in today's industrialized society. It forms the basis for most of our fuels, provides comfortable heat and is used in the generation of electricity.

There are also many everyday items that are made using oil: we depend on it as a preliminary ingredient in upholstery foam, detergents and cleaning agents, PVC products, flooring, pharmaceutical products and even CDs and DVDs.

However, it is not just in western society that oil drives the engines of luxury - the Arabian oil producing countries have achieved a level of prosperity that would have been inconceivable 30 years ago. Oil is therefore rightly called "black gold". But how long can we continue to count on this luxury? Despite all the efforts to cut back, global demand for oil continues to rise unabated, and even an economic slowdown in the US or other industrialized nations can do little to curb this trend. However, oil as a natural resource is not an inexhaustible source of wealth and energy supply, so alternatives to traditional oil production are needed.

The black gold of the North, known for centuries

A rather special form of treasure lies buried beneath Canada and Alaska, namely enormous oil reserves, locked in sand and sediments. These oil sand deposits have been known about for a long time. The indigenous people living on the Athabasca River in northern Canada used the sticky black substance that oozed out of the ground to waterproof their canoes. Today the Athabasca oil sands and other deposits in the region are turbo-charging the Canadian economy - and represent a source of hope for global industry, which continues to cherish high oil production.

The oil that is urgently required worldwide is increasingly being produced in areas of Canada. In the north-east of the Canadian province of Alberta lies the town of Fort McMurray, until recently a sleepy fur-trading camp, but which now has more than 80,000 inhabitants. The inhospitable climate can see temperatures plummet as low as -50 °C in the winter, while in the summer they can reach 35 °C. Spread over an area of 77,000 km2 are the largest oil sand deposits that can be commercially exploited. Estimates put the oil reserves they contain at 27 billion metric tons.

High-tech production

To date, oil has primarily been pumped up from the depths of the earth in fluid form, and the technology for this is mature. Oil sands production is subject to different laws and requires new, sophisticated technologies given that oil sands are made up of sand, water and bitumen - a tarry mixture of hydrocarbons. The bitumen is split off from the sand using steam and highly specialized centrifuges.

The raw material is strip mined using excavators, conveyor belts and also pipelines. The largest excavators in the world scoop oil sand into special dump trucks that themselves weigh 200 metric tons and have tires that are four meters high.

One metric ton of oil sand ultimately produces 80 liters of pure oil. If we add to the conventional oil reserves the known deposits in the form of oil sands, Canada has the second largest reserves of oil in the world. Almost on a par with Saudi Arabia, Canada's oil reserves as a whole are bigger than those of Russia and Iraq together.

Are oil sands economically viable?

The ongoing shortage of oil as a commodity has sent the price of oil soaring in recent years. In addition to the insatiable hunger for growth and luxury, this is also attributable to a natural drop in production, estimated at 5% per annum. Extracting oil from alternative sources is therefore becoming increasingly appealing. In short, high oil prices and technical progress are making extraction from oil sands a lucrative prospect.

30 years ago, it cost USD 40 to produce a barrel of crude in this manner, which at that time was more than the oil sold for. Two effects have since created a completely new situation: new materials and innovative technologies have halved the production costs, while at the same the prices received for crude oil on the world market have more than doubled, passing the USD 100 per barrel mark for the first time at the beginning of 2008.

Most of the large oil deposits known to date have a strategic disadvantage: they are located in countries that are politically unstable. In the case of oil from Iran, Iraq, Venezuela or Russia, it is entirely questionable from a western perspective whether the supply of oil will be ensured going forward.

It is therefore all the more welcome that Canada has joined the illustrious ranks of the oil suppliers. As a country with a high level of stability, both politically and economically, it is a reliable partner for the western world that can guarantee access to oil as a commodity over the longer term. Some 70% of Canada's oil production today is already exported to its neighbor, the US.

New investments in oil

Oil sands are a highly interesting alternative to an investment in conventional crude oil. As is the case with oil, here too rising demand is meeting limited supply - an excellent investment scenario.

However, the interesting profit structure of the private production companies is another factor in favor of investing in Canada's oil sands. While the big multinationals have to buy a large part of their oil from the state-run firms of producing countries, in Canada they have direct extraction rights and profit directly from oil price rises. Since the price of oil shot up in 2007, production from oil sands has also been increasing. Given this scenario, oil sands firms are still cheaply valued.

You don't have to be a major investor to be able to participate in Canada's new black gold rush - oil sands certificates also allow private investors to profit. The specialists at your bank will be happy to advise you.