The oil-sands slowdown is our opportunity to reassess

by Shawn McCarthy

Call it a "de facto moratorium" or a "market-based slowdown." Either way, Canada's oil-sands juggernaut has hit the skids, spreading a deepening gloom over Alberta's economy, and to some degree, across the country.
Most expansion projects not currently under way in the Fort McMurray region have been put on the shelf, as oil companies slash their budgets to reflect the new low-oil-price world where they have to operate.

The slump has given new meaning to "boom and bust." Just a year ago, companies were expected to spend more than $ 20-bn a year in new projects, workers were flooding into the province to meet a seemingly insatiable demand for labour, and many observers in both the United States and Canada, including former premier Peter Lougheed, were voicing concerns about the sustainability of the effort.
Now, the industry's spending on oil sands has been slashed by half, layoffs are looming, and as a result the environmentalists appear to have won at least an approximation of the moratorium on development that they have long called for.

But there is also an opportunity in the slowdown: "de facto moratorium" is a phrase that Jim Prentice, the federal Environment Minister, has used.
In the absence of a headlong rush for development, there is a chance for the industry and governments to reassess their approach to the oil sands, to make projects more environmentally and commercially sustainable. For companies, that means a sharp focus on driving down costs, in some cases by adopting new technology that will reduce energy use and therefore greenhouse-gas emissions.

For federal and provincial governments, it means concluding a North American agreement on climate change that will drive major emission reductions in greenhouse gases, not merely impose a small tax on polluting -- and at least asking whether there should be a more orderly pace, and even limits, to oil-sands expansion.
For both governments and the industry, there is now an opportunity to demonstrate and commercialize new technology -- from carbon capture and storage to new extraction processes -- that are now more promise than reality.

What is needed is nothing less than a national energy and environment strategy.
Such a plan, developed by Ottawa in consultation with the provinces, would place the oil-sands development in a broader energy strategy -- one that acknowledges the need for secure sources of transportation fuel, but also the reality of a carbon-constrained world in which the price of emitting greenhouse gases will have to be reflected in energy use, from the wellhead to the tailpipe.

Dovetailing with US efforts
Industry and environmental groups alike support the idea of a national approach, though such a plan would obviously look very different according to which interest group is colouring in the details.
"We need a national energy strategy or something that brings more balance to the energy and environment portfolios," says Wishart Robson, climate-changeadviser at the Calgary-based oil company Nexen. The federal government says it is pursuing a strategy, though it avoids any grandiose phrasing that might conjure up memories of the national energy program, the highly interventionist Liberal policy of the early 1980s that was -- and remains -- detested in Alberta.

Mr Prentice has said Ottawa will dovetail with US efforts to ensure secure energy supplies; pursue North American climate-change policies that will cap emissions on "dirty" sources like coal-fire power and oil sands; increase fuel mileage standards for autos; and encourage development of lower-carbon sources such as nuclear and natural gas.
Canada will be pushed down this path by US President Barack Obama, who has vowed to pursue emission caps and new standards for lower-carbon fuels, despite concerns that such policies will drive up energy costs in the midst of a recession. However, the federal budget provided little sense that Ottawa is preparing the country for a shift to a green economy, or even that it is concerned about the slump in the oil sands, which extends to the oil and gas industry generally.

Rather than any direct measures, the federal government provided $ 69-bn to ease access to credit in the economy generally -- admittedly, an important problem for a capital-intensive oil industry -- and vague promises of funding for carbon-capture-and-storage technology.
CCS is the fig leaf of the oil sands -- an untested, hugely expensive technology that governments and industry claim will be critical if oil-sands emissions are to be reduced to acceptable levels. The idea is to divert CO{-2} emissions from smokestacks and store it permanently underground, but sceptics doubt it will ever be commercially viable. The quest for sustainable oil-sands development is complicated by daunting economics that render investments risky even on a pure commercial basis.

As the world's second-largest oil reserves, Alberta's tarry oil sands yield a crude oil that ranks among the most expensive in the world to extract and turn into gasoline. The processes are capital- and energy-intensive, emit three times the greenhouse-gas emissions of conventional oil and gulp tremendous amounts of water.
The Calgary-based Canadian Energy Research Institute (CERI) estimated last fall that companies planning new oil-sands projects require prices between $ 80 and $ 100 a barrel to earn a reasonable rate of return, depending on the extraction method.

When crude rebounds
Prices are now hovering in the low $ 40 range. Most analysts expect that it will take a couple of years, at least, for crude prices to rebound above $ 80 (US) a barrel. However, there is also consensus that, in the longer term, prices will stay high enough to justify oil-sands investment.
Indeed, Imperial Oil announced that it is proceeding with plans for its Kearl Lake oil-sands project. Imperial, a subsidiary of the US giant ExxonMobil, has said it will incorporate the most up-to-date technology to minimize emissions, but is not planning to include carbon capture and storage.

All oil-sands companies are scrambling to cope with today's low oil prices by cutting costs. CERI researcher David McColl thinks the general pause in development should help that effort.
"The silver lining in this is that it gives companies a chance to breathe, a chance to think," he says. "It is an opportunity for producers to take a look at every aspect of their operations and really cut costs every way they can."

Labour rates, which shot up amid the construction boom, are hard to roll back, though firms are starting to ratchet back expenses and perks. Steel prices peaked last summer and have eased somewhat, but have a long way to fall before they retrace the price increases of the past four or five years.
Mr McColl estimates that companies can shave $ 10 off their breakeven thresholds, from $ 80 to $ 70. That's still well above current price levels.

Many oil-sands developers are experimenting with new techniques to reduce operating costs by lowering energy use, which can also cut emissions. They include underground combustion, reducing temperatures needed to process bitumen, and the use of solvents rather than steam.
But those efforts won't suffice to meet aggressive emission-reduction targets.

Some oil-patch observers are promoting what could be a breakthrough electric-heating technology that has the potential to dramatically reduce both the costs and the emissions. E-T Energy, founded by Calgary engineer Bruce McGee, has been testing the process in a pilot project near Fort McMurray, and is now planning to launch a small commercial operation that would produce 10,000 barrels of oil a day.
E-T Energy expects recovery costs would be well below the current price of crude oil, and emissions would be much lower. But while major companies such as Royal Dutch Shell PLC are also examining the use of electric heating, it is far too soon to determine whether the technology will transform the oil sands, as proponents envision.

At this point, governments are still touting carbon capture and storage to deliver hoped-for improvements in oil-sands emissions. Alberta has a short list of 17 demonstration projects, from which it will choose three or four to underwrite with a $ 2-bn fund. The list includes the biggest names in the oil sands, including Suncor, Syncrude, Shell and Petro-Canada.
In the budget, Ottawa announced a $ 1-bn "clean energy fund" -- to be spent over five years -- that will support CCS, among other emerging technologies. Finance Minister Jim Flaherty also promised tax breaks for companies that invest in CCS technology.

University of Calgary energy expert David Keith says he has some confidence that the carbon-capture technology can play a significant role in future emissions reduction. But the biggest opportunities are in coal-fired power and the upgraders that turn oil-sands bitumen into synthetic crude oil, rather than at the extraction sites.
Even at its most promising, there is a lot of work to be done before CCS technology is ready for prime time. Most important, perhaps, governments have to be willing to set a price on carbon emissions -- either directly or through caps -- that is high enough to drive the multi-bn-dollar investments that will be needed.
"If the governments seized the opportunity provided by the slowdown, it could be very useful in allowing more effective integration of CCS and other low-emission technologies in the oil-sands operations," Dr Keith says.

Time alone won't suffice. Without political leadership, the industry will use the hiatus to trim costs and reduce emissions marginally, then move like a herd to reignite the boom when prices climb again.
And future governments may be forced to react belatedly, to rein in growing emissions.