Market News

 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 even greater.

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:

Shrinking profit margin: The costs of producing oil sands - already the world's most expensive source of new oil -  are rising and will continue to do so due to the onset of carbon pricing, higher input commodity prices, and rising costs for water treatment and land reclamation. As a result, global oil prices will need to remain high - possibly approaching $100 per barrel - to ensure a competitive rate of return on $120 billion in planned expansion projects. Oil sand operators must also be mindful that if global oil prices get too high, between $120 and $150 a barrel, it will likely reduce global oil demand and shift markets in favor of alternative fuels.

Vulnerability to changes in U.S. Markets: Presently, the vast majority of of the 1.3 million barrels being produced every day flows to the United States. Long-term access to this market is jeopardized, however, by emerging low-carbon fuel standards in the U.S. that will require a lower carbon intensity in transportation fuels. These fuel standards, already adopted in California, will put carbon-intensive oil sands fuel at a distinct disadvantage because oil sands output will likely have to be mixed with next-generation biofuels that are not yet being produced on a commercial scale.

Other Distribution Obstacles: Transporting expanded oil sands production west to China and other Asian markets is another alternative. However, there is strong opposition to building pipelines to Canada's West Coast from Aboriginal communities who have significant rights under the Canadian constitution.

Water and Other Resource Constraints: Oil sands production is highly water intensive, with up to four barrels of freshwater consumed for every barrel of oil produced from surface mining extraction. Water withdrawals from the Athabasca River watershed are already restricted during winter months to protect fish habitat. If oil sands production volume grows according to companies' estimates, some oil sands mining operations could exceed their wintertime allowances as early as 2014, causing possible production interruptions. Climate change may also exacerbate this situation; glaciers feeding into the Athabasca River watershed are already shrinking.

Growing Land Reclamation Costs/Liability: After 40 years of production, no oil sand companies have yet fully reclaimed the extensive tailings ponds used for holding polluted wastewater. This is because the fine tailings in these ponds take decades to settle out. These tailing ponds, already covering an area the size of Washington D.C., pose risks of contaminating adjoining lands and water resources, and present health problems in downstream communities. Alberta's Directive 74 requires oil sands miners to speed up remediation of existing ponds - an order that creates especially large liabilities for the industry's legacy miners such as Suncor and Syncrude.

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:

  • Review the lasting impact of their proposed development plans and pursue more pro-active, incremental strategies to manage environmental and social risks;
  • Provide guidance for assumed oil, natural gas and carbon prices in future production forecasts.
  • Do a better job of articulating to community groups and other stakeholders their strategies for land use planning, water management and carbon mitigation;
  • Disclose information from these more detailed evaluations to investors;
  • Develop stronger ties with the U.S. biofuels industry both for speeding up development of advanced biofuel capacity and sharing existing infrastructure, such as oil sands pipelines that already feed into the U.S. Midwest.

"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."

The full report is available at http://www.ceres.org//oilsandsreport and http://riskmetrics.com


Source: www.ceres.org