The Wall Street Journal: Oil-Sands Obstacle: Emissions

Greenhouse-Gas Policy
In Canada Could Make
Tapping the Tar Harder
By ANA CAMPOY
April 25, 2007; Page A8

After several years of breakneck growth in Canada’s oil sands, energy producers now seem to be on an obstacle course.

In the next several days, the Canadian government is expected to spell out its new policy on industrial greenhouse-gas emissions — one that will almost surely hurt the bottom lines of oil companies. While the extra costs alone aren’t expected to be big enough to jeopardize most oil-sands projects, many producers say the new measures could add another layer of difficulty to tapping the vast and valuable petroleum source, which already faces surging costs for equipment and know-how, as well as less-favorable tax treatment.

Global oil prices have doubled over the past three years, and Western oil companies have had trouble tapping big new oil reserves, which are often in remote areas or unstable nations. Those factors have boosted the appeal of sources within friendly borders, including supplies from technically challenging projects such as Canada’s oil sands.

But projects in developed Western nations also carry with them greater environmental and other regulatory requirements. In the U.S. and Canada, momentum is gathering to take steps to curb global-warming gases, further complicating projects there.

The Canadian government’s coming policy could make oil companies emit less for every barrel they produce, making them more carbon-efficient but still allowing total emissions to grow. Or the government could take a tougher stance and require that total emissions be reduced, much like the Kyoto Protocol requires. Canada, unlike the U.S., has signed the global-warming pact.

Some major companies in the region, such as Chevron Corp., declined to comment on the coming policy, saying they are waiting for specifics. Shell Canada Ltd., majority owned by Royal Dutch Shell PLC, says it has voluntary targets for greenhouse gases for its oil-sands business. “We believe our greenhouse management plans make us as well-positioned as any business to address emerging regulation in Canada,” says Eurwen Thomas, a Shell spokeswoman.

Canadian Natural Resources Ltd., based in Calgary, Alberta, says it has delayed plans to build one facility because of the unclear policy, as well as higher labor and material costs. “It’s too much uncertainty,” says Steve Laut, the company’s president and chief operating officer. Citing other government policies, including less-favorable taxes, he adds, “If the government is not careful, it could dramatically affect economic activity in the oil sands.”

Another oil-sands producer, EnCana Corp., sees the economics remaining strong. “There will be changes in public policy, but the market is continuing to look for additional supplies of oil in Alberta, and we’re looking to extract them in the most efficient way possible,” says Alan Boras, a spokesman for EnCana, Calgary.

With costs rising in a number of areas, analysts believe only the most efficient companies will remain in the race. Companies that have easy access to capital and have learned how to manage big, complicated projects while keeping costs down will do well, says Glenn MacNeill, vice president of investments at Sentry Select Capital Corp. Others, particularly those with a lot of debt, will have a hard time keeping up, he says.

Margins for many oil-sands producers are currently plump and could withstand higher costs. Industry operating costs typically range from about 20 Canadian dollars to 25 Canadian dollars a barrel, or roughly US$18 to US$22 a barrel. Oil from the oil sands fetches about $60 a barrel. But oil producers say that the extra costs from emission regulations could become a concern when combined with the other pressures they face.

A tougher global-warming policy would be the latest in a string of bad news for the oil industry from the Conservative Party, which took over Canada’s national government last year. The Conservatives initially pledged to take a hard line on environmental policies, including backing out of Canada’s Kyoto commitments. Now in office, they are softening their stance because of increasing pressure from Canadian public opinion. Like many other governments around the world, Canada’s leaders have also been changing laws to get a bigger chunk of the profits generated by higher oil prices.
 
Currently, oil-sands production is more than one million barrels a day and projections are that it will hit 3.5 million barrels a day by 2015. Greenhouse-gas emissions will grow along with output, making companies operating there more susceptible to any regulations to curb emissions.

Oil sands help give Canada the world’s second-largest oil reserves, behind Saudi Arabia. Yet the process of extracting the tarlike crude from the sand and clay in which it is trapped is arduous and capital-intensive. To be used, it must first be separated from the sand and then processed to make it less heavy and sticky.

This involves hauling material in huge trucks, injecting steam into the ground and running upgrading plants — activities that use up significant amounts of energy and create high amounts of greenhouse emissions. Producing a barrel of oil in the oil sands releases an average of 85.5 kilograms, or 188.5 pounds, of carbon-dioxide equivalent, compared with the 28.6 kilograms emitted by conventional oil production, according to the Pembina Institute, a Canada-based nonprofit organization that researches environmental policy.

Philip R. Skolnick, senior oil and gas analyst at Genuity Capital Markets, a Toronto investment bank, calculates that in the worst case scenario, complying with Kyoto’s emissions targets could cost companies between C$1.25 and C$2.25 a barrel.

“It’s reasonable to assume that there will be more burden on these projects that could reduce the degree of activity and might even eliminate some activity,” says Richard Wyman, Calgary-based vice president and senior oil-and-gas analyst at CanaccordAdams, a division of investment bank Canaccord Capital Inc. in Vancouver, British Columbia.

Although overall oil-sands investment is still expanding, it is doing so at a slower pace than before. Last year, investment grew 12%, compared with an average yearly growth rate of almost 46% in 2004 and 2005, figures from the Canadian Association of Petroleum Producers show.

Write to Ana Campoy at [email protected]

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