Can Oil Sands Be Banned?

The boardroom wars around ExxonMobil, a district court in the Hague ruling Shell should speed up its emissions cutting above and beyond its own objectives, the International Energy Agency suggesting oil and gas exploration should come to a halt right now if we are to reach UNFCCC goals, all this seems to create a sense of agitation when everything is subject to revision and everything needs to be redefined to reflect the realities of 2021. In this context, the oil sands of Athabasca (and presumably a slew of other similar projects, including but not limited to tar sands in the Orinoco Belt, of course were they to reach a similar scope) seem to be at an especially vulnerable crossroads – just when oil sands production could finally surge unimpeded with new pipelines allowing for higher exports abroad, their raison d’être might be called into question.

Oil sands owe their rather negative environmental reputation to several factors. In order to extract oil sands, oilmen must stimulate the reservoirs to decrease the viscosity of the bituminous oil in place, only for it to be further diluted (either with naphtha or lighter crude oils) to attain the final product, synthetic crude oil. Whilst doing this, the Athabasca region is brimming with toxic tailing ponds as water gets contaminated with metals and chemicals over the course of steam injection, CO2 gets emitted into the atmosphere, simultaneously running risks of soil toxification and deforestation. Steam injection triggers less CO2 emissions than surface mining – 138 barrels produced for 1 kg of CO2 equivalent vs 113 barrels/kg CO2), requiring twentyfold less water – and some 80% of Canada’s projects belong to the former category, though the overall emissions are still off the charts.

That is not to say that Canadian companies do not set themselves binding objectives, oil sands firms are becoming increasingly wary of being caught on the wrong foot and started to get in line with the others. Suncor and Cenovus, two of Canada’s leading oil sands producers, target net-zero operations by 2050. The largest oil producer in all of Canada, Canadian Natural Resources (CNRL), was for a long time rather elusive on its quantifiable environmental goals. Some companies have even resisted the battle call for some time – for instance, Imperial Oil lobbied its shareholders to defeat a motion to set tangible net-zero emissions objectives in early May yet might well be compelled to do it nevertheless as its parent company, ExxonMobil, has become a battlefield of ideas with potential spillover effects all across the continent.

This week brought about a sudden (and collective) change of heart, five of Canada’s largest oil producers – CNRL, Suncor, Cenovus, MEG Energy and Imperial - have joined efforts in a bid to reach net-zero emissions by 2050. Seemingly, carbon capture and storage will be the main instrument of decreasing emissions, with overall energy efficiency gains and deeper integration of offsetting schemes into everyday operations also being on the corporate agenda. Timely and necessary as this initiative is, it still begs the question: how will Canada handle increasing oil sands production? It is estimated that 26% of Canada’s aggregate emissions come from the oil and gas sector and this is almost two decades from the presumed peak of oil sands production (the Canada Energy Regulator expects it to happen in 2039), i.e. the country is poised to move in the exact opposite direction as the net-zero campaigns would presume.

The federal government of Canada already mandates a $40 per tonne carbon tax on oil sands production, equivalent to $5.9 per barrel. The carbon tax stood at $30 last year and will be set even higher from April 01, 2022, at $50 per tonne. The Trudeau administration would strive to see the carbon tax reaching $170 per tonne by 2030, i.e. $25 per barrel. Even if we presume that crude prices might be high enough by that point to compensate for such a regulatory measure, Canadian oil sands producers’ profits would nevertheless suffer greatly. The provincial government of Alberta has tried to appeal against the federal carbon tax, trying to avoid that one of the cash cows of the economy is strangulated even more, to no avail – Canada’s Constitutional Court upheld the legality of the tax.

Thus, oil sands have become extremely susceptible to environmentalist pressures at a time when the Athabasca region was about to launch its last upward surge before hitting peak production. Oil sands are plentiful in Alberta and with an average timespan of 2-4 years between taking a FID and launching production they remain relatively swift to kickstart. Add to this that steam-assisted in situ projects have by now a $45-50 per barrel breakeven cost, i.e. significantly more than the current crude price. Whilst it is certainly true that the looming metal super-cycle might render oil sands equipment tangibly more expensive, long-term COVID-19 consequences could cheapen direct labor costs, perhaps even counteracting the potentially higher cost of procurements. Oil sands projects have the additional advantage that their production rates can be maintained at a comfortable plateau for 20-25 years before the field starts to get depleted.

By Gerald Jansen for Oilprice.com