Woe, Canada: Ramifications of Oil Sands Slump Are Economic and Political

A dramatic reversal of fortune for Canada’s tar sands oil industry has cheered environmental advocates, and it may also leave Prime Minister Stephen Harper vulnerable in the coming federal election because of the economic repercussions, some have predicted.

Harper, who has essentially bet his career on the bounty from unlimited expansion of tar sands production, has spent his six terms in office as the champion of extracting as much energy as possible from Alberta’s vast bitumen deposits—the tar-like fossil fuel found in ancient sand formations.

But now the lowest prices in eight years have the tar sands industry reeling. Developers have already halted expansions and new projects. Some producers are selling their crude at a loss, while others are barely squeaking out a profit.

Short-term issues—a key refinery outage, a pipeline shutdown and a spurt of new production—have put extra pressure on the price for Canada’s heaviest crude, robbing producers of precious income during the U.S. driving season.  Ongoing pipeline stalemates and looming carbon restrictions are making long-term prospects for the controversial crude increasingly gloomy as well.

“It’s bad for oil companies and the profit they were expecting from those projects, but from a climate perspective, it’s tremendous,” said Danielle Droitsch, senior policy analyst at the Natural Resources Defense Council, one of many environmental groups that oppose extracting the heavy oil sands crude. “Any of that oil that’s not developed will help the climate.”

Oil sands tied for fourth in a Greenpeace ranking last year of the world’s 14 largest “carbon bombs.” That list rated carbon-intensive resources or projects that could single-handedly pour enough carbon dioxide into the atmosphere to push the Earth’s temperature above the catastrophic warming limit of 2 degrees Celsius above pre-industrial levels.

Even before the benchmark price for the heavy tar sands oil hit a new low of $23.44 a barrel, tar sands investment was expected to fall by a third this year.

At current levels, oil sands producers are collecting a price “in the teens” for the bitumen portion of WCS, an amount that is below some companies’ stated costs, according to Tom Kloza, global head of energy analysis for the Oil Price Information Service. “People aren’t recognizing exactly how dire this might be.”

Further cuts and company losses could jeopardize the industry’s plan to at least triple oil sands output, and eventually expand to as much as 10 million barrels a day—a nearly five-fold leap from today’s rate of 2.1 million barrels a day.

At current production rates, high-carbon tar sands oil and its byproducts throw off enough greenhouse gas emissions to mark Canada as an obstacle to stopping global warming short of catastrophic levels. The climate challenge would become insurmountable if oil companies were to extract ever-larger amounts of bitumen.

To keep global warming from exceeding the widely accepted 2-degree limit, a third of oil reserves would have to be left underground along with higher levels of coal and natural gas deposits, according to a series of reports. Tar sands crude is one of the world’s dirtiest, most expensive-to-produce, and difficult-to-extract oils—and many analysts argue that those reserves will be among those left in the ground.

The downward tumble in global oil prices, which began last year and then continued after a short rebound, has taken the entire oil industry by surprise. On Monday, U.S. benchmark oil fell to $41.87 a barrel, the lowest closing price since March 2008. Western Canadian Select, the benchmark for tar sands oil, trades at a discount to U.S. crude because it is lower-grade oil that’s bought and sold in Hardisty, Alberta, far from U.S. refinery customers.

Making matters worse, a leak last week forced the shutdown of Enbridge Inc.’s Spearhead pipeline, which carries diluted bitumen from Flanagan, Ill., to Cushing, Okla.  On Aug. 9, mechanical problems shut down BP’s refinery in Whiting, Ind., one of the largest processors of tar sands oil. Neither company has released a restart date.

The heavily debated northern leg of the Keystone XL pipeline, designed to carry tar sands oil from the Canadian border into Nebraska, is awaiting a yes-or-no decision from President Barack Obama. A Westbound pipeline is stalled by First Nations opposition; and a pipeline headed to Canada’s East coast is facing stiff resistance on several fronts, including in Ontario, where the energy board last week concluded that the project’s risks outweigh the benefits.

In addition, a major expansion of Imperial Oil’s Kearl oil sands project recently came online in the midst of the down cycle, further depressing prices for tar sands oil. The industry also faces stiff competition from a flood of U.S. oil unleashed from oil shale formations by hydraulic fracturing, or fracking. A new business tax and a new provincial government in Alberta with a stronger interest in protecting the environment may also weaken the tar sands industry’s prospects.

Amid this atmosphere, Harper has called a federal election and the country’s economic downturn has helped thrust the reliance on tar sands oil into the debate. And while none of Harper’s opponents have explicitly come out against tar sands expansion, and even Liberal Party candidate Justin Trudeau has offered a platform that has many nods to the environment, he stays vague on how to tackle climate change.

In Canada, though, at least climate change gets talked about in the debates, and the tar sands slump can take credit for that.