The high cost of the oil sands

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The world is running out of oil and gas. More accurately, the world’s supply of easily obtainable crude oil and natural gas is quickly being depleted. What fossil fuels remain are located under an ocean floor, in remote and inaccessible corners of the globe, or are otherwise extremely difficult to extract or convert into usable forms.

The Suncor oil sands upgrading plant north of Fort McMurray, Alberta, in winter. Photo by Dan Woynillowicz, The Pembina Institute

Canada’s situation is a case in point. Extraction of established Canadian reserves of light crude and natural gas outstripped new discoveries a quarter century ago. The remaining life of Canada’s conventional reserves is now less than seven years for oil and nine years for natural gas.

Unofficially, we’re counting on unconventional reserves: the synthetic crude that can be made from tar sands to replace conventional oil, coal bed methane to replace natural gas. But these fuels may not be the salvation that’s anticipated.

Ecologically destructive

Oil derived from tar sand bitumen, a heavy form of crude which must be upgraded through a number of steps, comes with a hefty ecological price. The Pembina Institute has found that for each barrel of synthetic oil, an average of two tonnes of muskeg and trees is removed, two tonnes of tar sand are hauled, and three barrels of water heated by 21.3 metres (or 134 barrels) of natural gas are consumed. That’s for surface accessible bitumen that can be mined. For deeply buried bitumen, the destruction of boreal forest is less severe, but consumption of natural gas and water is doubled.

The accompanying release of climate-changing gases is triple that for an equivalent barrel of conventional oil. Depending on the technology employed, projected growth in oil sands development will result in up to 100 megatonnes of annual greenhouse gas emissions, making Canada’s commitment to Kyoto reductions ever more difficult to achieve and climate change impacts ever more certain.

Even at current rates of synthetic oil production, the process consumes enough natural gas every day to heat my house and 10,000 others like it for a year. Without a technological leap, projected future production could consume the entire output of the proposed Mackenzie Valley pipeline.

The long term impacts on the boreal forest under which the tar sands lie are harder to grasp, but no less disturbing. Rivers are being diverted, wetland complexes drained and thin boreal forest soils are being stripped away, carving up huge tracts of wildlife and bird habitat and replacing natural ecosystems with lakes of toxic tailings.

Is it really beneficial?

But the lure of jobs and economic growth has pushed environmental concerns aside. A barrel of syncrude oil is profitable to produce as long as it’s priced above $30 or so. Transportation is what most of the oil is being used for, and enough drivers are willing to pay far more than $30 for the 490 km that that barrel of oil will take a Chevy Avalanche.

With prices expected to remain high and spike higher, oil companies are racing to stake a claim and production is expanding feverishly. Both federal and provincial governments are eager to share in the excitement, but actual economic benefits for most Canadians may be illusory.

On paper, federal and Alberta taxes plus royalties combine to reap over 50% of total oil revenues. Under a 1997 federal-provincial agreement, however, oil sands projects are eligible for a plethora of tax deductions and a reduced royalty rate of just 1% of revenues until all capital costs are recovered.

From an investment perspective, it’s a sweet deal. As long as the oil sands projects keep expanding, the revenues paid to Albertans and the Canadian treasury will drop with declining production of conventional gas and oil. Analysts at the Pembina Institute estimate that in the 1995-2002 period, Alberta received less than 70% of the revenues it could have collected. In today’s terms, that annual shortfall would amount to $6 billion; with synthetic oil production replacing conventional, the shortfall will climb even higher.

Where has the money gone? In a discussion paper released in December 2005, Alberta’s Parkland Institute argues that while corporate equity in the fossil fuel sector and Alberta’s Gross Domestic Product have both risen dramatically in the past 10 years, average family income in Alberta (in constant dollars) has stagnated. Given that majority ownership of this sector is foreign-based, they conclude that a “significant portion of Canada’s energy wealth is flowing out of the country.”

Nonetheless, Canada appears determined to be gas pump jockey to the U.S., even if it means turning northern Alberta into an environmental sacrifice zone. (Canada sends 99% of our crude oil exports to the United States.)

Under NAFTA rules, Canada is prohibited from reducing the proportion of energy that we export to the United States or Mexico. Since the accord was signed, the percentage of both natural gas and oil exports to the United States has increased by 50%. Canada is effectively locked into an agreement under which almost two-thirds of production must be exported, even if imports are unable to meet domestic demand.

There are alternatives

Canada needs an energy security policy calling for a drastic reduction in consumption, a renegotiation or an exit from NAFTA and an end to subsidization of the petroleum sector. These three steps would not only extend the lifetime of our dwindling crude oil and natural gas reserves, they would generate nation-wide jobs and economic benefits.

How so? National programs to make buildings more energy-efficient, promote public transit and stimulate investment in renewable energy create jobs in a range of sectors including construction, transportation, finance, real estate, metal fabrication and electricity generation. A sharp reduction in consumption would lead to increased industrial efficiency and innovation, improving the competitiveness of Canadian business. And fuel efficiency standards that provide sustainability for the auto industry would also save billions in air pollution-related health costs.

A study conducted by the David Suzuki Foundation on “the bottom line on Kyoto” concluded that the only sectors that would experience “small net declines” in employment due to these sorts of climate change mitigation measures are oil and gas, government and retail.

A few jobs in the oil patch or warm homes, a healthy environment and more sustainable jobs for all Canadians? There is a better choice.

CPJ member and chemist Sandra Mooibroek endeavours to live sustainably in Kitchener-Waterloo. More of her articles are available at CPJ's environment section. You can track the environmental impacts of the tar sands at www.OilSandsWatch.org.

Citizens for Public Justice, Ottawa