|December 13, 2016|
With Oil Sands Ambitions on a Collision Course With Climate Change, Exxon Still Stepping on the Gas
|ExxonMobil placed a risky bet on the tar sands of Canada, even though they contain some of the dirtiest oil in the world and the company's own scientists had documented the link between fossil fuels and global warming.|
Now, representing more than a third of Exxon's global liquid reserves, the investment is running into strong headwinds: increased international pressure to curtail emissions that contribute to climate change as well as persistently low oil prices that make tar sands petroleum, among the most expensive to produce, a drag on the bottom line.
In a routine financial disclosure this fall, Exxon said it could be forced to wipe billions of barrels of tar sands reserves from its books if oil prices don't rebound before the end of the year, potentially cutting its reported holdings there by 70 percent and erasing a decade of investment.
The company said it was merely complying with financial disclosure rules, and that the change would have no impact on future production. Investors hardly reacted.
Yet Exxon, through its Canadian affiliate Imperial Oil, has known for decades that international efforts to slash greenhouse gas emissions could threaten its deepening reliance on the resource, according to documents in the company archives and interviews with former employees.
"It's not a very complex calculation," said John Godfrey, a Liberal Party veteran who served 15 years in Parliament and was a cabinet minister in the mid 2000s. All-out development of the tar sands is incompatible with cutting emissions, Godfrey said. "From 15 years ago it was pretty obvious. The basic facts of the case haven't changed since."
As early as 1991, Imperial recognized that a stringent carbon tax would halt investment in the sands and that growing efforts to cap emissions would increase production costs, according to an analysis the company commissioned that year.
The science supporting the need for action on climate change strengthened over the following decades. Yet Exxon, Imperial and others poured billions of dollars into the tar sands while lobbying against government actions that would curtail development. Today, Exxon's stake there stands at 5.1 billion barrels.
The companies fought off the first global climate accord, adopted in Kyoto in 1997, which the United States never ratified and from which Canada eventually withdrew. Meanwhile, the tar sands became the fastest-growing source of emissions in Canada.
Indeed, a look at the last three decades shows that expansion in the region has been abetted by successive Canadian governments that expressed concerns over growing carbon emissions but never stopped supporting industry growth.
While Exxon and Imperial are not alone in developing the tar sands, they have stood apart from their peers in the strength of their opposition to emissions limits and continued determination to fully exploit the resource. Most of the companies' investments came after Exxon's own scientists had confirmed fossil fuels' contribution to global warming, as InsideClimate News reported last year.
And the issues of what Exxon knew about climate change and the company's global ties will be in the national spotlight now that President-elect Donald Trump has picked Exxon chief executive Rex Tillerson to serve as secretary of state.
The Paris climate agreement, which went into force last month, calls for rapid emissions cuts and Prime Minister Justin Trudeau plans to impose a national carbon tax to comply. But that relatively modest tax and Alberta's new cap on emissions appear unlikely to limit tar sands growth, putting the country's Paris targets out of reach. Canada continues to promote exports through new pipelines, a position boosted by the election of Donald Trump, who has said he wants to revive the Keystone XL pipeline, which would carry more tar sands oil to U.S. refineries.
"I'm very concerned that it's not going to turn out well for the planet," said John Bennett, Sierra Club Canada's former executive director. "Growth is still there. It's enshrined."
Alberta's tar sands lie beneath nearly 55,000 square miles of boreal forests and peatlands, an area the size of New York state. Fine grains of sand are enveloped in a substance called bitumen, a heavy hydrocarbon with the consistency of cold molasses. Some deposits are mined in giant open pits and washed clean of sand. Most can only be accessed through deep wells that are injected with steam to melt the bitumen. The processes consume enormous amounts of energy. Tar sands oil emits 17 percent more greenhouse gas emissions from development to combustion than the average barrel of crude, according to the U.S. State Department.
In recent years, the resource has come under the scrutiny of economists and bureaucrats wielding a blunt instrument called the carbon budget. Like accountants balancing their books, a United Nations committee said this year that keeping global warming to 2 degrees Celsius to prevent catastrophic change requires cutting annual greenhouse gas emissions by more than half by 2050. To achieve that goal, there's broad agreement that some fossil fuel reserves will need to be abandoned. Canada's tar sands, with their high costs and high carbon emissions, are an easy target.
Energy companies say they have been making progress in cutting emissions intensity---measured in pollution per barrel---by close to 30 percent since 1990. But nearly all those improvements came more than a decade ago. In recent years, companies have been pursuing lower quality reserves that require more energy to extract, halting progress on emissions, according to the Pembina Institute, a Canadian environmental advocacy group.
"The greenhouse gas implications just get worse and worse as you work your way down," said David Hughes, a fellow with the Post Carbon Institute, a nonprofit in California.
Imperial declined to comment for this article, pointing instead to statements on its website that say the company is "committed to reducing GHG emissions at our oil sands facilities by improving energy efficiency and investing in the development of game-changing technologies." Exxon did not respond to inquiries from InsideClimate News.
Both the companies and Canada---along with much of the oil and gas industry---have made enormous investments in the tar sands, which hold the third-largest oil reserve in the world. Exxon's website says they will provide one quarter of the Americas' oil by 2040. "In the years and decades to come," the website says, "oil sands production offers a unique opportunity to increase North American oil supplies, strengthen energy security, and create jobs and economic activity over the long term."
Such a path would almost certainly prevent Canada from hitting goals it agreed to in Paris---cutting emissions 30 percent below 2005 levels by 2030---without a technological breakthrough.
If oil sands production grows as projected, the rest of the Canadian economy will have to cut its emissions nearly in half by 2030, according to a report published in June by the Parkland Institute, a research center at the University of Alberta.
"How likely is that?" said Hughes, the author. "It's extremely tough. If you look at transportation, I'd say it would be virtually impossible to bring that down in 14 years."
In a written response to questions, Environment and Climate Change Canada, the country's environmental agency, said it is continuing to develop policies to cut emissions, and that hitting the Paris target would require "action from all sectors." Maja Stefanovska, an agency spokeswoman, said, "Future oil and gas production levels will depend on how producers respond to carbon policies, what technological advancements are made, and the ability of companies to compete in an increasingly carbon constrained world."
Ace in the Hole
Imperial Oil was formed in 1880 by a group of Canadian refiners. Eight years later, Standard Oil acquired a controlling stake, which Exxon would later inherit.
As Canada's leading oil company, Imperial was one of the first to invest in the tar sands. But the enormous costs and technological challenges prevented commercial development. In the 1950s, Imperial joined a group led by the Richfield Oil Company that proposed dropping an atomic bomb 1,250 feet down a wellbore and detonating it to melt the bitumen for extraction.
The first commercial plant, which began operating in 1967, was built by Sun Oil, a precursor to Suncor. But Imperial quickly established itself as a leader. The company had already launched its first oil sands pilot, at Cold Lake, and had joined a consortium of investors to form Syncrude, a mega-project that would begin mining shallow sands in 1978. As an affiliate of Exxon, Imperial drew on the best oil technicians in the world. The companies filed the first patents on techniques to pump high-pressure steam underground at the Cold Lake project. They would later be used by the entire industry to unlock deep deposits.
The tar sands became even more attractive to industry and government by the end of the 1970s, after governments of several oil-exporting countries seized control of their oil from Western companies and Canada's conventional production declined. At a 1980 energy conference in Denver, two Imperial executives described how demand was climbing while Canada's production was falling. They said government would support development of the tar sands as critical to national interests.
By 1989, Imperial was preparing to spend billions of dollars on its tar sands projects, and Arden R. Haynes, the company's chief executive, was calling it their "ace in the hole."
A Problem of Politics
The tar sands, though, continued to face significant obstacles, including volatile oil prices, that would delay much of that investment. And Imperial had begun to recognize another problem.
"All fossil fuels contribute to complex and inter-related pollution problems including global warming, air contamination and acid rain," Gus W. Schindel, the environmental affairs manager at Imperial's exploration arm, Esso Resources Canada, wrote in a presentation given to its management committee in 1988. He was summarizing a U.N. report issued months earlier that addressed environmental degradation across the planet. He said risks associated with global warming make "increasing reliance on fossil fuels problematic."
In a recent interview, Schindel said that environmental issues were "a piece of every project we talked about. People in the organization were genuinely concerned, not just because it could affect the bottom line but because people are people and they have families."
As InsideClimate News reported last year, Exxon's own scientists had been exploring the climate-changing role of carbon dioxide emissions since at least the 1970s. In Canada, Imperial started looking at ways to trim its emissions, focusing in particular on the oil sands, said Clement W. Bowman, a pioneering tar sands scientist and former Imperial vice president who ran the company's research center in Sarnia, Ontario in the 1980s.
More than 300 scientists and policymakers gathered at an international conference in Toronto in 1988 and declared it was "imperative to act now." They called for lowering global carbon dioxide emissions 20 percent by 2005, and suggested placing, "a levy on fossil fuel consumption of industrialized countries" to help fund a transition to cleaner fuels.
Canada soon introduced an environmental plan that emphasized promoting alternative energy and conservation. The country also set a national target to stabilize greenhouse gas emissions at 1990 levels by 2000. Whatever concerns company executives may have had about global warming were quickly eclipsed by an emerging threat to their business from government policy.
"Everybody in the whole industry at that stage realized that this was not a scientific problem at all," said John W. Pollock, who was general manager for environment and communications at Esso Resources in 1990. "At that time, it suddenly became political."
That same year, another Esso Resources executive gave a presentation at an Exxon conference in Houston, outlining the business and technology outlook for his company. Roy H.G. Millar included a slide on environmental issues that said, "by far the greatest issue facing us is the potential for global warming. Concern over this issue is now mobilizing the development of public policy in Canada and this is sure to have a significant impact on energy use and production."
Millar, who declined to be interviewed for this article, said the science was fraught with "contradictions and uncertainties," and alluded to a growing body of work that Imperial was preparing on the topic. "It is now clear that every major project we propose will be judged in terms of its contribution to greenhouse gases."
Full Speed Ahead
Imperial faced a quandary, summarized in a 1991 strategic business review for Cold Lake. "Oil Sands are currently the only significant liquid hydrocarbon resources available to replace Esso's (and Canada's) declining liquids production," it said. New technology could allow the company to quadruple reserves and improve oil recovery. But the growing likelihood of a cap on emissions and other regulation would likely hurt bitumen production even more than that of conventional oil. "We are dealing with a high carbon, high sulfur resource at Cold Lake," the review said.
Still, management endorsed a decision to proceed, assuming that, "Cold Lake is and will continue to be critical to the future of Esso Resources."
Over the next several years, Imperial, together with much of the rest of Canada's oil sands industry, would begin two parallel, public campaigns: one to promote the tar sands as a national resource in need of development, the other to fend off the growing emissions reduction effort they believed threatened growth.
Company executives used a series of public position papers and speeches to chip away at the emerging consensus for climate action. A discussion paper on "potential global warming," published in 1990, highlighted the uncertainty of the science. It committed Imperial to help study the issue but argued that emissions cuts in Canada would harm the country's exporting industries and have little impact on global emissions.
Imperial published an economic analysis in 1991 detailing several policy options. The only one that would reverse emissions growth, it found, was a steep carbon tax. That policy would penalize Canada's oil and gas industry, halt investments in the tar sands and mean that "heavy oil would virtually cease to be a useable resource."
Executives gave speeches that walked a line, acknowledging that global warming was real and deserving of attention but arguing that "politics and emotion are outpacing science." They argued emissions-cutting policies would exact an unreasonable toll on the economy.
An internal paper noted in 1993 that Imperial was coordinating its activities with Exxon, which was carving out a similar position in the United States, trying to persuade the public and policymakers to doubt the science of climate change caused by human activity. The paper outlined Imperial's lobbying strategy and talking points for trying to limit "non market-driven" responses. The first: "Stress relative certainty of the debits to Canada's precarious economy and international competitiveness versus the uncertainty in environmental benefits."
Imperial's new chief executive, Robert B. Peterson, wrote to Prime Minister Jean Chrétien ahead of a coming United Nations conference on climate change in 1995 to "urge you and your colleagues to protect Canada's economic interests at the negotiating table."
Meanwhile, the oil industry was trying to build support to develop the tar sands, where costs remained high and investment low.
"We needed to come up with a new energy vision for Canada," said Eric Newell, who began his career at Imperial and was chief executive of Syncrude from 1989 to 2003.
Led by Newell, the industry formed a task force of corporate representatives and provincial and federal officials. The group spent two years studying ways to promote development, and in 1995 published a final report detailing a "clear vision for growth." The report saw production reaching 800,000 to 1.2 million barrels per day within 25 years and called for a new royalty structure from Alberta and tax breaks from the federal government. Newell toured the country to sell the plan. Within a year, the industry had won the tax and royalty changes.
"It was full speed ahead," said Robert Slater, a senior Canadian environmental official in the 1990s. "There may have been some platitudes out there about respecting the environment or indigenous peoples, but that wasn't the behavior."
Losing the Battle. Winning the War
Even as it was encouraging development of the oil sands, Chrétien's government was also trying to establish a plan to cut the country's emissions. In December 1997, Chrétien committed Canada to a 6 percent reduction from 1990 levels by 2012 as part of the Kyoto Protocol. It was a deeper reduction than Canadian policymakers planned for, and industry leaders were furious.
"All our advice at the time was, it doesn't mean we're against reducing emissions or whatever, but the Kyoto agreement is not feasible," said Newell, the former Syncrude chief executive. He met several times with Chrétien and his staff, he said, to make the case. "It's too big a reduction, too short a time, and we need to think it through."
Over the next several years the tar sands continued to grow and drive Canada's emissions higher. By 1998, more than 25 companies were investing billions of dollars in tar sands projects. Syncrude, Suncor, Shell and Imperial alone were planning to spend more than $8 billion, according to Petroleum Economist.
In public filings submitted that year, Imperial projected that its annual emissions would rise 7 percent between 1997 and 2000, driven largely by expansions at Cold Lake. Suncor projected a 26 percent jump. Syncrude said its emissions would drop modestly before increasing later.
When it became clear that Chrétien intended to ratify the Kyoto agreement in Parliament, industry tried desperately to stop him. Thomas d'Aquino, the president of the Canadian Council of Chief Executives, which represented many of the country's top corporations, sent an "insistent" note requesting a meeting with the prime minister to discuss Kyoto in early 2002. D'Aquino said his members took global warming seriously, but he condemned the international agreement. He called hopes that the country could hit the targets without disrupting Canadians' lifestyles and incomes "wishful thinking."
Alberta also rebelled. Provincial Environment Minister Lorne Taylor said the province would not comply with Kyoto and threatened to sue the federal government.
Canada ratified Kyoto in December 2002. But the Canadian government repeatedly failed to rein in emissions. Newell and his industry had succeeded: the tar sands had become indispensable to Canadian politicians, even those ostensibly committed to climate action.
Conservative Party leader Stephen Harper became prime minister in 2006 and withdrew Canada from Kyoto five years later, though it had long been clear the country would not comply. While Canada's emissions had begun to stabilize by the time it pulled out, they had risen by about 100 million tons since 1990. The tar sands were the biggest contributor, accounting for more than 40 percent of that growth.
Over the past year, political and market forces have raised the possibility of a change of course. Some climate advocates have expressed hope that the Paris agreement, and Canada's accompanying commitment, could prompt a structural shift against the tar sands. And oil prices remain comparatively low, near $50 per barrel, although recent production cuts announced by the Organization of the Petroleum Exporting Countries and Russia could drive them higher over time.
Trudeau's election as prime minister last year appeared to signal a new era in Canada's climate policy. Even Alberta---led by Rachel Notley, a Social Democrat---announced a cap on oil sands emissions.
But without even stronger steps, the cap and Trudeau's carbon tax seem unlikely to substantially limit emissions of the tar sands. Trudeau approved two new pipelines in November, one of which could expand exports to Asia. He said the decision will not detract from Canada's climate pledges.
Building new pipelines and trying to curb emissions at the same time "just doesn't work," said Greg Muttitt, with the climate advocacy group Oil Change International.
Jennifer Winter, an energy economist at the University of Calgary, said Canada is not on track to hit its Paris targets, whether or not oil sands growth is curbed. She said Trudeau's tax, which would eventually reach $38 per ton, isn't large enough to substantially affect development. The tax considered in Imperial's 1991 paper, by contrast, would have reached $260 per ton in current dollars.
Notley's administration has said that Alberta has no method of enforcing its emissions cap and hopes the cuts will come through innovation.
Even Newell said the country and the industry have not done enough. But he and many other industry supporters say technology, such as a government-funded carbon capture project operated by Shell, will allow for growth while cutting emissions. Newell said Canada and the oil industry have "a moral responsibility" to develop the tar sands and have no choice but to find a way to do so sustainably. "This world is going to need every form of energy we know of," he said.
Exxon argued in a 2014 paper that it "takes the risk of climate change seriously, and continues to take meaningful steps to help address the risk."
But the company also said it doesn't expect any restrictions that would prevent the development of all its reserves, including the tar sands. "We are confident that none of our hydrocarbon reserves are now or will become 'stranded,'" the paper said.
And Canadian officials, who have committed the nation to emissions cuts, continue to promote growth, even though environmentalists say the two are incompatible.
"The challenge at the heart of Canadian climate policy right now is this massive cognitive dissonance among people who want to do the right thing on climate change and think the tar sands can continue to grow," said Graham Saul, who led Canada's Climate Action Network until 2012. "Politicians are not being honest with Canadians."