Energy News

Rapid Oilsands Growth Poses Challenges

The environmental effects of the oilsands industry are like those of the ongoing Gulf of Mexico oil spill in slow motion, says an author of a recently released study.

And oilsands producers face numerous environmental, production and marketing challenges that will grow as industry pushes to boost production amid tighter regulations and resource constraints, concludes the 96-page report commissioned by Ceres, a Boston-based coalition of investors, environmental groups and other public interest groups.

The report, Canada's Oil Sands: Shrinking Window of Opportunity, examines how new carbon-reducing and land reclamation regulations, climate change and other environmental and social issues could create additional cost- and profit-margin constraints on future oilsands production. It says oilsands producers are operating in a narrow financial window that may shrink over time.

"The risks for companies involved in developing Canada's oilsands are arguably greater than those in the Gulf of Mexico," wrote Mindy Lubber, Ceres president.  "The energy-and water-intensive nature of oilsands, combined with climate change regulations, permitting obstacles and other challenges, are a recipe for diminishing revenues and returns if not properly managed."

Ceres works with companies to address sustainability challenges such as climate change. It also directs the Investor Network on Climate Risk, a network of 90 institutional investors with $10 trillion of collective assets focused on the business impacts of climate change.

The report was written by New York City-based RiskMetrics Group, which provides risk management and corporate governance services.

According to the Ceres-RiskMetrics report, increasing environmental regulations, including emerging carbon limits, will cause new producers' floor price needed to justify investment of $65 to $95 per bbl to rise. Adding to the projects' risk profile are resource constraints that could limit future production - specifically, adequate water and natural gas supplies that are linchpins for boosting oil production.

The reports points out the obvious, said Don Thompson, president of the Oil Sands Developers Group. "That is, that the industry has to continue to improve its performance with respect to, I guess all aspects, including environmental performance... I don't see this as a new contribution to the public debate."

Finding a marketplace for ever-increasing oilsands production is another major question, said the report. Currently, the vast majority of the 1.3 million bbls being produced every day flows to the United States. This market is jeopardized, however, by emerging low-carbon fuel standards within the U.S. that will require lower carbon intensity in transportation fuels, it said.

The report recommends that oilsands companies move quickly to examine and respond to these multiple challenges facing the industry, and that investors press the companies for such action, too. Investors have filed shareholder resolutions on the oilsands topic with Royal Dutch Shell, ExxonMobil, BP and ConocoPhillips. Shell's and BP's resolutions, challenging the financial risks that oilsands projects might pose, were voted down.

"Investors need assurances that the risks outlined in this report are being taken into account," wrote Lubber. "This includes the fact that carbon will be regulated, that water will be increasingly scarce, that tailings ponds need to be cleaned up, and that doing all this will be expensive. Companies need to build solutions in up front or they shouldn't be building these projects at all."

Again, not news to the industry, said Thompson. "It's not through an accident that we've been able to reduce our carbon footprint by 39% since 1990. It's because the industry has constantly focused on new technologies to improve our performance and our energy efficiency. It's not through accident that our water-use per barrel is now pretty competitive with conventional oil."

He said that as North America's conventional oil production footprint gets larger the oilsands' footprint gets smaller. "The reality is, if you look at it on a per-barrel of gasoline or other products, we are now about the same as conventional oil in North America. That didn't just happen. That's because for the history of the oilsands we have leveraged technology and we will continue to do so," said Thompson.

"I'd also point out that at the same time that we are reducing our footprint the average barrel of crude oil imported into North America becomes heavier and has a higher sulphur content every year. This is a 20-year trend."

The report calls on oilsands companies to take a cautious, incremental approach to oilsands expansion that fully analyzes and plans for managing these multiple risks before making additional major investments.

Over the long time-horizon of these capital-intensive investments, market and energy policies could turn against their projects for reasons largely beyond their control, it said. This argues for a more incremental approach that allows market signals to become clearer, carbon risks to be examined more thoroughly, and technologies and mitigation strategies to evolve so that risk exposures are limited and better managed.

To the extent that the oilsands industry is moving from traditional, mega-style mining projects to more modular in situ projects, this more reflective, incremental approach may already be evolving, said the report.

In situ operations have less impact on the surface, since they inject steam deeper underground to bring bitumen to the surface. But they have a much broader footprint across the boreal forest, with production facilities and pipelines fragmenting it into many parts, it said.

In situ production also requires large volumes of natural gas that add to the carbon-intensity of the process. Produced waste liquids are mainly re-injected underground, but some surface water withdrawals and wastewater treatment are also required.

According to the study, as of mid-2009, more than 530 square kilometres of land (equal to 53,000 hectares) were disturbed by oilsands mining activity in Alberta. And tailings ponds cover more than 13 000 hectares, or one-quarter, of this landscape.

"Investors need to question whether this is a wise use of resources," wrote Doug Cogan, a report co-author and director of climate risk management for RiskMetrics, whose ESG Analytics Group analyzes issues like climate change, water and ecosystem services. "It's like the Gulf of Mexico spill, but playing out in slow motion. From a climate and ecological perspective, we're really no better off."

The full report is available at http://www.ceres.org.

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