Investing in Canada’s Tar Sands Gets Sticky

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U.S. President Barack Obama stepped lightly around the tar sands issue this afternoon as he wrapped up his first official foreign trip and visit with Canadian Prime Minister Stephen Harper.

Obama said the leaders discussed the need to act on climate change and agreed to work together on developing technology capable of cutting greenhouse gas emissions and delivering clean, renewable energy to both countries. He stressed "clean energy," saying its development and use was one of the most pressing challenges of our time:

We can’t afford to tackle these issues in isolation.

How much political pressure the Obama administration will actually put on its northern neighbor to scale back greenhouse gas emissions from the tar sands projects – and how much the U.S. will reduce its consumption of Canada’s tar sands oil – remains be seen. Right now, most of the bitumen squeezed out of the tar sands is turned into fuel oil and then shipped to the United State at a rate of about 2 million barrels per day.

While the politics plays out, investors with tar sands holdings are trying to balance new developments that are rocking their world.

The dramatic fall in oil prices and the global economic crisis have slowed project development expenditures to its slowest pace in 10 years, and the time-frame for recovery is murky. Investors also see a U.S. carbon price on the horizon.

In that environment, a new pressure-point is emerging as a force to be reckoned with – shareholder activism.

Investors everywhere are looking closely at their portfolios for unnecessary risk, and carbon is taking its place as a growing concern in energy-intensive industries.

Some of the United States’ largest institutional investors, including public pension funds with hundreds of billions of dollars in assets, are now using their shareholder status to force companies involved in the tar sands to publicly assess the financial, environmental and social risks of the ventures. Their efforts, to protect their own investments and the planet, could make corporate involvement in the Canadian tar sands an increasingly sticky prospect.

Already this year, an investor coalition coordinated by Ceres has filed dozens of shareholder resolutions with 57 companies – including two deeply involved in the tar sands – seeking greater disclosure of the companies’ financial risk exposure in light of the changing political, social and regulatory environment on the issue of climate change.

Ceres President Mindy Lubber didn’t mince words about the tar sands:

Extracting oil from tar sands is a dead end on the road to a clean energy future, and a risky venture for investors.

Tar sands developers Chevron and Canadian Natural Resources were both added this week to the investor group’s  “climate watch” list of nine companies whose competitiveness could be hurt by their lack of action on climate change.

Exhibit A: Chevron

Investors have been trying for over a year to force Chevron to disclose the potential financial and environmental risks associated with extracting oil from the tar sands.

The energy giant holds a 20 percent stake in the huge Athabasca tar sands project in Alberta. More worrisome to investment advisor Green Century is Chevron’s 60 percent stake in the smaller Ells River project, which is developing an even more energy-intensive form of tar sands oil extraction referred to as in situ that uses heat and steam.

A shareholder resolution calling for a comprehensive, public risk assessment from Chevron got 20 percent support last year. Green Century is trying again at Chevron’s next shareholder meeting, likely in May. Its resolution lays out the problems:

Processing oil sands is highly resource intensive and environmentally damaging, requiring the draining of wetlands, diversion of rivers, removal of trees and vegetation, and emission of greenhouse gasses. Tailing ponds from mining operations cover over 50 square miles of forest and bogs. Their pollutants are acutely toxic, and 11 million liters of contaminated water are known to leak into the groundwater system, surrounding soil, and surface water per year.

And it adds this note on the changing political scene under the Obama administration, which should perk up investors’ ears:

The increasing likelihood of a carbon cap or carbon taxation regime creates economic risks for oil sands production because of its uniquely high greenhouse gas emissions [three times the amount for producing conventional oil and even more with in situ extraction].

Investors including the California State Teachers Retirement System (CalSTRS), the nation’s second largest public investor, requested a meeting with Chevron in December. The company’s response to their calls for disclosure was less than inspiring, says Green Century’s Emily Stone:

The company did not decide to disclose, and they have no plans to disclose.

There is a huge opportunity for investors to weigh in and have an impact. The risks involved in the oil stands are enormous – tailing ponds, land use, and the financial risks, whether in lawsuits or regulatory actions.

ConocoPhillips, also a target of shareholder calls for public disclosure of the tar sands risks, at least came out with a report, though it was far from comprehensive, Stone said.

Trillium Asset Management is on ConocoPhillips’ case now to fully assess the risks of continuing to expand its operations in the tar sands. In its current shareholder resolution, Trillium asks for a report by an independent committee of the board that will “consider the implications of a policy of discontinuing these expansions.”

Exhibit B: Canadian Natural Resources

The Canadian company, one of the largest tar sands producers, has refused to meet with investors on the issue of climate change, Ceres says.

Ethical Funds filed a shareholder resolution two years ago asking the company to assess its exposure to climate change risk. The response:

The company notified us that they would not be circulating it to shareholders for voting at their annual general meeting — the company is incorporated in Alberta and there is no legal mechanism for shareholders to file proposals in that province.

Ethical Funds is continuing to rally support from other shareholders in a bid to increase pressure on the company to respond with a risk assessment.

Exhibit C: The In Situ Oil Sands Alliance

With criticism over the tar sands ramping up, several smaller energy companies have banded together to spin the argument that they’re really much greener than people believe. The group is working with steam-assisted gravity drainage (SAGD), exactly the sort of in situ method that Green Century is worried about.

Sveinung Svarte, president of alliance member Athabasca Oil Sands Corp., cites the method’s lack of tailing ponds – recently blamed for the deaths of 500 ducks in Alberta. He tells the Globe and Mail:

I think it’s totally unfair that SAGD is seen as dirty oil. We are all considered environmentally unfriendly, but with footprint and water, we are not in the same league at all. And we wanted to be seen as different. And if the Americans really sat down and looked at all the different environmental parts of it, they would see that the California oil is as polluting as bitumen from SAGD.

Of course, SAGD also emits 20 percent more CO2 than traditional mining.

“These climate watch companies are ignoring a major business trend that will influence their competitive positioning for years to come,” Lubber said. “Given the political shift in Washington, all companies should be minimizing climate risks and maximizing clean energy opportunities. Companies that miss this trend are setting themselves up to fail in the 21st century low-carbon economy.”