How does the Alberta Tar Sands affect Vancouver Island? What will be the fallout? Points to ponder:

The U.S. Geological Survey defines the tar sands or oil sands, as an extra heavy oil having a viscosity greater than 10,000 cP.  This is oil which sinks in water and which is more resistant to flow than molasses in January. As you can see from the chart from Keyera, one of the natural gas companies supplying dilutant to the tar sands, their rating for Athabasca bitumen is much more dense than molasses. It’s like asphalt.

If there is an oil spill on the west coast, it won’t be possible to clean up the slime. It will sink and smother the ocean floor.

Before 1980, bitumen was transported by truck, but trucking is seasonally restricted and relatively inefficient and expensive compared to pipelines. In order to get the bitumen to pass through a pipeline, you have to add NGC (natural gas condensate) dilutants resulting in “dilbit”.

Oil boom gone bust?
Northern Gateway is a plan to pipe Alberta tar to other markets such as Asia.  Yet China has not contracted for tar sands oil; there is no refinery in China designed to refine the tar. Saudi Arabia on the other hand has invested in Chinese facilities to refine its own oil there. KSA (Kingdom of Saudi Arabia) crude is cheaper than tar sands crude and KSA will be able to underprice Alberta to retain control of the Asian market.

We are seeing an increase in OPEC production even with Iranian exports being curtailed by sanction. Saudi Arabia has indicated it wants to drive the price of Brent Crude below $100 a bbl. That will likely take WTI (West Texas Intermediate) below $80 and tar sands crude sells at a discount to WTI.

Right now, foreign producers are suffering the results of deep discounts for the tar sands crude. The discounts are significant: Extra-heavy Western Canada Select was trading at $18 less than WTI and $36 less than Brent. WTI-like Edmonton Par barrels were trading at $18 less than WTI.

Fear Mongering:
Shell’s chief executive said Canadian regulators need to act quickly (to get liquefied natural gas port set up on the west coast) or lose out to similar developments in the Middle East and Australia.

Who will pay for this? Who will benefit?

Dutch Disease vs Oilsands Fever:
Two thousand manufacturing jobs were lost in Oshawa last week and while some media are referring to this economic malaise as “Oilsands Fever” others are pointing out that it is really Dutch Disease and nothing to wave a towel around.

Dutch Disease is what happens during a resource boom.  Economists came up with a model to explain why the manufacturing sector lagged behind while the resource sector went through a boom in the Netherlands in the 1950s.  Labour shifted from the manufacturing sector to the resource sector. Ideally, the manufacturing sector will bounce back once the resource boom is over; however, other factors such as technological changes and globalization reduce the ability for the manufacturing sector to rebound.

Infrastructure and Royalty:
Oil companies want their stock prices to go up to keep their investors happy. Stock valuation is directly tied to the inventory (reserves) they hold in the ground. Alberta offers a lot of cheap reserves.

Alberta collects 1% royalty only when the companies earn back their invested cost of capital.  Some of the firms have a clause in their development agreements which permit them to charge a carrying cost of 7% on invested capital.

In the meantime, all the infrastructure and associated costs are paid for by the taxpayers who also pay another 7% for the companies’ inventory carrying costs.

Billionaire lobbyists:
To ensure the government toes the line, billionaires like the Koch Brothers have been funding political think tanks and public campaigns.

Current production:
Canadian oil sands account for about 46% of Canada’s total oil production, and that number is expected to rise from its current level of 1.2 mbd (million barrels per day)  to 2.8 mbd by 2015.

Cost of Natural Gas:
The oil sands industry is a large consumer of energy. The single highest operating cost is the cost of natural gas. By 2045, natural gas requirements will increase by 2 to 3 times the current levels.

Needs lots of water:
The oil sands industry is a large consumer of water.  In 2011 oil sands extraction used 170 million cubic meters of water, or about enough to satisfy New York City’s water demands for more than a month. In-situ drilling returns one barrel of oil for every two-and-a-half barrels of water used in getting it from the ground.

Rising Greenhouse Emissions from Tar Sands:
Without equipment to “scrub” the emissions streams, and separate the GHG (greenhouse gas) emissions, the emissions will be released into the atmosphere. While technological innovation within the oil sands industry (in addition to carbon capture and storage) is expected to help reduce these emissions, the emissions are still expected to rise.  Emissions were 45 MTs (megatonnes) in 2010 and are forecast to rise to 180 MTs in the next thirty years.

Future employment:
Technology is changing rapidly eliminating many jobs.  There will soon be driver-less trucks operating in the mining area.

So how does this all affect Vancouver Island? An old bumper sticker says it all.

“Please Lord, send another boom. We promise we won’t piss it away next time.” (Alberta bumper sticker 1982)  Does everyone remember the bust?

Sources:

• http://www.oilsandsreview.com/common/net-auth/verify.asp
• http://www.cbc.ca/news/canada/story/2012/05/30/pol-dutch-disease-pembina-institute-report.html?cmp=rss
• http://truth-out.org/news/item/9050-koch-brothers-activism-protects-their-50-year-stake-in-canadian-heavy-oils
• http://oilprice.com/Energy/Crude-Oil/Curtain-Closing-on-Canadian-Crude.html
• http://business.financialpost.com/2012/05/16/americas-future-oil-supply-depends-on-technology-at-this-canadian-oil-sands-site/
• Canadian Oil Sands: Life-Cycle Assessments of Greenhouse Gas Emissions Congressional Research Service May 15, 2012
• Canadian Energy Research Institute Study 128 March 2012

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