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Kicking BP and Shell over the economics of Canada’s tar sands doesn’t add up

Daily Telegraph

Last updated: March 11th, 2010

An area near Fort McMurray, Alberta, Canada, where oil sands are believed to lie

The group of investors vociferously trying to persuade BP and Shell to re-evaluate their potential investments in the Canada tar sands has now enlisted a group of MPs in Britain to propose an early day motion questioning the project’s financial viability.

The move is part of a pretty well-coordinated campaign mobilised by FairPensions (members: ActionAid, WWF and a number of trade unions). This year, the rebels have managed to get enough shareholder support to submit motions to the oil companies’ annual meetings against the Alberta prospects, which environmentalists argue will be responsible for high levels of carbon dioxide emissions.

Shareholders obviously have a perfect right to kick up a fuss about investments they’re not keen on. Around 25pc of the FTSE-100’s dividends are paid out each year by BP and Shell, so the importance of these two companies’ decisions to UK pensions cannot be under-estimated.

However, it does seem slightly disingenuous that FairPensions is trying to claim that a big reason for their concern is the economics of the projects. They question the margins that will be made by the oil companies and warn of possible high legal fees from environmental challenges, plus the rising costs of climate change legislation.

But if they were so concerned about the right economic decisions being made by companies like BP, they would be having a look at its portfolio of renewables and “other” unit, which made a stonking $2.3bn loss in 2009. Yet there seems to be no issue with wind, solar and biofuels: all eco-friendly, low-carbon projects that are undertaken to improve the company’s green image and prepare for a future of heavier regulation of emissions/higher financial penalties, rather than turn an immediate profit.

What’s more, if you look at an investment like BP’s Project Sunrise, it represents a low proportion of the company’s overall capital expenditure. It is currently planning to spend $1.25bn on the venture over the next few years out of a total $20bn yearly budget on exploration and new projects. If given the go-ahead, BP’s oil sands will only be pumping out 60,000 barrels out of 4m barrels per day by 2014 – around 1.5pc of overall output.

I’m not taking sides on the environmental controversy of this debate. BP claims the extra carbon dioxide emissions of Project Sunrise – from well to wheel – will only be an additional 5-15pc. The campaigners put this figure at a much higher 12-40pc.

It’s just that all the talk about the oil sands’ profitability seems to obscure this real purpose of this argument – do the tar sands pose an unacceptable environmental risk and how much do we care about it? Obviously the economics of the project are borderline unless oil stays in the $80-100 per barrel range, confirmed by the fact that Shell’s Peter Voser has decided to slow the pace of investment at the moment to concentrate on conventional reserves.

But it is highly unlikely that BP and Shell would have been examining these prospects if there were not a probability that they could make some money and they will be subject to the same financial feasibility tests as every other investment – there would be little point in them wasting all this time and money just to spite the environmentalists. And I somehow doubt that the campaigners would be putting all this effort into an anti-tar sand campaign if the projects were the cleanest form of crude extraction in the world.

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