Canada's Oil Sands Battle Headwind
Canada’s oil sands hold some of the world’s biggest oil deposits and logically should be America’s best guarantor for energy security. Their development though is increasingly facing strong headwind from both US and European regulators worried about environmental impact. They are generating large and vehement opposition from both industry and members of the public.
While the US dealt the first blow by postponing approval of a new vital pipeline, European Union and Californian climate change legislation will hit oil sands where it hurts the most: the bottom line.
Development of the deposits in Alberta, just across Montana, will at the very least be delayed, with the implied consequences to world oil markets and Canadian pockets, but most won’t be scrapped because oil sands have become a state priority. Still, the industry’s future has grown uncertain, morphing from silver bullet to dubious black sheep of the oil business.
Earlier this month, the EU Commission delayed implementation of controversial fuel quality regulation that would label products from oil sands as emitting 22 percent more carbon dioxide than conventional crude, in effect making them more expensive for refiners, especially after 2013 when Europe’s carbon trading scheme goes into full force.
Europe is mirroring California, which already labeled fuels from oil sands as dirty, also making it less attractive for refiners that will have to meet emission cuts. Even before, the Obama administration postponed approval of the Keystone XL pipeline to connect oil sands all the way down to Texas ports, and requested a new route for the pipeline, keeping the project alive, but conveniently delaying any approval for after the next elections.
At the heart of the issue though is not diplomacy or lobbying, but hard numbers. Canada is looking to increase output from oil sands regardless of what the US and Europe want or say because China is not only one of the biggest investors in oil sands, it’s also a happy customer for all the planned increased output.
For Beijing it’s a win-win, but the process would be even lengthier because a pipeline crossing westward to the Pacific Ocean would be required, one already facing even more opposition.
“I am very serious about selling our oil off this continent, selling our energy products off to China,” said Prime Minister Stephen Harper last week. “I ran into several senior Americans, who all said, ‘Don’t worry, we’ll get Keystone done. You can sell all of your oil to us.’ I said, ‘Yeah we’d love to but the problem is now we”re on a different track.'”
Canada has been more confrontational toward the EU, perhaps because it’s not a natural export market, as the US and China might be. The UK and European oil companies have lobbied hard on Canada’s behalf. But the European measure appears set for final approval next year.
“This fuel quality directive is not scientific, it’s discriminatory and it stigmatizes the oil sands in an unfair way,” said Canadian Natural Resources Minister Joe Oliver earlier this month.
The official position though contrasts high-level concern in the Canadian government exposed in two recently leaked documents from the Environment Ministry. “National and international concern over the environmental footprint of oil sands production represents a growing threat to the economic future of the industry,” one said. “Governments need to provide assurance in order to secure the industry’s social license to operate. The [industry] needs credible scientific information on its environmental performance as soon as possible.”
Oil sands are a mixture of sand, clay, water, and bitumen, most of which is a solid unconventional oil. So far, mostly the surface portion has been trucked to complex refineries that first separate the bitumen and then upgrade it before it can be refined into consumer products. In the future, most of the remaining oil sands, those that are buried, will have to be extracted in situ by heating and diluting the bitumen to help pump it up is a more liquid form.
But surface mining of oil sands significantly alters the landscape and ecosystem because it literally implies opening holes in the ground several football fields big. Additionally, the process is water and power intensive, meaning more natural gas will be required into the future and more water will be polluted. Over 65 square miles of tailing ponds have already been carved into the ground for accumulated unwanted byproducts.
Growing uncertainty is making investments a lot more expensive and politically risky. These environmental, political, and economic risks are compounded by the capital intensive nature of the investments, with longer return periods. Canada’s targets “could be hindered by continuing debate about the environmental effects of oil sands exploitation,” the IEA said it its 2011World Energy Outlook.
The IEA estimated last year that most new oil-sands projects are profitable at prices “above $65 to $75 per barrel.” But “investment payback is spread over a much longer time period. … As oil prices increase, some of the costs, notably of gas and services, will also rise, so the price threshold for profitability will also increase.”
At stake are at least 1.5 million barrels per day from oil sands by 2020, according to the International Energy Agency and the US Energy Information Administration most recent forecast from the second half of 2011. Canada is the second biggest source of oil output growth at least for the next two decades, after Brazil, and accordingly will weigh heavily on oil price fluctuations.
Oil prices are bound to increase with ongoing delays and project cancellations, an unwanted scenario both for Europe and the US, but welcomed by oil producing antagonists like Russia, Iran, and Venezuela. Furthermore, the US energy security plan is based on a growing share of Canadian oil -even if not necessarily additional volume-, to decrease reliance on the Middle East and Venezuela.
The eventual production -and profitability- remains ultimately a political decision, and Canada appears set in delivering. But the bonanza might have to wait longer for China and other buyers less concerned about the environmental footprint. In the meantime, the European and Californian fuel directives appear set to make oil sand products more expensive.