Wednesday Night #1336: TAR SANDS

Tar Sands
At one time, the supply of fossil fuels appeared virtually endless. It was probably Marion King Hubbert who, in 1956, first clarified the finite nature of the world’s petroleum supply, now painfully evident to consumers of petroleum products. Extraction of oil from the Athabaska Tar Sands, became feasible when crude petroleum reached eighteen dollars a barrel and with an adequate water and natural gas supply to facilitate the extraction. Estimated at two trillion barrels of extractable oil (of which only 10% is easily accessible), the Tar Sands reserves now exceed those of Saudi Arabia.
Thanks to our natural resources Canada has become insulated from the economic buffeting currently experienced by the United States.
What Canada is doing is continuing to feed American addiction to fossil fuels

Environmental aspects
At this point, the easy to access surface bitumen, lying just below the vegetation provides the raw material required for extraction, following which, the remaining sand and clay are redistributed over the ground; by law, old mines must be filled, flora replaced and fauna integrated. Syncrude appears to the visitors to have successfully carried out reclamation “birds in the trees, the herd of bison that has expanded from 35 to 300, recycling of water into the river”, etc. Each year, Syncrude produces a sustainability report which provides an overview of our performance in the areas of finance and economic contribution, stakeholder and employee engagement, community investment, health and safety, and environmental stewardship.
The soil of the earth is actually a larger sink for carbon than the plant material that exists on the surface of the earth, so when the surface is stripped , the fabric of the soil is disrupted. We do not yet know what the loss of CO2 to the atmosphere is; added to that is the methane released into the atmosphere. Finally, with the best intentions of regulators and oil companies, it is anticipated that it will take thousands of years to develop a soil profile for the roots to hold onto. The process also increases the salt content of the sands that are replaced, with consequeneces for the health of the trees that are planted in the reclaimed areas.
You just don’t get things put back exactly the way they were
In discussing their recent visit to the Syncrude Tar Sands (one of 19 such projects), Gerald Ratzer emphasized over and over the hugeness of every aspect of the project, from the size of the tires on the equipment to the domensions of the sites. Tony Deutsch, however, pointed out that when flying over the miles and miles of muskeg, the tar sands development appears very small.
Following the Enron scandal and the passing of the Sarbanes-Oxley Act, a number of pension fund managers and state financial officials are demanding companies declare their climate exposure, both regulatory and from the standpoint of physical and/or environmental harm as a financial risk.
Economic considerations
With respect to the economics of the operation, Syncrude documents its lifting costs at $14 – $15/bbl. This figure can be somewhat misleading as it does not include such factors as employee pensions, costs of reclaiming the land, or royalties, a topic that has been much in the news recently. A more reasonable estimate of total costs would be $25/bbl. Even at $15, the cost is considerably higher than marginal costs in the Middle East. Were oil prices to go back down to pre-Iraqi War levels of $18, it would be another story.
Royalties now are 1% of total revenue until all costs of capital equipment (new equipment costs can be in the neighborhood of $4 billion, all of which can be written off against revenues) have been paid down. Thereafter the royalties are 10 times that amount, however new proposals would see royalties hiked to 25-30% of revenues. The tar sands companies are resisting the hike and threatening to leave the province should it take effect as proposed.
As flexible as the petroleum market appears, at one point, alternatives will need to be provided. Nuclear, wind and solar energy have been proposed but require significant initial investment, particularly when considered without taking into account the cost and dangers of climate change and the potentially greater cost of delay. However, the cost of the inevitable initial investment will undoubtedly rise with the passage of time. Another option, mentioned previously but deemed extremely expensive, is the ability to beam solar energy to Earth from the moon thus supplying an unlimited quantity of solar energy to the entire world.
Social considerations
There is an immense shortage of labour in the area. The Tar Sands provide employment opportunities for Canadians from across the country, but the services sector is unable to attract enough people to do the jobs and the cost of living is unaffordable for people working in the low paying jobs at Canadian Tire or Tim Horton’s. Success has, as one might expect, been achieved at great social cost to the workers and the community. There has been no sense of community structure because of the necessarily transitory nature of those workers, not unlike the Klondike in the gold rush era.
If the oil companies were to slow down their investments because of the increase in royalties, the reduction in demand on the over-extended municipal infrastructure might have an unintended beneficial consequence
One observation concerned the prevalence of recent European workers in the hospitality service industry, a sector that in the rest of the country tends to be populated by people from Asia or other developing nations.
The real issue is, will we have a political leadership that is prepared to look more than 4 years down the road or can we convince our politicians that we, the electorate want them to do so
I would hope to see economic leadership — heads of businesses who will step forth and convince [their peers] that there is money to be made in renewable energies and environmental technologies

The economy (see also Jacques Clément’s Report)a collection of views
The economy of North America is receding. The Bank of Canada will publish their update on monetary policy on October 18; they will have to revise their economic outlook for next year. They are just too optimistic. The IMF is much closer to reality with projections of 2.3%, for Canada 1.9% and for the U.S. 2%.
In an interview today (Wednesday) Alan Greenspan declared that there was no credit crunch in the U.S. , only a rise in interest rates; this is in direct contradiction of the views of other authorities.
The nomination of Mark Carney as Governor of the Bank of Canada has come as a surprise to many who believed that the nominee would be Paul Jenkins, however he has an impressive track record for someone so young (42) and the confidence of the Minister of Finance. It is expected that he will do very well.
The ramifications of the ABC Paper débacle will likely involve a series of law suits, the first against the trusts, next against the DBRS . Why suits against the banks? “Because that’s where the money is” and many Canadians naively believed that the ABC Paper was backed by the banks.
Our favorite technical analyst suggests that while energy stocks are hot – and oil according to the chartists will go above $100, – what we should be talking about is longer term,- where this world is going to be in 2 years and 10 years. We have to recognize that we have been in a bull market since 1974. The end of the next (40-year) cycle is 2014. Since 2000, we have seen sequential rallies and corrections and this will continue through 2009, HOWEVER, we have a problem in the Canadian Index. Banks will not be strong, the energy stocks’ performance will counter balance, and the Index will not perform. Activities will be concentrated among the low-price stocks.
Nikolai Kondratiev in 1925 first noted the existence of a regularly recurring economic cycle approximately half a century in length. According to resident market mavens, we are currently at the low part of the Kondratiev wave that will end in 2014. The recent increasing birthrate is believed to be heralding a new baby boom that should be reflected in economic growth. The stock market indices will not necessarily reflect this growth as it is stock of the older less active companies that determine the movement in the indices as opposed to that of energy, technology, gold and material.
Another view suggests that at the end of every era there is a stock market mania: in the ’70s, gold and in the ’80s Japan, while in the ’90s it as technology. One of Wednesday Night’s experts suggests that we have two such manias coming up: the first, emerging markets; China has already started and others will follow, Brazil, Korea, India, Thailand, even Russia. The second is energy and the wise investor will follow both.

News of Wednesday Nighters
The first message and dispatch has arrived from Robert Galbraith in Kabul. All is going well. The Suburban is carrying his dispatches and the Wednesday Night sites will do so as well. He sends love to all.
John Ciaccia has been very ill, having suffered a burst aorta on August 28th. Thanks to exceptional medical care in Quebec and now in Montreal, he is slowly recovering, but is still frail and not yet up to receiving visitors. Cards and brief phone calls are very welcome.

T H E  I N V I T A T I O N

Gerald Ratzer OWN and Tony Deutsch OWN, being responsible members of the McGill Pension Fund Committee, have conducted due diligence on the Tar Sands and are back from Fort McMurray fully propagandized and ready to share their findings.
If this is our only topic (which is unlikely), it will be a fascinating Wednesday Night. Our resident Judy Geologist aka Professor Judith Patterson OWN will no doubt set matters straight in her inimitable fashion, invoking The End of Suburbia and Hubbert’s Peak.
To add fuel to the flames of discussion you may want to pick up William Marsden‘s recently published book, STUPID TO THE LAST DROP: HOW ALBERTA IS BRINGING ENVIRONMENTAL ARMAGEDDON TO CANADA (AND DOESN’T SEEM TO CARE). Failing that, read the Globe & Mail Review . The reviewer pounced on Mr. Marsden’s account of a ‘nutty’ plan hatched in the 1950s to release the oil mixed within Alberta’s gritty sand using an underground nuclear blast.
What goes around comes around and in September there were reports that “AECL and Energy Alberta have proposed building a nuclear reactor near the site of Shell’s vast Athabasca tar sands development. The boss of Energy Alberta has said the C$6 billion reactor has the backing of a large unnamed company that would take 70 per cent of the reactor’s energy.” This should please Douglas Lightfoot!
Critics of the Tar Sands abound. Consider this from World Watch/
“The environmental consequences of oil production from Alberta’s tar sands are major, beginning with its effect on climate change. North America’s transition to oil from the tar sands not only perpetuates, but actually worsens, emissions of greenhouse gas pollution from oil consumption.
While the end products from conventional oil and tar sands are the same (mostly transportation fuels), producing a barrel of synthetic crude oil from the tar sands releases up to three times more greenhouse gas pollution than conventional oil. This is a result of the huge amount of energy (primarily from burning natural gas) required to generate the heat needed to extract bitumen from the tar sands and upgrade it into synthetic crude. The energy equivalent of one barrel of oil is required to produce just three barrels of oil from the tar sands.”
On the other hand, as good economists are wont to say, consider the Edmonton Sun’s piece on the hike in royalties proposed by the Alberta Royalty Review Panel which mounts an attack on the costs of clean energy technologies. The proposal caught the eye of Bloomberg.
Should we tire of Alberta, there’s always the province formerly known as have-not. Newfoundland’s offshore oil is now so important it attracts attention from Economist writers, while the New York Times looks at exploration in out-of-the-way locations with climates even worse than in northern Alberta
And, if all of that leaves you feeling uninformed, consult the Wednesday Night Oil Notes
There will, of course, be other topics to cover as we survey developments around the world: Burma, China, Darfur, Iran, Iraq and Pakistan come to mind. Political events in the U.S. never cease to entertain. And for comic relief, there’s always the trail of political figures visiting Afghanistan.

5 Comments on "Wednesday Night #1336: TAR SANDS"

  1. Diana Thébaud Nicholson October 16, 2007 at 6:46 pm ·

    Muskeg [Algonquian, “grassy bog”] is a term describing a type of landscape, environment, vegetation and deposit. It attained widespread use in the 1950s during northward expansion of resource development. Peatland and organic terrain are equivalent terms generally referring to northern landscapes characterized by a wet environment and vegetation (e.g., black spruce muskeg) botanically classified as mire (subdivided into bogs and fens).
    Muskeg defies precise scientific definition. It may cover large areas (Hudson Bay Lowland) or occur as small, isolated pockets. Muskeg produces PEAT deposits of variable thicknesses and types because of incomplete decomposition of plant matter in the wet, acid environment. The particular vegetation and hydrological patterns allow recognition of different muskeg types by REMOTE SENSING. Most peat and muskeg in Canada is less than 10 000 years old and occurs in areas covered by the last GLACIATION. Peat accumulation rates and the distribution of muskeg are dependent on climate conditions and controlled by CLIMATE CHANGES. In northern regions, muskeg and PERMAFROST are closely associated and can present difficult engineering problems. No comprehensive, Canada-wide survey of muskeg has been made, but various estimates indicate that Canada may have more muskeg (over 1 295 000 km2) than any other country. More than you ever wanted to know

  2. Diana Thébaud Nicholson October 16, 2007 at 6:58 pm ·

    Oil Prices, the Kondratiev Cycle and Peak Oil
    by Michael A. Alexander
    (This essay was first published in May 2005)
    High oil prices are much on investors’ minds today and a cycle-based examination of oil is well due. I discussed oil in my 2003 book Retiring Rich and presented an investment strategy for oil stocks that has since been not very useful. The strategy called for buying oil driller stocks or a suitable index when oil prices and rig counts reached certain (low) levels. Since late 2002 when I developed the strategy, prices and rig counts have remained well above these buy levels and the strategy has been irrelevant as a result.
    The strategy was based on the assumption that the 1985-2002 experience during which oil traded in a broad range would hold into the future. As Figure 1 shows, almost immediately after I developed the strategy, inflation-adjusted oil prices rose to levels outside of this post-1985 trading range and today are far higher. The reason I believed that oil would continue to trade in this region was based on our position in a Kondratiev downwave. I interpreted the mid-1980’s collapse in oil prices as a reflection of the “fall to plateau” event in the reduced price measure. More

  3. Diana Thébaud Nicholson October 21, 2007 at 5:07 pm ·

    And from the Council on Foreign Relations
    “Some experts recently expressed concerns that Canada would follow through on calls to raise oil royalties, worried that such a step may dissuade investment in Alberta oil-sands projects. McKennitt of the U.S. National Association of Petroleum Investment Analysts points out that the energy-intensive process for extracting oil from tar sands has cut into natural gas exports to the United States because so much gas is being used in the extraction process. “So if we want the oil we don’t get the gas,” he said.” more

  4. Diana Thébaud Nicholson October 21, 2007 at 4:48 pm ·

    Oct 11, 2007
    Brokerage says oil royalty boost could cut 19,100 jobs
    Alberta, the source of about 10 per cent of U.S. oil supplies, may lose about 19,100 jobs if the government imposes higher royalties, says Calgary-based brokerage FirstEnergy Capital Corp.
    About 11,000 jobs related to the oil-sands industry and 8,100 from oil and natural-gas drilling could be eliminated if the province adopts a panel’s recommendations to boost royalties and implement a new tar-sands tax, the brokerage said yesterday in a research report.
    Canadian Natural Resources Ltd. of Calgary warned on Tuesday it may cancel oil-sands projects worth $7 billion because of changes proposed last month by the panel. Also warning of reduced spending in Alberta are producers EnCana Corp., Talisman Energy Inc. and ConocoPhillips’s Canadian unit.
    Higher royalties may prompt the cancellation of $28 billion in oil-sands projects from 2008 to 2015, the brokerage said, resulting in the loss of an estimated 11,000 direct and indirect jobs, while reduced drilling would eliminate about 8,100 jobs on oil rigs.

  5. Diana Thébaud Nicholson November 1, 2007 at 11:15 am ·

    From Jaime Webbe:
    “This reminds me of a discussion we had a couple of weeks ago…”

    Assess climate risk, firms urged
    SHAWN MCCARTHY, Globe & Mail
    October 31, 2007
    Corporate executives and directors face a growing threat of investor lawsuits if they fail to assess and mitigate the risk their companies face from climate change, accounting experts warned yesterday.
    The business of climate change is booming – major utilities are investing in efficiency; retailers are demanding energy-saving lighting; and exchanges are launching emissions-trading systems.
    But while some companies are leading the charge in anticipation of regulatory and market pressure to act, several chartered accountants warned that too many companies still regard global warming as a mere annoyance, if they think of it at all.
    “This is not a social responsibility issue but a business problem,” said Johanne Gélinas, a partner at Deloitte & Touche and a former federal environmental auditor.

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