Are Oil Sands Profitable?

Not all Oil is Created Equal

The government of Alberta is pressing hard for Canadian government environmental approval to expand oil sands production through the addition of new pipelines and oil sands projects.  Desperation is apparent as the provinces economy is sputtering with a commercial office vacancy rate in Calgary, and an unemployment rate for young men, both hovering around 20%.  

Alberta’s deficit this year is $6.7 billion on a budget of $50 billion and it plans to cut up to 6000 civil service jobs.  The government is promoting the growth opportunity which it feels will deliver the simplest and quickest relief: oil.

But is increased oil production from the oil sands a long term solution to Alberta’s fiscal woes?  The position Alberta finds itself in is not a one-time crunch, but rather a trend with only 1 surplus since 2008.

As far as the benefit to the Canadian and Albertan taxpayer is concerned, oil’s fiscal viability is determined by deducting subsidies paid into the oil industry from royalties and taxes paid back to the government.  This analysis yields the bottom line of government deficits or surpluses and increases in the Alberta Heritage Fund.

To this point, the government has promoted oil and gas as one monolithic industry.  In reality, natural gas, conventional oil, oil sands in situ and oil sands mining are 4 separate industries with very different cost and revenue structures.    

Energetic and Fiscal Reality

Not all oil is created equally clean, efficient or profitable.  The ratio called EROI (Energy Returned on Energy Invested) ultimately determines whether developing a particular oil field is energetically viable.  

The oil sands may contain 167 billion barrels of accessible oil but it is one of the most expensive sources in the world given the amount of energy production requires.   Oil impregnated sand must be either dug up for processing or heated in place allowing the oil to flow for extraction.   Mining the “paydirt” extracts over 90% of the oil while the in situ method achieves a 35% to 60% yield although its remediation cost would appear to be much lower.  

In the glory days of virgin conventional oil fields, EROIs of 100:1 were possible where 1 barrel of oil expended on drilling for and pumping out oil could yield a 100 barrel return.   Remediation consisted of sealing the wellhead.  Today, the average EROI of world oil has fallen to about 17:1 as the richest resources decline and more marginal plays have to be exploited.

Oil sands EROIs are 4.5:1 for mining and 3.5:1 for in situ making the sands a poor source of energy – much lower even than solar’s ~8:1 or wind’s 15:1.  But oil is the form of energy the world’s current transportation fleet needs making oil sands output more of an energy product than a rich source of energy.  Thus huge amounts of natural gas are used to mine the oil sands.  It is precisely because the oil sands require more energy input per unit of energy output that their CO2 emissions are higher than those of any other oil source.

For conventional oil, natural gas and in situ oil sands, cleanup consists of capping wells to prevent methane leaks and taking up pipelines and infrastructure.  Remediating mined oil sands land adds the requirement that thousands of square kilometers of surface strip mined land and tailings be cleaned and replanted.  What impact does remediation have on the fiscal viability of the oil sands?

Has the Oil Industry been Good Business for Alberta?

In 2019, the Alberta Heritage Fund is valued at $4,100 for each Albertan and the provincial debt amounts to $15,900.  In 2004, Alberta was debt free and the Alberta Heritage Fund value $4,800 in 2019 dollars.  All tolled, the per capita debt has effectively increased by $16,600 since 2004. 

Oil sands production has tripled from 1.1 million barrels per day in 2004 to over 3 million barrels in 2019.  If tripling the output of the resource has not paid the bills, how much production will it take to go cash flow positive?  Or is it, as seems to be the case, the more we produce, the more we lose?  Are the oil sands, from a public coffer point of view, a fundamentally money losing proposition even before the issue of their remediation costs are included?

For reference, Norway has produced about the same amount of oil and gas as has Alberta over the last 30 years and their National Fund is worth $270,000 per Norwegian while government per capita debt is $3,600.  There appear to be no legacy costs.  Norway’s policy was not to chase any business but to allow only fully costed, profitable business models to proceed.

The government needs to set out comprehensive numbers illuminating which sectors of the fossil fuel industry are a net fiscal and social benefit to Albertans because the scale of the issue is eye-opening.  

 

    • From:  The Renewable Energy Transition, Realities for Canada and the World (2020 Springer Nature)

The oil sands is shown above as a whole.  If the lion’s share of the remediation costs stems from mining, as seems to be the case, where does that leave the financial justification for expanding them?  

The graphic below indicates that remediation of mined lands will be more costly than the combined remediation costs for the other three sectors of natural gas, conventional oil and in situ.  What are the individual costs for the 4 different sectors?  This is an elephant in the rowboat question.

    • Graphic from an internal AER (Alberta Energy Regulator) presentation showing breakdown of liability estimates.   Note the gap between “Security Collected” and “Liability Estimated”.  This gap should be regarded as the “Public Liability”.

Based solely on their upfront production costs, possibly all 4 fossil fuel industries are economically viable although one would never know it from the Alberta budget numbers.  Once remediation costs are factored in, the picture changes dramatically and it is very likely that oil sands mining is a money loser.  And maybe a big one.  Regardless of the glittering magnitude of its cash flow, nothing is too big to lose money.

Governments of Canada need to face up to that fact.

Share on

How To Use the Website