Where Oil Is Mined, Not Pumped

High Demand for Petroleum Makes a Boomtown in Northern Alberta

FORT McMURRAY, Alberta -- Along Highway 63 here the rolling hills give way to massive open pits, huge waste ponds and tangles of pipes and refining equipment that spew smoke into the air.

In the pits, shovel trucks load dirt into dump trucks that are so gigantic a driver has to climb a ladder attached to the front grille to get behind the steering wheel.

The changing landscape reflects an ambitious quest to develop a new source of oil. Major companies -- faced with tougher prospects for developing big new oil fields around the world -- are doing what was once unthinkable: sinking billions of dollars into projects to wring oil out of deposits of petroleum buried amid sand and clay.

Until a few years ago, such projects -- called "oil sands" or "tar sands" -- sputtered at the fringes of the oil industry. But since technological breakthroughs brought down costs and oil prices have soared, companies have been investing heavily here. Oil-sands production is now profitable when a barrel of oil sells in the low $20s, analysts said -- far below the recent $50 range.

Just outside this boomtown, huge machines dig up the earth and remove the oil sands, whose deposits of a substance called bitumen smell something like roofing tar and are as thick and sticky as molasses. Companies are mining hundreds of feet deep and running the unearthed deposits through a complex process to convert them into oil. Companies move enough dirt and oil sands in two days to fill Yankee Stadium.

Factoring in the oil sands, Canada's proven oil reserves are reported to be nearly 180 billion barrels, second only to Saudi Arabia. U.S. energy officials say Canada's oil-sands deposits are among the largest in the world. The oil sands are buried under an area about the size of New York state. Fort McMurray, the hub of oil-sands activity, boasts on billboards: "We have the energy."

The oil sands also are enriching the province and creating thousands of high-paying jobs. On the edge of town, a modern museum has interactive exhibits showing how the mining and refining processes work. One exhibit allows visitors to smell samples of the oil sands. "As we call it: Sniff the smell of money," said Bert MacKay, the museum supervisor.

Companies here are producing increasing amounts of oil from this unconventional source -- about 1 million barrels a day. If all of that oil went to the United States, it would amount to roughly 5 percent of daily consumption. In 1995, oil derived from the sands was less than half the current amount. Alberta officials expect production to triple from today's level by 2020.

Oil companies have been struggling to replace aging fields whose production has tapered off. Many have been frustrated by oil-rich countries in the Middle East and elsewhere that refuse to open their doors to Western companies.

"We are all kind of fighting each other in the rest of the world where oil production is not increasing," said Michael Rodgers, a senior director of PFC Energy, a Washington-based consulting firm. "We have to start thinking about unconventional resources. A lot of companies are saying, 'We do have this option in Canada.' "

Canada was the top supplier of crude oil to the United States last year, providing about 16 percent of U.S. imports. Crude produced from the oil sands is making up a larger portion of what Canada sends to the United States. Even so, development of the oil sands is not happening fast enough to significantly reduce U.S. dependence on Middle Eastern oil. Companies such as Exxon Mobil Corp., Chevron Corp., the Royal Dutch/Shell Group and ConocoPhillips Co. have oil-sands projects here. China's oil companies, eager to gain access to supplies to satisfy the country's growing energy needs, are buying into oil-sands projects and would like to import some of the oil.

The oil sands are becoming increasingly important as the worldwide thirst for oil increases. Demand has surged and producers has struggled to keep up, pushing oil prices up. Gasoline has followed, with a gallon of regular selling for more than $2 in the United States.