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Industry documents reveal tar sands expansion plan economically marginal

Anthony Swift

Posted November 8, 2013

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Correspondence between the Canadian federal government and the Canadian Association of Petroleum Producers (CAPP) shows that behind closed doors, the tar sands industry recognizes that it is plans to expand tar sands would production are quite vulnerable to even the smallest increase in costs. Facing proposed oil and gas regulations that would increase production costs by less than a dollar a barrel, the tar sands industry notes that its production is already on the edges profitability and adding a few cents per barrel in additional production costs would be very likely reduce production and revenue. These revealing documents rebut a key argument made by the tar sands industry to U.S. policymakers that if Keystone XL is rejected, tar sands expansion will occur at the same pace and scale using more expensive alternatives such as rail. Keystone XL’s proponents argue that because tar sands expansion is inevitable, the Obama Administration need not consider the significant carbon emissions associated with projects like Keystone XL. But behind closed doors, the industry recognizes that its carbon intensive production plans are on the thinnest margins of profitability, and even small increases in costs will reduce tar sands production and associates carbon emissions. This is why Keystone XL is a linchpin for the industry’s expansion plans and the significant carbon emissions associated with it.  

The documents reveal that the tar sands industry is not prepared to deal with any sort of increased costs from regulations, even though they continue publicly claim their willingness to turn to more expensive transportatin option if Keystone XL is rejected. The strongest regulations suggested in the correspondence would cost less than one dollar per barrel. CAPP argues that even this extra cost would “very likely” impact production and revenue:

  • “Oil sands is already economically challenged relative to other North America oil and gas plays.”
  • “Will higher stringency requirements impact production and revenue? Very likely. Adding a regressive charge the oil sands, one that bites harder at low prices than high prices, introduces additional cost and risk. This will impair recovery of marginal resource associated with existing projects. And make new projects less competitive from a portfolio perspective.”
  • “Regulatory requirements have already added to cost and decreased economic viability. Additional burdens such as carbon tax increases are further reducing economic viability.”
  • “We would highlight that anything more stringent than today’s system will increase costs, possibly lowering investments and reducing production.”
  • “This could lead capital to flow from Alberta to other jurisdictions in North America and abroad.”

In public, companies say that rail—at anywhere between $5 to $20 a barrel in additional costs—is affordable and will allow production to grow. In private, they say that regulations increasing production costs by $0.81 a barrel regulations will “very likely” reduce production.

The reality is that even with cheap pipeline transport and weak regulation, tar sands production is economically marginal. Industry’s correspondence with the Canadian government implicitly recognizes that by providing a low cost transportation solution, Keystone XL would reduce costs and enable significant additional expansion of tar sands production. Keystone XL fails the President’s climate test, is not in the nation’s interest and should be rejected.

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Michael BerndtsonNov 8 2013 12:15 PM

US shale oil is killing oil sands. If Iran oil is brought back to pre sanctions levels onto the world market, that could reduce crude prices even more. I'm sure we'll see a doubling down of anti environmentalism PR soon. Or war.

FloridianNov 10 2013 04:17 PM

Another one of your colleagues is worries about planned rail terminals in the SF Bay Area bringing tar sands to that area. Are her concerns misguided?

SoccerDadNov 10 2013 04:26 PM

This is hardly news.
Tarsands are well known to be the "marginal barrels" that set the price of oil. My worry is that if you remove these barrels then the next barrels will come from a worse source. Arctic oil, ultra deep water drilling, and further reliance on similar oil from Venezuela and California.
I think that making this source of oil more expensive will raise the price of oil for everyone (marginal producer). And at which point they would become barely profitable again.

We need to attack the demand side of the equation. Since most of the greenhouse gases from a barrel of oil come from our burning it as gas or jet fuel lets tax the end user.
You'd need a reduction in income taxes and business taxes to assure that the economy doesn't tank.

By attacking the demand side, falling oil prices then stop the tarsands ( as opposed to an upward price move)

Anthony SwiftNov 11 2013 08:07 AM

Michael: That’s true – both the Chicago Mercantile Exchange and the IEA predict prices of crude oil to decline in the next ten or so years (and you raise a good point on additional oil supplies on the sidelines).

Floridian: No, her concerns are not misguided. While pipelines like Keystone XL would facilitate significant additional expansion of the tar sands, in their absence industry is pursuing smaller scale, more expensive solutions. While rail doesn’t seem to be an option well suited for significant tar sands expansion, shipments are being made to the Gulf Coast (~25,000 bpd), East Coast and proposals are out there for the West Coast.

While these projects are smaller scale than Keystone XL, they do bring with them considerable impact to the health of communities who will be in the vicinity of refineries processing significantly dirtier crudes (and causing greater emissions).

California is a particular issue that is independent of the KXL debate – it has heavy crude refining capacity, but not necessarily enough to merit a pipeline. It’s also closer to northern Alberta that the Gulf Coast, which makes tar sands by rail relatively cheaper. So reality is, while rail can’t replace pipelines when it comes to tar sands expansion, some rail proposals (like the one in the Benicia refinery) do pose legitimate risks to the health of local communities.

SoccerDad: You raise very good points – but can’t we do both? NRDC is actively engaged in policies to reduce oil demand – the recent autoefficiency rules, smartgrowth, transit, fuel alternatives, etc. Meanwhile, as we operate in a world in which there are more proven recoverable oil reserves than we can burn while staying within the global carbon budget, it makes sense to pick and choose which sources we develop. Tar sands is the most carbon intensive crude around – and there is a lot of it. Unlike conventional production, once you get a facility up and running, it can produce for 40-50 years at a relatively stable level of production (conventional wells tend to have significant rate of declines within a few years and finish in 15-20 years). So by developing the tar sands, we lock-in some of the most carbon intensive fuel sources available for the next 50 years, undermining the work that we are doing to reduce oil demands (and associated GHGs).

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