Would Slowing Oil Sands Development Make us Richer, Cleaner and More Powerful?

Taylor Owen asks, "Would slowing oil sands development make us richer, cleaner and more powerful?"
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October 17, 2011
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The development and management challenges of the Canadian oil sands strikes at the heart of some of Canada's most vexing policy challenges: interprovincial relations, climate change policy, global environmental responsibility, US relations, Asian trade expansion.  

At the root of this policy quagmire is a perceived conflict between being an energy superpower and living up to our climate responsibility.  But is this a false choice?  What if we could both gain international power and assist the world in meeting its carbon reduction goals.  And get richer by doing it.  

It is worth looking at three core tenets of the debate: power, carbon, and money.

First, advocates of Canada as a global energy superpower point to our total production rate as evidence of our power.  Canada, for example, is the third largest oil and gas producer in the world, behind only Saudi Arabia and Venezuela.  But there is a problem with this logic.  If you take the top ten global producers, Canada is the only country where the state does not play a major role in regulation and production. The other big oil producers are either dictatorships or monarchies (such as Saudi Arabia), or democracies with national oil companies (such as Norway and Venezuela).  Canada, on the other hand, has virtually no state engagement in the oil and gas sector.  With minimal leverage over the resource, we have very little international power to yield.

Second, while industry has made modest gains in extraction efficiency, our absolute development rate is growing at a remarkable pace. Five years ago, the industry target was to grow from 150,000 to 1 million barrels per day. This target was met in 14 months, we are currently at 2 million bpd, and industry has revised it’s 2020 target to 8.5 million bpd, or, 10% of global production.

This rapid scaling of production has three negative effects on carbon emissions: it obliterates any chance of making our current absolute emission targets; we are flooding oil into the market when both extraction and end use are not as efficient as they could be; and the increased capacity drives down prices, which increases use.

Third, while the price of oil has finally made oil sands extraction profitable, it still uses a tremendous amount of energy and resources, which cost money.  The margins on oil sands production, therefore, while profitable, are hugely inefficient.  As the long arc of oil prices will only make this industry more profitable, there is an opportunity cost of developing the resource now. 

So at the moment, oil sands development is not leading to increased Canadian power, while it is adding considerably to the global carbon challenge, and it is financially inefficient.

One answer is remarkably simple, yet politically vexing; slow oil sands development. The challenge of course is that the Provincial governments have been limited in their actions, the federal government has few levers over provincial resources, and the history of federal-provincial relations on energy is, shall we say, strained.

If there were political will, however, there could be two potential policy paths.  First, the Enbridge and Keystone XL pipelines could be stalled.  Not because this will halt oil sands development, but rather to temper some of the short term rapid ‘gold rush’ growth that will be enabled by these transport lines.  Second, what is clearly needed is a meaningful pricing strategy.  This could either be a much more robust provincial tariff, or part of a national energy strategy, including a national carbon pricing policy which re-invests revenue into emerging energy technologies.

At last month's Banff Forum, which this year focused on the oil sands, there was virtually unanimous consensus across industry, academia and government that a carbon tax was required. Perhaps it is time we had this conversation.

Proponents of a carbon tax have typically focused on the environmental benefits.  But the reality is properly costing oil sands development will have three positive effects.

It will make us more powerful, as Canada as a country, rather than just the companies that develop the resource, will have an increased role in the global energy conversation.

It will make us richer, as the price of oil will only go up over time, increasing profits for the oil and gas sector, and allowing for a wider social benefits from increased revenue.

Finally, if the oil sands will eventually be developed and the carbon released, why not do it when both extraction and end use consumption are more efficient?  This applies to both carbon and resource use. Producing a barrel of oil sands oil currently requires almost a barrel worth of energy, and 10 barrels of water. The efficiency of both, along with how carbon ultimately gets used, will increase dramatically with time. 

If absolute emissions and resource use are what matters, let's extract and consume the oil sands when it can be done more responsibly.  Doing so could also make us richer and more powerful.

Photo courtesy of Reuters.