Report for Investors Says Oil Sands’ Economic Viability Sits on a Knife’s Edge

Emerging low carbon standards and environmental risks make continued development financially risky

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With the risks associated with offshore oil and gas drilling highlighted by the ongoing disaster in the Gulf of Mexico, a new report warns investors that another enormous oil resource could be just as dangerous a proposition from both an environmental and financial perspective: the vast deposits of oil sands in the Canadian province of Alberta.

A report from the investor coalition Ceres and financial analysts at the RiskMetrics Group warns investors that continued development of the massive oil extraction projects along the Athabasca River in Canada depend on a shrinking window of opportunity.

To keep production and expansion viable, oil prices will need to stay high—possibly approaching $100 per barrel. But if they rise beyond $120 per barrel for extended periods of time the resulting market move away from oil could throw a serious wrench in the oil sands works.

“The long lived nature of the oil sands is both its greatest virtue and its most significant liability,” said Andrew Logan, director of the oil and gas program at Ceres. “Oil sands projects can last for a half century, so the oil sands represent the ultimate long term bet: that the world will still want and need high cost, high carbon oil decades from now.

"If not, the oil sands risk being a long-term answer to a short-term problem."

Hundreds of billions of dollars hang in the balance, he warned.

Market and policy

By 2020, more than 80 percent of all Canadian oil production will come from oil sands, and in 2008 fully 93 percent of production was exported south of the border to US markets. Canada now is the largest foreign supplier of oil to the US—ahead of Saudi Arabia—but if some of the ongoing policy discussions in the country move in certain directions, that demand could drop dramatically.

The report warns investors that the main market for Canada’s oil—the United States—is not a firm or predictable customer for the years ahead, for a variety of reasons.

Low-carbon lifecycle fuel standards in both Canada and the United States will require drops in the carbon intensity of fuels, putting oil sands crude at a distinct disadvantage because of the high carbon cost of development.

“If all of the US adopted a low carbon fuel standard eventually, with a 20 percent reduction in carbon intensity by 2030 compared to conventional gasoline, our report projects that demand for oil sands production could fall by one-third from our baseline forecast,” said Douglas Cogan, director of climate risk management at RiskMetrics and an author and editor of the report.

Jack Ehnes, CEO of the California State Teachers’ Retirement System, among the largest public pension funds in the country, agreed that policy measures could play a huge role in the future of oil sands investment.

“Bottom line, oil sands producers will be at a distinct disadvantage once low carbon fuel standards take hold, and that could ultimately lead to reduced production, lower revenues and lower returns on our investments,” he said. “Given the huge investments being made—200 billion has already been committed—investors must be sure oil companies are fully considering environmental and social considerations every step of the way. It makes sense financially and it makes sense for the environment.”

Water, before and after

Some of the other areas of risk that companies and investors need to start considering involve factors influencing the actual production of oil sands crude. The process involves huge amounts of water—around four barrels of water for every barrel of oil produced—and producers will very soon see their access to the precious resource diminish.

Water usage from the Athabasca River is already restricted during the winter, when flows are low. But if oil sands production continues to grow, those wintertime water allowances might be exceeded as soon as 2014. That prediction does not even consider that water runoff from glaciers may soon drop dramatically due to increasing temperatures, possibly reducing the Athabasca’s winter flow by as much as 50 percent by 2050.

“The oil sands are water-intensive in a world that is dry and getting drier. They are carbon intensive in a world that is increasingly carbon constrained,” Logan said. “And yet few oil sands producers have so much as a target for reducing the intensity of their carbon emissions, let alone a plan to prosper in a world that is moving to reduce greenhouse gas emissions by 60 percent or more over the next several decades.”

The cleanup from oil sands projects will also play a big role in the oil companies’ bottom lines. Producing crude from the viscous bitumen found in the Athabasca region also yields tailings ponds containing fine particulate matter that could be toxic if it leached out into drinking water supplies. The ponds, now covering an area the size of Washington, D.C., take decades to settle out, but the Alberta government—generally slow to engage in environmental regulation of oil sands projects—is now requiring [PDF] a speedier tailings reclamation process.

This, of course, will cost money, and a lot of it. Another earlier RiskMetrics report showed that the costs of water remediation could reduce oil sands producer Suncor’s annual net income by 26 percent; in a worst-case scenario, Suncor’s earnings would disappear entirely.

Companies unprepared?

Attention on the environmental risks of unconventional oil development will surely increase in the wake of the Deepwater Horizon disaster in the Gulf of Mexico, but financial concern over oil sands projects has been building for some time. Investors in a number of large oil companies already filed shareholder resolutions this year asking for increased transparency and scrutiny of the risks involved in further development in Alberta.

“Investors are concerned that many oil sands companies seem to be barreling ahead without well developed plans to manage the very significant risks that they face related to carbon emissions, related to water scarcity, related to other key issues,” Logan said. “And this lack of preparedness potentially places tens and even hundreds of billions of dollars of capital at risk. It also raises real questions about the viability of the oil sands as a long term investment.

(Photo: NASA —; map by Norman Einstein; both via Wikimedia Commons)

See Also

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