Friday, November 26, 2010

What James Cameron Can’t Tell You about the Oil Sands

When movie director James Cameron descended upon the Athabasca oil sands a while back, Albertans were subjected to the predictable but nonetheless aggravating media blitz of misinformation that occurs when a mega-star chooses a cause to elevate.

The elevation came in the form of a supercilious warning to put the brakes on the world’s second largest proved oil reserve. It could, he feared, become a curse if not properly managed. This revelation came upon reflection via a government sponsored helicopter tour and a token chat with a group of not-so disenfranchised First Nations peoples in the area. (In 2009, oil sands companies contracted more than $890 million for goods and services from Aboriginal owned businesses and employed 1600 Aboriginals in permanent jobs).

And with that, Mr. Cameron and the media were able to close the case on the oil sands, as Mr. Cameron purportedly had to jet. It’s not Mr. Cameron’s fault, completely. The oil complex is just that – complex. It’s not the kind of business one just picks up as a hobby horse. Sure, Cameron can regurgitate the technical terminology if he likes. It would be difficult for a techno-geek of titanic proportions to resist a sexy term like steam gravity assisted drainage (SAGD).

Here is where I suggest “putting the brakes on.” Perhaps a moratorium on incendiary statements by celebutantes or politicians a-la-Pelosi who are not able to, because of their lack of training, do the type of deep comprehensive assessment required for these matters.

There are a few facts that cannot be disputed and you will get those out of Mr. Cameron, the enviro-statist and their press sycophants. In this case it can be narrowed down to just two: the area containing the deposit and the size of the estimated reserves in Alberta. Then it’s down the rabbit hole we go.

The oil sands deposit covers an area that would equate to the size of England (54,132 square miles). For Americans without passports, that is the size of the state of New York. Of the total 170.4 billion barrels of remaining established reserves, about 80% is considered recoverable through in-situ (no tailings ponds and contrary to what is stated results in significantly lower GHG and energy intensity) the remaining 20% will be mined. Total estimated reserves are actually 1.7 trillion barrels but at this stage only 10% are recoverable at current technologies and prices.

To put these numbers to reality, to date only 0.3% of the total oil sands area has been disturbed, roughly equal to a small to medium sized city. Even more crucial to understand is that as only 3% of the total surface area could ever be mined (the deposits lie deeper than 75 meters) which leaves 97% of the surface area with some, but not much, industry impact. Mathematically this scales the land disturbance of oil sands development back to about 0.5% the size of England, and all area that are mined need to have a reclamation plan laid out by producers. In respect to Alberta’s boreal forest, in 40 years of oil sands activity, a mere 0.02% of the boreal forest has been disturbed.

In 2007 Alberta became the first jurisdiction in North America to legislate GHG reductions for large emitters. However, industry had already vastly mitigated its footprint and has every incentive to do so. Less energy in for every barrel of oil out means increased cash flows. Strong show of cash flows increases marketability to shareholders and helps shield a company from the inherit volatility of commodity prices. At current rates of production, 2.6 MMbbls/d, about half bitumen (WCS) and half synthetic light (SCO), the oil sands are responsible for 0.1 percent of total world emissions and that number is doubtful to increase much even if production ramps up to 4MMbbls/d as projected by the Canadian Association of Petroleum Producers.

As far as climate change is concerned, the oil sands are not really Alberta’s dirty secret at all. Environmentalists may still choose to call this resource “tar sands” like the brat at school who won’t let a nickname die, but they would be better served to make their mockumentaries where GHG is unregulated such as Saudi Arabia, Nigeria, or Venezuela where Hugo Chavez may believe he can bend time and space. And of course there’s no place like home; the GHG from the oil sands equates to only 1% of the emissions of the U.S. power sector where coal happens to be the “King of the World.”

Just like little bit of meat will never do for a vegan, neither will a little bit of oil development for an environmentalist. Therefore there will always be an entire portion of the story that the enviro-statists will obfuscate. This is the basic social cost/benefit analysis that economists are required to do.

As the leading exporter of crude and petroleum products to the United States, Canada is not only the safest, most secure supplier, but an economic partner. The North American energy complex is one of the most valuable business chains in the world precisely because every aspect from Main Street to Wall Street is linked and integrated. Hundreds of thousands of jobs will depend on the oil sands both directly and indirectly in the coming decades. The input goods, materials, and services for oil sands and in the U.S. oil shale – tires, trucks, gauges, pumps, steel, are produced across North America. It is this understanding of the political economy of North American oil, and how it positively impacts the average person, which the enviro-statist circumvents every time.

As one final example I will let Mr. Cameron’s own words to MSNBC hit the nail on the head. “[T]here’s an opportunity for all of North America to be weaned to some extent off of OPEC oil so that’s why it makes me very nervous… we need more science… we have the capacity for ecological disaster here on an unprecedented scale…”

As standards of living and GDP per capita increases worldwide and millions of individuals are lifted out of poverty, the global demand for energy is expected to increase by as much as 40% over the next two decades. Given even the most ambitious outlook for alternatives, biomass, hydro, and nuclear, unconventional oil remains the integral component of non-OPEC supply. There would be no realistic manner to supplant unconventional production other than increasing the call-on OPEC crude.

In reality, the disaster has been averted. Thankfully, enough people understand the inextricable link between North America’s oil (and gas) resources and economic growth and prosperity for all.

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