The high cost of the oil sands

By Sandra Mooibroek
From
Citizens for Public Justice

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.

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.

The paradox of the Promised Land

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 www.cpj.ca/otherwork/Environment. You can track the environmental impacts of the tar sands at www.OilSandsWatch.org.




Why We Need To Nationalize Oil and Gas
From Canadian Dimension
2006

As most experts agree, the production of natural gas and oil is nearing its peak. At the same time, the demand for both commodities is rising — and rising rapidly — as both China and India begin to experience their industrial revolutions.

The first thing that this unprecedented new situation of approaching peak oil and gas has meant is that prices have gone through the roof. What’s more, it’s very likely that these prices are going to stay sky-high for the foreseeable future and beyond.

Price Regulations?
Some people are now arguing for price regulations. This is an understandable reaction, but it ignores what is actually causing the problem: the law of supply and demand.

But if past experience is any guide, the law of supply and demand will eventually have its way. The situation of higher prices won’t be noticeably changed — even by the attempt to regulate prices.

It has been pointed out that from an ecological point of view there are potentially beneficial effects to higher energy prices: they force consumers to search for alternatives. But it’s a very mixed benefit, particularly for the majority, who depend upon the fossil-fuel-driven infrastructure to get food and clothing into the stores and oil and gas to our homes. Rising consumer goods and household energy bills bite the working and middle classes harder than they do the wealthy.

Moreover, currently understood energy alternatives are not without their own problems. Hydroelectric and coal power take terrible environmental tolls. And, as they currently exist, solar and wind power rely upon industrialized, high-energy-input hardware. For many leaders, too, “alternative energy sources” is simply code language for more nuclear power.

In any event, it’s not true that the law of supply and demand brings about ecological benefits. The truth is that the free play of market forces sends entirely the wrong signal to oil and gas producers. After all, it’s only financial barriers that discourage rapacious exploration and development. When prices fall, so too do speculative ambitions. When they rise together with sales, producers accelerate exploration, production and export. Alberta is a good example. These conditions also push producers into environmentally harmful projects.

What’s the Solution, Then?
To achieve a genuinely workable, long-term solution to the issue of rising oil and gas prices, we need two things:

The first is a massive and immediate shift into transportation systems that save on energy consumption. We need big and multiple injections of funds into public transit systems and railway infrastructure.

The second is big and multiple injections of funds into the development of alternative energy sources. We cannot continue our drug-like dependence on fossil fuels indefinitely. Of course, all this will involve hundreds of billions of dollars of investment.

To raise this kind of money, there is only one conceivable funding source: the oil and gas producers themselves. We will have to draw upon the huge profits being extracted from consumers every day from the sale of petroleum and natural gas. And the only way we are going to do this — the only way we can take control of the mega-profits needed to fund this energy revolution — is by nationalizing the oil and gas industries. We will have to ensure that their huge surpluses are held in the public sphere.How will this massive takeover be financed? By exchanging long-term government bonds equivalent in value to the worth of the industry.

Where There’s A Will…
Some might say that the political will to undertake this giant inroad on what is at the moment private property does not exist. However, recent public-opinion polls suggest otherwise.

An August public-opinion poll by Léger Marketing, for example, reveals that almost half of Canadians favour nationalizing oil firms. More precisely, 49 per cent of respondents wanted petroleum resources nationalized, while 43 per cent said they would like to see the gas companies in public hands. This support varied from province to province, of course. But while typically progressive Quebec led the way with 61 per cent, even in oil-rich Alberta, 36 per cent came out in favour of nationalization.

Of course, besides taking these companies and their resources into public hands, Canada will need to cut back its current exports to the U.S. At the moment, over half of Canada’s production is going south, and the proportion is rising. Conserving production for mostly domestic use will provide a longer lead time to bring about wiser alternatives, offering us some breathing room before the energy situation reaches crisis proportions.

Naturally, in order to cut back drastically on U.S.-bound exports, let alone nationalize the industry, it will in turn be necessary to abrogate NAFTA. In our November/December Dimension editorial, we set out some more reasons for giving notice.

All very fine and well, you might say — but just how would a nationalized oil-and-gas industry deal with the current crisis differently?

In the first place, in a nationalized scheme, unexpected price fluctuations can be more easily buffered by the state. The beneficiaries will be those whose livelihoods depend upon the availability of oil and gas, rather than the big energy companies.

A nationalized industry can also be both mandated to conserve energy and ordered to divert money into R&D for sustainable alternatives. It will have no fears about competing with its own new energy-saving products. Moreover, a state-run industry can weigh the benefits and costs of exploration against the interests of citizens, instead of merely return on investment.

Granted, this is a made-in-Canada solution for what is in reality a world-wide energy crisis. But we hasten to add that other countries — Venezuela, for example — are offering their own solutions. Clearly Canada must stand with other nations against the U.S. solution — an endless series of wars in the Middle East and other oil-producing regions to maintain an iron grip on the world’s increasingly scarce supply of oil.