Digging Deep; Even remote patches of oil are starting to look more and more attractive.(Cover Story)

Byline: Adam Piore (With Phil Gunson in Caracas and Frank Brown in Moscow)

Its approach echoes across the desolate plains of northern Alberta like the Tyrannosaurus rex that ruled here 265 million years ago. But even a three-story carnivore would have been no match for the Caterpillar 797 dump trucks that dominate the area now. Each of these metal behemoths rides on four-meter tires and carries 363 metric tons of oil-soaked tar sands, scooped out by gigantic shovels nearby. Owned by Shell, the machines are transforming this barren landscape--and the way oil companies think about fossil fuels.

For years, most such firms ignored the kind of oil that soaks these sandy steppes, dismissing it as too difficult and costly to get out of the ground. But the business is changing rapidly. Today, established fields in the Lower 48 United States yield less than half what they did at the peak in the 1970s. Some experts believe supplies from the oil-rich Middle East may begin to decline sometime in the next decade. Yet industrialized nations show no signs of slowing down consumption. Indeed, most analysts predict China's hunger for oil will soon surpass that of even SUV-choked America.

With oil prices high and demand outstripping supply, companies are increasingly venturing into rugged areas that only a few years ago they would've scoffed at. "High oil prices are here to stay," says former Venezuelan Oil minister Humberto Calderon. "The world has to be prepared." That means exploiting reserves of oil that have until now been uneconomical.

Geologists are venturing into the remote, icebound waters off the coast of Norway. At the massive Kazakh oilfield of Kashagan, oil companies have constructed two islands to stabilize their equipment and drill in freezing temperatures without endangering the local environment. In Chad, similar firms have begun to construct a massive infrastructure that includes roads, pipelines, housing and the drilling machines required to extract deposits. All these projects are expensive and seemed impractical only a few years ago. Now, regardless of what oil prices do in the coming weeks and months, many experts believe that such investments will eventually pay off.

Today's prices only make the investment easier to sell--crude futures recently topped $49 a barrel, more than four times the price in 1998. That kind of price jump makes all the difference in places like Alberta, where the cost of extraction is 10 times as high as in some Middle Eastern countries. Although Alberta is on a par with Saudi Arabian oilfields in terms of the sheer amount of oil trapped in the ground, nature has made that oil much less accessible. Both sets of deposits were formed over millions of years, as organisms fell to the bottom of nutrient-rich seas and were buried, before they could decay, under a sheen of sediment. Then heat and pressure slowly baked the mass of energy-rich material into oil. But whereas rock formed a protective layer over the fields of the Persian Gulf and Texas, the Alberta oil leached out, mingling with sand, rock and other materials on the surface. Separating it out is difficult and expensive--in Kuwait, it costs a mere $2 to get a barrel of oil out of the ...