Oilsands are here to stay

Sometimes big things happen so close that you don't realize you are living through a historic moment. The emergence of the Alberta oilsands, also known as heavy or nonconventional oil, could be one of those things.

Sometimes big things happen so close that you don’t realize you are living through a historic moment.

The emergence of the Alberta oilsands, also known as heavy or nonconventional oil, could be one of those things.

There might be enough energy underneath Fort McMurray to keep North America’s gas-guzzling lifestyle going for decades or even centuries, ending the prospect that Canadians might have to abandon their Suburbans for weird Swedish habits like walking to work and taking public transit.

Of course, just because something is “historic” doesn’t necessarily mean it is a good thing. But more on our troubled consciences later.

Like so many things in North America, the oilsands were a First Nation discovery. They used the bitumen to seal their canoes, a fact noted by explorer Alexander MacKenzie.

Farsighted government research funding also made the oilsands possible, with University of Alberta researcher Karl Clark inventing a method of using hot water to separate oil from gunk in the 1920s.

Both Clark and the First Nation people Alexander Mackenzie met would no doubt be astonished that the Athabasca oilsands are estimated to contain the equivalent of 1.7 trillion barrels of oil-drenched bitumen, roughly the same as total global proven reserves of conventional oil.

Only a portion of this energy, perhaps 10 per cent, can be economically extracted with today’s technology. Even that would make Canada the second largest oil power in the world after Saudi Arabia. And that doesn’t count further innovation in Alberta, which might make even more of the oil accessible.

People sometimes talk about Fort McMurray as if it were just another oil boom likely to be forgotten after the next bust. But if you look deeper into the three obstacles most people put in front of the Canadian oilsands, you’ll see that they are likely to power through them and continue to transform both our economy and our environment on a colossal scale.

The first obstacle is cost. It costs a lot more to mine sludge and extract the oil from it than it does to produce the oil squirting out of Saudi wells. This was why Clark did not die a billionaire. Oilsands development only really got going in the late 1960s, and had various near-death experiences as oil prices fluctuated subsequently.

But relentless high tech innovation – belying the resource industry’s stereotypical image of a business where brawn matters more than brain – has brought cash cost per barrel down sharply. Suncor, a leading oilsands player, estimates $32-34 per barrel in 2009.

With oil prices hovering around $70 per barrel, this generates significant operating cash flow. The oilsands are even profitable when you factor in the billions invested in earlier years; Suncor thinks its oilsands business can earn a return on capital employed of more than 15 per cent.

These kinds of numbers mean the oilsands will continue to attract capital for further growth.

The second snag was the financial crisis. The year 2008 saw waves of multi-billion-dollar postponements in Fort McMurray as global money markets seized up and oil prices fell. The restarting of these projects, even if not quite as large or fast, has garnered less news. Suncor is back on track to grow its capacity by 10 to 12 per cent per year up to 2020.

The final hurdle is environmental impact. National Geographic’s March 2009 story entitled The Canadian Oil Boom: Scraping Bottom brought oilsands environmental devastation to a global audience, with spectacular photos of oily tailings ponds and giant dump trucks filled with sludge.

The article has been described as the “baby-seal moment” for the industry and for Canada. The oilsands now have to be added to asbestos, Candu, genetically modified canola and seal pelts on the long list of distasteful Canadian exports the Foreign Service is tasked with defending overseas.

The industry also has to worry about climate change legislation in the US or Canada that might choke off customer demand. There has been talk in Washington of legislation to penalize “carbon-intensive” fuels; that is, oil from sources that require a lot of energy to produce the energy. Suncor used about 145 million cubic feet of natural gas per day fueling its oilsands extraction efforts in 2008, although a recent Alberta Energy Research Institute study claimed that the total lifecycle carbon emissions from oilsands were not significantly higher than conventional oil.

While climate change legislation seemed like a credible threat a few years ago, Canadian voters have since soundly defeated the party that suggested a carbon tax. And the current government’s minimalist approach to climate change policy, while controversial, seems broadly accepted by Canadians. Neither Liberals nor Conservatives are suggesting major curbs on the industry, especially since the Alberta government estimates one in 13 Albertan jobs depends on the industry.

This is despite the oilsands producing about five per cent of Canada’s total carbon dioxide emissions. This is a big number, but on the other hand, even if we completely shut down the oilsands we still would have blown our Kyoto commitments by a wide margin.

As for the United States, whatever senators may say when debating carbon-intensive fuels, it remains to be seen how they will trade off the opportunity to bash Canadian “oilsands” versus their desire to find politically stable sources of energy. And after the historic Democratic loss of Ted Kennedy’s senate seat, this column will leave it up to the reader to decide whether the Obama administration will be keen to take credit for higher gas prices and greater reliance on Iraqi and Saudi oil.

So the oilsands may be bad for the Fort McMurray environment and for global warming, but you can see why stock market analysts like Eric J. Fox of the hedge fund Alesia recently told his clients to buy oilsands stocks in a report entitled, Long Live the Oilsands.

Keith Halliday is a Yukon eco nomist and author of the Aurore of the Yukon series of historical children’s adventure novels.