First U.S. Oil Sands Project Moving Ahead In Utah

Talk about oil sands and most people think about Alberta's vast deposits, but a project getting underway in Utah promises to open up the United States' significant but little-known oil sands resource.

However, as with the Canadian oil sands operations, the ground-breaking effort by U.S. Oil Sands Inc. is facing opposition from environmentalists, and the company also must demonstrate a novel production technique to tap oil sands that are very different in composition than those in Alberta.

Utah's Oil wet sands - new processes and huge potential profits Unlike the Alberta oil sands, which are "water wet," the Utah oil sands are "oil wet," meaning the steam processes used to separate the bitumen from the sand in Canada would be ineffective. But U.S. Oil Sands says it has developed a citrus-based "bio-solvent" called d-limonene that can efficiently and safely separate bitumen from the oil-impregnated sand.

The company claims its proprietary process not only has very high bitumen recovery rates, but also is environmentally safe, leaving behind clean sand and requiring no tailings ponds. Further, it says its process recycles 95 percent of the water used and requires less energy than conventional oil sands mining.

If the company can show its extraction process is economic, it could open up a hugely profitable energy resource because oil sands acreage costs much less in Utah than in Alberta. While oil sands land in Alberta may cost as much as $1 per barrel of oil in the ground, Utah oil sands acreage costs only five cents per in-ground barrel, the company asserts.

U.S. Oil Sands is bullish because it recently surveyed a 6,000-acre plot and came away with estimates that it holds 190 million barrels of oil. And it says its Utah acreage is relatively close to existing infrastructure, and that the oil produced will be lighter and sweeter than Canadian oil sands crude, reducing refining costs and fetching a higher price.

Paving the way for Utah's Uintah Basin, but not without challenges U.S. Oil Sands' project could pave the way for commercial development of the estimated 12-19 billion barrels of oil in Utah's Uintah Basin. The Energy Department estimates total U.S. oil sands resources at 60-80 billion barrels, with other significant deposits in California, Texas, Alabama and Kentucky.

But while U.S. Oil Sands currently aims to produce 50,000 barrels of oil per day from its Utah acreage within ten years, environmentalists are determined to stop the project before it gets started. They maintain there is simply too little water in eastern Utah to allow U.S. Oil Sands to proceed.

The Utah Division of Water Quality (DWQ) has granted the company a permit, ruling that the company's PR Spring mine presents minimal risk to groundwater because there is a "general absence of groundwater" at the project site.

But two local environmental groups, Western Resource Advocates (WRA) and Living Rivers, argue that because the mine site is located on a high desert plateau where water is always scarce, even small resources must be carefully protected.

The greens appealed to the Utah Water Quality Board, which oversees the DWQ, to overturn the permit for U.S. Oil Sands. However, the board voted 9-2 Wednesday to uphold the permit, agreeing with earlier findings by a state administrative law judge that there is no groundwater in the area of the mine, and thus no risk of contamination from an oil sands mining operation.

WRA now plans to go to court to challenge the permit, saying U.S. Oil Sands' own groundwater surveys show there are seeps and springs at the proposed mining site in Utah's Book Cliffs area.

"This decision goes against clear evidence, already in the record, that there is groundwater at the mine site," Rob Dubuc, staff attorney for WRA, said Wednesday. "Groundwater is critical to the health of surrounding wildlife, which has made the Book Cliffs area one of the largest hunting sites in the world. Today's decision could have a lasting effect on the hunting and recreation economy in Utah."

WRA says the water resource data provided by U.S. Oil Sands was collected in the middle of the summer-in between the wet spring and fall seasons in the dry region-and that the state should require the company to do more groundwater surveys as part of a more extensive permit review process.

But with the favorable decision by the water quality board, U.S. Oil Sands said Wednesday it is going full speed ahead with field work on the PR Springs project, which remains on schedule for commercial production start-up in late 2013, with an initial output of 2,000 barrels per day.

While 2,000 bpd is a drop in the bucket, clearly the potential for the resources is much, much greater - assuming that both U.S. Oil Sands' technology scales cost effectively, and the water usage concerns can be put to rest. It will be interesting to track if these interests can be reconciled, and if so, how and when

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.