Boardroom at war over ExxonMobil, a district court in The Hague, ruling that Shell should step up emissions by cutting emissions beyond its own targets, the International Energy Agency suggesting that oil and gas exploration should stop now if we are to meet the goals of the UNFCCC, all of this seems to create a sense of turmoil as everything is subject to review and everything needs to be redefined to reflect the realities of 2021. In this context, the Athabasca oil sands (and presumably a multitude of other similar projects, including but not limited to the oil sands of the Orinoco Belt, of course if they reached a similar scope) seem be at a particularly vulnerable crossroads – just when oil sands production could finally expand unimpeded with new pipelines allowing for increased exp ortations abroad, their raison d’être could be called into question.
The tar sands owe their rather negative environmental reputation to several factors. In order to extract the tar sands, tankers must stimulate reservoirs to decrease the viscosity of the bituminous oil in place, only to be further diluted (with naphtha or lighter crudes) to achieve the end product, the synthetic crude oil. In doing so, the Athabasca region is full of toxic tailings ponds, as the water is contaminated with metals and chemicals during the injection of steam, CO2 is emitted into the atmosphere, simultaneously leading to risks of soil toxicity and deforestation. Steam injection triggers less CO2 emissions than surface mining – 138 barrels produced per 1 kg of CO2 equivalent vs 113 barrels / kg CO2), requiring twenty times less water – and some 80% of Canada’s projects fall into the first category, although overall emissions are still out of range.
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This does not mean that Canadian companies do not set binding targets, oil sands companies are increasingly worried that they will be caught on the wrong foot and are starting to align with others. Suncor and Cenovus, two of Canada’s largest oil sands producers, aim for net zero operations by 2050. Canada’s largest oil producer, Canadian Natural Resources (CNRL), has long been rather elusive in terms of its quantifiable environmental objectives. Some companies have even resisted the call to battle for a while. For example, Imperial Oil pressured its shareholders to reject a motion to set tangible targets for net zero emissions in early May, but may well be forced to do so as a parent company nonetheless. ExxonMobil. , has become a battleground for ideas with potential spillover effects across the continent.
This week brought about a sudden (and collective) turnaround as five of Canada’s largest oil producers – CNRL, Suncor, Cenovus, MEG Energy and Imperial – joined forces to try to achieve net zero emissions by 2050. Apparently, carbon capture and storage will be the main instrument for reducing emissions, with overall energy efficiency gains and deeper integration of offsets into day-to-day operations also being on the agenda of the business. Timely and necessary as it is, this initiative always raises the question: How will Canada deal with increased production from the tar sands? An estimated 26% of Canada’s overall emissions come from the oil and gas sector, which is almost two decades from the presumed peak in oil sands production (the Canada Energy Regulator expects this to occur in 2039) that is, the country is about to go exactly in the opposite direction of what the net-zero campaigns would assume.
Canada’s federal government already imposes a carbon tax of $ 40 per tonne on oil sands production, which equates to $ 5.9 per barrel. The carbon tax was $ 30 last year and will be even higher as of April 1, 2022, at $ 50 per tonne. The Trudeau administration would strive to see the carbon tax reach $ 170 a tonne by 2030, or $ 25 a barrel. Even assuming that crude prices might be high enough at that time to compensate for such a regulatory measure, the profits of Canadian oil sands producers would nonetheless suffer greatly. The provincial government of Alberta has tried to appeal against the federal carbon tax, trying to prevent one of the economy’s cash cows from being further strangled, to no avail – the Constitutional Court of Canada has confirmed the legality of the tax.
Thus, the oil sands became extremely sensitive to environmental pressures at a time when the Athabasca region was about to launch its last upward push before reaching a peak in production. Oil sands are abundant in Alberta and with an average time of 2 to 4 years between taking an FID and starting production, they are still relatively quick to start. Add to this that in situ steam-assisted projects now have a breakeven cost of $ 45-50 per barrel, which is significantly more than the current price of crude. While it is certainly true that the looming super-cycle of metals could make oil sands equipment significantly more expensive, the long-term consequences of COVID-19 could reduce direct labor costs, may -even offset the potentially higher cost of purchases. Oil sands projects have the added benefit that their production rates can be kept at a comfortable plateau for 20 to 25 years before the field begins to run out.
By Gerald Jansen for Oil Octobers
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