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Cogeneration in the Oil Sands Growth DespiteRising Fuel Costs

Selina Lee-Andersen

The development of Albertas oil sands is a highly energy-intensive pursuit. Both steam and electricity are ingreat demand. In situ operators use large quantities of steam to reduce the viscosity of bitumen and to

extract it out of the ground, and surface mining operators use steam to separate the bitumen from the oilsands. Furthermore, upgrading processes for the production of synthetic crude oil requires steam. Operatorshave the option of building their own steam plants and purchasing power from the grid, or alternatively,

cogenerating steam and power in a single facility. An increasing number of operators are opting for the latterto promote self-sufficiency and optimize their consumption of power.

Basics of Cogeneration

Cogeneration involves the simultaneous production of electrical power and heat using a single fuel source. Inthe oil sands, natural gas is typically used to fuel cogeneration units, although other kinds of fuel can be used

(or are under consideration for use) including: synthetic gas, petroleum coke, bitumen emulsions, bitumen,nuclear, coal and biomass. A cogeneration plant realizes efficiency gains by combining processes to run acombustion turbine to turn a generator and produce electricity. A heat recovery steam generator thencaptures the remaining heat that would normally be wasted to produce steam or hot water.

Cogeneration is employed to support the commercial production of bitumen from the oil sands, particularly in

the extraction and processing phases. Bitumen can be recovered using surface mining and extractionmethods, and in situ recovery methods such as Cyclic Steam Stimulation (CSS) and Steam Assisted Gravity

Drainage (SAGD). Each of these recovery techniques can employ on-site cogeneration to provide steam andelectricity. In addition, upgraders (which are used to convert bitumen from heavy oil to synthetic crude oil)can also benefit from the steam generated by a cogeneration facility.

The first cogeneration plant in the oil sands began operations in 1975. Since then, cogeneration capacity in

the oil sands has grown to the point where it currently accounts for 40% of Albertas total generationcapacity.

Benefits of CogenerationThe benefits of cogeneration are well known. Cogeneration produces electricity and thermal energy with

much less fuel than when they are produced separately, thus reducing fuel consumption and emissionssignificantly. Single purpose thermal electric power plants reject between 50% and 65% of the fuel heat torivers, lakes, the ocean or the atmosphere. Cogeneration systems can use this rejected heat for purposes

such as paper drying, chemical processing, food processing, space heating or cooling. Some cogenerationunits can increase fuel conservation, resulting in a 10 to 20 percent savings in fuel when compared to a

stand-alone unit.

Cogeneration enables oil sands operations to become self-sufficient, thereby eliminating the need foroperations to rely on the grid. Both surface mining and in situ methods are sensitive to unscheduled electricaloutages, and the primary concern of producers is a reliable supply of electricity. In particular, cogeneration

systems and selected loads can be kept running during grid failures, which minimizes the risk of a plant

shutdown and avoids costs resulting from power interruptions.

Regulatory FrameworkThe generation and transmission of electric energy in Alberta is governed primarily by the Hydro and Electric

Energy Act(the Act). The Act provides for the efficient development of generation and transmission facilities,safe practices for the electricity industry, and the management of information regarding demand and supply

for electric energy in Alberta. For the construction of a cogeneration plant in the oil sands, an applicationmust be filed with the Alberta Electric and Utilities Board (EUB) pursuant to section 11 of the Act.

Typically, an application for a cogeneration facility will be incorporated into an application for the approval ofan oil sands project. As part of each oil sands development application, the EUB requires the applicant to

outline its cogeneration plans.

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While some cogeneration plants are built exclusively to supply the internal electricity needs of a particularfacility, some cogeneration plants generate excess capacity and facility owners have the option of selling itsexcess power to the provincial power grid. If a party wishes to export power to the Alberta Electric System

(AES), additional approvals are needed pursuant to sections 14, 15 and 18 of the Act in order to constructand operate new transmission facilities and to connect the plant to the AES.

At the federal level, if the construction of a cogeneration facility will impact fish habitat or navigable waters,

the need for an environmental assessment under the Canadian Environmental Assessment Act will betriggered. Where federal review is involved, the provincial and federal authorities will often form a joint panel

to conduct the environmental assessment. As part of the environmental assessment, a public consultation isconducted where interested parties can express their views on the project.

In reviewing an application for the development of a new cogeneration project, the EUB will consider anumber of issues, including:

(i) the need for the cogeneration plant;(ii) impacts on the community such as noise, safety, air quality, excessive lighting;(iii) land use; (iv) whether the plant will produce excess power to sell to the power pool;

(v) impact on the flow of groundwater and groundwater chemistry;(vi) emissions and climate change impacts; and

(vii) technical issues.

Impact of Natural Gas Prices

In the late 1990s and early 2000s, there was great anticipation that oil sands producers would becomesignificant exporters of electrical power as a result of cogeneration operations. In particular, it was

anticipated that oil sands producers would generate excess electricity and sell it to the grid.

As the main fuel source for cogeneration is natural gas, the price of natural gas has a direct impact on theviability of cogeneration operations. Higher natural gas prices in recent years has slowed the growth ofcogeneration projects. According to the Independent Power Producers Society of Alberta (IPPSA), it takes

approximately six gigajoules of natural gas to produce one MW/h of electrical power. Based on a forwardprice to 2010 of CAD 8 per 1,000 cubic feet, the cost of fuel alone is CAD 48 per MW/h. Generally, IPPSA

recommends adding approximately CAD 20 per MW/h to account for cogeneration capital costs in the oilsands, which results in a total cost of CAD 68 per MW/h. Unfortunately, the forward price to 2010 ofelectricity in the power pool is only CAD 61 per MW/h. As a result, anticipated amounts of cogeneration

capacity to be installed in the oil sands have decreased over the past few years.

With higher natural gas prices, companies are looking at the option of cogeneration on a case by case basis.

For example, EnCana operates a pair of 40 MW cogeneration units at its Foster Creek SAGD facility.Currently, production is at about 40,000 barrels of oil per day and the facility uses 10 to 12 MW of power.

EnCana has announced plans to expand production to 150,000 barrels per day at Foster Creek over the next10 years and it plans to use the electricity produced by the cogeneration units to power the expandedproduction. A spokesman from EnCana has indicated that EnCana plans to sell the remaining power to the

grid when market prices are more favourable. However, at its Christina Lake SAGD expansion, rather thanconstructing a cogeneration facility, EnCana has indicated that it plans to purchase electricity from the grid

to power the expansion from 10,000 barrels per day to 250,000 barrels per day over the next 10 years.

Looking to the FutureDespite the increase in natural gas prices, cogeneration within the industry is expected to increase alongsidethe growth of the oil sands. Cogeneration facilities that are planned to be built with oil sands projects include

CNRL/Horizon, Suncor/Firebag, Shell Canada/Carmon Creek, Petro Canada/Meadow Creek, Imperial Oil/KearlLake, MEG Energy Corp/Christina Lake, True North Energy/Fort Hills, and Opti/Nexens Long Lake project.With higher natural gas prices expected in the future, it is anticipated that companies will turn to lower cost

alternative fuels to operate the cogeneration facilities. In particular, an increasing number of projects will usegasification and synthetic gas to fuel turbines for heat and power. For example, Suncor Energy has

announced that it will use a combination of natural gas and synthetic gas for an upgrader and, in 2005,Suncor filed a regulatory application to construct a petroleum coke gasifier, the first of its kind in an oil sandsproject. In addition, CNRL also has plans to incorporate a gasification plant into its Horizon project.

According to a recent report issued by the Canadian Energy Research Institute (CERI) on cogeneration in the

oil sands, the addition of capacity to the Athabasca region (where much of the capacity will be located) isunlikely to add much power for sale to the grid. According to the CERI report, excess power available for saleto the grid will likely range from 200 to 600 MW from now until 2020. This is because the increased

production of synthetic crude oil and bitumen from the oil sands which is estimated to reach three millionbarrels per day from 2015 will consume much of the increased power that is generated by the new


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cogeneration facilities. Despite industry concerns that transmission capabilities will be insufficient to exportexcess electricity from the Athabasca region to the grid, CERI notes in its report that the existing

transmission infrastructure is capable of handling this amount of excess generation.

The key benefits of on-site cogeneration power for companies are electrical security and energy efficiency.Although industry enthusiasm for cogeneration may wane when natural gas prices creep higher, the potential

application of alternative fuels to cogeneration and the numerous benefits that cogeneration brings with itwill ensure that cogeneration remains an option for oil sands producers in the foreseeable future.

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