Canada has staked its future on the oil sands. In November, Report on Business magazine together with Thomson Reuters examine what that means both at home and abroad. Read more from the issue at tgam.ca/oil.
Everything about Alberta’s oil sands is huge – from the sheer scale of the 170-billion-barrel resource in the ground, to the two-storey trucks that haul bitumen ore in the mines, to the $30-billion per year in capital investment to expand the flow of crude.
The industry was born 50 years ago with the largest single private investment made in Canada to that date, a $250-million bet by a forerunner of today’s Suncor Energy Inc.
The bid to produce commercial grade oil from the tarry bitumen that seeped through the muskeg of Northern Alberta was dubbed the “biggest gamble in history.” It was unlike any oil production that had been done–using massive mining and manufacturing machinery rather than the drilling rigs that coaxed crude from the ground in Texas and Saudi Arabia.
In the half-century since, oil sands producers have overcome the challenges of subarctic climate and wrenching oil price crashes. Now they are facing equally enormous tests: the need to access new markets and to mitigate their heavy environmental footprint.
Failure to meet those tests could slam the brakes on ambitious plans to double oil sands production over the next decade to four million barrels per day.
At stake is Canada’s largest export industry, one whose economic clout extends far beyond Alberta to labour markets on the East Coast, to Toronto’s financial district, and to a supply chain that extends across North America. Industry proponents argue Canada’s national prosperity depends on the oil industry’s access to new markets, especially in fast-growing Asia.
But that claim is hugely contentious. Supporters tend to exaggerate the economic benefits of the oil sands outside Alberta’s borders. And it is unwise to depend on the industry for the country’s economic well-being unless it can be made environmentally sustainable–a costly effort in a sector where high costs are already problematic.
Certainly, the battle to construct much-needed pipelines is fraught with difficulty, running through a minefield of environmental and aboriginal opposition. Proposed pipelines span the breadth of Canada: crossing mountain ranges to terminals on the West Coast where people who play on and make their living from the sea are loath to have more crude-bearing supertankers plying their waters; or heading east to the Atlantic Ocean past towns where Ontarians and Quebeckers often see risk but little reward.
Every oil-company executive in Calgary – certainly any one of them watching the current slump in oil prices – knows that today’s success can be fleeting. Producers of natural gas saw prices plunge from $12 (U.S.) per thousand cubic feet in 2008 to below $3 (U.S.) last year, and see little room for optimism. Oil-patch veterans remember the bust of the mid-1980s, which brought early oil sands construction to a halt and threatened the very viability of Fort McMurray’s fledgling industry.
Yet now that the oil sands dominate Canada’s largest export industry and draw such international opprobrium, it is easy to forget the visionary beginnings of the industry.
Early explorers like Alexander Mackenzie remarked on the tarry bitumen that was seen oozing out of the ground on the banks of the Athabasca River. A century later, a member of a delegation that had come to negotiate a native land treaty noted the region “is stored with a substance of great economic value.”
But it was the diligence of a chemist from Georgetown, Ontario, Karl Clark, that proved its commercial value. Dr. Clark joined the Alberta Scientific and Industrial Research Council in 1921, when the province was only 16 years old. He spent his career researching how to use hot water and chemicals to produce commercial-grade crude from the bitumen. He helped perfect the process in the 1950s at a pilot plant at Bitumount, located 90 kilometres north of Fort McMurray. But the big strike at Leduc in 1947 shifted attention to conventional oil, and by 1958, Bitumount fell into disrepair.
Two men kept the dream alive: Social Credit Premier Ernest Manning and Pittsburgh industrialist J. Howard Pew, president of Sun Oil Co. Manning never lost sight of the economic potential that the oil sands held for his province.
Pew–whose family trust is now a major funder of some anti-oil sands environmental groups–in-vested heavily in Great Canadian Oil Sands Ltd., the forerunner of Suncor. The two men attended the official opening of the company’s first plant near Fort McMurray in 1967. Even as Expo 67 was putting Canada on the international map, the Alberta Premier declared that “no other event in Canada’s centennial year is more important or significant.”
Since that bold beginning, the oil sands have seen boom and bust. The Arab oil embargo of 1973 drove up world oil prices and breathed life into the capital-intensive tar sands. The Iranian revolution generated even more enthusiasm, as Albertans became known in the rest of Canada as “blue-eyed sheiks.” But what goes up too fast tends to come down with a thud. And when oil prices collapsed–hitting $10 (U.S.) per barrel in 1986–the sector went into a slump that was to last nearly 20 years.
In the mid-1990s, with oil prices at depressed levels, the Liberal government of Jean Chrétien had to provide tax breaks to rescue the industry, in particular the two major oil sands producers, Suncor and Syncrude Canada Ltd. It wasn’t until international crude prices began to soar in 2003–reflecting war in the Middle East and the rise in China’s demand–that the oil sands sector found firm economic footing and expansion began in earnest.
A popular bumper sticker from the 1980s sums up the make-hay-while-the-sun-shines mentality: “Please God, let there be another oil boom. I promise not to piss it all away next time.” And while the collapse of international prices was a critical reason for Alberta’s 1980s bust, Ottawa and its interventionist National Energy Program will always share the blame in the minds of many Albertans. And there is an abiding fear in Calgary that Ottawa will again remove the punch bowl, spurred on this time by climate concerns rather than economic nationalism.
So far, the oil sands producers have largely escaped the climate lash. Alberta set some modest standards and charges a small levy when producers exceed their targets. But despite numerous promises to do so, the Harper government has so far refused to impose federal measures to control greenhouse gas (GHG) emissions from the oil sands. Based on the current production forecast, the sector will see its emissions grow by 56 megatonnes by 2020, offsetting all the reductions gained by phasing out coal-fired electricity in Ontario and lower outputs in other provinces. In the 2009 climate summit at Copenhagen, Harper pledged that Canada would reduce its emissions by 17 per cent from 2005 levels by 2020, a commitment that will be impossible to meet given the expected growth in the oil sands.
Indeed, the Harper government has spent considerable political capital defending the industry. Harper has strained relations between his government and the administration of President Barack Obama, which has delayed a decision on the proposed Keystone XL pipeline.
The Conservatives have overhauled – “gutted” according to critics–environmental regulations, while condemning industry opponents as “radicals.”
Both Harper and Alberta’s new premier, Jim Prentice, now insist Canada can only impose additional GHG regulations on the oil industry if the U.S. hits its booming crude producers with similar regulations. But Obama is engaged in a fierce battle with Republicans and the coal industry over his plan to impose carbon regulations on the coal-fired power sector, which is by far the largest source of CO2 emissions in the United States. Waiting for the Americans to deal with carbon emissions in their oil sector would delay Canadian action for years. Pressure will grow for Canada to table a national emissions-reduction strategy as countries work to achieve an international agreement at a United Nations-sponsored climate summit in Paris next year.
And with a federal election expected next year, the industry could well face a new government in Ottawa that would be more determined than the current one is to establish a national plan to reduce carbon emissions by reining in the oil sands. Greg Stringham, vice-president of the Canadian Association of Petroleum Producers, acknowledges that the oil sands’ emissions will increase so long as production expands at projected rates.
Some companies have made progress in reducing their emissions of carbon dioxide per barrel of oil produced. Imperial Oil Ltd. says bitumen from its new Kearl mine has a lifetime GHG output roughly equivalent to conventional oil, while Cenovus Energy Inc. is experimenting with solvents to reduce the steam needed to extract bitumen when companies employ steam-assisted gravity drainage techniques. Reducing the amount of steam generated by burning natural gas would cut CO2 emissions.
Stringham says innovation could bring down emissions-per-barrel by up to 20 per cent over the next 15 years, but that overall emissions would still head sharply higher due to production growth. The industry recognizes the world will need to transition away from high-carbon fuel. But the producers believe the transition will take decades, and that Canadians–and a growing number of people around the world–will need oil to fuel their modern lifestyles.
Environmentalists argue the climate can’t wait. Some, like U.S. climate scientist James Hansen, say rising oil sands production would mean “game over for the climate.” Others take a more measured view, proposing a stiff carbon tax that would slow but not stop production growth. “Ninety-nine per cent of environmentalists out there are not pushing for elimination of oil or the oil sands any time soon,” says Rick Smith, executive director of the Broadbent Institute, a left-of-centre think tank. “What we need is a national discussion on how we’re going to reduce carbon pollution in this country, and how everyone will do their fair share.”
Making the oil sands cleaner costs money–and they already rank among the world’s most expensive places to get crude. Major projects have been cancelled by international companies like Norway’s Statoil SA and France’s Total SA, which cited poor economics. The Calgary-based Canadian Energy Research Institute (CERI) estimates that a new mine would need an oil price of $105 (U.S.) a barrel to make a reasonable return, while a typical in-situ project would require a price of $85. Piling on more costs for environmental reasons could drive away badly needed investment. “Those types of social-licence issues could make the oil sands uneconomic if you added on enough of them,” says CERI president Peter Howard, whose institute recently produced a report on the “uncertainties” facing the oil sands sector.
While the industry has successfully fended off tougher carbon regulations for now, it is facing an uphill battle on pipelines. If they’re not built, climate activists may achieve indirectly what they couldn’t do in a head-on battle. CERI forecasts that a failure to win approval for major pipeline projects would slash 1.8 million barrels per day from anticipated oil sands production in 2030. Because the crude would be trapped in North America, producers would have to sell it at a deep discount, costing them $20 (U.S.) on every barrel they sell.
Indeed, as they sought to “decarbonize” the economy, environmentalists turned their spotlight on not just the oil sands but also on its pipelines. BP PLC’s Gulf of Mexico disaster and Enbridge Inc.’s ugly spill on Michigan’s Kalamazoo River illustrated local risks. On top of that, First Nations communities across Canada are determined to exert more power over development on their traditional lands, and pipeline companies face lengthy court battles to determine whether, once armed with approval from the National Energy Board, they can override aboriginal objections. That legal landscape has created tremendous uncertainty for the industry, says Robert Johnston, chief executive officer at Eurasia Group, a New York-based political-risk firm. “It used to be the NEB process was difficult but once you got that, you had a social licence to operate,” Johnston says. “But that seems to be no longer the case. Now, once you get your NEB permit, the real negotiations begin. That’s a very new and very complicated, difficult business model because it is not clear what the exit model is. How do you know when you have a social licence?”
What would be lost if the oil sands produces 3.7 million barrels a day at $70 a barrel, rather than five million barrels at $90? In its report on the future of the oil sands, CERI repeats a common refrain heard from the industry and the politicians that support it: “Canada’s future economic prosperity depends on its ability to provide reliable infrastructure to allow Canadian energy resources to fuel Asian economic growth at world market prices.” The Alberta government says the sector supports the jobs of 112,000 Canadians outside the province, a figure it says will grow to 500,000 in 25 years. In a 2012 report, the Conference Board of Canada forecast the oil sands sector would generate $79.4-billion in federal and provincial revenues from 2012 to 2035. Oil sands jobs for out-of-province workers–mainly from Atlantic Canada–have resulted in a significant drop in unemployment in their provinces and a flow of money back home. The sector “certainly does have positive effects to the Canadian economy as a whole,” Toronto-Dominion Bank economist Craig Alexander says. “There are knock-on effects nationally, but there is no question the provinces that benefit most are the provinces where the energy resources reside.”
A trickier question is whether the boom in the oil sands has had negative impacts outside Alberta. Former Ontario premier Dalton McGuinty once mused about those potential costs and faced such a storm of outrage that he quickly backtracked. But some economists still argue that the rapid rise in the Canadian dollar between 2003 and 2008–and again after a recessionary slump in 2009–reflect the country’s status as a “petro currency.” The oil-fuelled increase in the loonie undermined the export-oriented manufacturing sector centred in Ontario and Quebec, argue Bank of America economists Emanuella Enenajor and Ian Gordon in a recent report titled “Canada’s Dutch Disease.”
It’s been an ongoing debate: In 2012, then Bank of Canada governor Mark Carney rejected the Dutch disease argument as “overly simplistic,” arguing rising commodity prices benefit the Canadian economy and that the higher dollar was only partly responsible for the decline in manufacturing. But the industry tends to overstate the benefits for the rest of the country, says Matthew Mendelsohn, director of the Mowat Centre, a Toronto-based think tank. “The growth in the oil sands has created some opportunities in Ontario and elsewhere,” says Mendelsohn, a former deputy minister in Ontario. “But it has also been the primary driver of increases in our emissions–which we will have to pay for at some time–and it has driven up the dollar exceptionally and created volatility in our currency, which has hurt manufacturing significantly in Central Canada.”
The oil sands debate reveals a balkanized and deeply polarized Canada. In a country where one province discriminates against another’s winemakers, it’s small wonder the biggest question on interprovincial crude pipelines is: What’s in it for me? The Harper government vilifies pipeline opponents as radicals bent on undermining the national interest, while environmentalists paint the Prime Minister as public enemy No. 1 on climate change. The loudest voices proclaim: “Let her rip” or “Shut her down.” Somewhere in between, there’s a path that weighs the economic benefits against the environmental costs, takes into account the rights of First Nations and the need for a competitive industry, and deploys capital into 40-year projects that won’t be stranded as the world moves to a low-carbon economy.
Shawn McCarthy is The Globe and Mail ‘s global energy reporter, based in Ottawa.
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