Redrawing Mining Boundaries

Alberta's Regulator increases the size of the province's surface mineable area by 40 per cent.

By Peter McKenzie-Brown
Last year Alberta’s Energy Resources Conservation Board report rebalanced the provincial agency’s estimates of oilsands reserves, shifting them somewhat in the direction of surface mineable reserves. This raises questions about environmental impacts, for which the inimitable Pembina Institute have happily provided at least one group of answers.

The oilsands are a vast geological mystery, but last year the ERCB put into place a piece of the underlying puzzle 14.5 townships (1,350 square kilometres) in size. Mineable reserves are those with overburden of 65 metres or less. Based on an analysis of more than 2,000 exploratory wells drilled in recent years, the Board’s analysis increased the boundaries of the mineable Athabasca oilsands by almost 40%. The mineable oilsands area of north-eastern Alberta now measures 51.5 townships.

The first change in the surface mineable area since the Board first drew the boundaries in the early 1980s, this change increases total established mineable reserves – in many jurisdictions called “proved” reserves – by 11%, or about 3.5 billion barrels; more than Britain’s total reserves. These are new reserves. Previously, the Board had not done a resource calculation for the area.

While the mineable sands did well, deeper sands did not. As part of its report, the Board reduced established in situ reserves in the Peace River area on the principle that some previously booked reserves in the Bluesky-Gething deposit were too thin to be economic. As a result, the ERCB reduced the in situ component of established oilsands reserves by about 5.5 billion barrels. The net outcome was that Alberta’s established reserves of bitumen totalled about 170 billion barrels. About 20% of that resource is theoretically mineable. The balance will require in situ recovery procedures like SAGD.

Rick Marsh, a senior geologist with the Board, stresses that this report makes no differences for planning by individual companies, although he observes that landowners have posted this new assessment on their websites. “The purpose of this is to determine on a global or provincial basis what the bitumen reserves of the province of Alberta really are. There is no connection between the regulatory side and the (ERCB’s) resource assessment side. Whether regulatory approval to develop is given will determine whether our resource estimate is correct or not. If development doesn’t take place for environmental or economic reasons, or for any other reason, then we will have to de-book some of those reserves, adjust them downward.”

Marsh notes that there are spots within the boundary expansion that are not appropriate for mining (they would require in situ development) and stresses that, in any case, the new ERCB boundary has no regulatory effect. Leaseholders in the surface mineable expansion area include Shell, UTS Energy, Total S.A. and Synenco Energy; they can propose whatever approach to development they want, whether surface mining or in situ techniques. It’s up to regulators (primarily the provincial Department of Energy) to approve developments.

Economic and Environmental Implications
It isn’t difficult to figure out the energy implications of this analysis. From an economic and technical perspective, the ERCB report enlarges the technically more accessible sources of bitumen. The availability of more mineable reserves, if developed, would mean a lot more economic activity in Alberta, more royalties to the province and greater energy security to the world. Greater production would contribute greatly to Alberta’s status as an energy power. It would enable the industry to develop larger export markets – whether in the United States or, if a pipeline to the west coast is ultimately constructed, to East Asia. And, of course, the Canadian balance of trade would benefit. In a higher-oil-price world, the economics of oilsands development are terrific.

But what are the environmental costs? Especially in respect to air pollution, the balance of costs is well worth considering. According to an important 63-page Canadian Energy Research Institute (CERI) study, Green Bitumen, SAGD production generates 1.3 times the emissions of conventional oil. By contrast, integrated mining and upgrading projects produce 0.6 times the level of emissions. (Emissions from older plants are much higher than these averages.) As we shall see, this could dramatically change.

First, however, consider the notions of the Pembina Institute, which will always have an axe to grind in respect to bitumen production. “The technologies used to mine, extract and upgrade bitumen to synthetic crude make the product among the most environmentally costly sources of transport fuel in the world,” the organization proclaims.

In May, Pembina issued a report summing up its view of the relative environmental impacts of the two oilsands production systems as follows. In situ oil sands production generates more greenhouse gases and sulphur dioxide emissions per barrel. Oil sands mining affects habitat more from land clearing, generates more nitrogen oxides and uses more water during production.

This report follows Pembina’s release in March of a “report card” on nine non-mining plants in the oilsands. In that report Pembina observed that in situ plants are responsible for greater air pollution than mining plants. “When the land disturbance and fragmentation effects associated with natural gas production are considered,” the authors added, “the influence on wildlife habitat of in situ operations can reach (environmental impact) levels that are equal to and sometimes greater than mining.” According to Simon Dyer, the institute’s oilsands program director, “both mining and in situ oil sands development produce significant cumulative environmental impacts and those remain unaddressed.”

Plain Facts
It’s easy to find yourself flinching at the organization’s messianic sense of its own rightness. However, the Pembina Institute plays an important gadfly role within the oilsands industry. As an advocate for better environmental performance, it brings public and governmental pressure to bear on the industry.

Pembina does confirm its raw data with producers before conducting its analysis and releasing its publications, and that is to the ENGO’s credit. However, the organization then invariably puts its collective boots to the necks of lesser environmental performers – or, when justified, damns exceptional performers with faint praise. In one presentation on its website, Pembina labels statements from the Alberta government and the industry as “Spin” but describes its own biases as “Plain Facts.” Perhaps a reality check is in order. To use just one example from the table above, in situ projects mostly use non-potable groundwater, 90% of which they recycle, and then re-inject that water into underground formations. In the interest of spin, Pembina forgets to mention this plain fact.

The good news about the ERCB’s expansion of the surface mineable area in the Athabasca sands is that it describes a huge volume of petroleum that can be developed safely and, as technology and production practices improve, in more environmentally sustainable ways. Especially if your biggest concern is air pollution, oilsands mines are the way to go. Where to go is a plain fact of the ERCB report.

According to the highly-respected Canadian Energy Research Institute, combining carbon capture and storage or using nuclear energy as a component of production could create oilsands plants producing fewer greenhouse gas emissions per barrel than conventional crude oil. In the study noted earlier, CERI describes an astonishing scenario. “The oil sands could pave the way as a bold new energy system,” CERI argues, “producing hydrocarbons to power our economy with almost zero GHG emissions being released into the atmosphere.” Looking forty years into the future, the institute suggests that “by 2050 the reduction from CCS coupled with nuclear energy would enable the oil sands to produce at 2030 rates with zero emissions being released, creating the cleanest sources of produced crude oil on the planet.”

The irony, of course, is that in this case the real visionary is a research institute with ties to the University of Calgary and funded by industry and government. Like the Pembina Institute, most ENGOs are just gadflies. They have a role in the ecosystem, but revolutionary change is taking place without them.

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Books on the Oilsands: A new cottage industry

Books about the oil sands were once few and far between; today they are part of a cottage industry, and often written by people with an axe to grind.

Such is the case with the latest installments, each of which boasts a green theme. However, it would be difficult to imagine three more diverse approaches to such a challenging topic.

• Alastair Sweeny, Black Bonanza: Canada’s Oil Sands and the Race to Secure North America’s Energy Future John Wiley & Sons Canada Ltd., 2010
• Satya Das, Green Oil: Clean Energy for the 21st Century? Sextant, 2009
• Gordon Kelly, The Oil Sands: Canada’s Path to Clean Energy? Kingsley Publishing, 2009

This article appears in the August issue of Oilsands Review

By Peter McKenzie-Brown

Black Bonanza
For a rollicking good read with a clearly defined message, Sweeny’s Black Bonanza really hits the mark. To get the flavour of his offering, consider two of many questions he raises in his preface. “Why are millions of people obsessing about carbon dioxide, a trace gas in the atmosphere, 3 percent of which is due to human emissions?... Why are government officials demanding that billions of dollars be spent to control this gas that is so essential to plant growth, while real pollution concerns cry out for solution and scores of our fellow citizens starve to death or die from preventable diseases?”

A historian by education and a writer by occupation, his chapters on the development of the oil sands are particularly worth reading. He captures people’s lives well, and has quite the instinct for the compelling quote.

Sweeny is on a mission, however. His message is that the oil sands present a tremendous strategic advantage to North American energy security, and they should be developed immediately. Canada would benefit enormously as it became an energy superpower, and North America would remain an ascendant geopolitical entity as it used a combination of crude oil security, economic strength and technical expertise to develop the inexhaustible energy of the sun. While the text is riveting, as the book winds up its message begins to fall apart. To make his case convincing, Sweeny must destroy the foundations of the climate change and peak oil debates.

He does pick holes in the conventions of climate change theory. Some of his arguments are historical: the Little Ice Age of around 1600, which followed the Medieval Warm Period of a millennium ago – and neither of which was connected to greenhouse gases. Others are statistical: carbon dioxide makes up 391 parts per million of atmospheric gases, of which 12 parts per million come from human activity. Other arguments use conspiracy theories to explain the sources of public concern: to a certain extent, he pooh-poohs climate change science as the work of people with vested interests in government grant machines. This is not exactly respectful of the scientific method and scientists, who together have contributed so much to contemporary civilization.

Sweeny’s efforts to dismiss peak oil are equally dicey. The gist is that there is plenty of oil in the world’s unconventional oil deposits, which of course is true. The point at issue is whether those deposits can be developed in time to replace depleting supplies of conventional production. On that question, the jury is still out.

The author successfully argues that Alberta’s oilsands have been demonized because environmental NGOs need easy, controversial targets to use in their annual fund-raising campaigns. Similarly, celebrities and politicians know they can get press by visiting Fort McMurray and proclaiming that the mines and plants look like something out of J.R.R Tolkien’s fictional Mordor, so they do.

The statistics Sweeny uses to defend the oil sands from the critics are compelling. He claims that each year America’s single-biggest coal-fired electrical generating plant spews forth 25.3 million tons of carbon dioxide contaminated with sulphur dioxide. That compares to about 40 million annual tons of relatively clean CO2 emissions from the Athabasca oil sands. Furthermore, Canada – the world’s poster child for dirty oil and GHG emissions – is responsible for 1.9% of global greenhouse gases. By comparison, green Europe emits 13.8%, the US 20.2% and China 21.5%. And so the argument goes.

Sweeny’s book is worth the read. As a gadfly, he counterbalances much of today’s conventional wisdom. Of equal interest for the bookworm, it’s an entertaining read from start to finish. The same cannot be said of the effort by Satya Das.

Green Oil
“Beyond a few purblind ravers,” says Das, “no rational person denies the reality of climate change.” Given the author’s background in journalism (notably with the Edmonton Journal), this mess of a book is particularly surprising.

He does not have a coherent message. In the absence of such a message, he parrots endless buzz-word laden passages from provincial government and ENGO reports – mostly on the importance of provincial stewardship of its resources, and strategies for governmental success. Painful to read, this book offers little except a sense of what higher-echelon bureaucrats conclude in their strategic planning meetings.

Self-published by the consultancy Das helped to found, this book’s main purpose is probably to drum up business. In fact, it is only in the context of his understanding of the roles of the public and private sectors that this publication makes much sense. “The principal role of government is to set a strong and effective policy framework,” he proclaims. However, “in every instance, the private sector role is to proceed robustly and vigorously to create wealth and value within the direction set by government.” As a private-sector entity advising government on policy issues, it’s safe to assume his firm is proceeding robustly and vigorously in the aforementioned direction.

This book is a stinker. Buyer, beware.

The Oil Sands

Gordon Kelly’s book is long, sometimes dry and technical, occasionally rambling. However, it’s also the most comprehensive and current study of the oilsands available. For anyone wanting a crash course in the oilsands, it’s a godsend. For anyone wanting a complete and current reference, it’s the only game in town.Kelly draws deeply from technical reports without taking shrill or ideological positions. For the most part he reflects the industry’s collective wisdom about the state of the oil sands. Fortunately, he also offers innovative ideas worth serious consideration.

Well into his 70s, Gordon Kelly had a long and diverse career in the petroleum industry – much of it as an ex-pat – and still works as a consultant. An engineer with an MBA by training, his understanding of the petroleum sector runs deep. It is therefore worth noting that his review of peak oil is comprehensive, and that he takes the issue quite seriously.

“A major theme of this book,” he says, “is that the world could run short of oil before new sources of mobile power are available. That is why the oil sands are needed and why it is important that Canada start the search for new alternative power sources now.”

Unlike most peak oil advocates, Kelly doesn’t see a probable decline in oil production as a function of scarcity. Rather, he sees it as a social problem. “Environmentalists are becoming more aggressive against oil and nuclear power because they really believe biofuels, windmills and solar panels can save the planet from GHG climate change. Politicians demand GHG curtailment because it makes them look ‘green’” he writes, “but it adds to the cost and time to build projects. Adding ‘Cap and Trade’ penalties to curb GHG emissions has reduced the money available for adding more capacity in Europe and may be expanded to North America. Project approval hearings drag on for months or years. Court challenges add to the delay....The world has lots of oil, but politics (will) block the (industry’s) ability to develop it fast enough.”

When we pass the peak in oil production (Kelly guesses the year will be 2015), “the shortages will be only a small percentage of demand, but for those who do not get the oil, it will be a crisis. History suggests it will be the poorest countries.”

Besides acknowledging peak oil as a reality, Kelly sees climate change from greenhouse gases as a threat. In that context, he puts forward some refreshing proposals on making Canada a leader in alternative energy.

In effect, he argues in his concluding chapter that Alberta should diversify from an energy-based economy into an energy-based economy. The oilsands and Alberta’s existing energy infrastructure provide a formidable base from which province and country can constitute a global clean energy superpower.

Concerned about the need to develop new sources of energy, Kelly conjures up the ghost of a creation of Alberta’s Lougheed years. Introduced in 1975, the Alberta Oil Sands Technology Research Authority invested $670 million over a 15-year period – all of those funds matched by private dollars. “AOSTRA was not government research but private research supported by the Alberta government,” says Kelly. “There is a big difference between the two. The private sector (had) to be willing to invest 50% of the cost in a project before Alberta (would commit) to the investment.”

According to Kelly, the program was so successful that it led to the construction of more than $100 billion in oilsands plants, so far. That is a stretch, perhaps. However, even if he is off by 75% (with rising commodity prices and associated inflation being mostly responsible for Alberta’s recent oilsands investment), the province’s AOSTRA investments generated highly leveraged results.

Today, he says, the province should introduce an AOSTRA-style program (Kelly calls it the Alberta Energy Research Project, or EARP) to encourage investment in alternative energy, arguing that research incentives could take advantage of the province’s existing expertise to create next-generation technologies. This is not far-fetched, he argues. BP is already “a large supplier of solar energy, while Chevron is the largest supplier of geothermal energy. Shell has a hydrogen division. Suncor has windmills and a biofuel operation.”

If you are interested in Alberta’s and Canada’s energy future, this is a fine tome. It’s too long, perhaps, and in some places could use a bit of cosmetic surgery. Even so, it is worth the time you invest in reading it.

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Practice Run

H2S re-injection a rehearsal for carbon storage program

This article appears in the May 2009 issue of Alberta Oil Magazine

by Peter McKenzie-Brown

Once an obscure part of waste management, the injection underground of unwanted gases will soon become a huge part of Western Canada’s business. The industry has had plenty of practice at disposing of nastier materials than carbon dioxide.

Oil and gas operations produce two kinds of acid gases – hydrogen sulfide (H2S) and carbon dioxide (CO2). The former is usually stripped from the gas stream and converted into sulfur. Tom Byrnes, a reservoir engineering manager at the Energy Resources Conservation Board, says the sulfurous impurity is sometimes just stripped from the gas and re-injected underground. “It’s usually an economic question. There may be small volumes of H2S in the gas stream, or the infrastructure [to strip out sulfur] may not be in place to make it practical.” In Alberta, the board regulates all disposals through disposal wells and first approved an H2S re-injection project in 1989.

Both of these acid gases are routinely stripped from natural gas for re-injection, as appropriate. “But the smaller the concentration of H2S or CO2 there is in the gas stream, the more expensive it is to get it out. It’s a problem of diminishing returns,” Byrnes says.

If H2S can have commercial value as a source of sulfur, CO2 is frequently injected into operating oilfields to stimulate production. This is not new. Carbon dioxide has long been used for enhanced oil recovery, to urge additional barrels out of elderly oilfields. One such project has been operating in the 50-year-old Weyburn oilfield in southern Saskatchewan for nine years.

The project uses a 330-kilometer pipeline to transport carbon dioxide captured at the Great Plains Coal Gasification plant, which manufactures methane from coal near Beulah, North Dakota. As it keeps oil flowing from this aging field, each year the EnCana-operated project disposes of about 1.5 million tonnes of carbon dioxide emissions. This is environmentally beneficial, since CO2 is both an acid gas that can acidify water and a greenhouse gas that can trap heat within Earth’s ionosphere.

While EnCana’s Weyburn project is profitable in its own right, most industrial operators would find it economically prohibitive to strip CO2 from industrial processes for sequestration down disposal wells. Those economics changed profoundly last July when Alberta Premier Ed Stelmach announced a $2-billion commitment of government assistance to advance carbon capture and sequestration (CCS) technologies in the province. Provincial authorities are now sifting through a dozen applications for funding, and will announce the successful projects as decisions are made.

Alberta’s involvement follows a gestation period of deep study, including a provincial policy paper which observed that “Alberta has a unique opportunity to implement carbon capture and storage to substantially reduce our greenhouse gas emissions. CO2 emissions can be captured where they are produced, transported and stored in geological formations (such as depleted oil and gas reservoirs, coal beds and deep saline aquifers) that may be located hundreds of kilometers away.

Ultimately, CO2 capture and storage technologies provide the province with the greatest potential to substantially reduce greenhouse gas emissions while, at the same time, retaining our ability to produce and provide energy to the rest of the world.”

According to that policy paper, Alberta is counting on CCS to meet 70 per cent of its long-term greenhouse reduction targets. If the five provincially subsidized projects – likely to cost a billion dollars each–all go into operation, they would collectively reduce emissions by up to five million tonnes annually. That is likely just the beginning for large-scale underground carbon sequestration projects in the province.

While five million tonnes annually of sequestered CO2 may seem like a large number, it’s barely a whiff of what’s possible. Over four decades, Alberta’s greenhouse gas emissions plan targets a 200-million tonne cut in emissions, but only compared to a do-nothing scenario. That volume is a bare indication of the huge volumes of waste – solids, liquids, effluents and emissions – generated by one of the world’s leading petroleum producers.

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.

Shell's Take on Carbon Sequestration

This article appears in the November, 2008 issue of Oilsands Review. The generic graphic comes from here.

By Peter McKenzie-Brown

Is human activity influencing climate change or not? Indeed, is global warming even taking place? There is widespread disagreement within academia about the causes of increased global average air temperature, especially since the mid-20th century.

Some argue that the observed “trend” is a normal climatic fluctuation. Others claim it isn’t even happening. These issues are the source of rip-roaring arguments in Alberta. Perhaps because of the impact of geological thinking on a province with a petroleum-based economy, the arguments here are both heated and informed.

Geologists, who think in terms of Earth’s periods and epochs rather than its decades, are well aware that climate always changes. Perhaps they also have an innate scepticism about whether human behaviour can meaningfully alter the powerful natural forces continually changing our planet. While the debates rage, the scientific “consensus”, as it is delicately called, supports the idea that greenhouse gas emissions from human activity are increasing Earth’s temperatures and thus speeding up climate change.

For many environmental groups the problem seems critical, and they call for urgent action. Increasingly, so do many corporations. For example, Royal Dutch Shell’s position on climate change is unequivocal. According to Jeroen van der Veer, the corporation’s CEO, “For us, as a company, the scientific debate about climate change is over. The debate now is about what we can do about it. Businesses, like ours, should turn CO2 management into a business opportunity and lead the search for responsible ways to manage CO2, use energy more efficiently and provide the extra energy the world needs to grow. But that also requires concerted action by governments to create the long-term, market-based policies needed to make it worthwhile to invest in energy efficiency, CO2 mitigation and lower carbon fuels. With fossil fuel use and CO2 levels continuing to grow fast, there is no time to lose.”

Carbon Capture and Sequestration: So what’s a company to do? Over the last decade, global think tanks have increasingly focused on CCS – the common abbreviation for carbon dioxide capture and sequestration (more colloquially, “storage”) as a technologically simple way to remove CO2 at some large processing plants. The most prospective targets for this technology include coal-fired electricity generators and oil sands upgraders.

Problem is, such ventures are not profit-driven enterprises. They are climate-driven – initiated in response to concerns about climate change and related regulation. On its own, CCS doesn’t make sense. It requires government intervention. In that context, the CCS climate changed profoundly last July when Alberta premier Ed Stelmach announced that his government would provide $2 billion to advance these technologies in the province. That is the biggest sum available for CCS anywhere.

Often (unfairly) derided elsewhere in Canada as a Johnny-come-lately to the environmental table, Alberta’s involvement follows a gestation period of deep study. Last January a provincial policy paper observed that “Alberta has a unique opportunity to implement carbon capture and storage to substantially reduce our greenhouse gas emissions. CO2 emissions can be captured where they are produced, transported and stored in geological formations (such as depleted oil and gas reservoirs, coal beds, and deep saline aquifers) that may be located hundreds of kilometres away.... Ultimately, CO2 capture and storage technologies provide the province with the greatest potential to substantially reduce greenhouse gas emissions while, at the same time, retaining our ability to produce and provide energy to the rest of the world.” Alberta is counting on CCS to meet 70% of its long-term GHG reduction targets.

When the September deadline for submitting expressions of interest to the Alberta government arrived, the Department of the Environment received “more than a dozen” proposals, according to government representatives. The province is now narrowing those proposals down to the few with the greatest potential to be built quickly and significantly reduce greenhouse gases. The province hopes to reduce emissions by up to five million tonnes annually through this program.

The names of the contenders have not been publicly disclosed, although the rumour mill is speculating on the usual suspects – big players with interests in oilsands or enhanced oil recovery. Devon, Imperial, Syncrude, a Husky/BP partnership, ConocoPhillips, ARC, Petro-Canada, Enbridge and Total E&P come to mind. One player, however, has been quite public in its enthusiasm for CCS. Shell Canada has long been studying a CCS project connected to its Scotford Upgrader, and a story on that project accompanied a great deal of the coverage of Alberta’s CCS incentives.

Sequestration or Storage? The name of that project, Shell Quest, refers to the notion of sequestration. According to Rob Seeley, Shell’s general manager of sustainable development, the idea of sequestration is quite different from storage. “Sequestration implies permanence,” he said. “Storage seems temporary. (In a CCS project) the carbon would be sequestered, not stored. It will be there forever.” In his world, CCS refers to carbon capture and sequestration, not storage.

The venture manager for Quest, Seeley is upfront about the global warming issue. “We (at Shell) are seriously concerned about man-made CO2 emissions in the atmosphere. We know that global warming is a natural process that has been going on for 10,000 years, but we believe that man-made emissions could be accelerating the process. Whatever the science ultimately finds, we believe in the precautionary principle. We need to take action on reducing CO2 now.”

The Scotford Upgrader is part of a complex dating back to 1984, when Shell constructed there the first refinery to exclusively process synthetic crude from Alberta’s oil sands. Located northeast of Edmonton, Shell’s Scotford complex has often been expanded. It, and was augmented with an upgrader in 2003.

The upgrader receives bitumen from the Albian oil sands plant, and transforms it into two types of synthetic oil – Albian premium synthetic oil and Albian heavy synthetic oil. Synthetic oil is bitumen with the impurities removed and hydrogen added. Adding hydrogen yields upgraded oil that can more readily be refined into high-quality products like gasoline, diesel and other types of fuel. The Scotford plant processes 155,000 barrels per day of raw bitumen.

The upgrader is now undergoing a third expansion which, when completed in 2010, will include the commissioning of a third hydrogen plant. Hydrogen plants combine steam and natural gas (methane) to produce hydrogen for upgrading and by-product CO2 that is vented to the air.

The key to Shell Quest would be a facility that captured the CO2 from all three of the upgrader’s hydrogen plants. “We will use a patented Shell process that uses amine solvents to scrub H2S and CO2 from our gas stream,” Seeley said. Once the gas stream was cleaned up, compressors would prepare the CO2 for transport to underground storage sites. Compressing CO2 transforms it into a supercritical liquid – a form of matter which has the properties of gas and liquid simultaneously. Once liquefied, Shell would pipe the CO2 to field facilities, where it would be injected into deep, underground rock formations.

How it would work: CO2 will remain in supercritical form if stored more than 800 metres below ground. Shell is targeting structures 2,000 or more metres deep. The injection wells would use several casings of steel pipe to ensure the CO2 entered the deep rock formations alone, and would not enter shallower areas of the ground. This would prevent leakage to the surface or into drinking water aquifers.

Cap rocks would trap the CO2 underground. In addition, however, several technical down-hole traps would keep the CO2 permanently in the reservoir. For example, CO2 can eventually combine with chemicals within the reservoir to form carbonate rock – limestone, for example. These traps plus the cap rock mean there is little likelihood the CO2 would ever leave the injection sites.

According to Rob Seeley, “We believe CCS is an important piece of the toolkit to reduce CO2 emissions. We think it’s a great opportunity within an oilsands operation to reduce our greenhouse gas footprint.” He notes that capture, compression, transport and sequestration themselves require energy, and that these energy needs will partly offset the benefits of CCS. “If we capture and sequester 1.2 million tonnes of CO2 per year, the net result of putting that away would be roughly 1 million. It depends on where the energy comes from for the capture and sequestration processes and how effectively it’s integrated into the whole process.” All in all, though, “CCS is a great opportunity to reduce CO2 emissions and to help move us on the path to greater sustainability.”

The Role of Government: Seeley was unwilling to discuss the cost of these ventures, but suggested that Alberta’s $2 billion would be distributed among only five CCS projects, each of which would capture at least one million tonnes per year. The simple math says the projects would each receive a $400 million subsidy. Why should they?

“We believe governments should take action on regulation to control CO2 emissions,” Seeley said. “If they do that, it will create a level playing field in which big industrial polluters can innovate to reduce emissions.” Seeley thinks big: “If we can have regulation that is complementary from country to country then we have a better chance of reducing these emissions internationally.” Seeley noted that CCS faces numerous risks that will require government involvement. These projects “are sitting waiting for regulation. The rules for greenhouse gas regulation in Canada are still not certain. You have to settle regulatory issues such as Canada and Alberta harmonisation before those projects can go forward.”

In his view, “The beauty of (CCS) is that it can capture very large from industrial sources. However, prices of $80-100 per ton are well beyond the prices that have set for CO2 in the near time. If the price of carbon is $15-20 per ton, it will be cheaper for companies to pay into a government tech fund than to actually sequester CO2.” Thus, if governments see CO2 emissions as a problem, helping fund CCS is a way for them to this important CO2 mitigation opportunity started.

“Capital costs will be in the hundreds of millions of dollars, but operating costs will also be high. It could be that over the life of a project the operating costs (present value basis) would be about the same as the capital costs. There are also technological costs.” Although CO2 has long been used in enhanced oil recovery, Seeley observed that “EOR doesn’t save the day on this. Historically, for EOR you get paid maybe $20 per ton for CO2. With higher oil prices, maybe you will get $30 to $40 per tonne. This is still well short of the $100/tonne cost to capture, compress and transport CO2. Only higher carbon pricing (by government) or the market will make this viable.”

Six Pathways: He adds, “The price of this technology will come down, but first we need some demonstration projects. That’s what Quest is all about – a large-scale demonstration of fully integrated CCS. We need to build this first round of projects so that we can learn from them. As these projects go ahead we will go from using amines to capture the CO2, then move on to cryogenics and other approaches that are more sophisticated.”

The earnestness with which Rob Seeley describes the issue of GHG emissions seems to reflect corporate culture at Royal Dutch Shell. The corporation has identified “six pathways” toward reducing carbon emissions. For the record, here they are: Increase energy efficiency within the corporation. Create technologies that increase efficiency and reduce emissions. Develop low-carbon fuels. Help customers use less energy. Work with governments on effective regulation. Implement carbon capture and sequestration.

This seems like a map other oilsands producers should study.

China: Panda or Dragon?

This article appears in the August 2008 issue of Oilweek.

By Peter McKenzie-Brown

A symbol of unrivalled wisdom and power, China’s dragon is a long, scaly, snake-like creature with the paws of a tiger and the claws of an eagle. This chimera is an emblem of ancient imperial power. Indeed, the dynastic emperors were known as dragons.

The revolutions of the twentieth century made a break with the past, and the present regime does not think the dragon is a proper symbol of China. Instead, the country’s rulers prefer to use the giant panda – that loveable, bamboo-eating member of the bear family – as the national emblem. By tradition a rare and noble creature, the panda has been part of diplomacy since 685 CE, when an emperor of the Tang dynasty sent a pair to his counterpart in Japan.

As the world sets its eyes on Beijing, where the Olympics will showcase progress since the death of Mao Zedong two decades ago, this commentary asks a simple question. Is the panda in charge of Chinese energy strategy, or is it the dragon? From the security of its bamboo forest, the gentle panda would stress comparative advantage. The dragon would rely on cunning, speed and power.

The charts below show growth in China’s oil consumption (top) and the country's oil production - both since the death of Chairman Mao

Until 15 years ago, China exported oil to neighbouring countries. Today, it has an almost insatiable appetite for the stuff. Since the Great Helmsman’s death in 1976, the People’s Republic has become the world’s second largest oil consumer (behind the U.S.) During those years Chinese consumption has quadrupled to about 7.7 million barrels per day while production – about 3.7 million barrels per day – has barely doubled.

The International Energy Agency thinks China will burn 16.5 million barrels per day by 2030, after buying 13.1million barrels abroad. Think about it: Saudi Arabia’s total output is now less than 11 million barrels per day.

Thrift: This article suggests that such parabolic growth requires the skills of the dragon to survive. In that spirit, China is now applying its extraordinary energy in four ways to meet its petroleum and other resource needs. The first is domestic resource development. Diplomatic manoeuvres on behalf of its petroleum industry are the second. The third involves partnerships with Western companies. Last is what the mandarins call “thrift.”

Based on efficiency, conservation and innovation, thrift is sometimes called the fifth form of energy.

China’s rise is making the world a more energy-efficient place. The country’s energy intensity – the amount of energy it uses per unit of GDP – has dropped by about 75% in the last 20 years, largely because of more efficient industry. Its energy intensity higher than America’s but lower than Canada’s, in 2006 China adopted the slogan “Save energy, cut emissions” as part of a drive to cut energy intensity even further. The country is thus improving its energy efficiency while increasing its energy-intensive role as workshop of the world. So don’t blame the Chinese for the world’s energy woes. They are doing an effective job of managing energy.

A latecomer to the world’s petroleum stage, China is now simultaneously the world’s second-largest oil consumer, the third-largest net importer, and the fifth-largest producer. In the last 15 years the dragon has been sending its agents into the world to secure the new energy supplies it desperately needs. Compared to the West’s international producers, China’s national oil companies arrived late to the petroleum Olympics, and they are not large contenders. The prizes left in play are expensive, and often in countries where Western companies refuse to operate because of human rights issues and geopolitical risk.

Through petroleum-related state-owned enterprises (SOEs) – China National Petroleum Corporation (CNPC), China National Offshore Oil Corporation (CNOOC) and China Petroleum and Chemical Corporation (Sinopec) – China started investing outside the country in 1993, just as the country became a net oil importer. China’s first petroleum acquisition was in Thailand, but CNPC acquired exploration acreage in Canada and Peru the same year. The amount of equity oil generated by those projects was relatively insignificant, and this remained the case for several years.

In terms of Canada’s ties with China, 1997 was an important year. As the British were preparing to return Hong Kong to China, Sir Li Ka-shing, the colony’s richest man and chairman of the Hutchison Whampoa conglomerate, became the owner of Husky Energy. Husky’s headquarters continued to be in Calgary, and the acquisition did not affect the company in the short term. However, Husky has since expanded its assets offshore China, and is now the largest foreign owner of exploration blocks there. All its holdings there are in the South China Sea.

Since 2001 Husky has signed eleven production sharing contracts in collaboration with the China National Offshore Oil Company (CNOOC) – now publically listed, but 70% owned by the government of China. Husky can participate in these projects up to 51%, and the company describes its entry into China as part of a strategy to develop conventional oil and gas outside North America. Certainly the company is also part of Chinese strategy, also. It is one source of capital for mandarins focused on securing energy supplies by developing the Middle Kingdom’s domestic resources.

The Venezuela Card: China cannot secure Canadian oil supplies as long as the only export pipelines from Alberta lead into the United States. Especially after the two countries announced in 2005 an agreement on energy cooperation, it was therefore astonishing when CNPC announced last year that it had pulled out of an agreement to take a 50% stake in the proposed Enbridge-operated Gateway Pipeline. When completed, the pipeline will transport 400,000 barrels of oil per day to Kitimat BC for overseas export. According to the terms of the original deal, CNPC would take 200,000 barrels per day of throughput, with the balance being exported to refiners in California. If the line had been expanded to 800,000 barrels per day capacity, CNPC could have acquired a larger stake.

For a country with rapidly rising oil demand, what’s not to like about this deal? When PetroChina vice president Song Yi-wu announced the dragon’s decision, he put it in the political context of a nation re-evaluating its commitment to Canada’s oilsands.

Projects take too long to get off the ground here, he said, and the political environment “frustrates” Chinese investors. Song said China would slow down its involvement in the Canadian oilsands business, give up its involvement in the Gateway pipeline project and wait for better investment policies and politically friendly opportunities in the future. Translation: Chinese policy-makers were frustrated over the unwillingness of Canadian producers to partner with CNPC in a production/refining venture that would see Canadian bitumen and heavy oil sent to Asia for processing.

Forecasting that CNPC couldn’t begin to produce bitumen from the oilsands for at least another decade, he made it clear that China’s near-term heavy oil strategies were pointed directly at Venezuela, where a “warm-hearted” President Hugo Chavez has taken steps to nationalize oil operations. Song said China is building energy security for its people in “politically friendly” countries, which include Venezuela, Saudi Arabia, Russia and a host of Asian and African nations – Burma, for example, and Sudan. Call it the Venezuela card.

The Venezuela card suggests a competitive advantage for China that Western countries often will not play. The dragon sees oil security as an urgent need, and is willing to exert whatever cunning, speed and power it must to meet its future needs. Not surprisingly, given its political structure and domestic situation, China will not let issues like liberal democracy and human rights stand in the way of its quest for energy.

Do Western oil companies let political and human rights niceties stand in the way of business? It’s a matter of degree, of course, but it is not difficult to find examples of North American and European companies pulling out because of political risk and public pressure based on human rights abuses. In Canada the most famous case is that of Talisman.

Ten years ago the company acquired a 25 percent interest in a developing oil project in Sudan. The production facilities, pipeline and offshore loading terminal were being built and the wells were being drilled. By the summer of 1999, oil was flowing and being exported. By 2002, the project was producing 240,000 barrels of oil a day, with the equity oil being distributed to the project’s participants, three of which were subsidiaries of state-owned oil companies from China, Malaysia, and Sudan. The only privately owned company in this consortium, Talisman bowed to public pressure based on Sudan’s human rights record and sold its 25% interest to an oil company owned by the government of India.

The pattern is clear. The Asian players were unconcerned about human rights. There is a subtext here about Asian strategies toward energy. Especially in the face of a high-profile divestment campaign like that launched against Talisman, Western companies will buckle in the face of pressure related to human rights, environmental integrity and so on. Chinese and other Asian companies will not. For example, all three of China’s oil and gas SOEs are active in Burma. Latecomers to the petroleum Olympics, they measure petroleum victory in terms of land, reserves and production.

Comparative Advantages: Chinese industry’s willingness to overlook “soft” issues like human rights gives it a distinct comparative advantage. China’s willingness to bring diplomacy to bear on behalf of its SOEs gives it another. These advantages are rebalancing the planet toward East Asia. The dragon is rising.

Chinese energy policy is directed by government, and some 70% of the world’s petroleum resources are now controlled by national oil companies like Saudi Aramco and Petróleos de Venezuela. State-to-state negotiations are especially important when one of the participants is an emerging superpower.

Much of China's efforts are directed to the energy-rich nations of Central Asia, which can deliver energy overland instead of by tanker. For example, a trans-Kazakhstan pipeline is already delivering oil from the Caspian Sea.

Two other factors in China’s favour deserve mention. One is that Southeast Asia is home to many in the Chinese Diaspora – the descendants of the many waves of migration from China over the last millennium. Particularly as colonialism collapsed after the Second World War, they came to control great assets and even some national economies. By some estimates the third largest economic entity in the world, the Overseas Chinese began repatriating capital to China in the 1990s, thereby igniting the Chinese miracle. Today they occupy key positions in Southeast Asian business and government, and strengthen local ties with China.

Another factor working for China began during Cultural Revolution – that decade of social, political, and economic madness from 1966 until the arrest of the Gang of Four. Despite mutual fascination and incomprehension, during those years black African governments and African revolutionary movements were the recipients of Chinese aid (both military and economic) and other diplomatic efforts. African governments – many of them successors to those revolutionary movements – remember China’s efforts during that time. That diplomacy is now paying off with preferential access to petroleum leases and production sharing contracts.

A classic example is Angola, in West Africa. Mainly because of the expansion of its oil industry that country has the fastest-growing economy in the world, and its growth is mainly driven by Chinese explorers and producers. China’s SOEs got access to Angola’s offshore as a ‘Thank you’ to the People’s Republic of China. Despite desperate poverty at home during the Cultural Revolution, the dragon still found the wherewithal to support Angola’s independence movements during those critical years.

China’s Peaceful Rise: A final point deserves comment. In the late 1990s, China’s central government developed what it called “the new security concept.” The idea is that the Cold War mentality of antagonistic blocks no longer makes sense. In a globalizing world, nations can increase their security through diplomatic and economic interaction. This notion has become part of a foreign policy doctrine known among diplomats as “China’s peaceful rise” – a policy that, for example, encourages Chinese businesses to form partnerships with Western firms. For Canada, which is one of the few countries likely to increase production in the coming decade, it has important implications.

Consider, for example, that Enbridge is undeterred by CNPC’s decision to pull out of the Gateway Pipeline. “The appeal (of this pipeline) to Canadian producers is that you would get another bid on the crude oil from somewhere other than the United States,” said Enbridge’s executive vice president, Steve Wuori. Also, of course, pipeline costs would be less.

“When (Enbridge) first started we were aiming (to complete the project in) 2011,” Wuori says. “But now we are targeting 2012-2014.” Will Canada be able to supply new markets with heavy? Wuori thinks so. “Production forecasts up to 2020 for the oil sands support that kind of growth potential, even if you risk it for economics and environmental concerns.”

Although China has placed less than 1% of the $50 billion investment in the oilsands since the early 1990s, it is still part of the equation. China’s most significant direct investment has been the SinoCanadian Petroleum joint venture, through which Sinopec owns a 40% stake in Synenco’s Northern Lights project. CNOOC made its presence known with the acquisition of a small interest in MEG Energy, which is focusing on a project at Christina Lake.

Obsessed with diversifying its oil sources and avoiding dependence on a single supplier, Beijing sees Canada as a country in the U.S. sphere of influence, a country where oil could be held hostage to political concerns. It has little enthusiasm for multibillion-dollar oil deals in a country whose relations with China have been soured by human-rights disputes. Think Tibet.

“China doesn’t want to make a multibillion-dollar commitment to a country where the political contacts are constrained,” says Jiang Wen-ran of the University of Alberta’s China Institute. Professor Jiang adds that the Middle Kingdom worries about Canada’s business practices. Canadians can’t explain how they will triple production from the oilsands given environmental constraints. The costs of environmental protection seem out of control. Labour costs are reaching the moon.

The Panda Speaks: This article has focused on the areas of Chinese petroleum development where Westerners are more likely to see a dragon than a panda. Of course, in modern China it is the giant panda that speaks for the neo-imperial court. To conclude, let’s listen to what this species has to say.

According to China’s State Council, a policy-making arm of the People’s Republic, “The basic themes of China’s energy strategy are giving priority to thrift, relying on domestic resources, encouraging diverse patterns of development, relying on science and technology, protecting the environments, and increasing international cooperation for mutual benefit.”

The panda adds that its energy development is based on “the principle of relying on domestic resources and the basic state policy of opening to the outside world.” In its efforts to ensure a stable supply of energy, the country wants “a steady increase in domestic energy production.” It also wants to “promote the common development of energy around the world.” China’s energy development “will bring more opportunities for other countries.” It will “expand the global market, and make positive contributions to the world’s energy security and stability.”

All this will help perfect the national system of “socialism with Chinese characteristics.”

The Ultimate Dilemma for Oil-Dominated Economies

By Peter McKenzie-Brown

Energy security, always a critical mission for any nation, will steadily acquire greater urgency and priority. As it does, international tensions and the risk of conflict will rise, and these growing threats will make it increasingly difficult for governments to focus on longer-term challenges, such as climate or alternative fuels – challenges that are in themselves critical to energy security yet which, paradoxically, will be seen as distractions from the campaign to keep the energy flowing. This is the ultimate dilemma of energy security in the modern energy system. The more obvious it becomes that an oil dominated energy economy is inherently insecure, the harder it becomes to move on to something else.

I am a big fan of Paul Roberts, whose book The End of Oil: On the Edge of a Perilous New World (from which I copied this passage) is one of the best tomes available about the current energy situation. The book was published in 2004, though. Although Roberts accurately spotted the major trends and concisely explained the issues, the period in which he did his research and writing was one of high optimism compared to the situation today. Sometimes he seems almost naïve. The big word today is recession, with fears around the world that the US may already be there, and that Europe and Japan will soon follow. Perhaps the ballyhooed “disconnect” between growth in the developing world and that in the west is nonsense, goes the thinking: growth in China, India and other rapidly developing countries actually will respond to a slowdown in the West. Those fears have raised concerns in the oil markets: Will demand for the commodity decline so much during the recession that surpluses will wash around the world, driving prices down? Fearing a crash in demand, the price of West Texas Intermediate briefly dropped to its lowest level in three months at the end of January. Then, as I suggested elsewhere, reality began to intrude: OPEC doesn’t have a lot more oil (in the sense of productive capacity) they can produce. Geopolitics, rising demand and historically tight supply still govern the price of oil. Traders aren't likely to let oil prices decline from their current lofty levels. (Natural gas prices, by contrast, are likely to rise rather quickly.) Won’t a slowing of oil demand give the world a respite – buy a bit more time during which we can “do something” about the energy mess? Not if the decline in demand is caused by recession. The world’s energy problems need money to be solved. In an era of job loss, declining consumer spending, huge government and trade deficits (in the United States and other western countries), rising inflation, tightening credit and seemingly interminable religious and energy wars around the world, money for energy solutions is increasingly unavailable. Add to these problems the uninspired leadership in the US, Canada and much of the rest of the world (especially in respect to the intimately related issue of carbon emissions) and the outlook seems particularly bleak. How bad can things get? I’ll give the last word to Paul Roberts, who describes a grim worst case in which crude oil production has peaked, followed by “global recession, worldwide unemployment, economic chaos, and, perhaps, a dangerous and escalating competition among the big oil-importing nations over the remaining reserves in the Middle East.” In an afterword to the reissue of his book, Roberts describes an important change in people’s awareness – by which he mostly means that of the American people. He writes,

More people and policymakers now seem to understand that the energy system is in serious and growing trouble and that without a fundamentally new approach we are almost assured of a catastrophic failure. What our new awareness actually means is hard to say. It may be the first tentative step toward building a more sustainable energy economy. Or it may simply mean that when our energy system does begin to fail, and begin to lose everything that energy once supplied, we won’t be so surprised.

The Decoupling of Oil and Gas Prices

By Peter McKenzie-Brown

Energy forms are not created equal. Gasoline and diesel are great fuels for transportation, and at the moment there are few viable alternatives. Coal, on the other hand, is just dandy for generating electricity and smelting metals. Natural gas is terrific for space heating, powering electricity-generating turbines and manufacturing fertilizer and petrochemicals. Because of their different applications and their different energy densities, hydrocarbons have different relative prices. And until recently, they were priced in a band which reflected their relative values.

That band is now falling apart. Perhaps this is a sign of things to come - but not before the market experiences what commodity traders call a "short squeeze". The chart shows the price of oil compared to that of natural gas in North America. Until recently, natural gas prices traded in a fairly close ratio to the price of oil. Depending on the state of the industry, the ratios formed a band which ranged from 10:1 to 6:1. Here’s a practical example of how helpful those ratios used to be.

Petroleum industry analysts make their estimates of the future price of petroleum stocks based on their future cash flow – that is, the amount of cash they will have available from production. If they wanted to estimate the future net worth of an oil producer, for example, they would make a knowledgeable assumption about the price of oil in the coming year and an estimate of the company’s total oil production for the coming year. A bit of fifth grade arithmetic then enabled them to estimate the value of that company’s shares. To illustrate, let’s begin with four assumptions:

• First, the company under review will produce a million barrels of oil in the coming year. • Second, the average price of a barrel of oil will be $25. • Third the company’s cost of oil production will be $10 per barrel. • Fourth, the company has 15 million shares outstanding.

Given these assumptions, the company’s cash flow for the coming year would be $15 million, and cash flow per share would be one dollar. To get a good idea of the likely price of the stock in a year's time, we would then ask ourselves whether we thought oil stocks would be in a bull market then or a bear. If we were bearish, we would estimate the price at year end by multiplying that dollar of cash flow by three. If we were bullish, we would multiply it by five. So shares of the company in question would have an implied value of $3-$5. What if the company’s production consisted of natural gas rather than oil?

You can see on the chart that until recently, natural gas prices tracked the price of oil fairly closely – so much so that immutable ratios about the relative value of oil and gas seemed to exist. When gas prices were strong, a gas producer would only have to produce six times as much gas as oil (6,000 cubic feet of gas equals 1 barrel of oil) to be on equal terms with an oil producer. For example, to generate the same cash flow as the little oil producer I just described, in good times a gas producer would only have to produce 6 billion cubic feet of gas a year. If natural gas prices were relatively low, the company would have to produce perhaps ten times as much gas – 10 billion cubic feet per year – to have the same share price as our oil producer.

Eternal Verities: For many years these ratios seemed to be eternal verities for oil and gas producers. Then, last year, the verities fell apart. Oil and gas decoupled. In 2006 gas averaged less than $6, while oil was $65. The 10:1 ratio had been breached. And the situation today? Natural gas on the NYMEX is $7, while oil is $96. That’s a ratio of more than 13 to one. The once seemingly immutable ratios have collapsed, and the gaps are widening. One outcome is that the shares of natural gas producers – especially Canadian gas producers – are in the toilet. The following chart of Rider Resources illustrates the disasters that befell investors in Canadian gas stocks during 2007. What does all this mean? On a continent and in a world facing hydrocarbon-related energy and environmental problems, the cleanest and most efficient form of hydrocarbon energy has become the ugly stepsister compared to its less secure and much dirtier competitor, crude oil. This is not a happy state of affairs – especially since the North American gas industry is in decline.

 Forecasters now commonly suggest that Western Canada's conventional gas production has peaked and will continue to decline. In the United States, reserves peaked years ago. The reasons are complex, but the practical reality is that the economics of gas production stink, especially in Canada. The $7 futures contract for gas on the NYMEX isn’t reality here. In Western Canada, our producers get $5-6 per thousand cubic feet for their gas, while the cost of finding and developing the stuff is in the $7-$9 range. Because of the strong Canadian dollar, a less attractive fiscal regime in Alberta, the lack of storage facilities and for other reasons, the Western Canada sedimentary basin is now the most expensive place in North America to find natural gas, and the least profitable in which to develop and produce it. This is the reversal of yet another verity. Until recently, Western Canada’s natural gas hunting grounds were among the most profitable and prolific in North America.

Greenhouse Gases: In a world nearing the crude oil peak, you would expect something like this to happen. The simple, cold logic of economics 101 implies that tightening oil supplies would send price signals which would identify the problem, spur crude oil exploration and make previously marginal resources profitable. The irony, though, is that in North America these events are taking place to a large extent at the expense of natural gas – an energy resource that can be used to fuel vehicles, generate electricity and fire industrial boilers. As we approach Hubbert’s peak, we are neglecting development of one of the few viable alternatives available, and one which, compared to all other hydrocarbons, contributes less per energy unit of the greenhouse gases that appear to be warming our planet. In a world where oil and gas prices have decoupled in this way, it may seem to make economic sense to bail out of gas producers like Rider Resources: Put your money into companies developing pollution-intensive resources like the oil sands. If you subscribe to peak oil theory, and if gas is relatively plentiful while oil isn’t, then the decoupling I described makes sense and is a long-term trend. It also means – and this is a serious environmental problem – that a world desperate for energy will focus investment on oil and coal (environmentally unfriendly) rather than gas (environmentally friendly.)

Medium Term: I believe this is probable over the medium term, at least, because of the growing importance of liquefied natural gas (shipped by boat from plentiful overseas reserves) in world trade. LNG will help keep North American gas prices relatively depressed, since it can be landed in the US for as little as $4-5 per thousand cubic feet. If that trade continues to grow, then the decoupling will continue. However, nothing moves in a straight line, and there is a strong case to be made for rapid upward adjustments in gas prices. Perhaps the ratio of gas and oil prices will soon revert back toward the mean - either because oil prices drop or (in my view more likely) gas prices climb. As the above chart of the natural gas exchange-traded fund (ETF) shows, US natural gas stocks may have just about hit bottom.

From an investment point of view, if natural gas prices are about to rise and you can anticipate when they will begin to make this move. You could make a lot of money by buying companies like Rider Resources (I personally do not own this stock) rather than avoiding them. Evidence that such a situation may be upon us can be found in this chart, which shows net positions in natural gas contracts. The net long positions held by the commercials and small speculators are so extreme that they suggest that a "short squeeze" could be in the offing.

 A short squeeze occurs when short sellers start to feel pressure from a rising stock or commodity - natural gas, in this case. Their losses increase as prices move higher. This "squeeze" places pressure on those holding short positions by forcing them to buy back their bearish positions in order to limit their losses. Short squeezes often result in dramatic price gains over relatively small periods of time due to this spike of buying pressure. If that's what's happening here, the commercial buyers (who tend to win over the long term because they better understand the market) and the small speculators seem ready to cream the large speculators. Stay tuned: This could be more fun than the Grand Ole Opry.