Wednesday, June 8, 2011

Canadian Oil Sands

The rapid development of the oil sands, perhaps the world’s largest energy project, has made Canada a northern Saudi Arabia with more than just a dirty-oil problem.

Given that US imports from the oil sands now total nearly 1.5 million barrels a day (b/d) of extra-heavy oil and that approvals for 4 million b/d of new production are in the works, Canada has staked its economic future on selling low-grade, asphalt-like crude.

No-one questions the economic clout of the capital-intensive oil-sands industry. It employs more than 144,000 Canadians as well as thousands of foreign temporary workers. The complex megaproject, which has attracted operators as varied as PetroChina and Statoil, now accounts for 5% of Canada’s GDP and about 25% of total exports.

Billions of investment 

In the absence of a global transition to low-carbon energy, or other black swans, oil companies plan to sink C$200 billion ($207 billion) into the world’s second-largest petroleum reserve over the next two decades.
Although federal and provincial governments could make C$500 billion in the form of taxes and royalties during that period, Canada has held no national debate about its oil wealth. Nor does it have a fiscal plan. Even the OECD is appalled by this brazen neglect of fundamentals.

The scale and pace of oil-sands activity, which now represents 2.5% of world crude production, has also attracted unprecedented global controversy. US Democratic representatives and senators have raised concerns about US reliance on the dirtiest source of transportation fuel available.

European parliamentarians have also appealed to Shell and Statoil “to cease your tar-sands activities in Alberta”, a reference to bitumen’s messy upgrading process and carbon intensity. Even free trade with Europe is at risk.

Ugly footprint

Global scrutiny combined with the unrelenting lobbying by industry, government and environmental groups has also focused sharp attention on the oil sands’ ugly footprint. Given present approvals, it will industrialise a northern forest the size of 17 Berlins.

In the past year, more than half a dozen official reports have seriously challenged both Canada’s and Alberta’s ability to monitor oil-sands projects’ impact on air, water, wildlife, human health and the global atmosphere.

Moreover, Canada’s environment commissioner, the Royal Society of Canada, the federal Oil Sands Advisory Panel, the Alberta Water Monitoring Data Review Committee and several peer-reviewed scientific papers have uniformly concluded that the underfunded, fragmented and lacks federal leadership. 

For example, the Oil Sands Research and Information Network (Osrin), a distinctly un-green group funded by the Alberta government, warned in 2010 that if government didn’t address environmental concerns as serious as acid rain or C$20 billion-worth of mining waste, then the bitumen industry could lose its collective social licence “to operate, access markets and access capital to invest in the oil sands”. Osrin added: “Improvements in the monitoring and reporting system are urgently required.”

Environmental groups, in other words, have not been crying wolf about the project. And both the federal and Alberta governments have slowly recognised that a thorough revamp of existing monitoring programmesis absolutely urgent.

Bitumen fever 

But Canada must also address the feverish symptoms of becoming a significant oil exporter. The country now has a bad case of the Dutch disease and central Canada’s manufacturing sector is floundering. The creation of a stabilisation fund, or sovereign-wealth fund could temper the nation’s petro-currency, but Canada’s ruling Conservative party seems committed to an oil-funded Thatcherite revolution.

The federal government is spending oil revenue for highly partisan gains and saving nothing for the future. Like any typical petro-state, it lowered taxes and then racked up a record C$50 billion deficit.

Although industry spin doctors describe the project as “secure”, its unwieldy size and complexity suggest real vulnerabilities for investors and consumers alike. Indeed, Canada has yet to complete a socio-economic risk assessment of the projects.

Two bitumen pipeline leaks last year showed that the project’s infrastructure was as brittle as an Afghan-military petroleum convoy. Pipeline ruptures in Michigan and Illinois nearly shut down six US Midwest refineries and increased the price of oil by $10 a barrel. The Midwest, the largest burner of bitumen, even had to import oil by barge up the Mississippi River.

Incredibly, US bitumen imports now depend on insecure foreign imports. Because the hellishly viscous crude can’t move through a pipeline without being diluted with light oil or condensate, the industry must now import 200,000 b/d of light oil ;And this dependency will increase to an estimated 800,000 b/d by 2025.

To date, the bitumen rush, haphazard regulatory oversight and federal disdain for climate-change action (the Canadian prime minister remains sceptical) has sorely diminished the country’s global reputation. All of this neglect has placed the social licence of the petroleum industry to exploit heavier and dirtier resources around the world at risk.

Rethink required 

To avoid global censure, both Canada and Alberta must rethink the pace and scale of development in the oil sands. They must address serious scientific gaps, create an integrated monitoring system with federal leadership and proceed at a slower pace.

The project needs a single monitoring agency with strong federal leadership, staffed primarily by federal scientists. This would reflect the projects’ impact on matters of critical federal interest and jurisdiction including water, aboriginal health and carbon emissions.

A national carbon tax that takes 2 kg of pollution off the national table for every 1 kg produced in the oil sands is also essential. Even industry leaders would support such a move. It would also place Canada on a much-needed energy diet.

Several years ago, Peter Lougheed, Alberta’s former premier, prescribed a coherent policy for oil sands development. Slow down, he said. Behave like an owner; collect our fair share; save for the future; clean up the mess; add value and build one project at a time. It remains the most prudent national vision for an extreme resource.

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