There’s a risk here that I come off as an apologist for what a lot of folks would call an “ecological disaster.” I’m fine with that. The drum I’m beating is in the tone of “energy independence” and begs US politicians to gird up for a serious effort to localize the North American crude market by making a start of the infrastructure upgrades that will support extraction, upgrade and refining of Canadian oil sands output.

Debate on this broad issue right now focuses on the Keystone XL extension to the Keystone Pipeline. The US Dept of State, which has jurisdiction over cross-border pipeline projects, has referred the matter for yet another environmental review, with a decision hoped for by the end of 2011. The principals, Secretary of State Hilary Clinton and President Obama, have indicated support for the plan; the problem is basically “NIMBY” opposition from a bipartisan group of legislators and other locals concerned about the proposed Keystone XL path across a large swath of the vast-yet-shallow Ogallala Aquifer.

In other words, the opposition is not hard-and-fast. As for the substantive count, the original Keystone footprint would make a suitable alternative to the one currently proposed.

The good news is innovations and updates to steam-assisted gravity drainage (SAGD) technology indicate the major concerns–the huge natural gas requirements, the equally substantial water needs–can be mitigated. Major discoveries of natural gas (which itself will play a role in bridging the long gap to this “clean energy” future) in both Canada and the US, of course, render the first rather moot, while company-specific progress with their own adaptations of SAGD indicate the water problem, too, can be addressed.

Certain groups will never be satisfied. Others give no quarter to any suggestion that our activity can have a net negative impact on the planet. The investor’s place is in the rational middle, where humans try to come up with human solutions to human-scale problems. That’s what’s happening in the oil sands space, where companies are coming up with new ways to extract bitumen. A lot of this innovation is trend-specific, meaning what works in one oil sands deposit may not be suited for another. Bitumen characteristics–and costs–vary on a seemingly project-to-project basis.

With a Little Help from Some Steam

There are two basic ways to get bitumen out of the ground and into refineries. The first is the one that made the Canadian oil sands’ scary reputation, open-pit mining, where enormous amounts of sand are stripped from the earth’s surface. The process of separating bitumen from sand and then preparing it for processing involves a lot of heat and a lot of water, which is left behind in huge tailings ponds. This is where Canadian geese land to die.

Open-pit mining, which began with the original Great Canadian Oil Sands in 1967, is a thing of the past. The present, which will help us to a future of renewables, is based on steam-assisted gravity drainage (SAGD). That’s a matter of simple math. Of the estimated 172 billion barrels of recoverable crude only an estimated 10 to 30 percent is recoverable through this big-footprint process. The other 70 to 90 percent is too deep, reachable only via in situ methods.

One of those methods, SAGD, involves heating the resource in place, using horizontal well-drilling techniques familiar now in this era of unconventional extraction. The footprint is much smaller, as a single complex of six paired wells (one about 15 feet above the other) is capable of drilling an area about the size of 96 football fields while taking up about 10 to 15 percent of the total area. That’s all you’ll see on the surface.

A recent addition to CE How They Rate coverage, MEG Energy Corp (TSX: MEG, OTC: MEGEF), is on track for further reductions of per-barrel production costs in the first quarter of 2011 after posting a 70 percent-plus reduction in fourth quarter of 2010 from year-earlier levels. During a presentation before the Barclay’s Capital High Yield Bond & Syndicated Loan Conference on Mar. 25 MEG management described the company’s particular gifts, including its 800 square miles of 100 percent owned oil sands leases that hold an estimated 1.9 billion barrels of proved plus probable reserves, as well as the relative advantages of SAGD.

As of Dec. 31, 2010, MEG’s proved plus probable reserves represent an estimated discounted present value of CAD12.1 billion. The more compelling statistic, however, is MEG’s 2.3-to-1 steam-oil ratio. This is in part the result of MEG’s unique use of local water. The best SAGD projects show steam-oil ratios (SOR) of about 2.5, which means 2.5 barrels of water must be converted to steam and injected into the reservoir to recover a barrel of oil. Most SORs are above 3. (Current estimates indicate that it takes about 1,000 cubic feet of natural gas to recover a barrel of bitumen.)

The company doesn’t use fresh water in its process, sourcing instead from subsurface aquifers of non-potable water–water that wouldn’t be used for drinking or agriculture. It’s brought to the surface and cleaned for use in MEG’s steam-generation equipment, and it’s constantly recycled.

From both a surface land perspective and a water-use perspective, MEG is efficient.

After refinancing more than CAD1 billion in outstanding loans in late March MEG, a recent addition to How They Rate coverage, has more than CAD2 billion in cash, CAD500 million in available credit lines and estimated cash flow of CAD500 million in 2011 and 2012. Phase 2B of its flagship Christina Lake project will cost about CAD1.4 billion to bring to full stream, leaving considerable room to fund more development.

Cenovus Energy (TSX: CVE, NYSE: CVE) is using “wedge wells” at its Foster Creek oil sands project, where it hopes to produce 210,000 barrels a day by 2017. A wedge well, which Cenovus predecessor/parent Encana (TSX: ECA, NYSE: ECA) patented, is estimated to cost about half as much as a SAGD pair. The process involves drilling a simple horizontal well between two existing well pairs in the “wedge” of stranded bitumen between them.

Cenovus is using wedge wells at Foster Creek because of the specific bitumen properties, and because the process, of course, will “improve [its] economics, lower [its]environmental impact… and produce additional oil with no additional steam, effectively reducing [its] steam-to-oil ratio.”

The use of solvents and non-condensable gases along with injected steam would, of course, lower steam-oil ratios, although such additives have yet to be put into wide use and are expensive. The method known as solvent-aided process (SAP) has yet to be commercialized. Cenovus is testing the process, as the feeling is “a good SAGD reservoir is going to be a good SAP reservoir…The fundamental mechanics are the same.” Cenovus has been injecting butane at its Christina Lake operation and has an SAP pilot project at its Senlac property.

Early-stage explorer Excelsior Energy, which has 37,000 operated acres in the Athabasca oil sands region, is using a proprietary in situ process, combustion overhead gravity drainage (COGD). COGD is said to use practically no water and only 20 percent of the industry consumed by SAGD operators.

The method involves drilling injection wells down the middle of the bitumen deposit and pumping in steam to break it down. An air injection triggers an ignition. Vent wells gather the ignition gases, while a long horizontal well at the bottom of the deposit collects the bitumen. Recovery rates for COGD are generally comparable to SAGD.

Another in situ method, toe-to-heel air injection (THAI), invented by Dr. Malcolm Greaves in 1993, combines a vertical air injection well with a horizontal production well oriented in line to the vertical well. Petrobank Energy & Resources (TSX: PBG, OTC: PBEGF) holds the patent.

Fed by air from the injection well, a combustion front sweeps the oil from the toe to the heel of the horizontal producing well. Estimates from experimental tests indicate that the process can recover as much as 80 percent of original oil-in-place while partially upgrading the crude oil in situ.

Petrobank has reported positive results from its test wells in the oil sands region. Petrobank estimates are that it will cost USD20,000 per producing barrel to put a project together, whereas the average SAGD (steam assisted gravity drainage) project is USD30,000 to USD35,000 per producing barrel.

Oil sands greenhouse gas emissions declined 33 percent per barrel between 1990 and 2008, along with development of new technologies. New technologies will help reduce emissions, water use and the footprint of these projects even further. The depth and breadth of our reliance on oil as a fuel requires that we begin taking a solutions-based approach to the Canadian oil sands. The acronym-soup above is a good place to start.