Petrodollars: Canada’s move on Kyoto doesn’t mean clear sailing for oil sands

Canada’s official exit from the Kyoto treaty–an act undertaken by one of the pact’s biggest public supporters–could be seen as a significant win for the oil sands industry. But that sector is facing a host of other issues, including rising costs. Platts correspondent Gary Park, in this week’s Oilgram News column “Petrodollars,” reviews the landscape.

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When the Canadian government made official in December what has been unofficial policy for six years and became the first of 191 participants to abandon the Kyoto Protocol, the embattled oil sands sector wasted no time launching a fresh round of new and expanded projects.

The administration of Prime Minister Stephen Harper had made little progress since first being elected in 2006 toward implementing the Kyoto provisions, insisting it was not going to place itself in an uncompetitive position with the US, its largest trading partner and the sole outlet for its energy exports.

Instead, it opted to set its own goal of lowering greenhouse gas emissions by 17% from 2005 levels by 2020, although a 7% rise in greenhouse gas emissions during Harper’s term of office effectively requires a 34% reduction.

“It’s really only the Europeans who are staying with Kyoto,” said Environment Minister Peter Kent, while Harper brushed off Kyoto targets as “stupid” and a threat to Canada’s economy–a defiant response to China, Japan, Mexico and others who chided Canada for its “regrettable” action.

By refusing to continue participating in what it viewed as a false pretense that there is an international consensus on dealing with climate change, Canada has chosen to put its international reputation on the line and face the music.

But government insiders–especially in Ottawa and the energy powerhouse of Alberta–share the view of Michael Levi, an energy expert at the Council of Foreign Relations in New York, who said in December that “there are political implications for abandoning Kyoto and Canada has already suffered them.”

California fuel standards punish oil sands crude and European legislators have warned their parliament’s proposed Fuel Quality Directive will offer no special exemptions to oil sands producers, even though there are no plans to export Alberta oil to Europe.

The bigger challenges for Harper are opening new markets for oil sands crude. That means overcoming obstacles to TransCanada’s Keystone XL pipeline and gaining industry backing for Enbridge’s proposed Seaway project to access Texas Gulf Coast refineries, along with opening routes to Asia through Enbridge’s Northern Gateway and Kinder Morgan’s planned 133% expansion of its 300,000 b/d Trans Mountain system.

Since exiting Kyoto, Harper has shed his traditional step-by-step, measured approach to big issues and declared his intention to turn Canada into a global energy superpower, putting himself on a collision course with those who portray Canada as an energy super villain. In the process, he has rallied the Alberta government and oil sands investors to a cause he says will create thousands of jobs and C$270 billion ($266.2 billion) in taxes and royalties.

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Almost as if they were waiting for that signal, regulators and companies have issued a string of approvals and new announcements over the past month.

France’s Total got a green light for its C$8 billion Joslyn mine to add 100,000 b/d of new production by 2017, another phase of its joint-venture with Suncor Energy to develop the Fort Hills mine and Voyageur upgrader at a cost of C$20 billion and produce 200,000 b/d by 2020.

Imperial Oil, with ExxonMobil Canada as a 29% partner, sanctioned spending of at least C$20 billion to build its Kearl oil sands mine to produce 345,000 b/d by 2020.

Devon Energy received Alberta government approval for the C$1.3 billion third phase of its Jackfish thermal-recovery project, pushing output towards 100,000 b/d.

PetroChina announced it will pay Athabasca Oil Sands Corporation C$680 million for the 40% it doesn’t own of the 150,000 b/d MacKay River project and is expected to commit another C$1.3 billion later this year to take outright ownership of the 250,000 b/d Dover project.

Also in the line-up are Canadian Natural Resources, which is stepping up plans to expand its Horizon mine, and Canadian mining company Teck Resources, which is buying SilverBirch Energy for C$435 million, inheriting regulatory applications to produce 277,000 b/d at a cost of C$22.9 billion.

The grand total of what is on the table points to oil sands output of 4 million-5 million b/d by 2020, 10 years ahead of even the most bullish earlier forecasts.

Investors in the oil sands, probably more than any other petroleum sector, are unnerved by the economic challenge of embarking on projects that are predicated on operating lives of 40-50 years.

A report by Canada’s National Energy Board estimated minimum oil prices of $85-$95/b are needed for new projects to be commercially viable, compared with $40/b in 2004.

And that test is compounded by the ever-present worry of a return to cost inflation for projects that James Jung, senior vice-president at credit-rating firm DBRS, said face a level of volatility “well-above most industries” because of the financial and project execution risk.

Andrew Logan, with Boston-based Ceres, which tracks sustainable investment, said a minimal retreat from $100/b oil prices would drag “relatively marginal” economics into the red.

Within the oil sands business, those considerations are already obscuring the fallout from Canada’s Kyoto decision.

–Gary Park in Vancouver  PLATTS