The Future of the Oil Sands

 

Deborah Yedlin argues for ongoing development

In March of last year Justin Trudeau stood in front of an audience of business leaders and politicians from Saudi Arabia to Texas, India to Russia, the US to China. His message was unequivocal—to leave a resource such as the oil sands undeveloped was both irresponsible and unrealistic. “We have the third largest oil reserves in the world… No country would find 173 billion barrels of oil and just leave it in the ground. The resource will be developed. Our job is to ensure this is done responsibly, safely and sustainably.” Trudeau reflected a pragmatism many in Alberta wouldn’t have expected—or believed possible—from a Liberal prime minister.

The oil sands are an important part of Alberta’s and Canada’s economy. The industry is one of the largest employers in the country, responsible for more than 400,000 direct and indirect jobs. According to studies by the Canadian Energy Research Institute, the oil sands will pay an estimated $1.5-trillion in taxes and royalties—provincially and federally—over the next 20 years. That’s money to fund what governments are elected to do: healthcare, social services, education and infrastructure. In the absence of that economic stimulus, the futures of our province and country alike would be compromised. That’s why Trudeau said it would be irresponsible to leave the oil sands undeveloped.

But as Albertans and energy companies are only too aware, developing the oil sands is not so straightforward. It is expensive, the resource is far from market, and we have insufficient infrastructure (i.e., pipelines), not to mention the persistent concerns about the environmental impact of development. The recent war of rhetoric between Alberta and BC— who clearly don’t give Alberta enough credit for our robust Climate Leadership Plan—is evidence enough of that.

And that’s before getting into broader arguments over the future of oil as the adoption of electric vehicles continues to gather momentum, not to mention the automobile market’s disruption by ride-sharing and autonomous vehicles. These factors, which are contributing to an era of energy transition, will undoubtedly alter demand for oil and gas.

As emerging economies continue to grow, so too will demand for energy—and that includes oil.

But the key word is “alter.” Demand won’t be eliminated. As emerging economies continue to grow—and lift billions of people out of poverty—so too will the demand for energy, and that includes oil; it will continue to be the dominant fuel for transportation for decades to come.

What overrides all of this is that Alberta—and other oil and gas producing jurisdictions—must come to terms with the era of abundance of supply rather than one of scarcity (which is what drove up the price of oil to US$140 per barrel). High oil prices did what they were supposed to do—spur technological developments such as fracking that have contributed to the surfeit of oil and natural gas by enabling access to reserves that could not have been produced previously.

The fall in oil prices (also caused by geopolitics of the Middle East and within the Organization of Petroleum Exporting Countries) has been felt in the oil sands in several ways: a push to increase competitiveness and decrease costs, investment in technologies to increase productivity and reduce the environmental footprint, and a decrease in the level of investment by major corporations. The fact that Royal Dutch Shell, Marathon Oil, Statoil, Chevron and ConocoPhillips all chose to sell their oil sands assets in 2017 was seen by some people as a signal to investors that the oil sands are about to go the way of the buggy whip. But that is anything but true. While investment has decreased and the era of the oil sands megaproject may be over, to borrow from Mark Twain, rumours of the demise of the oil sands are premature.

Oil sands producers have made a number of important advancements in the past several years. They came together in 2012 to establish the Canadian Oil Sands Innovation Alliance with the goal of sharing technologies and intellectual property. Research and development within the companies themselves has yielded promising results. The per barrel emissions intensity of oil sands crude has decreased 30 per cent. Measures put in place under the government’s Climate Leadership Plan, including the oil sands emissions cap, will ensure that number continues to fall. The Clean Resource Innovation Network connects the oilpatch to academia, research institutes, government and sources of capital, and is aimed at accelerating commercialization and increasing production while delivering energy with a smaller environmental footprint.

Water use continues to decline. The oil sands is allotted 3 per cent of the Athabasca River’s annual flow, but the amount withdrawn is less than 1 per cent and most of the water used is recycled: 80 per cent in mining operations and 94 per cent at in-situ sites. Significant progress has also been made in tailings technology, aimed at reducing the size and need for the ponds but also decreasing the time it takes to reclaim the land. Canadian Natural Resources alone is spending $1.6-billion in research to decrease wastewater created by its operations.

As to the issue of cost, recent improvements in technology, both at mining and in-situ operations, mean production can be sustained at prices below $40 per barrel.

The oil sands have become—and will remain—an important part of global supply. Not only is the resource important to Canada, but the barrels produced in Alberta are an important offset to supply volatility in other parts of the world. It’s time to dispense with the polarizing rhetoric and be proud of a resource that helps eliminate energy poverty around the world, not to mention keeps our cars running in –30°C winters.

Kevin Taft argues for phasing out the oil sands

It’s time to stop expanding oil sands production and start planning for the long-term phaseout of this industry. The longer we delay, the bigger the Alberta government’s problems and liabilities become.

In 2015 Alberta’s Auditor General reported that the future cleanup costs for oil sands mines were almost $21-billion and warned that industry had set aside less than 8 per cent of this amount. Unless important changes are made, the province will be on the hook for the rest, some $20-billion. The Auditor General’s estimates almost certainly understate the risks. They don’t include the cleanup costs of immense SAGD operations, with their networks of wells and industrial sites, or oil sands pipelines and other facilities, nor do they include the cleanup liabilities of the conventional oil industry.

The government has allowed oil sands companies to defer cleanup costs decades into the future, when operations will be approaching the ends of their reserves. This allows companies to pad their bottom lines by avoiding costs—a classic case of powerful industries boosting profits by shifting liabilities onto taxpayers. This is part of a massive government subsidy scheme for oil sands operators that includes rock-bottom royalties, generous tax treatments and publicly funded research programs that run into the hundreds of millions of dollars. The oil sands industry keeps pace with Bombardier in the govern-ment subsidy business.

Alberta taxpayers face a jeopardy all too common: When a business is in decline, investors can strip its assets for themselves and walk away from its liabilities. That was the fate of Sears pensioners, and it happened at the Giant Mine in Yellowknife (cleanup cost to taxpayers: $1-billion) and the Sydney tar ponds in Nova Scotia (cleanup cost to taxpayers: $400-million). We’re on the way to repeating this pattern at a far more expensive scale in the oil sands.

The risks increase even more if there is a general decline in the oil sands industry. As the Auditor General’s report states, the province has designed the system so that the government itself is not protected “against a broad based and rapid structural decline in the oil sands sector.” In short, if the world loses its appetite for oil sands product (a distinct possibility), the industry will not be made to clean up any of its mess—the people of Alberta will be.

But aren’t these costs more than offset by oil sands royalties flowing into our treasury? Hardly. The total royalties collected from oil sands production in the past six years are $21-billion, and in several of those years royalties were based on stellar oil prices that are unlikely to return. Worse, all of that money has been spent. Alberta stopped putting royalties into the Heritage Fund in 1987, choosing instead to use royalties to keep taxes lower than in other provinces. Thirty years later Alberta is in a financial mess: royalties are spent, the tax system is unsustainably low, debt is climbing fast, and environmental liabilities are massive. The Heritage Fund in its entirety is not big enough to cover the cleanup costs of the oil sands.

We’ve spent decades propping up the oil sands; the rest of the world has been shifting to renewables.

Many Albertans may be confused about the costs and benefits of the oil sands because the situation wasn’t always this way. Until the 1990s, royalties on oil sands bitumen were much higher, and every operation had to meet specific economic and environmental requirements. In 1997 the Klein government, an eager servant of the industry, launched a “generic” oil sands scheme that removed requirements for new operations to meet special economic or social requirements and slashed royalty rates to a fraction of previous levels, to as low as 1 per cent for new projects. Global investors raced to cash in and an oil sands frenzy began. Tens of thousands of jobs were created but the frenzy would not last, and neither would the jobs.

Today, if the oil sands were a country they would be the eighth largest oil producer in the world and climbing, yet the Alberta government—which owns the oil and sells about three million barrels of bitumen a day to companies—earns more money from alcohol sales and gaming. That’s right, royalties from the oil sands are so low that in recent years the government earned more from liquor and gambling than from bitumen sales.

It’s time to stop expanding the oil sands and to start discussing how we’ll manage when production declines. Make no mistake: the industry’s demise looms. While Alberta and Canada have spent two decades propping up oil sands production, the rest of the world has been shifting to renewable energy. Virtually every major carmaker is committed to rolling out full lines of electric cars between 2019 and 2025, with the intent of ending petroleum use by the 2030s. Renewables are now winning the race against fossil fuels for electricity: from Britain to Australia to Alberta, the cheapest new power is solar and wind. Google, a massive energy user, went from zero renewables in 2010 to 100 per cent in 2017, and Apple, Microsoft, Walmart and other businesses are on similar tracks. China will invest US$360-billion in renewables from 2017 to 2020. The writing is on the wall if we would only read it.

Demand for oil and other fossil fuels will likely peak within a few years and then decline. At that point production from the oil sands will be displaced by cheaper, better-located sources. So while Alberta has all its chips on the table backing bitumen, the Europeans, Chinese, Californians and others are going to win the bet with renewables.

We need to stop gambling on the oil sands, figure out how to cut our losses and move on to a different future. It’s time to relearn a hard lesson: The interests of the oil industry are not the same as the interests of Alberta.

Yedlin responds to Taft:

It’s very easy to get swept up in the off-oil rhetoric of individuals and non-governmental organizations that believe the transportation sector can function on something other than fossil fuels. Their arguments are unrealistic.

While it is absolutely true that a revolution is underway in the context of the world’s energy mix, which includes a shift towards renewables, ride-sharing and increased adoption of efficiency standards, it does not mean demand for oil will collapse. The recently released BP statistical outlook—often seen as the gold standard for analysis of trends in the energy sector—shows that the changes taking place will see the world reach a level of peak oil demand by 2030, but nothing resembling a collapse in consumption. Its analysis shows that a worldwide ban on combustion engines by 2040 would cause oil demand to drop by 10 million barrels a day, but not cease.

What is ignored in the utopian “off oil” scenario is that despite the rise in electric vehicles and ride-sharing, the demand for car travel is going to double from current levels, primarily due to continued industrialization of the developing world, especially China and India. And the majority of those trips will take place in cars run by combustion engines.

The continued industrialization also means growth in the use of fossil fuels for trucks, ships, aircraft—modes of transportation that are much harder, if not impossible, to electrify. And consider this: the International Energy Agency is still forecasting that by 2030, 675 million people on the planet will be without access to electricity.

Lost in the anti oil sands hyperbole is the importance of the barrels produced in Alberta to providing pricing stability and certainty to world oil markets. Research and development take time, just as it took almost 40 years for the oil sands to be profitable. But ongoing efforts will yield the results Albertans and Canadians are looking for: oil sands production that is sustainable from both an environmental and a cost perspective, not to mention provide a host of spinoff technologies that can be applied to other sectors.

For too long the oil sands has been seen as Alberta’s dirty secret. But it is has attracted more than $217-billion in investment, supports more than 400,000 direct and indirect jobs across the country, and is expected to generate $1.5-trillion in taxes and royalties over the next two decades, not to mention support Canadians’ retirement through investment portfolios. It’s time to change the dialogue and be proud of a tremendous resource whose development is underpinned by strong regulation and oversight not seen anywhere else, not to mention by innovations that continue to decrease its carbon footprint.

Taft responds to Yedlin:

In 1950 there were more than 100 coal mines in the Drumheller Valley, the economy was good and jobs were plentiful. But history was at an inflection point. Twelve years later almost every mine was closed and Drumheller’s economy was shattered. There was still plenty of coal in the ground but railways had converted from coal to diesel and home heating from coal to natural gas.

Justin Trudeau, Rachel Notley and the oil sands industry should remember this lesson, because history is at another inflection point. Governments and corporations around the world are intent on replacing petroleum with renewable energy as soon as possible. No matter what politicians and the oil industry proclaim, most oil sands reserves will remain in the ground.

The single biggest use for oil from Alberta is as fuel for internal combustion engines in cars and trucks, but the internal combustion engine is on the same track today as the steam engine was in 1950. In 2017 Norway became the first country where electrified cars outsold internal combustion cars, and by 2025 the sales of internal combustion cars there are expected to be zero. Zero! Norway’s not a fluke, it’s the thin edge of the wedge. Germany’s government voted to eliminate sales of gasoline and diesel cars by 2030 and other European countries are following suit, as is India. Internal combustion vehicle sales in China, the world’s largest car market, are expected to peak in about two years and then steadily decline as electric vehicles take over.

Governments around the world realize global warming must be addressed quickly and many have policies to phase out carbon emissions, while technology makes wind, solar and other renewable energies better than ever. Electricity is now cheaper from wind and solar than from coal and natural gas, and the operating costs of electric vehicles are less than half those of gasoline vehicles.

The glory days are over for the oil sands. In April 2017, Moody’s Investors Service published an in-depth analysis of the oil and gas sector that listed several significant risks, including lower demand and advances in alternative energy “that could occur at a faster pace than anticipated.” The Energy East pipeline was cancelled because it didn’t make financial sense, and the Keystone XL—if it is ever built—depends on guarantees from the Alberta government. The foundations of global oil markets are already shaky and the oil sands will not be spared.

We need to start planning now for an Alberta and a Canada after the oil sands.

Deborah Yedlin is a long-time Calgary Herald business columnist. Kevin Taft is the former Edmonton-Rutherford MLA and Alberta Liberal Party leader.

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