How the oil sands could very quickly become unviable

It all comes down to two simple numbers

Harper’s carbon tax smokescreen

Mark Ralston/AFP/Getty Images

It was reported today that Exxon-Mobil will begin disclosing the degree to which its assets are exposed to future greenhouse gas policies. This risk is at the heart of what has become known as the carbon bubble, a term advanced by UK group Carbon Tracker, which suggests that assets may be over-valued as a result of not accounting for potential future limits on fossil fuel extraction imposed to fight climate change.

The so-called carbon bubble should be a concern to investors in oil sands stocks, and you only need to consider two numbers to understand why: 80 and 320.  First, the number 80: oil sands producers and the Alberta government are quick to tell you that up to 80% of the life-cycle emissions from oil sands occur from refining and combustion, not from extraction and upgrading.  That’s comforting, until you consider that this means that most of the carbon policy exposure for these projects comes from emissions-control policies and innovations far beyond the jurisdictions and markets in which oil sands companies operate.  Second, the number 320: when it was leaked that the Alberta government was considering a 40-40 approach (a requirement to reduce emissions intensity by 40 per cent, with a penalty for exceeding this limit of $40/tonne), the oil industry responded that governments acting this aggressively would create significant competitiveness concerns. Shell’s CEO Lorraine Mitchelmore, long a champion for carbon pricing policy, was quoted as saying that, “Alberta needs to be sure that it keeps the industry competitive,” while former Suncor CEO Rick George stated that, “it’s a bad idea to make companies uncompetitive.” Here’s the kicker: if an average cost of carbon of $16/tonne on 20 per cent of your emissions raises competitive concerns, it seems that investors should worry a great deal about risks to future returns from oil sands assets. Such a policy boils down to 320 pennies per tonne of life-cycle carbon emissions, hardly aggressive given the magnitude of global emissions reductions which will be required to meet Prime Minister Harper’s commitment to policies which keep global climate change below 2 degrees Celsius.

Reports by Carbon Tracker and others were part of what led me and my colleague Branko Boskovic to ask whether stringent carbon policies, if applied to all emissions associated with oil sands, would render new oil sands investments uneconomic.  We started out with a model of an oil sands mine, tabulated the life-cycle emissions (for a mine, production emissions are about 36kg per barrel of bitumen produced, while total, life-cycle emissions are about 535kg per barrel as estimated by Jacobs and others), and applied carbon taxes first to production emissions, and then to the full emissions impact of the oil produced.

Sensitivity of oil sands mine rates of return to upstream and downstream carbon prices.

Sensitivity of oil sands mine rates of return to upstream and downstream carbon prices.

In the figure above, you can see some of the preliminary results of our analysis.  Our base case is a mine with financial attributes similar to Suncor’s recently-approved Fort Hills mine. This project has a rate of return of 12.5% assuming WTI prices of $90, a Canadian dollar exchange rate of 94 US cents, and a $15 differential between light and heavy oil at Edmonton, with Alberta’s existing policy in place.

In the top row of the figure above, you see what happens to those returns on investment as carbon prices on production increase—not so scary, even as carbon prices climb to $100/tonne of CO2. However, it’s when the number 80 starts to play a role  that you really see where the risk comes from. Reading down every column, you see what happens to project returns as a greater share of the downstream (combustion and refining) carbon liability is paid for by the producer, most likely indirectly through lower oil prices resulting from demand-side carbon policy.

Even a $50/tonne carbon price presents a serious risk to the economic viability of this investment if, as will have to be the case if global emissions are to be reduced, these policies are applied to combustion emissions and consumers aren’t willing to simply pay the tax. The more consumers react to increased prices with reduced demand, the more detrimental carbon policies become for oil sands investments.

So, if you want to know where the risks to oil sand projects lie, they aren’t from the policies which are being considered for production emissions in Canada.  They come from two numbers—the 80% of emissions that occur once the oil is burned, and the concerns that executives appear to have with carbon emissions costs of as little as 320 pennies per tonne.


How the oil sands could very quickly become unviable

  1. This is one special interest that will be squealing like a stuck pig if it’s done right… (To paraphrase Preston Manning, CEO, president, and founder of the Manning Center for Democracy — and also a client!)

  2. Very interesting, but most growth in production in the future will come from in-situ projects, which seem to have much better economics than for mined bitumen. Have you run a similar analysis with them?

    • Yes. In situ is a similar story. They are higher return, but higher emissions, plays. They also have more geologic risk, so hurdle rates tend to be higher. Will post the in situ stuff at some point, bit think of the top left numbers in the table as higher, and the bottom right as about the same.

  3. Glo-Bull Warming is the biggest fraud ever perpetrated in human history.

    As soon as the Democrats lose control of the Senate all bets are off for any continuation of this sham.

    It was first called global warming, then climate change, now we here climate disruption, what joke.

    Nothing but a socialist wealth transfer scheme, greenies are like watermelons, green on the outside and red on the inside.

    • Don’t get out of your closet much,eh?
      Watch Chasing Ice….when all the ice is melted, what do you propose for the people impacted?
      Already countries are being adversely affected…water in your living room at high tide will do that.
      Are they all going to be invited to Alberta? or because you don’t know ‘THEM’ they don’t matter.
      Your socialist wealth transfer scheme shouldn’t matter because oil & gas makes SO MUCH money from federal transfers, tax credits THEY are already part of the wealth transfer scheme.

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