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A tailings pond near a Syncrude facility in Alberta

Jeff McIntosh

Oil sands companies could soon run out of water and, in years to come, find themselves with a shrinking market for their product, according to grim new research.

Under current expansion plans, companies could run out of adequate winter water supplies as early as 2014, estimates the report, which was prepared for Boston-based investor and environmental advocacy group Ceres.

In coming years, rising construction costs could join with carbon tariffs to make new projects unprofitable at double-digit oil prices, the report says.

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Industry believes solutions lie in new technologies under development, and says current oil sands investments are responsible. But the report contemplates a worst-case scenario that would see the entire United States adopt low-carbon fuel rules. If that happens, demand for oil sands crude - which has a higher carbon content than conventional crudes - could fall below the two million barrels a day expected from projects now operational or under construction.

Though that scenario is currently unlikely - only California has made serious headway on low-carbon fuel rules, although other states have begun contemplating such a move - the report's author called the oil sands a gamble that should make investors wary.

"All of this should give investors pause as they consider anteing up for what has become a $200-billion bet," said Douglas Kogan, director of climate risk management for research group Riskmetrics Group, which wrote the report. "There may be safer places to put their money, and certainly more environmentally sustainable ones."

The Canadian Association of Petroleum Producers said the risks highlighted by the report are real - although it said industry is addressing them. The purchase of carbon credits, for example, could offset low-carbon fuel worries, while improved extraction techniques could address water and cost concerns.

"We take the risks to be very serious," said Greg Stringham, vice-president of markets and fiscal policy at CAPP. "But we believe there's also equally serious technology and mitigation and regulation to address the risks."

Oil sands investment in coming decades is expected to top $200-billion. But that spending could be held hostage to a very narrow profit window, the report finds: Future oil sands projects could need $100 (U.S.) a barrel to turn a profit, but could struggle if oil hits $120 a barrel and prompts a sag in demand.

Taken together, those risks could create a future of "reduced production, lower revenues and lower returns on investment," warned Jack Ehnes, chief executive officer of the California State Teachers' Retirement System, which manages $135-billion in funds, and has pressed companies such as ConocoPhillips for better oil sands disclosure.

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The report's publication coincides with mounting pressure on companies operating around Fort McMurray, Alta. Royal Dutch Shell PLC investors will vote Tuesday, for example, on a resolution requiring greater transparency on oil sands, while Greenpeace activists soaked a Norwegian flag with oil at a protest outside the Calgary headquarters of Statoil.

But Pius Rolheiser, a spokesman with Imperial Oil, which is investing $8-billion to build its Kearl oil sands mine, said the company is investing prudently.

"We believe that the Kearl development will be a responsible development. And if we didn't believe that we wouldn't be proceeding with it," he said.

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