[R-G] The Costly Compromises of Oil From Sand

[Anthony Fenton]

January 7, 2009
The Costly Compromises of Oil From Sand
By IAN AUSTEN
http://www.nytimes.com/2009/01/07/business/07oilsands.html?_r=1&em

OTTAWA — The oil that is extracted from Canadian dirt is being  
portrayed as saving America from energy dependence on the unstable  
Middle East, or an environmental catastrophe in the making — depending  
on the perspective.

As Barack Obama prepares to take office in two weeks, the debate is no  
longer academic. The president-elect has promised to move forward with  
an ambitious program aimed at fighting climate change.

Not all oil is alike when it comes to environmental impact, and many  
environmentalists single out production from the oil sands as the  
epitome of “dirty oil.” In a recent study, the RAND Corporation  
estimated that oil from the oil sands generates about 10 to 30 percent  
more greenhouse gases than conventional crude.

Canada, in large part because of the production capacity of its oil  
sands, is now the largest oil supplier to the United States. But  
environmental groups in both countries are pushing for a slowdown or  
even a halt to further oil sands development, which is concentrated in  
northern Alberta.

Operators of oil sands projects and Canadian governments are eager to  
point to its potential to reduce America’s dependence on oil from  
politically unstable regions. Canadian oil sands produce about 1.2  
million barrels a day, or about 9 percent of the imported oil consumed  
in the United States.

Production was headed toward 3.5 million barrels a day by 2015 before  
the economic slowdown; with the vast reserves available, Canadian oil  
sands have the potential to produce the equivalent of 1.7 trillion  
barrels of oil.

The oil sands companies, however, have been scaling back as falling  
oil prices and the general market turmoil create a significant  
economic challenge for the projects. The entire process adds up to the  
world’s most capital-intensive method for extracting oil. A tiny  
example: each of the tires on the cartoonishly oversize dump trucks  
used in oil sands mining costs about $60,000.

While no one is about to park their giant dump trucks, several  
companies have recently announced delays in future oil sands  
investments. In November, a consortium led by Petro-Canada said it  
would temporarily stop 23.8 billion Canadian dollars ($19.5 billion)  
worth of expansions to its oil sands operations in Alberta.

“We’re not in megaproject mode anymore,” Steve W. Laut, the president  
and chief executive of Canadian Natural Resources Ltd., said to  
analysts after cutting his company’s capital spending plans in half.

And as Washington prepares to deal with climate change,  
environmentalists, who generally prefer to use the deposits’  
traditional name of tar sands, are already pressing for restrictions  
on the projects.

“It’s one of the most destructive projects on earth,” said Susan Casey- 
Lefkowitz, a senior attorney with the Natural Resources Defense  
Council in Washington. “It would be strongly resisted in the United  
States to exempt the tar sands from any climate agreement.”

Transforming the tar, more properly known as bitumen, which is mixed  
with sand, into petroleum is energy intensive and creates significant  
carbon emissions. Steam created by burning natural gas separates the  
semisolid bitumen. Then, more natural gas is needed to turn the  
bitumen into synthetic crude, which can be processed by refineries.

The development of oil sands projects has created North America’s  
greatest boomtown in recent years, Fort McMurray, Alberta. Its outsize  
economic importance has prompted Canada’s Conservative government, led  
by Prime Minister Stephen Harper, to champion the industry.

After the November election in the United States, Mr. Harper said he  
would seek to devise a continental climate change pact with the Obama  
administration. Mr. Harper suggested that any such agreement would  
include an apparent escape hatch for the oil sands because, he argued,  
of the energy security benefits they offer the United States.

Since then, however, Mr. Harper avoided an early defeat of his  
government, which does not control a majority of seats in the House of  
Commons, by shutting Parliament. Even if the Obama administration is  
willing to hold talks with Canada, Mr. Harper’s grip on power is now  
uncertain.

Recent environmental assessments, including the RAND study, also do  
not further the cause of the oil sands industry. While climate change  
is the current focus, it is not the only environmental issue  
surrounding the projects.

Spent water used in oil sands projects is placed in lake-size tailings  
ponds, one of which killed about 500 migrating birds in April. Seepage  
from the ponds is polluting rivers in northern Canada, some scientists  
argue. In December, Environmental Defence, an environmental lobby  
group based in Toronto, estimated that about four billion liters of  
contaminated water leaked from the ponds each year. (The Alberta  
government and the oil industry dispute that finding.)

Strip mining of the oil sands, the most common method of extraction,  
has destroyed large swaths of boreal forest, an important habitat for  
migratory birds and other wildlife. In December, a study published by  
the Natural Resources Defense Council and two other groups found that  
six million to 166 million birds could be lost over the next 30 to 50  
years because of that disruption.

Producers say they are making efforts to address environmental  
concerns. Mr. Laut’s company, which recently completed a 110,000- 
barrel-a-day oil sands project, is developing systems to capture and  
store much of the carbon dioxide it emits. It has applied for  
government grants to test a system that will trap some of its carbon  
dioxide output by bubbling the exhaust gases from an upgrading plant  
through the spent water from a strip mine’s steam.

Large-scale programs to capture and store carbon dioxide are not yet  
in place. The demonstration project of Canadian Natural Resources, for  
example, is not scheduled to begin until 2010.

With oil prices around $49 a barrel, profitability is fast eroding at  
oil sands projects and may already be vanishing at some operations.  
Producers have widely differing cost structures and varying  
definitions of profitability. But Andrew J. Leach, a professor of  
environmental economics at the University of Alberta in Edmonton,  
estimates that long-established plants can operate with prices as low  
as $30 a barrel. But he said newer operations need $60 to $70 a barrel  
for acceptable returns, and no one will proceed with proposed projects  
until prices return to the $80 to $90 range.

Exactly how Canada could participate in the shaping of an American  
strategy for climate change is unclear.

Mr. Harper, who is from Alberta, initially dismissed concerns about  
climate change. After taking power in 2006, he abandoned commitments  
to reduce greenhouse gas emissions made by the previous Liberal  
government when it signed the Kyoto Protocol of the United Nations  
Framework Convention on Climate Change.

Instead, Mr. Harper’s government has promised a 20 percent reduction  
in Canada’s greenhouse gas emissions by 2020. What is more  
significant, however, is that the proposal wants to use as a baseline  
2006 — a year with more pollution — rather than the Kyoto standard of  
1990.

In addition, the new plan requires companies, including oil sands  
operators, only to reduce the rate at which they emit greenhouse  
gases. If they achieve those efficiencies, they will still be allowed  
to raise their total emissions through increased production.

Even if Canadian producers dislike American climate change policies,  
they will be hard-pressed to sell their oil elsewhere. Canada’s  
pipeline network takes oil sands production south and offers no routes  
to ports for export to other countries.

But some people are optimistic about the prospect of a two-nation  
climate pact.

“It would be a big mistake for Congress to impose restrictions on the  
oil sands,” said Paul Cellucci, a former governor of Massachusetts and  
former United States ambassador to Canada who now works on energy  
issues for the law firm McCarter & English, in Boston. “That would not  
be good for the United States.”