01 Feb 2016: Report

Once Unstoppable, Tar Sands
Now Battered from All Sides

Canada’s tar sands industry is in crisis as oil prices plummet, pipeline projects are killed, and new governments in Alberta and Ottawa vow less reliance on this highly polluting energy source. Is this the beginning of the end for the tar sands juggernaut?

by ed struzik

In the summer of 2014, when oil was selling for $114 per barrel, Alberta’s tar sands industry was still confidently standing by earlier predictions that it would nearly triple production by 2035. Companies such as Suncor, Statoil, Syncrude, Royal Dutch Shell, and Imperial Oil Ltd. were investing hundreds of billions of dollars in new projects to mine the thick, highly polluting bitumen.

Eyeing this oil boom, Canadian Prime Minister Stephen Harper said he was certain that the Keystone XL pipeline — “a no-brainer” in his words — would be built, with or without President Barack Obama’s approval. Keystone, which would carry tar sands crude from Alberta to refineries along the Gulf of Mexico, was critical if bitumen from new tar sands projects was going to find a way to market.

What a difference 18 months makes. The price of oil today has plummeted to around $30 a barrel, well below the break-even point for tar sands producers, and the value of the Canadian dollar has fallen sharply. President Obama killed the Keystone XL project in November, and staunch
The industry is suddenly weathering a perfect storm that analysts say has significantly altered its prospects.
opposition has so far halted efforts to build pipelines that would carry tar sands crude to Canada’s Pacific and Atlantic coasts.

Equally as ominous for the tar sands industry are political developments in Alberta and Canada. In May, Alberta voters ousted the conservative premier and elected a left-of-center government. The new premier, Rachel Notley, is committed to doing something meaningful about climate change and reviewing oil and gas royalty payments to the province, which are among the lowest in the world.

In October, Canadian voters tossed out Harper and his Conservative Party government and elected liberal Justin Trudeau as prime minister. Last month, Trudeau vowed not to be a “pipeline cheerleader” and said he would take greenhouse gas emissions into account when evaluating oil pipeline projects. Trudeau signaled that a new era had arrived when he told The World Economic Forum in Davos, Switzerland, “My predecessor wanted you to know Canada for its resources. I want you to know Canadians for our resourcefulness.”

Photo by Mark Ralston/AFP/Getty Images
The Syncrude oil sands extraction facility near the town of Fort McMurray in northern Alberta.
While it may not be time to raise the white flag of surrender in Fort McMurray, the tar sands capital in northern Alberta, the industry is suddenly weathering a perfect storm that analysts say has significantly altered its prospects. Mark Jaccard, a professor of sustainable energy at Simon Fraser University in Vancouver who has served as CEO of the British Columbia Utilities Commission, is not alone in suggesting that because of concerns about climate change and low oil prices, the era of tar sands megaprojects may be at an end.

“This is not good for high-cost oil resources, such as oil sands,” says Jaccard. “And if major countries such as the U.S., China, and the European Union continue their modest climate push, there will be further challenges to high-emissions oil sources, such as oil sands.”

Peter Tertzakian, chief energy economist and managing director at ARC Financial Corp., agrees, saying that the oil sands industry needs to get smaller, cleaner, and more efficient if it is to be a significant player in the future.

“Even before the price crash there was a trend in oil and gas investing – whether it was by large corporations or individual investors — away from long-payback projects with lots of above-ground risk that were also characterized by very high capital costs,” Tertzakian told Alberta Oil Magazine in September. “The oil sands has to compete for capital with all
‘Within the realm of sanity, I think the oil sands are finished,’ says one critic.
the other types of oil projects that are out there... The old paradigm of 4,000-man camps and long construction periods is over.”

Other energy and environmental experts take an even dimmer view, saying that given the steady expansion of renewable energy and more concerted international action to slow global warming, the carbon-intensive tar sands may well shrink and disappear in the coming decades.

“Within the realm of sanity, I think the oil sands are finished,” says David Schindler, who, as a limnologist and ecologist at the University of Alberta played a key role in forcing the tar sands to change the way it monitors and reports air and water pollution. “With their product now so cheap, they are operating well below cost, only desperately trying to recoup some of the huge startup investment rather than see it all lost.” He predicted that the industry will undergo major consolidation until only one or two deep-pocketed giants remain. But, he added, “Eventually they too will fall. New investment? Not unless investors are total idiots.”

Photo by Mark Ralston/AFP/Getty Images
A tar sands excavation pit at a mine operated by Calgary-based Suncor.
Schindler and other scientists and conservationists have called attention to the large-scale environmental destruction that has accompanied tar sands mining, which involves excavating pits as deep as 250 feet to extract the oil-rich sands. Over the past four decades, tar sands operations have destroyed roughly 300 square miles of boreal forest and wetland habitat. Large amounts of water are used in the mining process, and the industry has created 70 square miles of toxic tailings ponds that have yet to be cleaned up. The mining and refining of tar sands crude also creates significantly more greenhouse gas emissions — estimates range as high as 37 percent more — than producing conventional crude oil.

Many companies have already conceded that they do not have a future in an economic and regulatory regime that rewards lower costs and lower emissions and penalizes big polluters. According to Wood Mackenzie, an energy consulting company, 800,000 barrels a day of oil sands projects have been delayed or canceled over the past 18 months. That amounts to 16 new projects that have been put on hold or canceled. CNOOC, which recently suspended production at its Long Lake tar sands facility, is reportedly one of a number of other companies looking for ways of bailing out of the tar sands.

Even the Canadian Association of Petroleum Producers has backed away from its once-rosy forecasts for tar sands expansion. In 2013, it predicted that tar sands production would increase from approximately 2 million barrels per day to 5.2 million barrels per day by 2030. In 2015, CAPP
One wild card is the generous government subsidies that are needed to keep the tar sand industry afloat.
reduced estimated 2030 tar sands production to 4 million barrels a day. Tar sands output could fall even lower, analysts say.

Making matters worse for the industry is that there are few signs that prices are going to rebound to the $60- to $80-per-barrel break-even point for many companies anytime soon. The International Energy Agency predicts that oil prices might not rebound to the $80-per-barrel range until the 2020s and that growth after that will be “tepid at least until the 2040s.”

If that’s the case, only the biggest and richest companies will have enough revenue in reserve to weather this current storm. That may be why Canadian Oil Sands Ltd. recently agreed to a takeover by Suncor, and why other companies are likely to consolidate.

Another existential problem for the tar sands industry is that pipeline projects such as Keystone and Northern Gateway — which would transport tar sands oil to Pacific Ocean ports — are dead or on death row. Other pipeline projects such as Trans Mountain and Energy East are encountering strong opposition from Canadian aboriginal leaders, provincial premiers, and municipal officials, including 82 mayors from Quebec, who in January voiced their opposition to the Energy East Pipeline, which would transport tar sands crude to ports in Atlantic Canada.

Jaccard and some other analysts aren’t about to count out the tar sands just yet. He says that conflict in Saudi Arabia or the Middle East could slash production and boost oil prices. A faltering of long-term efforts to slow climate change could also bode well for the tar sands, says Jaccard. He also believes that some of the bigger tar sands companies are rich and innovative enough to surmount the technological challenges they face in dealing with carbon emissions and other climate change challenges, such as the predicted shortage of the massive amounts of river water required to separate oil from the tar sands.

One wild card in all this is the generous government subsidies and rock-bottom royalties needed to keep the tar sands industry afloat. These subsidies may well decline or disappear as the Alberta and Canadian governments shift their priorities and increase support to wind, solar, and
‘The interesting question is how do oil sands and pipeline companies evolve?’ asks one expert.
natural gas — not only to meet their CO2 emissions-reduction targets, but also to stimulate the economy.

According to a 2014 report conducted by Clean Energy Canada, renewable energy growth in Canada has produced more jobs than the oil sands industry. Direct employment in the clean energy sector — which includes hydropower, as well as wind, solar and biomass — was 23,700, compared with 22,000 people employed in the tar sands, according to the report.

“The interesting question then is how do oil sands and pipeline companies evolve?” says Dan Woynillowicz, policy director for Clean Energy Canada. “Some have become players in renewable energy, and while it’s a small part of their current business, they are actually some of the largest renewable energy developers in Canada. What does it look like for these companies to keep transitioning from a fossil fuel company, to an energy company with fossil and renewable assets, to a renewable energy company?”

Even if and when oil prices bounce back, the tar sands industry will continue to see steady competition not only from renewable energy projects, but also from the boom in oil produced by hydrofracturing shale formations in the United States.

ALSO FROM YALE e360

Canada’s Indigenous Bands Rise
Up Against a Tar Sands Pipeline

Canada indigenous bands rise against tar sands pipeline
TransCanada, the company behind the now-defunct Keystone XL, is proposing another pipeline that would ship Alberta tar sands oil to Canada’s Atlantic coast. But fierce opposition from First Nation communities could derail this controversial project, Jim Robbins reports.
READ MORE
Schindler, the limnologist who has been a longtime industry critic, may well be wrong in predicting that Fort McMurray “will be the next Butte, Montana, with lots of boarded-up houses, and that taxpayers will be left with lots of toxic tailings ponds and desolate unreclaimable mined lands on their hands.” But he’s not wrong in pointing out that Albertans are genuinely frightened about the future of their once-indomitable energy industry.

Simon Dyer, the associate regional director for Alberta at the Pembina Institute, which acts as an energy industry watchdog, says the Alberta government’s recent plan to cap tar sands carbon emissions at 100 megatons by 2030, from 70 megatons today, is a clear sign that a robust expansion of production is not in the cards.

“It’s not clear that Albertans and Canadians know that the kind of expansion we were promised several years ago will not come to pass,” he says. “That's not going to happen.”

POSTED ON 01 Feb 2016 IN Energy Policy & Politics North America 

COMMENTS


Very interesting Ed. One question: what would the
break-even point be if the generous subsidies were
removed, or the royalties increased? It seems clear
the current break-even point is artificial given the
handouts to industry.
Posted by Kyle G. on 03 Feb 2016


Kyle: It’s a good question that is impossible to
answer succinctly because there are so many
variables, including the much disputed definition of
a subsidy.

But consider the following:

• In 2013 the International Monetary Fund
estimated that energy subsidies in Canada
amounted to about $34 billion each year in direct
support to producers and from taxes that were
uncollected on externalized costs such as carbon
emissions and air pollution. It doesn’t take into
account the fact that these companies are allowed
to freely divert massive amounts of water from
aquifers and rivers without treating it and
returning it back to the environment.
http://www.oecd.org/site/tadffss/CAN.pdf
• The Canadian Exploration Expense (CEE)
provision allows oil and gas and mining companies
to deduct exploration expenses in full (in the year
in which they are incurred. Exploration expenses
include the costs of geological surveys and
exploratory drilling, whether successful or
unsuccessful.
• Tar sands royalties are based on two things:
whether the company has paid for its start-up
capital costs on a project and on the price of oil.
The Alberta government encourages development
by charging as little as a one percent royalty rate
during the start-up phase of a project, which can
last for several years. These rates are among the
lowest in the world.
• In early February, the new socialist government
in Alberta shocked many critics of the royalty
regime when it decided to maintain the status quo
on what it gets from the tar sands for the
foreseeable future. It was pretty clear to all that
the government realized that many tar sands
companies would go under if they were asked to
pay for more. Faced with a multi-billion budgetary
deficit, the government didn’t want to take that
risk.
There is, of course, a lot more to this. But to make
a long story short, many tar sands companies
couldn't survive without ultra low royalty rates,
generous subsidies, and free water, especially in a
world in which the barrel price of oil is below $60.
If the price remains below that level, many
companies are likely to go under or consolidate,
unless of course the government sweetens the pot.
There is also one other thing to consider, as the
IMF says in it 2013 report: Subsidies “crowd out
priority public spending, and depress private
investment, including in the energy sector.
Subsidies also distort resource allocation by
encouraging excessive energy consumption,
artificially promoting capital-intensive industries,
reducing incentives for investment in renewable
energy, and accelerating the depletion of natural
resources.”

There are a couple of good articles on this that you
might want to read
http://thetyee.ca/News/2016/02/02/Alberta-
Royalty-Review-Disaster/
http://thetyee.ca/Opinion/2014/05/15/Canadas-
34-Billion-Fossil-Fuel-Subsidies/

Ed Struzik

Posted by Ed Struzik on 04 Feb 2016


Thanks very much for the additional information Ed
- much appreciated.
Posted by Kyle G on 08 Feb 2016


Good post. I be taught one thing more challenging on totally different blogs everyday. It would at all times be stimulating to read content material from other writers and follow somewhat something from their store. I’d prefer to use some with the content on my weblog whether or not you don’t mind. Natually I’ll offer you a hyperlink in your internet blog. Thanks for sharing.
Donald Alvord
Posted by Donald Alvord on 05 Mar 2016


Hello.This article was extremely motivating, especially since I was browsing for thoughts on this issue last Wednesday.
isabel marant skor rea
Posted by isabel marant skor rea on 09 May 2016


POST A COMMENT

Comments are moderated and will be reviewed before they are posted to ensure they are on topic, relevant, and not abusive. They may be edited for length and clarity. By filling out this form, you give Yale Environment 360 permission to publish this comment.

Name 
Email address 
Comment 
 
Please type the text shown in the graphic.


ed struzikABOUT THE AUTHOR
Canadian author and photographer Ed Struzik has been writing on the Arctic for three decades. In previous articles for Yale Environment 360, he has reported on shrinking snowpack and glaciers in the Rockies and the tar sands industry's proposed Arctic export route.
MORE BY THIS AUTHOR

 
 

RELATED ARTICLES


Canada’s Indigenous Bands Rise
Up Against a Tar Sands Pipeline

TransCanada, the company behind the now-defunct Keystone XL, is proposing another pipeline that would ship Alberta tar sands oil to Canada’s Atlantic coast. But fierce opposition from First Nation communities could derail this controversial project.
READ MORE

As the Fracking Boom Spreads,
One Watershed Draws the Line

After spreading across Pennsylvania, fracking for natural gas has run into government bans in the Delaware River watershed. The basins of the Delaware and nearby Susquehanna River offer a sharp contrast between what happens in places that allow fracking and those that do not.
READ MORE

How British Columbia Gained
By Putting a Price on Carbon

Seven years ago, British Columbia became the first jurisdiction in North America to adopt an economy-wide carbon tax. In a Yale Environment 360 interview, economics expert Stewart Elgie explains how the tax helped cut the province’s fossil fuel use without hurting its economy.
READ MORE

Oklahoma’s Clear Link Between
Earthquakes and Energy Boom

Oklahoma officials this week said oil and gas activity was the likely cause of the stunning increase in earthquakes in the state. In an interview with Yale Environment 360, Oklahoma geologist Todd Halihan talks about what has caused this growing problem and what can be done about it.
READ MORE

Natural Gas Boom Brings Major
Growth for U.S. Chemical Plants

The surge in U.S. production of shale gas is leading to the rapid expansion of chemical and manufacturing plants that use the gas as feedstock. But environmentalists worry these new facilities will bring further harm to industrialized regions already bearing a heavy pollution burden.
READ MORE

 

MORE IN Reports


As Drought Grips South Africa,
A Conflict Over Water and Coal

by keith schneider
Facing one of the worst droughts in memory, South Africa’s leaders have doubled down on their support of the water-intensive coal industry. But clean energy advocates say the smartest move would be to back the country’s burgeoning wind and solar power sectors.
READ MORE

Saving Amphibians: The Quest
To Protect Threatened Species

by jim robbins
The decline of the world’s amphibians continues, with causes ranging from fungal diseases to warmer and drier climates. Now, researchers are looking at ways to intervene with triage measures that could help save the most vulnerable populations.
READ MORE

How Rising CO2 Levels May
Contribute to Die-Off of Bees

by lisa palmer
As they investigate the factors behind the decline of bee populations, scientists are now eyeing a new culprit — soaring levels of carbon dioxide, which alter plant physiology and significantly reduce protein in important sources of pollen.
READ MORE

Can Uber-Style Buses Help
Relieve India's Air Pollution?

by jason overdorf
India’s megacities have some the deadliest air and worst traffic congestion in the world. But Indian startups are now launching initiatives that link smart-phone apps and private shuttle buses and could help keep cars and other motorized vehicles off the roads.
READ MORE

Trouble in Paradise: A Blight
Threatens Key Hawaiian Tree

by richard schiffman
The ʻohiʻa is Hawaii’s iconic tree, a keystone species that maintains healthy watersheds and provides habitat for numerous endangered birds. But a virulent fungal disease, possibly related to a warmer, drier climate, is now felling the island’s cherished 'ohi'a forests.
READ MORE

Climate Change Adds Urgency
To Push to Save World’s Seeds

by virginia gewin
In the face of rising temperatures and worsening drought, the world’s repositories of agricultural seeds may hold the key to growing food under increasingly harsh conditions. But keeping these gene banks safe and viable is a complicated and expensive challenge.
READ MORE

As World Warms, How Do We
Decide When a Plant is Native?

by janet marinelli
The fate of a tree planted at poet Emily Dickinson's home raises questions about whether gardeners can — or should — play a role in helping plant species migrate in the face of rising temperatures and swiftly changing botanical zones.
READ MORE

With New Tools, A Focus
On Urban Methane Leaks

by judith lewis mernit
Until recently, little was known about the extent of methane leaking from urban gas distribution pipes and its impact on global warming. But recent advances in detecting this potent greenhouse gas are pushing U.S. states to begin addressing this long-neglected problem.
READ MORE

Is Climate Change Putting
World's Microbiomes at Risk?

by jim robbins
Researchers are only beginning to understand the complexities of the microbes in the earth’s soil and the role they play in fostering healthy ecosystems. Now, climate change is threatening to disrupt these microbes and the key functions they provide.
READ MORE

As Electric Cars Stall, A Move
To Greener Trucks and Buses

by cheryl katz
Low gasoline prices and continuing performance issues have slowed the growth of electric car sales. But that has not stymied progress in electrifying larger vehicles, including garbage trucks, city buses, and medium-sized trucks used by freight giants like FedEx.
READ MORE


e360 digest
Yale
Yale Environment 360 is
a publication of the
Yale School of Forestry
& Environmental Studies
.

SEARCH e360



Donate to Yale Environment 360
Yale Environment 360 Newsletter


CONNECT


ABOUT

About e360
Contact
Submission Guidelines
Reprints

E360 en Español

Universia partnership
Yale Environment 360 articles are now available in Spanish and Portuguese on Universia, the online educational network.
Visit the site.


DEPARTMENTS

Opinion
Reports
Analysis
Interviews
Forums
e360 Digest
Podcasts
Video Reports

TOPICS

Biodiversity
Business & Innovation
Climate
Energy
Forests
Oceans
Policy & Politics
Pollution & Health
Science & Technology
Sustainability
Urbanization
Water

REGIONS

Antarctica and the Arctic
Africa
Asia
Australia
Central & South America
Europe
Middle East
North America

e360 VIDEO

“video
Tribal people and ranchers join together to stop a project that would haul coal across their Montana land.
Watch the video.

e360 MOBILE

Mobile
The latest
from Yale
Environment 360
is now available for mobile devices at e360.yale.edu/mobile.

e360 PHOTO ESSAY

“Alaska
An aerial view of why Europe’s per capita carbon emissions are less than 50 percent of those in the U.S.
View the photos.

e360 VIDEO

“Battle
The 2015 Yale e360 Video Contest winner documents a Northeastern town's bitter battle over a wind farm.
Watch the video.

e360 VIDEO

Food waste
An e360 video series looks at the staggering amount of food wasted in the U.S. – a problem with major human and environmental costs.
Watch the video.

e360 VIDEO

Colorado wildfires
An e360 video goes onto the front lines with Colorado firefighters confronting deadly blazes fueled by a hotter, drier climate.
Watch the video.

e360 SPECIAL REPORT

“Tainted
A three-part series Tainted Harvest looks at the soil pollution crisis in China, the threat it poses to the food supply, and the complexity of any cleanup.
Read the series.

OF INTEREST



Yale