|May 24, 2010|
Financial Risks of Oil Sands Greater than BP's Gulf Oil Spill
While public attention is focused on widespread environmental and
financial damage from the Gulf of Mexico oil spill, a new Ceres
report released today shows that the environmental and financial
risks of producing oil in Canada's vast oil sands region may be
Alberta's oil sands are already the world's largest energy project-with $200 billion in funds committed from the world's leading oil producers, including BP, ExxonMobil and Shell. However, these producers face numerous environmental, production and distribution challenges that will grow as the oil sands industry pushes to boost production amid tighter regulations and resource constraints, concludes the Ceres-commissioned report authored by RiskMetrics Group. Oil sands companies in Alberta are already producing 1.3 million barrels a day, and their goal is to triple production by 2030.
"The risks for companies involved in developing Canada's oil sands are arguably greater than those in the Gulf of Mexico," said Ceres president Mindy Lubber, whose group commissioned the report, Canada's Oil Sands: Shrinking Window of Opportunity. "The energy-and water-intensive nature of oil sands, combined with climate change regulations, permitting obstacles and other challenges, are a recipe for diminishing revenues and returns if not properly managed."
The report recommends that oil sands companies move quickly to examine and respond to these multiple challenges facing the industry and that investors press the companies for such action, too. Investors have already filed shareholder resolutions on the oil sands topic with Royal Dutch Shell, ExxonMobil, BP and ConocoPhillips. The Shell resolution will be voted on at tomorrow's annual corporate meeting in London. ExxonMobil's shareholder resolution is up for a vote on May 26.
While just over half of U.S. oil comes from overseas countries like Venezuela and Saudi Arabia, the fastest growing source is from two North American regions - the Gulf of Mexico and Canada's vast oil sands region. Oil production from these two areas has grown to three million barrels a day in recent years, supplying more than 15 percent of total U.S. oil needs.
While deepwater oil production in the Gulf has huge environmental risks that are obvious today, this report concludes that long-term risks from development in Canada's oil sands region are arguably greater. Many of these risks stem from already-high financial costs and the environmental impacts of transforming highly viscous bitumen into synthetic crude oil - a process that requires vast amounts of energy and water.
"Investors need to question whether this is a wise use of resources," says Doug Cogan, a report co-author and director of climate risk management for RiskMetrics Group. "The oil sands process takes natural gas-the cleanest-burning and lowest-carbon fossil fuel-to turn one of the dirtiest and highest-carbon fuels into a saleable product. Large volumes of freshwater are also consumed in the process, and end up in toxic tailings ponds.
It's like the Gulf of Mexico spill, but playing out in slow motion. From a climate and ecological perspective, we're really no better off."
"This report makes clear that oil sands companies must do more to analyze the far-reaching risks from current and future production in Alberta," said Jack Ehnes, chief executive officer of the California State Teachers' Retirement System (CalSTRS), the nation's second largest public pension fund. "With nearly $1.9 billion invested in the equity securities of BP, Shell, Exxon and ConocoPhillips combined, we have quite of teachers' money at stake here. We need to ensure these companies are properly recognizing and managing oil sand risks."
The Ceres/RiskMetrics report examines how new carbon-reducing and land reclamation regulations, climate change and other environmental and social issues could create additional cost- and profit-margin constraints on future oil sands production.
Among the report's key findings:
The report calls on oil sands companies to take a cautious, incremental approach to oil sands expansion that fully analyzes and plans for managing these multiple risks before making additional major investments.
The report specifically recommends that oil sands producers:
"All oil is getting dirtier and harder to produce," Bob Walker, vice president of sustainability at Northwest and Ethical Investment in Canada.
"With Chinese investment and demand set to grow outside the U.S., oil sands production is likely to grow. Investors need to be aware of the environmental and social risks and engage oil sands companies to improve disclosure, operational performance and to make technological investments to reduce environmental and social impacts."
"We recognize that oil companies will continue to invest in the oil sands," continued Lubber, "but they shouldn't do so blindly. Investors need assurances that the risks outlined in this report are being taken into account. This includes the fact that carbon will be regulated, that water will be increasingly scarce, that tailings ponds need to be cleaned up, and that doing all this will be expensive. Companies need to build solutions in up front or they shouldn't be building these projects at all."