Tuesday, May 18, 2010

Making Green Oil Happen

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.


Government of Alberta said...

A very good read, Mr. Murgatroyd. A bit like listening to my colleagues across Government talking about where we are in oil sands management and where we need to go.

On C02 emission pricing, as the Minister of Environment has stated previously, we share your view that it has to increase. But as you allude to further on in the context of regulations driving innovation, we are somewhat limited currently by the lack of movement in other oil-producing jurisdictions where there is no charge for emissions at all. If we increase our charge more and more here, we risk making production – and investment – more attractive elsewhere. And while it’s not enough, we still have seen emission reductions per unit of production, and we do have a healthy $180 million ready to invest via the emissions management fund. Expect to hear news on that very soon.

As to reviving AOSTRA, both government and industry are heavily involved in R&D through various enterprises, and it’s not a stretch to see Alberta Innovates as an example of one successor to AOSTRA, albeit not so narrowly mandated as was the former.

And one happy outcome of R&D in the industry underlines your point about reducing water use. Earlier this week I visited an in situ operator who was down to a 4:1 water-to-oil ratio, and with 95% recycling is using just 0.4 barrels of make up water per barrel of oil.

Your comments on transparency also resonate here. We have recognized what our critics have said about Government’s current methods and approach to releasing the sorts of information you refer to, and we are well toward a system much closer to what you describe.

To tie this back to the Ceres report, if I may, this is what appears to be missing from that particular assessment of the future of the oil sands industry. The Government of Alberta certainly shares your views that a number of improvements can be achieved in virtually any challenge the industry faces - using a number of different drivers - and I certainly get the same sense from the people in the industry.

For Ceres, I think it’s a question of whether one wants to look pessimistically and negatively at the industry, or one examines its history of achievements and is thus far more optimistic that practical and pragmatic solutions are within our grasp. Thank you for encouraging that latter view.

- David Sands, Public Affairs Bureau, Government of Alberta

Robbie said...

Has CERES done similar reports on other oil producing countries or regions and how does Alberta stack up compared to those? Especially in terms of water use.

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Doug Cogan said...

One common reaction to our report, "Canada's Oil Sands: Shrinking Window of Opportunity," is that the financial and environmental risks it outlines are serious and real. This is acknowledged not only by Mr. Murgatroyd and the Albertan government, but indeed by the oil sands industry itself.

For RiskMetrics Group, which authored this report on behalf of Ceres, the point is to urge greater transparency and engagement around the issues we've outlined. The question is not whether we have taken a negative view, but whether we've offered an objective assessment of the challenges the industry faces. We do not say that oil sands producers have no answers to our questions, but rather that that they need to be more clearly articulated and compelling to forward-looking investors.

For our outlook to be more upbeat, the oil sands industry needs to provide a more convincing explanation of the "practical and pragmatic solutions" that Mr. Sands of the Albertan government says are within its grasp.

Companies can start by addressing the disclosure issues around energy and carbon management, water use and land reclamation, and Aboriginal consultation, laid out in the Executive Summary of our report.

Until this is done transparently and in detail -- looking at the risks ahead and not just at the achievements of the past -- our concerns and those of many investors will remain.

Doug Cogan, report editor and co-author, and Director of Climate Risk Management, RiskMetrics Group Inc.

Evan B said...

Where do you stand on climate change? You imply that co2 is an issue, but you've written in the Red Deer Advocate that it's all an illusion. And you have an ad on your site by a well known climate science denier.