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The plus-and minus-game Alberta oil sands faced with fresh blitz of doubt, criticism, led by challenging costs, lowering water consumption, NAFTA probe Gary Park For Petroleum News
The negatives keep piling up on the doorstep of Alberta’s oil sands, with water consumption, the prospect of an environmental probe and the constant financial risk attached to the multibillion dollar operations making up the latest list.
For the industry, the biggest current woe is on the cost side, as reflected in a study by Carbon Tracker Initiative, a not-for-profit think tank, which said the oil sands figure prominently among 20 of the world’s costliest energy projects - representing a combined US$91 billion in capital investment - that need a minimum oil price of US$95 a barrel to be economically viable.
The report said most on the list need prices above US$110 and some in the oil sands are gambling on upwards of US$150.
CTI analyst Andrew Grant said the study “demonstrates the worsening cost environment in the oil industry and the extent to which producers are chasing volume over value at the expense of returns.
“Investors will ask whether it is prudent for oil companies to bet on even higher oil prices when they could be returning cash to shareholders,” he said.
Among the oil sands players on the list of 20 projects were ConocoPhillips’ operations that include joint ventures with Cenovus Energy, Total E&P Canada, Shell’s Carmon Creek project in northwestern Alberta and two ExxonMobil/Imperial Oil projects.
However, Cenovus challenged the CTI figures, arguing that its steam-driven projects cost only C$35-C$65 a barrel to reach a breakeven point.
Cost crunch impacts The cost crunch has already prompted the partnership of Suncor and Total to suspend indefinitely work on their C$11 billion Joslyn North mine, while the Canadian Association of Petroleum Producers predicted in July that rising costs and capital constraints would slow the pace of growth to 4.8 million barrels per day by 2030 from its earlier target of 5.2 million bpd.
Among the hardest hit are the Chinese state-owned enterprises - led by PetroChina, Sinopec, CNOOC and China Investment Corp. - which have a C$30 billion bet on the line at a time when the oil sands sector is grappling with rising costs, operational problems, delays and anemic returns.
Those investments occurred during a hasty scramble to secure assets, and although those in the best geological regions are expected to generate healthy returns, those in the more distant locations will lag, warned Samir Kayanda, vice president of energy research at ITG Investment Research, who said there is now “remorse” among many buyers.
The water challenge A General Electric Canada report noted that developing the oil sands and the shale gas deposits of northern Alberta and British Columbia “will require a lot more water than is easily or sustainably available.”
GE said fresh water consumed by the oil sands in 2012 was about 187 billion liters, according to the Canadian Association of Petroleum Producers - an amount equivalent to 40 percent of the annual water consumption in Toronto, Canada’s largest city.
The report said that despite Canada’s abundant lakes and rivers, water supplies are not evenly distributed, notably in the shale resource area of northern British Columbia where a 2012 drought forced the community of Dawson Creek to cut off up to 30 percent of water servicing the oil and gas industry rather than rationing supplies to residents.
GE said that only Shell Canada dodged the cutback because of its foresight some years ago to collaborate with Dawson Creek by contributing C$11 million to a new sewage treatment plant, while the community paid only C$1.5 million.
That facility opened in 2012, treating 3 million liters of water a day, most of which Shell sent to its Groundbirch shale gas project, while Dawson Creek used the surplus for its parks and playing fields.
The reclaimed water is stored and treated at Groundbirch, further lowering consumption, prompting Shell to sign similar deals with two Alberta municipalities.
Improved water management, GE said, has become “an obsession for oil sands development companies,” which are faced with using 2.4 barrels for every barrel of bitumen produced.
That has prompted 13 companies to form the Canadian Oil Sands Innovation Alliance, which has made reduced water consumption one of its priorities.
The lead role is being played by Suncor Energy, the largest oil sands producer, which is set to surpass its goal of lowering water use by 12 percent from its 2007 baseline by 2015, including an industry first by treating and reusing wastewater and virtually eliminating the transfer of wastewater to its tailings ponds.
Designs are also in the works for more efficient boilers and steam injection systems, which are vital to continued growth in the oil sands, now that open pit mines are being overtaken by thermal-recovery operations.
NAFTA investigation The need for the industry to get ahead of its critics is underscored by word earlier in August that investigators from an environmental watchdog set up under the North American Free Trade Agreement want to determine whether Canada is enforcing its laws on toxic leakage from tailings ponds, even though the Canadian government says the Commission on Environmental Cooperation doesn’t have that right.
That sets the stage for a second clash between the government of Prime Minister Stephen Harper and NAFTA, which believes it has a right to ensure free trade does not undermine environmental protection.
Environment Canada said the investigators are acting “contrary to their authority” by probing a 2010 complaint by two environmental groups and three individuals, who estimate that seepage from the ponds amounts to 4 billion liters a year of wastewater containing hydrocarbons and heavy metals.
For the complaint to be investigated requires a majority vote of the three NAFTA nations.
The Canadian government argues that a similar complaint is already before the courts, barring the NAFTA commission from starting its own probe.
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