(On Thursday, we looked at why environmentalists’ opposition to the oil sands became a symbolic, four-front battle targeted at Keystone XL. Today, in the final installment of our three-part series, we ask if the death of Keystone XL would be considered a true victory if nothing fundamental in the oil sands changes.)
With Keystone XL on the ropes, activists claim to be winning the fight – even if the final punch has yet to be thrown.
What is clear is that the oil sands are in a crisis. Every week of 2015 seems to bring another announcement of a delayed or cancelled oil sands project, layoffs or industry consolidation. Environmental groups often follow such news with triumphant statements about the imminent extinction of the oil sands. The Natural Resources Defense Council has even suggested that advocacy groups and their supporters take a celebratory bow. “By delaying the proposed Keystone XL pipeline, which would ship tar sands oil across the Midwest to refineries on the U.S. Gulf Coast, [you] have helped make digging up Alberta’s boreal forest an increasingly bad investment,” it said.
The reality, however, is not so simple. The oil sands’ current lull is driven by a combination of factors, including spiraling projects costs and the fact oil prices are half of what they were a year ago. Continued pipeline opposition has added to the industry’s troubles, but whether untapped bitumen reserves remain permanently in the ground depends mostly on the demand for fossil fuels. A drop in oil prices ultimately incents people to use more oil, precisely the opposite of environmentalists’ goal of having the world purchase battery-powered Teslas, step onto public transit or ride their bicycles. Delaying or stopping Keystone does nothing directly to affect the demand side of the equation.
And if oil prices swing back around, as they are likely to do, the survivors of today’s industry malaise will have found new techniques and technologies to bring these projects back into contention for investment. Some projects may even come back into play thanks to the recent fall in land, labour and supply costs in Northern Alberta.
For projects already or nearly operating, it’s also important to remember that producers will not simply turn off the taps. Production of bitumen at the end of 2015 will almost certainly be higher than it is today, despite the low oil price, and by 2020 higher still. This rise in production will continue until the backlog of projects partway through construction get ‘worked through’. Surprisingly, existing projects are far cheaper to keep in production than to shut in. The steel, concrete, and giant yellow diesel toys have been paid off. With comparatively little investment, these projects can be kept operating for generations. Indeed, it is possible that companies will never shut down some of these projects, since the ever-escalating cost of full reclamation would land like a bomb on their balance sheets.
Which brings us back to Keystone. A cap on pipelines, if a Keystone XL rejection inspires more such rejections, is in reality only a cap on the pace of extraction, not on emissions or production. The total amount of oil sands ultimately produced, and thus emissions, is likely to be around the same. It will simply take a lot longer to reach those levels. Projects will source bitumen from further afield and with different recovery enhancements, to keep the existing pipelines and refineries fully supplied. So long as willing buyers of the product can be found, the current roster of mines and thermal plants will continue to chug along with the economics of the business shifting from growth to boring utility-like returns. Outside of the pace of production, nothing fundamentally will change – that is, no assets will be stranded unless the framework governing both production and consumption is transformed.
In other words, today’s low oil prices are far from a final nail in the oil sands coffin. As Mark Twain once remarked, “reports of my death are greatly exaggerated.” The environmental community may win the Keystone XL battle and celebrate a symbolic victory, one which adds fuel to the oil divestment campaign and strikes fear in the hearts of pipeline developers everywhere. But this victory is in reality at best a pause. Whether it can be translated into a lasting change that keeps carbon out of the atmosphere will depend on whether a wider resolution of the tensions between fossil fuel dependence and climate limits can start to emerge. It also depends on what role Alberta chooses to play in reaching that resolution.
Shifting sands
As the Keystone XL debate enters its final chapter, it is clear that Ralph Klein’s advocacy as Alberta premier nearly a decade ago helped propel talk of oil sands growth from Alberta onto the U.S. stage, where it gained national significance.
It also transformed the climate campaign tactics of environmental groups, transmuting the pipeline into a headline-grabbing proxy war over climate policy and a rallying cry for grassroots protest. This has slowed the momentum of the industry – but it hasn’t stopped it. Oil sands production will still grow to 2.3 million barrels a day by the end of 2015, and many of the bottlenecks to market access that inspired the Keystone XL proposal have since been largely resolved.
Not that Keystone XL no longer matters. This large pipeline would make access to tidal waters cheaper than trucks and barges, and possibly less risky than rail. If built, it would certainly improve the economics of existing projects, and potentially bring some suspended projects back to life.
While what ultimately happens with Keystone XL remains uncertain, there’s no question that this debate has moved onto shifting sands – starting in Alberta, which is feeling the pain of collapsing oil prices and declining resource revenues. A spring 2015 election put a left-leaning, climate-friendly NDP government in charge, bringing an unexpected end to the Conservative Party’s 40-year monopoly on power and resource policy.
Similar changes could come at the federal levels, with both Americans and Canadians heading to the polls over the next 18 months to elect their national leaders. At the same time, momentum is building toward the Paris climate conference at the end of 2015.
One consequence of political change in Alberta is that its leaders will no longer reflexively support new oil sands infrastructure and production. Another is that they are getting more serious about reducing carbon emissions.
In 2007, the Alberta government imposed a carbon price of $15 per tonne on 12 per cent of the greenhouse gases from its large emitters, becoming the first jurisdiction in North America to do so. Criticized for being too weak, Alberta’s Specified Gas Emitters Regulation (SGER) has endured while other more ambitious policy efforts have withered on the vine. Among its first acts, the new government in Alberta has increased the stringency of its GHG reduction target to 20 per cent and doubled the cost of compliance to $30 per tonne.
The amount collected so far for emissions has been put into an investment fund which has contributed over $1 billion to innovative carbon reduction projects and technologies. Through Alberta’s ‘Grand Challenges’ approach, funds are also being used to incent a global competition to crack one of the greatest challenges impeding progress on carbon-emission reductions – that is, the pathway to transform CO2 from a waste product into an economically valuable commodity. The idea is that Alberta will host groundbreaking early deployments, and the recently strengthened regulations bring added punch to such efforts.
Oil sands developers, meanwhile, are responding to the unprecedented pressure and uncertainty plaguing them. Haltingly and unevenly, they are developing a new approach to innovation, and potentially, establishing a new and better template for resource development.
Even before today’s challenges, in 2007 a small group of leading oil sands developers established the Oil Sands Leadership Initiative (OSLI) with the aim of achieving “tangible improvements in environmental, social and economic performance through collaboration and technological innovation.” Their insight was that environment was a collective problem that requires collaboration and not competition; there was no incentive to “win” environment. That these companies chose to collaborate rather than compete is rare in any bottom line-focused industry. OSLI became the springboard in 2010 for the launch of Canada’s Oil Sands Innovation Alliance (COSIA), a novel collaboration encompassing virtually all of the major project developers to accelerate deployment of new environmental technology.
At its core, COSIA works to reduce barriers to the sharing of experience and research between all producers, as well as to accelerate deployment and wider diffusion of successful environmental actions or technologies across the sector. Working closely with the innovation arm of the Alberta government, COSIA has reached out within its members and more widely for the best ideas, and is working frantically to bring those ideas to a commercial scale. But whether a larger group means greater heft, or lowest common denominator, remains to be seen.
At the same time, and backed by substantial federal and provincial subsidies, Alberta has become a world-leading jurisdiction for development and deployment of carbon capture and storage (CCS). In 2015, Shell will officially turn on the $1.35 billion “Quest” CCS project at its oil sands refinery and upgrader complex. It has several additional initiatives in the works, including a pipeline to collect CO2 from capture sites and a range of technology pilots. In tandem, it has worked through a notably consultative process to develop regulations that govern CCS deployment. These regulations are reportedly being closely studied by other jurisdictions.
Good intentions aside, the focus on environmental technology innovation in Alberta highlights the limitations of these efforts. It is the production process itself, not the carbon, land, tailings or water management techniques that happen during production, which offers the greatest opportunity for environmental improvement. Yet collaborating on production is a third rail due to anti-trust concerns. Also, the historically low price of natural gas is expected to be far more significant in preventing the implementation of more efficient production technology than anything reasonably contemplated under a carbon price.
Even with the right incentives, industry-wide use of new technology in the oil and gas sector historically has taken decades to emerge. COSIA is likely to make it possible for companies to partner in the piloting of novel technology more rapidly than if they went it alone, but commercial-scale deployment would still be decades away due to the slow cycle of new capital investment, stalled by today's low oil and natural gas prices. Just look at AOSTRA’s track record. Despite its successes and foresight, it invested less than 1 per cent of its funds over its 18-year existence on environmental research. There is clearly a gap in public investment too great to fill with carbon policy on its own, so more innovative approaches are needed.
Also important to consider is that new technologies can carry additional costs, and pose new and potentially unforeseen risks to the public and the environment. Providing operators with the necessary rewards for deploying unproven technologies, and giving regulators the discretion they need to temporarily exempt those technologies from performance standards required by permit or law, calls for an overhaul of both fiscal and regulatory approval structures.
In their search for new innovation models, Alberta’s political leaders have looked outward to like-minded governments in countries such as Norway, the United Kingdom and the Netherlands, as well as to First Nations, the environmental community and other non-government stakeholders.
One model that needs little government action is gaining traction in Latin America. Inspired by the success of fair trade, sustainable forest products and coffee certifications, at least one oil certification scheme has started to emerge. Equitable Origin’s market-driven approach aims to reward progressive oil companies for their greater investments in environmental and social performance by charging willing consumers a premium and passing a portion back to the company and its host communities.
Some suggest Alberta should shift its focus to new energy sources, leveraging its unusually high quotient of engineers and megaproject financiers, as well as synergies between renewables, oil and gas. With vast untapped potential for hydro, geothermal and solar energy development, and having wind power that is arguably already at cost-parity with coal, Alberta could become a clean power leader, they argue.
Would any of these initiatives be sufficient to buy a thumbs-up for Keystone XL from a new U.S. president? In a letter sent to President Obama back in 2013, Prime Minister Harper suggested their two countries collaborate on oil and gas GHG emissions as a quid pro quo for market access. Two years on, as far as the public knows, this letter remains unanswered.
While fair to give credit to Alberta’s regulators, industry and new government for their efforts to date, the facts cannot be ignored. Environmental impacts from the production and consumption of hydrocarbons have never been higher and thirst for all fossil fuels in transportation continues its steady climb. The path we are on locks the oil sands into a slow burn; it is unlikely they will be the financial magnet they once were. But the oil sands will be produced and burned, to the detriment of the climate, until something fundamentally changes on the demand side.
In a world that sets limits on global emissions, some carbon reserves will stay in the ground. This coming hammer, if it falls, does not threaten all fossil fuels, oil producing regions, or individual projects in a region, equally. Like a game of musical chairs, the question will be who is most likely to be left standing when the music stops. For Alberta and for the companies invested in the oil sands, the challenge is to position some portion of their reserves to be consistent with a carbon constrained world, either by being first to find a seat, or by being faster – lower-carbon - than the competition.
Finding a path that delivers climate benefits and space for the oil sands to prosper will require collaboration and innovation across sectors and at a scale that may be tough given the entrenched and adversarial positions of many of the key players. If such a path can be found, it offers the opportunity to pivot Alberta towards a leadership role in the emerging green economy, and to set a global high water mark for extractive sector development. But it calls for nothing less than making the oil sands into a laboratory in which fossil fuel development and carbon constraints can be reconciled.
As one oil sands insider put it, “downside risk is all in Alberta, but upside potential is in Alberta and across the globe.”
