Canada in danger of booming tar sands backlash

Experts warn that Alberta's success story could unravel in face of falling oil prices as investors weigh up whether to pull the plug on lucrative projects

Six weeks ago Canada's booming tar sands industry was growing so fast that it looked possible it might one day overtake every major oil-producing nation except for Saudi Arabia.

With West Texas Intermediate crude trading at more than $105 a barrel there was no question the vast, but costly to extract, reserves of oil contained in the tar sands of the Alberta province would yield a huge profit.

Just how vast an economic opportunity this presented for Canada was laid bare in BP's latest statistical review of world energy, published yesterday.

This showed that while Canada's tar sands-dominated crude production stood at 4.3 per cent of global output last year, the country actually houses 10.6 per cent of the world's proven, recoverable oil reserves. This is the third largest reserve of any nation – in other words, even after a decade-long boom, Alberta was only warming up.

After two years of sustained high oil prices, investors had regained the confidence that was shattered when the financial crisis pulled oil below $40 a barrel and prompted them to shelve $80bn of planned developments in 2008 and 2009.

An unprecedented 16 projects were scheduled to come on stream over the next four years, increasing the output of bitumen – a heavy form of crude – by 1 million barrels a day to 2.6 million.

But a lot has changed since the beginning of May. West Texas crude has tumbled by about a fifth to hover around $80 a barrel and there are fears of a continued decline that threatens the viability of large swathes of Canada's biggest industry.

Last week, Wood Mackenzie, the oil experts, came out and said what many in the industry had increasingly been fearing. Noting the tar sands' high-energy extraction process meant production costs were among the highest of any oil fields in the world, Wood Mackenzie warned that falling – or simply volatile – prices "could result in operators delaying or cancelling unsanctioned projects."

While this may not feed through into reduced production straight away, in the longer term output could be hit substantially, Wood Mackenzie warned. "There is little scope to adjust near-term production, due to the amount of capital already sunk. However, if the external environment proves to be unattractive, companies do have the option to significantly change the longer-term production outlook," Wood Mackenzie said.

Wood Mackenzie points out that a quarter of planned tar sand projects scheduled to begin production between 2015 and 2018 are still "unsanctioned" – meaning their financing is yet to be finalised and making them particularly vulnerable to delay or cancellation in the coming months if the oil price is dragged down further.

In the longer term, a persistently lower oil price could hit tar sand investment far harder. Although Albertan oil production dates back to the 1960s it has only taken off in the last decade and the cost of production has soared in line with increased competition for labour and machinery, pushing prices up far more than in the economy at large.

Competition from the US mid-West, Canada's main market, is rising rapidly as new extraction techniques have greatly increased the amount of oil that can be produced from shale rocks in North Dakota.

This has created a glut of supply, which has pushed the tar sands oil price down to about $64 a barrel in recent days, well below even the price of declining West Texas crude.

To put this into perspective, it now costs between $80and $100 a barrel to break even on new Canadian oil sand mines where the sands are dug up with giant mechanical digging trucks that have hydraulic and electrically-powered shovels and transported to an extraction plant in 320 tonne trucks. The bitumen is extracted from the sand, water and clay by blasting it with hot water and separating it from the resulting slurry. Less than five years ago, the figure was just $30 a barrel.

For deeper reserves, the so-called steam-assisted gravity drainage drilling method – which injects steam underground and pumps the bitumen to the surface – costs about $60 a barrel.

Investors also have concerns about a lack of pipelines to transport the growing volumes of oil to foreign markets. A number of key pipelines have yet to gain approval because of environmental concerns. The best known is Keystone XL, which would run, via the Mid-West, all the way to the Gulf of Mexico, connecting the Canadian tar sands to international markets.

Just how dire the need for additional pipeline capacity is illustrated in the huge disparity that has opened up in the West Texas and Brent crude oil prices. "The differential between Brent and West Texas Intermediate reached a record premium (in $/bbl) due to infrastructure bottlenecks driven by rapidly-rising US and Canadian production," said yesterday's BP report. Yesterday, Brent crude was fetching about $97.50 a barrel, compared to around $83.50 for West Texas.

Several oil sands projects have recently come on to the market. Just last week, it emerged that the billionaire Koch brothers in the US are hoping to sell stakes in six tar sand properties which analysts estimate could fetch up to $2.9bn, while Shell put Orion, a small steam-driven project in north-eastern Alberta, on the block.

Although it produces just 5,000 barrels a day, it has been granted regulatory approval to expand that to more than 30,000. These offerings come after ConocoPhillips put a multi-billion dollar package of Canadian tar sand assets up for sale. "We are definitely at that point where if the price of oil comes off much more oil sands will lose their attractiveness. They will be the first area of global production to come under pressure," said Sanford Bernstein analyst Iain Pyle.

Furthermore, companies are rejigging plans to expand existing projects rather than building expensive new ones, Mr Pyle adds. Shell, for example, said last week it planned to increase production by up to 90,000 barrels a day at its Athabasca oil sands project at Alberta by "debottlenecking" – or improving the efficiency of – its existing development.

However, the FTSE 100 oil giant insisted it would also press ahead with a proposed new development of its Jackpine Mine in the Athabasca oil sands – the world's biggest known reservoir of crude bitumen – but was still waiting on regulatory approval.

The long-running environmental battle is also set to escalate in the coming months. Canada has been battling the EU since 2009 when Europe proposed a measure called the Fuel Quality Directive, which sought to reduce the level of greenhouse gases emitted by vehicles by labelling tar-sands generated fuel as "dirty". Virtually no tar sands fuel reaches European refineries from Canada but Ottawa is concerned a European ruling will influence other markets, including the US, where most of its oil ends up.

A stalemate in February had 12 EU nations voting for, eight against and seven (including Britain) abstaining. Another vote was planned for this month but has now been postponed until next year after Joe Oliver, Canada's natural resources minister, demanded an extensive study into the validity of the EU proposal.

With Canada's vast tar sand oil reserves forecast to contribute C$2.1 trillion to the nation's economy over the next 25 years, that letter is but the tip of the industry lobbying iceberg.

However, the Canadian Association of Petroleum Producer forecasts that oil sands production will double from 1.6m to 3.2m barrels a day by 2020 and more than triple to 5.0m by 2030 – backed up by Canada's political stability, the relative ease of its extraction, the certainty of the volume and location of the oil and the fact that global demand is only going to go up in the longer term. It's just the growth could be a good bit lower than many may have forecast six weeks ago.

Energy boost in crude health

Rising crude prices and improving extraction techniques have increased the volume of economically viable oil reserves in the world by 60 per cent in the past two decades, according to BP's latest statistical review of energy.

The volume of global reserves hit 1.65tn barrels of oil in 2011, according to new BP figures, as the crude price hit its second highest inflation-adjusted price ever, after 1864.

This, combined with technological innovation, has made extraction of hydrocarbons from tar sands, rocks and deep water increasingly common.

Although fears that the declining oil price may hit some high-cost projects, such as in the Canadian tar sands, production is likely to remain historically high for the foreseeable future.

BP's report also revealed that the amount of coal consumed across the world jumped by 5.4 per cent last year to its largest share of global energy consumption in more than four decades, dealing a blow to hopes of hitting key carbon emissions targets.

China's voracious appetite for coal-generated electricity saw it burning 9.7 per cent more of the black stuff than in 2010, according to BP's latest statistical review of energy.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
News
ebooksNow available in paperback
Life and Style
tech
News
The 67P/CG comet as seen from the Philae lander
scienceThe most important scientific breakthroughs of 2014
Arts and Entertainment
Ian McKellen as Gandalf in The Hobbit: The Battle Of The Five Armies
film
Arts and Entertainment
Sarah Koenig, creator of popular podcast Serial, which is to be broadcast by the BBC
tvReview: The secret to the programme's success is that it allows its audience to play detective
News
Ruby Wax has previously written about her mental health problems in her book Sane New World
people
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Marketing Services Manager - (communications, testing, DM)

£32000 - £35000 per annum + benefits: Ashdown Group: Marketing Services Manage...

Guru Careers: Finance Account Manager

£Neg. (DOE) + Excellent Benefits: Guru Careers: A Finance Account Manager with...

Ashdown Group: Java Developer - Hertfordshire - £47,000 + bonus + benefits

£40000 - £470000 per annum + bonus: Ashdown Group: Java Developer / J2EE Devel...

Ashdown Group: Direct Marketing Manager - B2C, Financial Services - Slough

£45000 - £55000 per annum + Benefits: Ashdown Group: An exciting opportunity h...

Day In a Page

Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Could cannabis oil reverse the effects of cancer?

Could cannabis oil reverse effects of cancer?

As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

The Interview movie review

You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
Serial mania has propelled podcasts into the cultural mainstream

How podcasts became mainstream

People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
Jesus Christ has become an unlikely pin-up for hipster marketing companies

Jesus Christ has become an unlikely pin-up

Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
Rosetta space mission voted most important scientific breakthrough of 2014

A memorable year for science – if not for mice

The most important scientific breakthroughs of 2014
Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

Christmas cocktails to make you merry

Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
5 best activity trackers

Fitness technology: 5 best activity trackers

Up the ante in your regimen and change the habits of a lifetime with this wearable tech
Paul Scholes column: It's a little-known fact, but I have played one of the seven dwarves

Paul Scholes column

It's a little-known fact, but I have played one of the seven dwarves
Fifa's travelling circus once again steals limelight from real stars

Fifa's travelling circus once again steals limelight from real stars

Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
Frank Warren column: 2014 – boxing is back and winning new fans

Frank Warren: Boxing is back and winning new fans

2014 proves it's now one of sport's biggest hitters again
Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

The Boy in the Dress: On set with the stars

Walliams' story about a boy who goes to school in a dress will be shown this Christmas