Alberta’s oil sands are the world’s largest energy project, with $200 billion in funds committed from the world’s leading oil producers, including BP, ExxonMobil and Shell. The lifetime value of the oil locked in the bitumen around Fort McMurray is $17.5 trillion. The companies currently produce 1.3 million barrels a day and their strategic intent is to triple this production over the next decade.
A recent report, written by Ceres - a coalition of investors, environmental groups and public interest groups working with companies to address sustainability challenges such as climate change – and widely publicized around the world, suggests that the oil sands risk assessment is such that the potential profitable of the oil extracted from the oil sands will decline over time unless the environmental issues associated with its extraction are addressed. These issues include increasing C02 emissions, water use, tailings ponds, land reclamation, biodiversity, the state of the Athabasca river and its watershed and biodiversity impacts.
One key issue, dramatized by the death of over 1,500 ducks, is the tailing ponds – already so large that they cover an area equivalent to Washington DC (US) and require the world’s second largest damn to prevent leakage into the water system. The Government of Alberta, which issued Directive 74, is now requiring the oil companies to speed up their restoration of the tailings ponds and solve this problem once and for all. A related problem is water. It takes approximately twelve barrels of water to extract one barrel of oil, but eight of these barrels of water can be recycled in the process, leaving four to be “lost” to production or become part of the tailings ponds. If the current use continues to grow at the current rate, then the oil sands companies could be at the limit of their water quota’s by 2014, causing production to be delayed, slowed or postponed. These represent real financial risks to the industry, but also call upon the managers of the resource (the Government of Alberta) to act on behalf of the owners of the resource (the people of Alberta) to engage in effective stewardship.
But what should be done? What does a greening of the oil sands and a mitigation of these real industry risks look like?
The first step is to put a realistic price on CO2 emissions and provide for a trading scheme which will permit emitters to buy time while they find appropriate technological solutions to the emissions challenge. When the industry came together two years ago to look at the value chain for oil from the oil sands, it was clear that this price needs to be set at around $40 - $70 a tonne of CO2, which will be enough of a penalty to drive innovation. If CO2 is allowed simply to float on the market like any other commodity, it could sell for below the current Alberta penalty price of $15 a tonne (it has been as low as $13 on the European CTS market).
The second step is to invest heavily in research and development on oil sands technologies which will green the oil sands. The Government of Alberta might want to look at recreating AOSTRA – a public private R&D partnership which had access to significant public:private funds so that key challenges in the sector could be overcome. Its time for the industry and government to enter into a real partnership to leapfrog past the current “tit for tat” politics of green energy and get to grips with the problem in a serious way. A $1 billion fund for R&D against a clear plan of action would send a powerful signal to firms, investors and the public that we are serious about green oil.
As part of this R&D work, the Government of Alberta should create an X Prize (called the Alberta Challenge) to see if somewhere in the world there is a method for extracting oil from bitumen in a way that halves water use. The X Prize is a method of setting a real issue in front of the world, creating specifications for the solution and standing back waiting for solutions to emerge. A prize of $25 million would be a small price to pay for a new approach to extraction and this approach has produced results in the past.
The third step is to use the power of regulation to stimulate development. Shell has asked for this and many other companies are making the point that they require tough Government regulations so that they can legitimately expend investors capital on meeting these regulatory requirements. Directive 74, the land use framework, Water for Life strategy and other measures are all steps in the right direction, but much more needs to be done to demonstrate that the Government is on top of its stewardship responsibilities.
The final step involves transparency – publishing performance data on an independent website, such as that being developed by the Oil Sands Research and Information Network (OSRIN) at the University of Alberta. Seeing what each mining site is doing to reduce CO2 emissions, water use, improving air quality, land restoration, tailings and biodiversity would be an important part of any strategy to green the oil sands.
Until we demonstrate to the world that Alberta is leapfrogging past the current issues and challenges and creating a new industry – how to make dirty oil green – then we will continue to be challenged in the courts, legislatures, investor community and shareholder groups around the world. The “green” issue will not go away – in fact, it is a massive opportunity to diversify the Alberta economy and we should be really pushing the managers of our resource to make green oil happen now.