'Greater scrutiny' seen for energy projects in wake of Gulf spill

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The Gulf of Mexico oil spill could do more harm than good to Canada's oil sands by accentuating the environmental record of Alberta's massive oil resource, one of the leading U.S. energy thinkers says.

Alberta politicians have argued that the impact Gulf spill will improve the environmental image of the oil sands, and some in Calgary believe capital dollars will be diverted from the deepwater projects to Fort McMurray. But the chief energy strategist with IHS CERA says the U.S. disaster may also create a rougher ride for Alberta.

"The impact will be probably greater scrutiny," said David Hobbs, who is based in Cambridge, Mass., and works for one of North America's most respected energy analysis firms..

"What [the Gulf spill]has done is to raise the general profile on energy investments," he said, citing as an example the growing controversy about TransCanada Corp.'s Keystone XL pipeline, which would carry oil sands crude to U.S. refineries.

"The environmental footprint of energy has risen up the ladder," he said. "That's particularly important at the point where the Canadian oil sands has just become the largest source of imports into the United States."

Critics argue that the Alberta oil sands use large amounts of energy to produce oil, produce greenhouse-gas emissions, and create lake-sized tailings ponds filled with toxic effluent.

But whatever attention the Gulf spill brings to massive energy projects, it is unlikely to diminish foreign interest in Canada's oil sands, Mr. Hobbs said in an interview.

"To the extent that they're welcomed by Canadian policy, I think we'll see expanding investment in the Canadian oil sands," he said. "If you're an energy-hungry economy, you invest where the resources are. And there is undoubtedly a huge resource in Canada."

China, in particular, could be drawn by a potential that has been seen little discussion in Canada: a closed supply system that would draw crude exclusively to its shores.

"I can foresee a situation in which ... there is a physical integration of the supply chain, which means it's very hard for that oil to go elsewhere," Mr. Hobbs said.

That could involve doing barely enough refining - what the industry calls "upgrading" - to make the thick oil sands bitumen flow in a pipeline, but not enough to bring it to the specifications required by U.S. refineries. That would effectively take that crude away from the markets that currently count on oil sands supply, and could have implications for plans to build pipeline capacity both to the U.S. and to the Canadian West Coast, where it could be shipped across the Pacific.

"I think what we'll find is an attempt to customize the integrated supply chain such that it becomes quite expensive to divert out of that supply chain," Mr. Hobbs said.

Though he cautioned that the billions of dollars in Chinese oil sands investments are "a prelude to physical crude moving to China only if that is demonstrably, economically, attractive for that to happen," other factors could influence decisions to transport oil to Asia.

Establishing a supply chain would give companies "long-term predictability," he noted. "And that has a value: knowing it's a structure [a company]can rely on for 10, 20, 30, 50 years. People forget that with the oil sands, you're making an investment that is going to outlive most of the people who took the decision to make the investment."

But, he added, those investments are unlikely to appear unwise, especially given the difficulty new energy sources will encounter in replacing fossil fuels. Wind, solar and other energy sources have become comparatively more expensive recent years, especially as falling natural-gas prices have made petroleum-fired energy cheaper.

Mr. Hobbs cautioned, however, that those who want to make natural gas into a transportation fuel - including Encana Corp. and U.S. oilman T. Boone Pickens, both of whom have advocated refitting diesel semi-trucks - may find it difficult to do so without governments requiring the switch.

"The cost of infrastructure to allow that switch is very large," he said. "And the difficulty is the loss of payload, or the shorter distance between refuelling [which comes from powering trucks with gas] That's the profit in as competitive a market as long-haul trucking. And so it only really starts to make sense if everyone has to convert."