The U.S. government said Thursday Canada holds the world's second-largest oil reserves, taking into account Alberta oil sands previously considered too expensive to develop.

The Energy Information Administration, the statistical wing of the U.S. Department of Energy, has included recent private sector estimates that an additional 175 billion barrels of oil could be recovered from resources known to exist in Western Canada since the 19th Century.

At a briefing on this year's EIA International Energy Outlook, EIA Administrator Guy Caruso cited a December report in the Oil and Gas Journal that raised Canada's proven oil reserves to 180 billion bbls from 4.9 billion bbls, thanks to inclusion of the oil sands - also known as tar sands - now considered recoverable with existing technology and market conditions.

"Canada will be producing a lot of oil from the development of these tar sands, but the quality of those reserves differs substantially from the Saudi reserves in terms of cost and ability to bring...the productive capacity on in a meaningful way," Caruso said.

"There is a difference in the absolute amount versus the ability to turn that into productive capacity," he said.

The latest estimates put Canada ahead of war-torn Iraq, which the EIA estimates holds 112.5 billion bbls and is constrained from raising production for entirely different reasons. The U.S. agency estimates Saudi Arabia's recoverable oil reserves at 264 billion bbls.

The EIA projects Canadian oil sands could produce 2.2 million barrels a day by 2025 compared with the current level of about 700,000 b/d, which already represents more than a fourth of total Canadian output of 3.1 million b/d.

Canadian Industry Sees More Oil Sands Potential

The Canadian Association of Petroleum Producers estimates current projects will raise Alberta oil sands production to 1 million b/d this year, and continuing development will raise it further to 1.8 million b/d by 2010, according to CAPP Vice President Greg Stringham.

Current oil sands projects are economically viable at crude oil prices of $18-$20 a barrel, though the quality of oil produced can vary according to whether production comes from "in situ" reserves that require drilling assisted by steam-injection pressure or from simple mining, Stringham said.

CAPP's own estimate of Canada's recoverable oil sands is 315 billion bbls - 20% from mining and the rest from steam-assisted drilling.

"There's clearly a lot of the stuff in the ground," said David Pursell, oil-sector analyst with Houston-based investment bank Simmons & Co. But the commercial viability of the reserves is sensitive to oil prices, technology and public policy, Pursell said.

Among political complications are the additional carbon dioxide emissions from production and processing of the tarry substance. Stringham said despite Canada's ratification of the Kyoto Protocol limiting carbon dioxide emissions, the industry expects the international agreement to add only 25 cents to 30 cents a barrel to development costs through 2012.

Oil sands development, which relies heavily on natural gas, could benefit from development and pipeline transport of large Arctic gas reserves in Alaska's North Slope and Canada's Mackenzie Delta, which under current proposals could be on-stream by 2010, the CAPP official said.

While cautious about the new reserve estimates, Pursell said oil sands may be "a good contrarian investment" at a time most energy investors are focused on natural gas. "It's a good potential source of hydrocarbons in this hemisphere," he said.

The EIA report is availabe on the Internet at: www.eia.doe.gov/oiaf/ieo/index.html