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02/15/2018 12:25 EST | Updated 02/15/2018 12:31 EST

Greenwashing Won't Save Big Oil's Failing Tar Sands Business Model

Tar sands projects are especially vulnerable because the cost of extracting oil from the tar sands is worse than for any other resource.

Big Oil's business model has collapsed and the situation for the industry will not improve. This business model is premised on strong growth to contribute to high prices and, in turn, render economically viable, expensive to develop non-conventional fossil fuels, such as the tar sands plus shale oil and gas.

The increasingly aggressive actions on climate change by nations around the globe to comply with the Paris Agreement, solar and wind energy now among the lowest-cost electric power alternatives, and the pending significant penetration of electric vehicles with China leading the show, have made it evident that the flattening of demand and low prices for fossil fuels are not just another cyclical phenomenon.

On transportation, a sector that represents 55 per cent of global petroleum demand, studies by Salman Ghouri and Andreas de Vries, The Grantham Institute at Imperial College London and Wood MacKenzie indicate that even a modest market penetration of electric vehicles would have a devastating impact on the oil industry.

Oil companies have come to the realization that they cannot make a profit on tar sands projects.

This cocktail of current and future prospects is already being felt in Canada's tar sands country. Oil companies have come to the realization that they cannot make a profit on tar sands projects that were sanctioned on the assumption of an international price of $100/barrel, with a floor of $60 to $80/barrel to break even.

Tar sands projects are especially vulnerable because the cost of extracting oil from the tar sands is worse than for any other resource. It takes one unit of natural gas to produce less than three units of oil, the projects are capital intensive, take a long time to build and are intended to produce for several decades. Accordingly, in fall 2016, Exxon cut 19 per cent from its reported reserves, with most of the cut, 3.6B barrels, from the Kearl Alberta tar oil sands project. For similar reasons, Shell, ConocoPhillips and Marathon Oil Corporation have withdrawn much of their investments in tar sands.

In the case of Statoil, it was a total withdrawal from the sands at a loss of $500M to $550M loss. Especially significant, Koch Industries, formerly the third largest leaseholder in the tar sands, has indicated its pulling out of the $800M Muskwa region lease in Alberta. BP and Chevron are considering getting out of the tar sands business as well.

So far, 17 tar sands projects have been suspended or terminated.

Todd Korol / Reuters
Oil runoff at a tar sands processing plant.

No new capital expenditures for tar sands projects were registered in 2017, projects currently under development are to be completed by 2019 and there are no projects on the horizon for 2020 and beyond.

Moreover, Canada's bitumen is a lower quality oil that only the U.S. Gulf Coast refineries are capable of handling. Then, like compounded interest, the high viscosity of tar sands oil renders transportation expenses higher than conventional oil as substances must be added to improve the viscosity. The result is Canada's bitumen acquires a lower than conventional oil market price.

Economics aside, there aren't any environmentally friendly options for exploiting the tar sands region, an area equivalent to the size of Florida. One either has to bake the oil to the top or use open pit mines techniques. One result is that there are 170 square kilometres of toxic lakes in Alberta.

The tar sands are also the greatest source of current and potential emissions in Canada, factors which mean Canada cannot meet its 2030 greenhouse gas (GHG) 30 per cent reduction targets, with a tar sands business as usual formula. Presently the petroleum and natural gas sectors represent 26 per cent of Canada's GHGs, higher than Canada's transportation sector at 24 per cent.

If the Government of Canada was truly serious about complying with the Paris Agreement, it would halt all future expansion of tar sands developments, commit to far more ambitious contributions to the development of our clean tech sectors, and engage in an aggressive phase out of fossil fuels and their associated subsidies. Right now, Canada seriously lags behind other developed countries in support for clean tech and has a very long way to go.

Chris Wattie / Reuters
Prime Minister Justin Trudeau speaks during a news conference in Ottawa on Nov. 29, 2016.

On Feb. 8, 2018, the Trudeau administration introduced Bill C-69 on the abolition of the National Energy Board (NEB), the NEB replacement by a new Canadian Energy Regulator (CER), and the creation of an independent environmental assessment organization, The Impact Assessment Agency of Canada (IAAC).

On one hand, this is welcome news that the pro-industry NEB will no longer be responsible for environmental impact analyses and the CER pipeline focus will be primarily on the regulation of the transmission of oil and gas. But undefined "small projects" may have CER responsible for environmental analysis as well.

On the other hand, the recently proposed legislation suggests that environmental assessments of big projects that pose "significant risks" will be the object of government appointed independent panels of experts to do more thorough reviews. The trigger for the deeper environmental scrutiny would be at the discretion of the government. This new approach could result in fewer projects qualifying for a comprehensive review and would require shorter times for reviews, as per the industry's request. Likewise comforting for the industry, the IAAC must collaborate with the CER.

Most telling, the Government of Canada would reserve the right to approve projects of "national interest," regardless of the outcome of environmental assessments or First Nations considerations. Pipelines already approved would remain so.

This has all the appearances of wanting to improve the social acceptability of pipelines even if new tar sands pipelines are redundant.

By controlling all the decks to strike the balance between the resource economy and the environment, the Trudeau administration is engaged in greenwashing, and just doesn't get it. If it did, economic development and the emerging green economy would be one and the same.

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