The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™

‘From oilsands to quicksands?’

By Rob Foulkes and Daniel Litvin – A version of this article first appeared in Ethical Corporation. Please note that, as with other Critical Resource news content, it does not necessarily reflect the views of the Senior Advisory Board for LicenseSecure™ – Click here to view

The profitability of huge investments in Canada’s oilsands will hinge not just on the oil price, but on the industry’s response to environmental risks

An innovative or smokestack industry?

For a country with the world’s second largest oil reserves, Canada until recently received little attention on the energy security agenda. Its enormous resources – an estimated 175 billion proven barrels of oil – are almost all in the form of oilsands, a mixture of sand and thick, oily bitumen which can be upgraded to “synthetic crude”. They were not attractive while “lighter” and more easily accessible oil was freely available elsewhere.

But since early this decade, resource nationalism in oil-rich countries and historically high prices have pushed big oil companies to pursue such “unconventional” reserves with great determination. The resultant rush has been described as “the biggest industrial project on Earth”: capital spending on oilsands development in Alberta topped C$50 billion (US$ 47 billion) from 2000-2007, with well over C$100 billion in addition planned until recently.

Now, rising costs together with the fall in the oil price over the last several months have stalled much of this investment. But when the oil price revives – as many expect it to – the rush could well resume.

For all their potential, however, the oilsands involve significant environmental challenges which – if not adequately addressed over the long term – could undermine the very value of these enormous investments. Research using Critical Resource’s LicenseSecure™ methodology (which rates the health of resource projects’ “socio-political license to operate” – including stakeholder pressures driven by environmental concerns – on a scale from AAA-D) scores the Canadian oilsands industry as a whole between B and CC. This suggests exposure that may be greater than the companies involved believe.

The environmental challenges have been well documented: for example, the heavy water usage and inevitable impact on Alberta’s boreal forest involved in oilsands production have attracted strong criticism, though the industry vigorously defends its performance. More significantly from a commercial perspective, there are also substantial risks around greenhouse gas (GHG) emissions which companies may not be taking fully into account.

Producing a barrel of synthetic crude from oilsands emits, according to some estimates, three to five times as much CO2 as producing a barrel of conventional crude. While the difference narrows considerably once emissions from the actual use of the oil (in cars, for example) is taken into account, developments in GHG regulation or carbon pricing nonetheless could impact heavily on the industry’s economic calculations.

Crude assumptions
Supporters of the oilsands tend to downplay this concern. As Alberta Premier Ed Stelmach put it, “I’m confident that by the time the regulations are put in place, we will meet or exceed” them. Such self-assurance appears to rest on two assumptions: that carbon constraints will not take effect for many years (especially given the world’s continuing need for secure oil supplies); and that by the time they do, oilsands production will be clean enough to comply. Experience may well prove both assumptions correct, but neither can be taken for granted.

While robust carbon regulation and pricing remain a distant prospect, there are signs that progress in this area could already be building momentum. In addition to moves by the Canadian and Albertan governments to begin cracking down on carbon emissions from industries in their jurisdiction, regulators have also been busy in the key market across the border, potentially restricting oilsands producers’ ability to sell their products in the US.

California is leading the way, having recently adopted a low carbon fuel standard requiring all transport fuel supplied to the state to meet a carbon-intensity standard over its life-cycle; numerous other states and the US Conference of Mayors (a club of major cities acting at the federal level) have also supported curbs on the use of high-carbon unconventional fuels. Importantly, Barack Obama has proposed similar legislation nationally, while the US Congress has upheld, though not yet enforced, a separate 2007 law prohibiting the federal government from buying carbon-intensive fuels. Even the EU recently amended its Fuel Quality Directive, also with the aim of reducing the life-cycle emissions of its fuels.

It is not yet clear exactly how these new and proposed regulations will affect the sale of oilsands products; besides, as the industry has hinted, there is likely to be ample demand elsewhere should the US choose to close its markets. Nonetheless, when viewed alongside broader trends pushing for lower GHG emissions – not least the wider environmental reforms promised by Obama and ongoing efforts at the UN to agree a post-Kyoto emissions regime – such regulations may suggest that the world is moving against CO2 faster than some oilsands executives assume. Reliance on countries’ thirst for oil consistently trumping environmental concerns may, especially regarding the US, be an increasingly risky strategy.

To an extent, to give due credit, the industry has taken this on board; companies accept that eventually their projects will need to get cleaner. Their greatest hopes are pinned on carbon capture and sequestration (CCS), which removes CO2 from emissions and injects it (hopefully permanently) underground; according to proponents this could eventually reduce some oilsands operations’ CO2 emissions by 75%. Encouragingly, Alberta’s government is taking a global lead on developing the technology, announcing in 2008 a C$2bn fund to support CCS projects in oilsands and other heavy industries.

Capturing carbon and value 

Facing an uncertain climate

But it is far from clear that current efforts will prove sufficient to allow oilsands companies to meet forthcoming regulations. The first stage commercial plants are expected to take several years, and the technology seems unlikely to have a substantial impact much before 2015.

This delay is partly inevitable due to the construction and testing times involved, but insufficient funding also may be holding back faster development. Companies have so far been reticent to commit substantial sums without government backing; given the investments at stake, it may be in their interests to take more responsibility for ensuring that CCS is developed quickly.

The case for doing so is strengthened by continuing doubts from some quarters that the technology will ever work effectively in oilsands projects. A recent Canadian-Albertan government joint report, for example, concluded that in oilsands operations “only a small percentage of emitted CO2 is ‘capturable’ since most emissions aren’t pure enough”. From the companies’ perspective the only way to dispel such doubts may be to quickly build CCS plants that demonstrably work.

Alongside more strenuous efforts to prove the technology, meanwhile, the industry also needs to engage energetically and over the long term with regulators to ensure that emissions reductions derived from CCS are taken into account when the life-cycle carbon intensity of oilsands products are assessed. Otherwise their CCS investments may not protect demand for their product as they intend.

Insufficient activity in these areas could be leaving some oilsands producers with little margin of error should carbon regulations hit harder and sooner, or should CCS present more difficulties than expected.

The potential business impacts of the environmental risks for oilsands are also beginning to be acknowledged by investors – both “ethical” and mainstream funds (albeit mostly the former). Co-operative Asset Management, a major UK investor, fears that “companies investing heavily in unconventionals are too focused on short-term profit and their strategy is too defensive”; F&C, Calpers and Calstrs (California’s public pension funds), among others, have also expressed concern that environmental performance could undermine the projects’ profitability.

In fact, it may perversely prove to be a blessing for the companies involved that the recent collapse in the oil price and the drying-up of finance, has brought new investment in oilsands almost to a standstill. With the competitive imperative to keep pace diminished, companies can take time to test their assumptions about the long-term viability of their investments, and if necessary step up their work on CCS. Some may even decide against further investment until there is more certainty around the technology and around imminent regulations. If such approaches are adopted, the industry might emerge from the current slowdown less frenzied but with its long-term prospects considerably more secure.


To hear Critical Resource interview Alberta’s Energy Minister, Mel Knight, on these issues please click here.

Critical Resource rates the health of the “socio-political license to operate” of resource projects using its own methodology, LicenseSecure™. Ratings are based on a range of factors, including potential risks surrounding the project, the views of stakeholders (including customers and regulators), and also the way in which the company itself manages these issues. See here for more details.

Please note this article provides a provisional rating for the oilsands industry, based on publicly-available information, and hence sets out a range of potential scores. A full rating has yet to be calculated for the industry.

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