Global demand for crude is escalating. There is no longer an abundance of cheap oil, which is driving prices higher, and it seems that $100 oil is here to stay. With prices this high, it gives oil companies strong reason to increase production through whatever means necessary, even if it has to be mined.

Kearl
The Kearl project, which is jointly owned by Imperial Oil (NYSEMKT:IMO) and ExxonMobil (NYSE:XOM), is a perfect example of how far companies are willing to go to find crude. Even after billions in cost overruns and production delays, Imperial Oil and ExxonMobil are still going to spend billions more expanding Kearl.

The Kearl project has had its share of problems, which in part were due to public opposition to the transportation route of its fabrication equipment. So in order to not face the same cost overruns twice during the expansion phase, Imperial Oil and ExxonMobil are going to source the fabrication equipment out of Edmonton instead of South Korea.

As of right now Imperial Oil and ExxonMobil are mining 110,000 barrels per day of heavy crude out of the project, which means Kearl is running at peak capacity. On top of the $12.9 billion it has spent on Kearl so far, Imperial Oil and ExxonMobil are going to spend an additional $8.9 billion to double production capacity by 2015.

Imperial Oil and ExxonMobil's investment in Kearl is heavily dependent on oil prices staying where they are. These kinds of projects carry huge upfront costs, but the payout can last for decades. Imperial Oil and ExxonMobil see Kearl producing crude for 40 years, which means that once the cost of the project is paid off this will be a cash flow generating machine.

There is a lot of talk about oil sands, but few know just what a project like Kearl is pumping out and how it goes about producing oil, so here is the general idea.

Bitumen
Alberta houses 173 billion barrels of recoverable reserves in its oil sands, which could last over 100 years. Oil sands are made up of water, sand, and a heavy crude called bitumen. Bitumen needs to be diluted before it can travel through pipelines, because bitumen comes out with a consistency similar to that of peanut butter. 

There are two ways to recover bitumen from oil sands, one of which is by mining, the technique being used at Kearl.

Image

Source: Imperial Oil

This is a visual representation of oil sands mining from Imperial Oil's website. The basic concept is that large trucks and shovels scoop up tons of oil sand and dump it onto a processing plant to be diluted into a heavy crude that can travel through pipelines. Only 20% of Alberta's oil sands can be mined, so most projects will need to use the in-situ process to remove the oil from the sand.

The in-situ process involves removing the oil from the sand while leaving the sand in place. The basic idea behind this is that companies like Imperial Oil and ExxonMobil pump high pressurized steam through a pipeline down into the oil, where it softens up and dilutes the crude. When the crude is fully "soaked" it is able to flow back up through a different pipeline.

Final thoughts
As you can see we aren't living in the 1900's anymore, and crude oil is much harder to find and produce. This is why we need companies like ExxonMobil and Imperial Oil to go out and spend billions of dollars mining for bitumen so our fuel demands can be met. While these projects can have huge upfront costs, the payout lasts half a lifetime.

 

Callum Turcan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.