Oil sands do not make economic sense

It is unlikely that Asian demand will support their long-term development

October 2, 2013

Ryan-Lijdsman2EDMONTON, AB, Oct 2, 2013/ Troy Media/ – There are claims that Alberta’s oil sands are claimed to be the “engine of the country”, producing “ethical oil”. These and other monikers are used by supporters to evoke images of Canada as an energy superpower unlike any other.

In reality, the oil sands are a marginal source of oil that only gained traction because of world supply disruptions.

The demise of carbon capture, once hyped as the panacea for high carbon emitters, is a foreshadowing of the idling of new projects and the return of the oil sands to its historic position as a backstop fuel.

Carbon capture has always been more of a political solution than a scientific one. It has never been commercialized, development is more expensive and complex than originally thought, and the power generation needed to compress carbon dioxide leads to increased emissions of other air pollutants such as nitrogen dioxide.

New projects, including ones in Alberta and Norway, have been cancelled and the U.S. Environmental Protection Agency (EPA) has ended plans to mandate carbon capture in existing coal-fired power plants. While the technical issues could be overcome with enough time and money, the economic issues that underlie this paradigm shift, from controlling carbon in old technology to a low carbon society where “no means no”, cannot.

World oil supply has increased through efficiencies, better use of oil, and increased world production. Saudi Arabia, for example, has reduced the amount of oil it uses for power by 100,000 bpd this year alone and it is estimated that by 2020 structural changes in it and other Gulf nations will add three million bpd to the world market. Political and security changes in Iran, Libya, Syria, and Iraq all have the potential to add several million bpd into the world market, in spite of Canada’s reluctance to acknowledge these advances.

Increases in world oil supply will reduce the price and cause the oil sands barrel to once again become the marginal barrel – the one that is the most costly to produce and the first to be replaced. The failure of carbon capture will mean that oil sands will not only be the most costly economically, but also environmentally; questioning further development of this resource.

As important as supply is, demand is equally important. Oil demand is generally viewed as inelastic: a price increase will not significantly lower demand. Elasticity, however, changes over time and within geographic regions. Demand in North America and Europe has stabilized but people are increasingly looking at the source of their fuel and making choices based on what they feel is ethical; a trend that is moving us away from high carbon fuels. But even though oil demand is inelastic, the demand for high carbon fuels is not and the “elasticity of carbon,” rather than the “elasticity of oil,” is a better determinant of future demand.

Oil is a global commodity and demand is increasing in Asia, but Asian usage is not following the same trajectory as in the West. The trend in these countries can be best compared to the wireless industry, where consumers jumped from no phone to a smart phone. These consumers are buying smaller, more efficient, cars and driving less than in North America, while at the same time their governments are rapidly implementing efficiency standards and developing alternative technologies.

The oil sands could satisfy short term Asian demand, if it could compete with other oil, but development in the oil sands is extremely costly and therefore dominated by the supermajors, such as Shell, Exxon, and various state-owned companies. These companies are spending more money to develop less oil in the oil sands than in other areas of the world and returns on investments are poor. Therefore, it is unlikely that Asian demand will support long-term oil sands development.

The supermajors are evolving to meet these new realities. Natural gas is currently more than 40 per cent of their production – for Shell and Exxon it is more than 50 per cent. As people increasingly turn to gas as a transportation fuel, these companies will increasingly becoming gas companies and oil sands assets will become obsolete. Canada’s economic engine is becoming just too expensive to run.

Carbon capture was at best a stop-gap measure to be used on an interim basis while the world shifted to gas and other technologies. That future is now. The oil sands do not make economic and environmental sense and we shouldn’t be seen as a country that merely puts racing stripes on a horse and buggy and calls it a race car. I believe we are better than that.

Ryan Lijdsman in independent analyst and consultant. Follow Ryan on twitter @ryanlijdsman

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