A new report from RiskMetrics Group, a financial research firm, warns investors that some leading oil sands companies may be particularly exposed to financial risk from toxic waste water liabilities.
The report attempts to quantify the true cost of cleaning up billions of barrels of contaminated water resulting from the mining and refining operations of leading producers of oil sands crude. It was quietly released in December to RiskMetrics' private clients, and unveiled more publicly last week in a conference call. Titled "Oil Sands Tailings Pond Remediation Costs Understated," the report shows a handful of companies to be at a financial disadvantage because of their exposure to waste water remediation liabilities.
For example, for Suncor, currently the largest producer in the oil sands, water remediation could cost almost $2 million a week, or $104 million a year, according to RiskMetrics. That would erode the company's annual net income by 26 percent according to RiskMetrics' low-cost analysis. In the worst case, RiskMetrics says, the cost of cleaning up toxic waste water could completely wipe out Suncor's earnings.
In contrast, the super majors, like Exxon and Chevron, can easily absorb the clean-up costs because of their enormous size and diversified holdings.
"Many investors were really glad to see the report," Yulia Reuter, the author, told SolveClimate. "They have known that tailing pond remediation was a problem. Now, they can see something specific that quantifies the financial risk."
Reuter explained that oil sands producers have been setting aside debt obligations on their balance sheets in the knowledge that they would one day have to pay the cost of waste water clean-up. Her analysis, however, reveals that the set-aside calculations have been insufficient to cover the full cost and that ongoing clean-up could substantially erode earnings of the most overexposed companies.
Each barrel of oil that comes out of the oil sands requires as much as four barrels of water to extract, water that is contaminated with toxic tailings in the process and disposed of in giant containment ponds. Since February 2009, companies have been under government orders to clean the toxic tailings out of the water left behind. Alberta's Energy Resources Conservation Board (ERCB) issued Directive 74, which requires oil producers to address a problem that has been growing without a solution for decades. Existing "tailings ponds" now cover 50 square miles, including once-pristine boreal forest.
The directive requires producers to process fluid tailings, transform them into solid "fines" — mineral solids with particle sizes equal to or less than 44 micrometers — and deposit them in dedicated disposal areas that must become trafficable within 5 years. A first baseline survey is due from all oil sands developers by the end of this September, followed by a gradual phase-in over three years of the directive's regulations.
Non-compliance could theoretically result in a shut-down of mining and refining operations. However, observers believe that would be highly unlikely. The ERCB has historically enjoyed a cozy relationship with the oil sands industry — a lynchpin of the Canadian economy. If producers go into default, they more likely would face a fine or restrictions on permits for expanded operations, Reuter said. Compliance with Directive 74 is negotiated on a case-by-case basis.
Super Majors Have an Advantage
The new regulatory measures are unlikely by themselves to slow the growth of oil sands production, already about a million barrels per day. That's because the super major oil companies can absorb the cost of cleaning-up toxic waste water without recording a noticeable erosion of profits, according to the RiskMetrics analysis.
For example, the cost to Exxon and Chevron of cleaning up their waste water — based on 2007 production levels — would amount to three-tenths of one percent of net income in the high-cost scenario.
The analysis, in essence, shows that the super majors have a financial edge in oil sands development moving forward. They can absorb the increased costs on their balance sheets and income statements without causing concern among shareholders. The smaller, pure-play oil sands producers, like Suncor, Imperial Oil and the Canadian Oil Sands Trust, will face the greatest risk of stock valuations being negatively impacted by compromised earnings or balance sheets that are over-leveraged.
The RiskMetrics quantification may present good news for environmental advocates. The analysis demonstrates that the sector as a whole can accomplish the massive clean up using bioremediation, the most effective technology, without roiling financial markets and spooking shareholders.
The report also makes clear that the clean-up is vital for the oil producers, as well. The oil sands industry — one of the largest energy development undertakings on the planet — will collapse unless the region's water supply is protected from both overuse and toxic pollution.
The Athabasca watershed, already compromised by oil sands development, cannot tolerate the extraction of almost five million of barrels of fresh water that the Canadian Association of Petroleum Producers estimates could be needed every day for mining operations alone by 2014, the report states. It would exceed the withdrawal limit currently imposed by the environmental regulator. The river provides the lifeblood of one of the largest watersheds in the world, spanning 36,000 square miles of Canadian wilderness, and the oil sands industry is equally dependent upon the natural resource.
Oil sands producers have also been under growing international pressure to lower the outsized carbon footprint of their unconventional oil extraction. The oil sands are the primary reason Canada is failing to honor its Kyoto commitment to reduce its greenhouse gas emissions and instead has substantially increased them.
Last month, shareholders of both BP and Royal Dutch Shell filed resolutions for consideration at upcoming annual meetings, asking for a review of the financial risks posed by oil sands development. A coalition of unions, pension funds and faith groups fear the impact of carbon costs and reputation damage from environmental degradation will be high.
The RickMetrics analysis indicates that waste water clean-up is a more material financial issue than greenhouses gases.
Battle for World Opinion
The waste water issue has been one major reason the oil sands industry has suffered in the battle for world opinion. The tailings ponds drew global attention in 2008 when more than 1,600 migrating ducks landed on a toxic pond at one of Syncrude's mines, became coated in oil and mining waste and died. The company is now on trial for allegedly violating Alberta's Environmental Protection and Enhancement Act. The deaths also underscored for the public just how dangerous the water is: It is contaminated by phenols, arsenic, mercury, carcinogens such as polycyclic aromatic hydrocarbons and naphthenic acids.
The oil sands industry had assumed these compounds would settle out of the water, and about 35 percent of the particles do end up on the bottom of the ponds within three to five years; but most of the toxic pollution remains suspended in the water as fine tailings which take decades to settle unless they are treated, Reuter said.
The tailings ponds, huge constructions whose contents have been documented to leak, have been blamed for an increase in cancer rates among people in the region. There is also concern that if the walls of the ponds give way and cause a major spill, the toxic water could flow into the region's waterways.
Later this month, the Canadian Energy Research Institute is sponsoring a presentation in Calgary on the battle for world opinion as it relates to oil sands. In its announcement, it explains:
"Many believe that the oil sands brand is being shaped by interests outside of the industry. And if actions in the form of activism, photo journalism and public displays are any indication, the oil sands brand has shifted from 'innovation' to 'dirty oil.' This tagline has captured the world's attention and is being used more frequently to define the oil sands, and by extension Canada, to the world. Has the industry, the province and the nation lost control of the message?
The featured speaker is F. William Smullen III. He was a former aide to Gen. Colin Powell, and, according to Smullen's bio, was responsible for managing the general's brand. Smullen is to lead the discussion to "explore a plan of action to influence how others not only see us [the oildsands industry] but whether they accept our actions as being responsible."
The RiskMetrics report provides investors with another financial yardstick for measuring performance in the context of the need to clean up an enormous and longstanding waste water liability, now with the pending implementation of Directive 74 and various shareholder resolutions.
(Photo: David Dodge/The Pembina Institute)