Saturday, January 17, 2009

The Case against Dirty Oil


This article appears in the February 2009 issue of Oilsands Review; graphic taken from here.
By Peter McKenzie-Brown

“Two wars, a planet in peril, the worst financial crisis in a century.” In his victory speech in November, with those words Barack Obama summed up the challenges his new administration would face.

The phrase “a planet in peril” was, of course, shorthand for climate change and other environmental troubles. For those in the oilsands industry, it seemed to threaten lost market share. After all, during the campaign Senator Obama promised to ban imports of dirty oil – that is, oil that releases a great deal of CO2 during production and upgrading. At present, the United States is the only market for Alberta’s bitumen and upgraded oil.

This article suggests that the US market for oilsands producers may not be as secure as Canadian producers may hope. Canada can compete in the market, but it may increasingly be at the expense of other global oil producers as this continent’s energy mix changes. There are a lot of caveats to that theme – not least of which is that the drive to greener bitumen production is now an almost unstoppable force. In Canada’s traditional export market, the greenest producers may become the most successful players.

American legislators have already begun to target it as an easy way to reduce emissions without hurting American voters. For example, Congress has already passed a law banning federal government agencies from directly promoting energy projects that will emit greater greenhouse-gas emissions over their entire life cycle than conventional oil. A section of the US Energy Independence and Security Act of 2007 prevents federal agencies such as the military from entering into fuel contracts that directly encourage unconventional energy development. This could include the oilsands.

For its part, California has passed regulations requiring fuel suppliers to reduce the emissions from the fuel they sell – and to account for those emissions right back to the original source of production.

Energy calculus of this kind is unprecedented, and if followed to its logical conclusion could be devastating for Canada. The world’s largest per capita consumers of energy, Canadians are also the world’s largest per capita producers of CO2. Regulations that limit the carbon quotient in other imported goods could shut a variety of Canadian products out of American markets. Whether or not such rules will ever apply to other commodities, for oilsands producers these developments are immediate matters of deep concern.

Will President Obama, who often used green rhetoric on the campaign trail, continue down that road? “No”, according to Murray Smith – a one-time provincial energy minister who until recently served as Alberta’s representative in Washington, D.C.

“(Obama) was trained in the very tough political environment of Chicago. In order to operate inside today’s political conditions,” Smith said, he “must govern from the centre. From November 4th to the 5th, his move from the political spectrum of the left to the political spectrum of the middle was virtually instantaneous. So presidential candidate oratory that mentioned the oil and gas sector as a target for higher taxes, promises to increase environmental efficiency and to take other measures for energy efficiency measures are either already law or just promises.”

Smith added that the president is a “former senator from an important coal-producing state, a state that relies almost exclusively on coal for electricity generation. In fact, he sponsored an important coal-to-liquids bill” – albeit one that didn’t make it out of the Democratic caucus. In Smith’s view, “energy and environment will drop to tertiary issues as the USA digs itself out of the economic hole that the mortgage and housing crises dug.”

As if in support of this view of the world, in one of his first radio addresses after his win the president-elect put his energy program in the context of infrastructure projects. “We’ll put people back to work...building wind farms and solar panels; fuel-efficient cars and the alternative energy technologies that can free us from our dependence on foreign oil and keep our economy competitive in the years ahead.”

Unwilling to take a chance, the day after the election prime minister Stephen Harper proposed a joint US-Canada pact on climate change which would exempt production from Alberta’s oilsands from import controls on the grounds that it could contribute to Obama’s goal of making the US independent of Middle East sources of supply.

The Tar Sands Controversy:
In Canada, the dirty oil question became a high-profile public issue with the publication of a rambling, ideologically incoherent and highly inaccurate book on the oilsands. Author Andrew Nikiforuk and his publisher promoted the book well, and environmental issues surrounding oilsands production got a great deal of play in the media. This touched raw environmental nerves across the continent.

Consider some of his statements, however. “Many tar sand projects puff out nearly a million tons of carbon dioxide a year.... A million tons – a megaton – is enough lethal carbon dioxide to fill one million two-storey, three-bedroom homes and suffocate every occupant.” Where do you start with such a statement? CO2 is no more lethal than water, and far less likely to become a disagreeable or life-threatening localized pollutant. Like water, it is essential for life.

Nikiforuk’s sloppiness is extraordinary. For example, his diatribe on carbon capture and storage (CCS) stumbles from technical blunder to unsubstantiated claim and shows no comprehension of the economics of the concept. Then, astonishingly, he pronounces the whole idea – a demonstrably safe (though expensive) system of pollution reduction already being used around the world – to be “morally bankrupt.” This seems an absurd term to apply to technologies that remove pollutants.

Straightening out the endless errors in this book would be a thankless and time-consuming job, but let the following illustrate Nikiforuk’s efforts to, apparently, deliberately mislead. “The average Canadian burns twenty-five barrels of oil a year,” he claims. “The average Albertan burns sixty barrels, due to an above-average use of fossil fuel toys such as ATVs, trucks and SUVs.”

In fact, Alberta’s energy use is higher than the national average because its industry is heavily focused on the energy-intensive businesses of producing and processing energy – including growing volumes of unconventional oil and gas, which are especially energy intensive. Consumer toys have almost nothing to do with it. The author of a book on the oilsands would surely know this.

The Princeton Wedges: At one end of the climate change spectrum are demagogues like Nikiforuk. At the other are those who say the issues are imaginary or, since they are unsolvable, irrelevant. A more pragmatic part of this latter group are those who, like St. Augustine 1500 years ago, ask to be granted “chastity and continence, but not yet.” Although concerned about the challenge, they hope CO2 emissions will be rendered “tertiary issues” because of the world’s financial meltdown or lack of political will, so they can postpone the cost of action.

In the centre are those concerned about the scientific consensus on climate change and global warming, and they are the group who will ensure the issue does not go away. Dirty oil became a campaign issue in Obama’s dignified presidential campaign because it is now a mainstream concern. That is unlikely to change.

A few years ago, physicist Robert Socolow and ecologist Stephen Pacala from Princeton University wrote that “Humanity already possesses the fundamental scientific, technical, and industrial know-how to solve the carbon and climate problem for the next half-century…. Although no element is a credible candidate for doing the entire job (or even half the job) by itself, the portfolio as a whole is large enough that not every element has to be used.” The world of environmental politics took note, and the concept of stabilization wedges – commonly called the “Princeton wedges” – was born. The wedges represent emissions that can be taken out of the world’s growing volumes of pollution by different techniques. In many quarters, they revolutionized thinking about greenhouse gas emissions.

Socolow and Pacala identified 15 strategies that could reduce business-as-usual increases in emissions by 25 billion tonnes of emissions over a 50-year period. They include using more efficient vehicles, developing more efficient buildings, and using natural gas instead of coal. Each stabilization wedge would lower the angle of the line representing carbon-emissions growth; together, they would reduce CO2 emissions enough to stabilize its concentration in the atmosphere. To put the magnitude of the problem in perspective, human activity is now adding 7 billion tonnes into the atmosphere annually. Unchecked, that figure will double in the next half century.

Each Princeton wedge is a steel-jacketed bullet in the struggle against CO2 pollution. For the issue of CO2 pollution as a whole, there are no silver bullets – especially since 85 per cent or more of CO2 emissions from oil come out of the consumer’s tailpipe.

For the oilsands industry, however, one bullet is at least a silver alloy. The province is counting on CCS to meet 70 per cent of its long-term GHG reduction targets. Compared to a “business-as-usual” case, the province’s climate change strategy has targeted annual reductions of 200 million tonnes of CO2 per year by 2050 – compared to that slippery “business-as-usual” case, a 14 per cent reduction from 2005 levels. Of total reductions, 139 million tonnes would come from CCS. Not bad for a morally bankrupt strategy.

Back to the Future: However, the real risk to the oilsands market may not arise directly from environmental issues. Perhaps the new American administration will take action to back out crude oil demand by frog-marching a shift to electric and natural-gas fuelled vehicles. Such a development would have mixed implications for the petroleum sector.

In a recent presentation to the Canadian Society for Unconventional Gas, ARC Energy’s Peter Tertzakian proposed that rapid change in the transportation fuel mix could represent opportunity for gas producers. “We are in a period that is very 1973-ish,” he said. “Things have to change. About 60 per cent of our energy comes from coal and oil, and they are disadvantaged fuels” for several reasons. Both commodities present serious environmental problems. Oil prices in general are volatile, and Middle Eastern oil also carries a lot of geopolitical baggage. In the US there is a strong sense that the country has to stop importing oil from Persian Gulf suppliers.

According to Tertzakian, “There are policies coming at us,” and they will lead to fundamental changes to North America’s energy mix. “The two opportunists are renewables and natural gas, and I’m here to tell you that renewables are winning.”

To prosper in the changing environment, he said, the gas industry needs to think strategically. “Gas is a clean fuel. It’s plentiful and scalable. It’s time this industry took control and said this fuel is the fuel of the future. If we don’t, we’ll remain hostage to a situation in which all we do to market our (natural gas) production is to sit around the table waiting for the weather report.”

For the oilsands sector, strategic thinking needs to take different forms. By year-end 2009, supply from the oilsands is likely to increase by 150,000 barrels per day, and that supply is going to be competing in a recessionary market. Looking to the longer term, the new US administration and state governments will likely find additional ways to discourage the consumption of oil and the shift to other fuels.

A pipeline to the Pacific is in order, and Enbridge has already begun to develop its Gateway project. One appeal of this line is that Canadian producers would get bids on their crude oil from other markets than the United States. Also, of course, pipeline costs would be less. The downside is that it may come too late to avert a near-term supply glut.

If crude oil demand is going to continually shrink in North America, suppliers to the diminishing market will have to compete on geopolitical, economic and environmental terms. This will involve the continuation of advertising campaigns like those of PetroCanada, Husky Energy, Shell, BP and other integrated firms, which paint the corporation green. More importantly, it will require measures which, like carbon capture and storage, directly reduce emissions.

To win the battle for hearts and minds, both industry and government will need to fight the perception that oilsands production is “dirty oil.” At present, 20 companies – including oilsands players Canadian Natural Resources, ConocoPhillips, Shell and Petro-Canada and coal-fuelled electricity producers Epcor and TransAlta – are vying for a $2 billion pot the province has made available to kick-start CCS within Alberta. As those projects go into operation, Alberta will become a global leader in this technology. The province has also put aside $2 billion to promote public transit.

To make the province’s oilsands production more marketable, provincial strategy is clearly to build a greener image. A three-year, $25 million public relations initiative to improve Alberta’s image is a tiny part of a much larger package.
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