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Page added on October 7, 2014
The Tar Sands Bubble
The Canadian tar sands industry has seen better days. Energy giant Statoil announced last week that it would postpone a major mining project in Alberta for at least three years. It was just the latest in a string of major setbacks for tar sands oil, which has become nearly as bad for corporate profits as it is for the environment.
High labor costs and the falling price of crude oil have contributed to the industry’s dark days, but environmental activists can also take a bow. By delaying the proposed Keystone XL pipeline, which would ship tar sands oil across the Midwest to refineries on the U.S. Gulf Coast, they have helped make digging up Alberta’s boreal forest an increasingly bad investment.
How did this happen? First you need to understand a bit about the economics of tar sands oil—a cheap, off-brand version of conventional crude. (You know a product is bad when it’s compared unfavorably to oil.) Refiners don’t particularly want tar sands oil, which is tougher to make into usable transportation fuel, so it sells for about $20 to $30 less per barrel than crude from Texas or the Dakotas. Therefore, if producers can’t make it on the cheap, they can’t afford to make it at all.
Still, tar sands used to look like a decent investment. Energy producers can calculate, almost down to the barrel, how much oil can be extracted from a tar sands plot. Companies that could afford the steep upfront costs expected steady, if small, returns for decades. In June of 2013, the Canadian Association of Petroleum Producers forecasted a doubling of the country’s daily crude oil production to 6.7 million barrels by 2030. But things aren’t looking so rosy these days. CAPP’s 2014 report cut the production forecast by 300,000 barrels per day.
What changed? Extracting and processing tar sands has always been a tough business. Bitumen, the fuel component in tar sands, is nearly solid underground. Producers have to heat up prodigious amounts of water to melt the stuff and get it to flow toward the surface. Surface-level deposits are less technically challenging to access, but no greener. These projects look very much like strip mines and have some of the same environmental impacts, which include diverting and polluting rivers and streams, causing heavy erosion, and disturbing vast areas of soil. The ponds of leftover toxic waste threaten millions of migrating birds, and studies have identified health problems in the nearby indigenous communities linked to pollution.
Extracting the bitumen also demands large investments in machinery; the heavy, sticky crude requires large processing facilities to prepare it for transport. In order to make the tar sands bitumen marketable, producers have to heat the thick sludge to 500 degrees, which requires plenty more energy. All things considered, the energy you can get from burning a barrel of tar sands oil only barely exceeds the energy required to produce it.
And it doesn’t help that most of the stuff is buried in the remote northeast of Alberta. To call the area God’s country requires the iffy assumption that God remembers where he put it. Getting equipment and people to the tar sands region costs loads of money.
But the even bigger challenge is getting the oil out of there to refineries. Tar sands producers would love to send their oil to the Upper Midwest, but those refineries are already saturated with domestic crude. They have no use for the cheap stuff from Alberta. That means the tar sands oil has to travel all the way to the Gulf of Mexico—more than twice the distance.
There are two primary methods to move oil: by pipeline, which is cheap, and by rail, which is expensive. That cost differential is make-or-break for a tar sands business. The break-even price of tar sands oil is around $100 per barrel if transported by rail, according to Anthony Swift, a staff attorney at NRDC (which publishes OnEarth). Tar sands oil sells for $75 on a good day. So producers have to find a savings of $25 per barrel somewhere in order to make it worth the investment.
That’s why they’re so desperate for President Obama to approve Keystone XL—and why, in the pipeline’s absence, the narrow margins necessary to make tar sands extraction economical are starting to dissolve.
Moving oil from Alberta to the Gulf by pipeline would cost around $9 per barrel, or one-third the cost of rail transport. With a stroke of his pen, the president could almost (almost) make tar sands into a worthwhile economic proposition for investors. (Though, in the words of climatologist James Hansen, that proposition would be “game over for the climate,” which isn’t exactly a good deal for the rest of us.) And if the pipeline doesn’t get approved? Well, to put it in the simplest terms possible: No KXL, no new tar sands projects.
Photo credit: Rocky Kistner
That is a truism that has been playing out across Alberta as the six-year (and counting!) wait for a Keystone decision—delayed many times by legal, environmental, and political concerns—continues. This year, both Shell and France’s Total SA halted tar sands projects, saying they weren’t economically viable. Last year, Suncor Energy of Canada and Total killed joint plans to build a massive bitumen upgrading plant in Alberta. “Market conditions have changed significantly,” the Suncor CEO said. The cancellation cost the companies more than $1.5 billion. And yes, the delays in building Keystone XL are playing a major role. When Statoil announced its postponed project, the company cited “limited pipeline access” as a factor.
“Tar sands extraction is a marginal business in the best of conditions,” says Swift. “As the financial risks stack up, companies are reconsidering throwing millions and millions of dollars at these projects.”
That’s good news for the environment. According to DeSmogBlog, the emissions difference between burning oil from conventional wells and tar sands is about the same as trading in your Honda Accord for a Chevy Suburban.
That would be bad deal, but not quite as bad a deal as investing in tar sands. As long as the Keystone XL pipeline stays on the drawing board, much of that cheap and dirty crude will remain in the ground—right where God left it.
20 Comments on "The Tar Sands Bubble"
rockman on Tue, 7th Oct 2014 8:59 am
“That would be bad deal, but not quite as bad a deal as investing in tar sands. As long as the Keystone XL pipeline stays on the drawing board, much of that cheap and dirty crude will remain in the ground—right where God left it.” And that statement has been proven wrong here so many times I’ll skip it.
Makati1 on Tue, 7th Oct 2014 9:03 am
Tar sands bubble and fraking bubble…
Both need to break now, while there is still some ecology left.
paulo1 on Tue, 7th Oct 2014 9:44 am
Funny, for such a bubble with delayed projects, that folks like my son are constantly being asked to work there on ‘new projects’. Wonder why?
Some plants are profitable at $35/bbl, and some new projects need $75.
From the Globe and mail: “Other oil sands developments are going ahead. Canadian Natural Resources Ltd. recently said it plans to spend an additional $400-million on its Horizon oil sands expansion project this year. Steve Laut, CNRL’s president, in early May said costs are favourable. Horizon, which went wildly over budget when it was first built, has an advantage over Joslyn now because it is expanding, rather than starting from scratch.”
Emissions: Depends on what they are compared to. Compared to conventional crude from drilled wells 3X-4X higher.
If oil supplies were not becoming scarce, oil sand resources would not be exploited and LTO would still be talked about. If there were effective alternatives in cost and utility these resources would also stay in the ground. If oil continues to drop in price I suppose the economy will improve and the costs will again rise. That is the point we are at.
As an aside, it is far easier to shut down LTO than billion dollar oil sands plants. Plus, even new plants are more cost effective. The new oil price regime will be taken seriously when Baaken stops production and companies fold, imho.
Paulo
Davy on Tue, 7th Oct 2014 10:25 am
Yea, Paulo, the point the greenies won’t face is we are approaching the terminal decline of the oil age. Do they want to drive their Prius a few years more to their favorite mountain hiking trail? Maybe they instead should focus on excessive consumption and wasteful electrical use. Oil is so vital as to make mute any criticism of any source. The end is so near the effort to mitigate collapse is being wasted by an effort to curb emissions. In any case the financial system is teetering and I doubt these expensive unconventionals will grow much when we have a financial contraction.
GregT on Tue, 7th Oct 2014 10:55 am
Unconventionals are only going to kick the can down the road for a little while longer, and they are not going to solve our long term dilemmas. In the mean time they are only adding more unwanted CO2 into the environment, and turning vast areas into toxic wastelands.
We are living in a state of denial. The time to stop this stupidity has already long since passed. The longer we go down this road, the closer to the abyss we will come. BAU is going to end, we either plan for it, or we continue to make our own problems worse down the road.
More oil is not the answer, it is the greatest threat to the future of mankind, and all other species on this planet.
Kenz300 on Tue, 7th Oct 2014 11:17 am
Second generation biofuels made from algae, cellulose and waste are a better investment.
Every waste landfill can now be converted to produce energy, biofuels and recycled raw materials for new products. This is better for the environment, better for the local economy and provides local jobs…..
Distributed energy production is the future.
Scott Benson on Tue, 7th Oct 2014 12:26 pm
I would prefer to just let capitalism and natural market pricing take care of it. Less of something means prices go up, and I think we all would agree a lot of oil is wasted … I’d guess about half. Europe has had $10 a gallon gas for decades — why couldn’t North America?. Ok, so there is a lot less distance between cities in Europe. Why could that not be a design/planning principal for American and Canadian cities? The rural areas are emptying out anyway, and with Google-driven no-humans-needed combines … The wrecking of the Canadian/Albertan countryside will be seen someday as a huge mistake. But for the time being, let the economy take care of itself; dont muck with it. It will price oil/gasoline/diesel in a realistic manner and people will adjust and make due.
Northwest Resident on Tue, 7th Oct 2014 12:51 pm
Scott — What natural market pricing? In case you haven’t noticed, “the market” is been hijacked and is no longer an accurate (or even close) approximation of actual value anymore. All stocks, equities and securities are significantly inflated, bubbles everywhere, and total manipulation of the stock market is now taken for granted. The only reason smart investors are still invested in the stock market is because they know as long as ZIRP and QE continues, the stock price manipulation and stock prices can only go up, up, up. Oil and commodities are also highly manipulated. There is NO “natural market pricing” anymore.
Apneaman on Tue, 7th Oct 2014 1:38 pm
Given that there is 40 year lag and .85 of a degree has already started feedback loops (like methane & permafrost melting) only a suicidal species would continue burning. Most people will have their line broken. Maybe everyone. Enjoy your remaining trips to home depot and the dollar store.
bobinget on Tue, 7th Oct 2014 2:30 pm
Now that we have ‘fraccing’ to kick around, you woulda
thunk folks might have forgot oil sands for a while.
If most of these oil companies survived $38 crude
they’ll manage with $90.
The authors didn’t forget to plug Keystone XL as a cheaper method of transportation. Believing perhaps approval of Keystone may come before elections in November.
rockman on Tue, 7th Oct 2014 2:56 pm
Bob – maybe but I’m not sure I would bet you lunch that even if approved it will be built. If the choice were between building the pipeline and expanding the rail infrastructure the pipeline might will. But that is exactly the choice today. It would between building a pipeline and charging a high enough tariff to make it a worthwhile investment or between the railroads charging a price low enough that if he pipeline were to try to capture some of their current market share they might have to charge so much less than they would have without the existing RR competition. IOW the RR could lower their fees enough to kill the economics of KXL and, once permanently buried, starting increasing their fees.
If I were a RR hauling oil I would certainly try to keep KXL out of play if I could afford to do so. But that’s just me: nothing personal…just good business practice.
jjhman on Tue, 7th Oct 2014 5:18 pm
Rock:
Are you quoting Don Corleone?
shortonoil on Tue, 7th Oct 2014 5:36 pm
“If most of these oil companies survived $38 crude
they’ll manage with $90.”
When the predecessor of Suncor started in the 70’s the overburden at Fort MacMurray was 25 feet, and the bitumen bearing sands were almost 300 feet thick. The overburden is now better than 150 feet, and the oil bearing seam is less than 100 feet in some areas. Thinning deposit, and increasing overburden is a death toll to any open pit operation. Even if the price of oil does not continue to decline these operations would have less than 10 years. The best the Keystone can do is give them a few more years, and not many at that.
This is a low grade crude, and will be phased out before conventional with all the other poor energy delivering alternatives.
As far as advertising for help, the tar sands have always been short handed. My brother-in-law was working there in 1975, and was making $25 per hour driving a truck. He made enough to buy a farm on Prince Edward Island in a year, and a half. The place is a shit hole to work.
Harquebus on Tue, 7th Oct 2014 5:46 pm
Everyone buy as much fossil fueled Chinese made rubbish as you can. Landfills will be the energy source of the future. Eh Kenz300?
Makati1 on Tue, 7th Oct 2014 7:47 pm
I think that: “What goes up, must come down” also applies to standard of living.
The questions are:
Are you in control, or is lady luck?
Are you voluntarily stepping down the ladder or waiting for it to be pulled out from under you?
Or, maybe you are still trying to take that next step up, hoping there is a step there to take?
markisha on Wed, 8th Oct 2014 4:10 am
great information shortonoil
thanks
rockman on Wed, 8th Oct 2014 6:35 am
jj – I had not made that connection but, hey, business IS business. LOL.
And again as I pointed out about every hydrocarbon play in history that boomed, of course the oil sands are a bubble. As shorty pointed out you hit the sweet spots first, make a sh*t load of money and then exit leaving the scraps behind for the late comers to deal with. It will happen to the Eagle Ford, Bakken, DW GOM etc.
It’s called resource depletion. A rather simple concept that seems to elude some folks.
Kenz300 on Wed, 8th Oct 2014 12:13 pm
Quote — ““Tar sands extraction is a marginal business in the best of conditions,” says Swift. “As the financial risks stack up, companies are reconsidering throwing millions and millions of dollars at these projects.”
“That’s good news for the environment.”
————————-
There are safer, cleaner and cheaper ways to produce energy. The fossil fuel industry is doing all it can to try to hang on to its old centralized business model.
Decentralized local energy production is the future. The huge fossil fuel companies hate that and are doing all they can to limit competition. Second generation biofuels do not lend themselves to the huge centralized model of energy production. It is a smaller, decentralized model that produces local jobs and adds to the local economy. That helps provide both energy security and economic security.
————–
Charles Koch Linked To Creation Of Fossil Fuel-Defending Nonprofit: Report
http://www.huffingtonpost.com/2014/08/29/charles-koch-institute-for-energy-research_n_5738868.html?utm_hp_ref=energy
—————
Cities are starting to become more people centered and less auto centered. That is a good thing.
Walk, ride a bicycle or take mass transit. More people and cities are looking to alternatives to the automobile.
—————–
Bike Friendly Cities, The Journey to School – YouTube
https://www.youtube.com/watch?v=4-XenU6UEp8
Kenz300 on Wed, 8th Oct 2014 12:32 pm
Biofuels are growing in use around the world.
DuPont’s $500 Million Biofuel Bet Expected to Pay Off
http://www.renewableenergyworld.com/rea/news/article/2014/10/duponts-500-million-biofuel-bet-expected-to-pay-off
Donald A Fraser on Thu, 9th Oct 2014 11:03 am
f there were only one government in the world and no countries, the tar sands oil would be left in the ground. Long before it would ever be necessary to use it, we would have switched over to alternative energy sources, including fission as a bridge to (we hope) fusion. The responsible thing for Canada to do it just that … LEAVE IT IN THE GROUND … Canada can do fine without the dirty revenue.