Smart. Sharp. Funny. Fearless.
Wednesday, October 26, 2016

Late 21st-century graduate students of business studying the growing problem of stranded assets will almost certainly focus on the history of Canada’s Athabasca Oil Sand (aka tar sands). The case studies they read will either describe the gradual abandonment of the world’s largest reserve of bituminous crude, or they will read about the tar sands’ miraculous last-minute escape from becoming the world’s largest stranded asset. For either outcome, the turning point they will look back on is just about now.

In some respects Alberta’s gigantic deposits of bitumen, a dense mixture of sand and heavy crude oil, third in size only to the reserves of Saudi Arabia and Venezuela, were stranded from the start by location. Situated in the heart of a vast boreal forest at the center of a very large continent, they are hundreds of miles from the nearest refinery and thousands more from navigable tidewater.

Of course, some of Alberta’s crude has made its way to market, but so much slower than it could have, or was projected to, that producers, refiners, shippers, banks and other investors, in tar-sands development are beginning to wonder whether they have backed a good play by investing over $160 billion to turn tar into oil.

So the economic stranding process has already begun. Five global energy giants — Shell, Total, Suncor, Statoil and Occidental — have cut bait on major bitumen deposits in Alberta, in which they had already invested billions. Suncor has just slashed another billion dollars from its capital spending program and $800 million more from operating expenses. And as oil prices slide lower, commercial and investment banks are reconsidering future underwritings. An industry that recently envisioned doubling production over the next two decades is now looking at something closer to the opposite, a halving of production or worse in far fewer than 20 years.

American media coverage of the tar sands has focused primarily on the approval of the Keystone XL Pipeline, which, if completed, would carry 830,000 barrels of Athabasca crude, every day, to the world’s largest refining center near Houston next to a booming export hub. Because American and Canadian politicians and oil execs have lobbied so hard for its approval, Americans tend to believe that construction of Keystone will secure the future of the tar sands. Not true. To even approach break-even, at least four other pipeline routes will be needed to carry bituminous crude to the world’s market: two to the Canadian west, one to the east and one north. If two or three of those lines are somehow stopped, and that’s quite likely to occur, the stranding of the tar sands will escalate, Canada will cease being a petro-state, and its business leaders will begin their search for yet another staple to drive its national economy.

Canada has always been what economists call “a staples economy,” reliant almost completely on one staple resource after another. Fur was followed by cod, then wheat, potash, minerals, timber, and hydropower. Today, Canada’s staple resource is carbon, some of which derives from coal but most of it from oil. Oil, in fact, represents 46 percent of Canada’s commodity production. Unfortunately, over 90 percent of its reserves are bitumen, the costly production of which nets only 4 percent to Canada’s GDP. But oil represents 40 percent of the country’s exports. So the urgency to develop and export the tar-sands oil has become a national priority.

Canada’s tar-sands booster-in-chief is Prime Minister Stephen Harper, an Alberta-based petrolero who rose to prominence in politics as Chief Policy Officer of the Reform Party, Canada’s version of the American Tea Party. Founded in 1987, Reform merged in 2000 with the floundering Progressive Conservative Party to form a new and almost unbeatable national coalition calling itself the Canadian Conservative Reform Alliance (after adding “Party” to its name, it became CCRAP, and was nicknamed “see-crap”). Harper became party leader of CCRAP, which has since won two national elections. It’s as if Ted Cruz became the Republican frontrunner and won the White House twice.

Once a member of Canada’s Young Liberals and a supporter of Pierre Trudeau, Harper went west as a young man, worked in Alberta’s oil fields and followed his father into employment with Imperial Oil, Canada’s second-largest petroleum company (69 percent owned by ExxonMobil). There, like so many other western Canadians, he grew to despise Eastern Canada, rather like the scion of a prominent American family moving from Connecticut to Texas. In Calgary, he became an outspoken and eloquent opponent of Trudeau’s National Energy Plan, which seemed set upon nationalizing Canada’s last staple resource. While there is still talk of nationalizing oil and tar-sands oil in Canada, and in some polls a majority of Canadians support the idea, that couldn’t possibly happen with Harper in power.

At the 2012 World Economic Forum, in Davos, Switzerland, Harper announced that the expanded production and export of tar-sands bitumen was a national priority. Canada, he predicted, was set to become an energy superpower. In Ottawa, he took immediate and aggressive steps to weaken environmental protections like the Navigable Waters Protection Act, which was hindering pipeline construction, and to fast-track tar-sands production.

But Harper’s focus remained on Europe, where in 2012 the European Parliament and member European Union governments were debating terms of a revised Fuel Quality Directive (FQD) and considering an official ban on the import of “dirty fuels”— oil shale, liquid coal and tar sands, all of which have high extraction impacts, releasing more greenhouse gas than conventional oil through their “well to wheel” life cycle. A Stanford University study that many members of the EU Parliament relied on projected a 23 percent increase of lifecycle carbon emissions from tar-sands production.

Harper and his advisors immediately saw the danger of that study and the disaster a European ban on dirty fuel represented for Canada’s largest new staple. One vote in Brussels could leave the tar sands stranded immediately and forever, even if oil producers found a route to the Chinese market.

During the two years leading up to the EU parliamentary vote on the issue, Harper mobilized Canadian oil executives and his cabinet behind a $30 million nation-to-nation lobbying effort. Their first target was the Stanford study, which they drove into the ground with their own industry-funded studies.

Week after week, planeloads of oil execs and PR flacks crossed the Atlantic, Harper aboard whenever he could be, laterally threatening a trade war with Europe if the vote went the wrong way. Side trips were made to Washington. And members of the European Parliament were flown to Ottawa and Alberta for gold-plated junkets.

Without Harper’s effort, the Parliament in Brussels would almost certainly have voted to ban dirty fuels. After two years of intense lobbying, the measure lost by a 12-vote margin, 337 to 325, with 48 abstentions. A few months later, in the fall of 2014, the first shipment of tar-sands crude arrived in Europe, with many more to follow, as a vote on the Fuel Quality Directive will not come up again for at least four years.

In the meantime, if a few EU member nations condemn tar-sands oil, and ban its import, more small nails will be driven into the tar-sands coffin. And if two of the proposed source-to-port pipelines on the drawing boards are blocked (see map and sidebar here), more producers and investors will abandon the sands.

If Canada’s tar sands do one day become stranded, the equivalent annual emissions of over 65 coal-fired plants and 50 million passenger vehicles will remain underground. And a lot of the credit (or blame) will go to environmental activists, aboriginal communities, litigious farmers and groups like Greenpeace, NRDC and, who have added to their anti-pipeline advocacy a campaign to pressure institutional investors to divest their “Big Fossil” holdings. Even before divestment began, 9 of 10 tar-sands producers’ stocks had underperformed the market. So they are vulnerable.

According to the Institute for Energy Economics and Financial Analysis, a think tank in Cleveland, the campaigns of environmentalists and native communities have already cost tar-sands producers $17 billion. But that has not stemmed the determination of the North American fossil-fuel industry to move Athabasca crude to refineries around the world.

Despite the insistence of American Republicans and petroleros that everything rests on completion of Keystone XL, the pipeline means little to the U.S. economy. In Canada, however, economists estimate that U.S. rejection of the pipeline could cost the country as much as $1.7 billion a year, far more significant than the loss of two or three hundred permanent jobs the pipeline would create in the U.S. And by simply raising break-even higher than it already is for bitumen producers, stopping Keystone could place the tar sands in far greater danger of being stranded.

While assets like the tar sands should be stranded, because mining and burning them will raise the temperature of an already overheated planet a degree or more, they are more likely to become stranded, because they are either unable to reach market or have lost market value.

The sad irony is that before Canada selected tar-sands crude to be its staple export, the country was poised to become a major global contributor to clean energy. It had signed climate treaties, promoted solar-energy, developed hydroelectric power and had a prosperous renewable-energy industry under sail, for which the country possessed all the necessary natural and financial resources. Then one powerful neo-liberal free-market zealot decided to double down on high-carbon fuels and announce to the world that tar sands would become the next nation-building staple for his country.

It appears he was wrong about that, which would not be a bad outcome for the planet.

Journalist Mark Dowie is the author of Conservation Refugees: The Hundred Year Conflict Between Global Conservation and Native People.

This article appears in the March 2015 issue of The Washington Spectator.

Photo: Stephen Harper via Flickr

Click here for reuse options!
Copyright 2015 The National Memo
  • charleo1

    The article makes clearer one of the principal reasons the GOP was in such a hurry to rush approval of the XL thru Congress. And it has zero to do with job creation, or creating a friendlier oil producer to do business with. Or, moving away from dependence on Middle Eastern oil, as their literature to their constituents claim. But rather has a lot more to do with calming the growing concerns of investors, over a project that is beginning to show all the indications of an over hyped, incredibly expensive deal, headed South. The message they hoped to send, and may yet accomplish is. We’re running the U.S. Government down here, and we’re with you. So, “the fix is in,” no matter what it takes. Now, feel better? But the truth is, they don’t feel better. And the much more meaningful truth is, there is nothing the Republican Party of the U.S. Government can do about the fundamental worsening economics of the deal, even if the XL Bill had passed. So say the President had struck a deal over immigration, the coming debt ceiling fight, or even an infrastructure deal, and okayed the pipeline. It wouldn’t have altered the enormous costs of mining crude oil from sand. Or the fact it still must be transported thousands of miles to be refined. And that refining itself being more expensive. Only to be placed on a World Market awash in oil. And new U.S. Reserves, that analysts predict may keep oil prices below the $100.00 per barrel mark, and well below the profit margin of tar sands oil for years to come. But also, there’s something else going on with oil, entirely disconnected with supply and price. More, and more industrialists, and World Leaders, see a future not all that far off, that includes the end of the era of oil. Globalists that accept the science based evidence of global climate change, as result of man’s burning of high carbon fuels. And see the dead end path of a future built on an ever dwindling, and finite resource. A so are investing, and preparing for that future, without the crippling, and blinding effects, affecting our politicians here, and to lesser degree I suspect in Canada as well. Reliant as they are on big money energy corporations to fund their campaigns. The politicians are no more able to politically oppose the XL. Than the business consumers of energy are able, or are willing, to continue to ignore the markets, and financially support the tar sands project themselves.

    • Dominick Vila

      A dramatic reduction in oil consumption is already evident in most Western European countries, Australia, New Zealand, and Japan. In addition to substantial investments and improvements in solar and wind technologies, more and more drivers are choosing electric cars and hybrids to save and to reduce the carbon footprint. Oil is not going to go away overnight, or in the next couple of decades, but it is definitely going down rapidly as the main source of energy.

      • charleo1

        Demonstrating for me at least, the danger of constantly looking backward, and seeking to protract a status quo that no longer makes sense. And then claiming to possess the competency, and vision to lead a Nation into a bright prosperous future. The opinion that one may not insist on ignoring science, or refuse to embrace modern technology. Or, indeed, come to see all things thru the lens of political expediency. Where, slogans like “drill baby drill,” trumpet the notion that more oil is a be all, and end all. Because it works for the moment. And not oil as a bridge to the technology that will power the future. It’s what is often referred to as yet another example of the Right’s dead end philosophies. Or what I call the Right’s, “Down the rat hole,” World overviews. Which eventually lead to nowhere.

  • Dominick Vila

    A tar sands petro-State may be critical to Canada, but only until entrepreneurs propose building a pipeline across their beautiful landscape. When that happens, their reaction is swift: forget it, head South where there are plenty of politicians willing to sell their mother’s for a buck and a vote.

    • dtgraham

      The Northern Gateway pipeline to the BC coast is dead for various reasons including Premier Christy Clark’s Liberal Provincial government being opposed. The energy east pipeline to the maritimes is not going to happen either. The Liberal Provincial governments under Kathleen Wynne in Ontario and Philippe Couillard in Quebec have too many problems with it and it has little public support. Now Obama has cancelled the Keystone going south. Thank you Mr. President. The latest rumours have Harper wanting to negotiate with Alaska to build a pipeline going north. The Northwest Territories and Yukon are not likely to approve.

      • Dominick Vila

        Good for Canada! Incredibly, there are many among us who believe our country and our environment is for sale to the highest bidder.

        • dtgraham

          Good for America and President Obama too! When referring to President Obama I can confidently speak for the vast majority of my fellow Canadians, due to the polling done on the topic, that…I wish he were ours.

  • FT66

    I think Canadians are laughing a lot by seeing XL Pipeline might be built through US. The oil will come from them, and one day somewhere the pipe will burst and destroy the environment in US. You hear some elected officials like Joe Manchinn saying that it will create jobs. Can’t they think other ways of creating jobs without taking risk of destroying environment?

  • Brian Loudermilch

    Looks like the Tar Sands end up being quicksand for the Investors.

  • dtgraham

    Nice to see some Harper bashing on my favourite American political website. I’ll take Harper hatred anywhere I can find it, as will most Canadians I’m sure. I like the article and will forward it to the opposition parties in Canada despite some hyperbole, factual errors, one incorrect assumption, and misuse of terms.

    A staples economy originally referred to the origins of social, political and economic history insofar as it described the evolution of certain nation states from their original dependence on key commodities to their development as diversified economies later. It has since been used to study the economies of many developing nations that are completely dependent upon resource extraction and primary industries. That hardly describes any of the G7 nations though. Oil doesn’t represent 40% of Canada’s exports even under Harper. It’s about 27%

    Likewise a petro state is defined as a small oil rich country in which institutions are weak, and wealth and power are highly concentrated in the hands of a few. Among major oil producers that probably describes Nigeria and some of the middle east states. It might possibly describe Russia (?) but it certainly wouldn’t describe countries like Norway and Canada. I’ve been recently guilty of using that term myself when commiserating with my compatriots on Harper, but I know it’s not quite that bad. It’s a term loosely tossed around a lot by the anti-Harper crowd in Canada, which is most of us.

    Harper is definitely guilty of ignoring the manufacturing sector and putting too many of his eggs in extraction, no question. As the price of oil has collapsed, he suddenly wants to focus his talk on things like accelerated CCA for manufacturers’ capital acquisitions but this is a first for him.

    As for comparing Harper to Ted Cruz, I suppose he would be Canada’s Ted Cruz, but it’s all relative. Cruz by Canadian political standards I guess…but in no way, shape or form does he ever advocate what Ted Cruz does. It’s not the same thing. Even modern day conservatism in Canada at the federal level is still substantially different than the U.S.

    Harper has actually won three national elections but only one of them have been a majority government. The suggestion that Harper has “an almost unbeatable coalition” is laughable. There is a very big problem in Canada right now with vote splitting among the center-left parties, and that’s to Harper’s advantage. The very latest polls have close to 70% of Canadians supporting one of the three progressive parties. That could conceivably still allow the Conservative party to squeak in with another tiny minority government. That means that they can’t really do anything without the support of the opposition parties. Should that happen, rumours still float that the other 3 parties may declare a motion of non confidence in the government early and approach the Governor General with a plan for a type of coalition government where they would give a guarantee of cooperation for a specified period of time. That almost happened for the first time in 2008.

    It’s been the rise of the democratic socialist party (NDP) federally, and the establishment of the Green party vote (key areas particularly) that’s done this. The NDP have formed many Provincial governments, but their historic role federally has always been to heavily influence the Liberal party and keep them true to their progressive nature in order to attract the voters that might otherwise vote NDP. The NDP are now the official opposition in Canada and are challenging the Liberals directly. The newcomer Green party runs around 7% nationally but between 10-15% in British Columbia. On Vancouver island, they can attain 20+% points in support and there are 9 federal seats there. What used to be a three way race in BC has become a four way race in parts of it. The Greens, New Democrats and Liberals are mostly fighting over the same voters. I’m hoping that more disaffected moderate swing voters that sometimes vote Tory will cross over to Justin Trudeau’s Liberals, even though I support the NDP personally.

    Lastly, it’s just the “Conservative party” federally, with the party still being called the Progressive Conservative party in Provincial politics. There never was a “Canadian conservative reform alliance party”, then or now. The western based Reform party sprung up to challenge the imagined “eastern” Progressive Conservative Party federally. The reformers later changed their name to the Canadian Alliance. The Alliance eventually merged with the Progressive Conservatives to become the Conservative Party of Canada. I still like that name CRAP though, as do a lot of Canadians. It gets lengthened to the corrupt reform alliance party or the conservative reform alliance party depending on how sour a mood you’re in about them.