Oil Sands: Canada's 10 Ethical Challenges

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Oil Sands: Canada's 10 Ethical Challenges

ENERGY & EQUITY: How we turned a blessing into a curse, and ways to atone. Part one.

By: By Andrew Nikiforuk, 14 October 2011, TheTyee.ca

View full article and comments: http://thetyee.ca/Opinion/2011/10/14/Canadian-Ethical-Challenges/

Five per cent of Canada's GDP comes from oil; bitumen makes up 25 per cent of exports.

Canada has joined the ranks of exporting oil nations and now supplies more petroleum to the United States than Mexico or Saudi Arabia. The unconventional character of mined bitumen as well as the startling revenue it generates for government coffers has irrevocably changed the country. Five per cent of the nation's GDP comes from oil while bitumen makes up 25 per cent of the nation's exports.

As the wild debate about the Keystone XL pipeline illustrates, Canada's $200-billion energy project has also become a global lightning rod. No oil exporting nation, whether Christian or Muslim, is immune from the corrosive influence of oil money and its dirty politics. Yet Canada has anointed bitumen as the nation's new "economic engine" without setting clear public policy goals or assessing the economic risks. The exploitation of bitumen has also proceeded without a national vision or even an energy strategy.

The environmental risks are now well documented. In fact both the Alberta government and Ottawa have systematically failed to monitor pollution as well as cumulative impacts. In 2011, the Office of the Auditor General declared the obvious: "incomplete environmental baselines and environmental data monitoring systems needed to understand changing environmental conditions in northern Alberta have hindered the ability of Fisheries and Oceans Canada and Environment Canada to consider in a thorough and systematic manner the cumulative environmental effects of oil sands projects in that region."

Although North America's greens have focused on carbon pollution and landscape degradation, the project poses other ethical challenges for the nation. These moral issues include the scale and pace of the project as well as the nature of the Dutch Disease, the absence of a savings plan, severe technology gaps, diminishing energy returns, the Chinese gamble, and the dysfunctional persona of petro states.

Until Canada's elites and its citizens address these critical issues, the project will become an increasing source of global and national conflict. In simple terms too much has been developed too quickly without the proper fiscal, political and environmental safeguards. What should have been a slow-moving blessing has turned into a rapidly developing curse. Moreover, Canada's reputation as a fair and democratic nation has now been blackened. It cannot redeem itself without democratically addressing the following ethical issues:

Ethical Challenge One: Bigness (Scale)

Since 1996 the global oil industry has invested nearly $200 billion in bitumen mines, upgraders, pipelines and steam plants. Seven of the world's largest companies (ExxonMobil, Shell, BP, Sinopec, Petro China, Total and Chevron) now propose to invest another $180-billion on the resource over the next two decades to boost production from 1.6 million barrels a day to more than 3 million barrels. By 2030 industry will have dug a 40-metre hole in the boreal forest the size of Rhode Island. It has already created lakes of mining waste (170 square kilometres) great enough to flood Washington, D.C. or downtown Vancouver. Moreover, the world's longest and therefore least secure pipelines are all connected to the project. Everything about the project gives a new meaning to the word big.

But the project's Hulk-like scale invites vulnerabilities that should alarm politicians and citizens alike. The development's brittleness can be found in the project's basic economics, engineering complexity and long supply and delivery chains.

As the world's most expensive hydrocarbon ($60 to $80 a barrel) the oil sands are highly vulnerable to oil price shocks. During the 2008 recession companies cancelled or shelved $150-billion worth of investments that became uneconomic at $40 a barrel. Just one improperly installed piece of pipe at an oil sands plant can create a half-billion dollar fire. Just one Enbridge pipeline leak can raise the price of oil by ten dollars and nearly shut down half a dozen U.S. refineries. And the failure of just one large dam of toxic mining waste can pollute a watershed all the way to Beaufort Sea.

A Calgary law firm acknowledged the project's fragility this way: "When it comes to the oil sands, the reality is that small mistakes can lead to big problems."

Fifty years ago, the Austrian economist Leopold Kohr identified bigness as the source of all social misery. In other words, big projects, like big corporations, big cities and big economic unions, invariably fail because they transgress important human scales and the resilience associated with smaller enterprises. Nassim Nicholas Taleb, the astute business critic, has repeatedly warned that big systems are highly vulnerable to improbable events (black swans) and possess little robustness. He has shown mathematically "that a certain class of unforeseen errors and random shocks hurts large organism vastly more than smaller ones." Unless slowed or scaled down, the oil sands could become a Titanic for the Canadian economy.

Ethical Challenge Two: Pace

In 2011 the government of Alberta released a startling infrastructure plan for the world's largest energy project. It forecasts that oil sands production will grow from 1.6 million barrels a day to 6 million by 2035. At the same time the population of the Regional Municipality of Wood Buffalo could more than double and grow to 240,000 people.

Yet this rapid expansion poses more risks than benefits for Canada. For starters, the U.S. demand for oil is in steep decline due to the global recession and rising domestic production from North Dakota's unconventional oil fields. That leaves Communist China as a core market for expanding bitumen supplies. Yet renewable energy reforms combined with slowing growth in its industrial megacities could also lesson demand for imported oil. Moreover oil remains the world's most volatile commodity. The Deutsche Bank has predicted that oil price volatility alone could diminish demand for petroleum as a transportation fuel and cripple high cost projects such as the oil sands as early as 2015.

Given such market uncertainties former Alberta premier Peter Lougheed has persistently advocated for a dramatic slowing down of the project. Until Albertans, true owners of the resource, insist that bitumen be developed in a deliberate and prudent timeframe, overexpansion could expose both the Alberta and Canadian economy to unacceptable risks.

In the 1970s Norway strove to create a "qualitatively better society" by maintaining "a moderate pace in the extraction of petroleum resources." However, industry undermined that public mandate and Norway embarked on a high-speed liquidation program just like Alberta. To date there has been no serious public debate in Canada about the pace of bitumen development.

Ethical Challenge Three: The Dutch Disease

Every oil exporting country invariably suffers a bad case of the Dutch Disease or the "petrolization" of its economy. Even David Emerson, Canada's former industry minister, now defines the Dutch Disease as a major national concern in which "opportunities from natural resources create destructive pressures on other businesses and industries."

The symptoms have been well defined. They start with a currency that becomes tied to the vagaries of global oil markets. In the 1970s Holland experienced the curse when it discovered natural gas off its shores. Its rising currency greatly eroded the ability of its manufacturing and agricultural sectors to compete and export their goods abroad.

The same hollowing out of the economy has begun in Canada. According to several studies by StatsCan, Desjardins and other groups, approximately half of the 340,000 jobs losses reported in the nation's manufacturing sector are now due to Canada's rising petro dollar. Even a 2007 parliamentary report on the decline of Canada's manufacturing base blamed the nation's new petro dollar and rising energy costs as major contributors.

A damning 2011 report by a Montreal investment group, MRB, concluded that the nation has crossed a critical threshold: "A severe case of Dutch Disease has dramatically reduced the breadth of the Canadian business sector over the past decade, hollowing out manufactured goods exporters and making the nation increasingly reliant on commodity demand. Canada has often been referred to in jest as the 51st state, due to its historical reliance on the U.S. as a key export market. However, it is becoming more accurate to regard Canada as another Province of China."

Without the creation of a national stabilization fund, Canada's petro dollar could fracture the country and tie the nation's economic fate to catastrophic oil price volatility.

Ethical Challenge Four: The Money

According to Bruce March, CEO of Imperial Oil, both federal and provincial governments stand to make more than $500-billion in income from the oil sands over the next 25 years. Yet unlike most oil exporting nations, neither Alberta nor the government of Canada have exercised any fiscal accountability over this sweat-free income. (Ottawa makes more money from the oil sands in form of corporate taxes than Alberta does due to the province's "give-it-away" bitumen royalties.) To date neither jurisdiction has saved this one-time inheritance for future generations.

One 2007 study bluntly warned that Alberta could look like a ghost town by the end of the century if it didn't save $100 billion by 2030.

In contrast to Canada and Alberta, Norway has saved 90 per cent of its oil wealth for future generations. Modeled after Alberta's now debilitated Heritage Fund, the Norwegian Government Pension Fund holds more than $500 billion. The fund has a two-fold purpose. It tames the volatility of oil revenues and saves for the future. The growth of capital in the fund also reflects the physical depletion of finite oil resources.

Unlike Canada or Alberta, the Norwegian government runs responsibly on taxes as opposed to non-renewable oil wealth. Both the OECD and International Monetary Fund have criticized Alberta and Canada for their libertine approach to oil revenue. The current system allows political parties to manipulate oil rent for their own self-serving purposes. Although the bitumen boom provides all Canadian governments with an opportunity to rethink their management of resource revenues and to save responsibly for the future, the nation's baroque political leadership remains asleep at the wheel.

Only ordinary citizens can force their governments to bank resource revenues. Government that run on taxes, represent their citizens; government that run on effortless oil revenue, ultimately represent the dark interests of petroleum.

Ethical Challenge Five: Energy Security

As Canada floods U.S. markets with more bitumen than Americans can burn, both Quebec and Atlantic Canada have become increasingly reliant on foreign oil from the North Sea, Venezuela, Iraq and Algeria. In fact eastern Canada is more dependent on imported oil than the United States (70 per cent). This growing dependence mocks arguments that bitumen is somehow "ethical."

It also highlights the priorities of the North American Free Trade Agreement, which prevents oil from being shipped east. In addition eastern Canada's perilous oil dependence reflects the absence of any national energy plan. While bitumen fuels the western half of the nation, eastern Canada now relies on petro states such as Iraq and Saudi Arabia for its energy security.

Given declining oil reserves from the Middle East, Larry Hughes of Dalhousie University's Energy Working Group has warned that "Eastern Canadians will have to reduce their reliance on oil products; replace insecure supplies of crude oil with ones that are secure; and restrict new demand to non-oil products."

An innovative Canada could turn this challenge into an opportunity. It could even experiment with green renewables in the region in order to lessen its costly dependence on fossil fuels and decrease Canada's unethical carbon footprint at the same time. Yet the issue goes missing in the Canadian media.

Published Oct 26 2011 by The Tyee, Archived Oct 28 2011

Two more ethical challenges to Canada's oil sands

by Andrew Nikiforuk

Bitumen: Its Energy Return on Energy Investment is vastly lower than light oil.In a previous article, I listed the first five of ten ethical oil challenges Canada faces. Find those here. Two more are presented today, with the final three to be published next week.

Ethical Challenge Six: Diminishing Energy Returns

Since the turn of the century, light oil, the highest quality hydrocarbon, has given civilization extraordinary energy gains and fueled all the trappings of modern life. But the rapid development of bitumen, one of the world's most expensive and heaviest hydrocarbons, has clearly signaled the end of cheap oil. Like most unconventional fuels, bitumen takes more energy to make than conventional oil. In fact, bitumen production requires so much natural gas for processing and enrichment that it now accounts for one-fifth of Canada's natural gas demand. The extravagant use of natural gas to produce a lower grade fossil fuel is unprecedented.

Fuels that require lots of energy to make energy ultimately provide fewer returns to society. Economists refer to this challenge as Energy Return on Energy Investment (EROI). At the turn of the century, it took but one barrel of oil to find and liquidate 100 barrels. But ever since the glory days of the Texas oil fields, the EROI ratio has slowly diminished on the continent. Charles Hall, a prominent energy analyst and ecologist at the State University of New York, estimates that EROI for U.S. oil production has dropped from 24:1 in 1954 to 11:1 in 2007. As companies employ more energy to drill or fracture deeper formations, their overall energy returns grow smaller. Hall also calculates that modern civilization requires a high EROI or massive source of moderate EROI fuels that deliver a return of at least 15:1.

However, bitumen, like many so-called green alternatives such as wind, provides poor energy returns. According to Peter Tertzakian, the chief energy economist at ARC Financial Corporation (and a very astute energy commentator), the EROI for the oil sands amounts to 7:1 for extraction and drops to 3:1 after it has been upgraded and refined into something useful such as gasoline. Several industry experts say that oil sand mines have an average EROI of 5:1 or much better returns than Steam Assisted Gravity Drainage (SAGD) plants. In fact, a detailed energy balance analysis sponsored by the Alberta Government for SAGD suggests that its EROI is close to 1:1. That makes bitumen a source of energy as pathetic and tragic as corn ethanol.

A few SAGD projects have even recorded EROI in negative numbers. When a nation gets less energy out of system than it puts into it, "the process is ultimately unsustainable," explains Tertzakian in The End of Energy Obesity. Given that natural gas has an EROI almost as high as conventional oil, many energy experts regard the use of natural gas for bitumen production as folly.

The low EROI of bitumen (even sugar cane and solar panels have marginally better returns) has other important implications. The United States now spends a billion dollars a day buying oil and 16 per cent of that on Canadian bitumen imports. As the U.S. becomes more dependent on poorer quality oil, its petroleum addiction will enrich a few oil companies and progressively weaken other economic sectors. RSK Limited, an oil advisory group, recently noted that "There are limits to which any nation can continue exporting such large amounts of wealth, but there is little progress in modifying the social and economic structure to reduce oil consumption."

In other words, high cost hydrocarbons that provide low EROI such as bitumen (and many renewables share this same trait) could cannibalize economies long before this abundant junk crude runs out. The 2010 RSK report asks a significant question: "Which runs out first, the oil or the money?"

Add the group's analysts: "The alternative to a successful transition from an oil dependent economy could be a very long dark age." To date, no federal or provincial regulator or major investment group annually reports on the EROI of oil sand projects. Without this important tool, politicians and oil consumers can't make good decisions on how to regulate the pace and scale of investment.

The returns on renewable energy projects also go unreported and require the same scrutiny. To Hall and other analysts, declining EROI reflects declining efficiencies and "makes a sustainable society increasingly difficult. We must adjust to this new reality by using less, rather than expanding drilling efforts." In other words, the rapid development of bitumen threatens to sink the North American economy instead of energizing it.

Ethical Challenge Seven: "The Innovation Crisis"

Just about every oil sands developer claims that they can clean up messy bitumen production and its large carbon and water footprint with better technology. "Technology is the key to further progress," says the American Petroleum Institute in its oil sands propaganda.

But this technology doesn't exist yet. Although the energy industry may be dependent on technology for making fossil fuels, it doesn't invest much in innovation. According to Forbes, big energy companies are fat and lazy creatures that devote barely 0.3 per cent of their sales to research and development (R&D). Many have even axed their R&D departments. In contrast, the pharmaceutical industry spends 19 per cent of its sales on research. The auto industry follows closely behind. But not the oil patch. In fact, Canadian energy firms devote no more than 0.2 to 0.7 per cent of sales to research.

Compared to other Canadian industries, big energy companies invest significantly less in research and development.
How can a country call itself a "global energy superpower," when its bitumen producers spend almost nothing on energy research? The Danish wind company Vestas, for example, spends more money on research and development than Total, Nexen, Suncor or Shell. U.S. oil analyst Philip Verleger notes that the oil companies profit "not through ingenuity, but through commodity price increases."

Canadian industry, dominated by commodity exports, shows little entrepreneurial flair, too. Concluded one 2009 report: "The innovation performance of Canadian business, taken as a whole, is significantly weaker than the innovation performance of the U.S. business sector, and in fact weaker than that of many of Canada's peers among OECD countries."

The oil sands mirrors this "innovation crisis" in spades. (The term was ironically coined by former Harper advisor, Bruce Carson, a convicted thief and oil sands lobbyist. He's now under investigation for illegal lobbying.) After the federal and provincial governments spent billions on publicly funded research in the 1980s, the oil sands industry sat on its thumbs. As a consequence, bitumen producers are now running on 20- or 30-year-old technology that is inefficient, carbon intensive and extremely wasteful.

Steam Assisted Gravity Drainage (SAGD) makes a dismal case in point. Industry says that steam plants, which now produce nearly 40 per cent of all bitumen production, represent the new and clean face for the oil sands. Yet the process boils vast amounts of groundwater with extreme volumes of natural gas in order to pipe steam into deep formations and thereby melt bitumen. None of these deposits are homogeneous and controlling steam in deep formations has become as problematic as hydraulic fracturing. In one celebrated case, Total injected steam into bitumen formation at too high a pressure. The steam then blew out a 300-metre hole in the forest in what regulators called "a catastrophic explosion."

Steam injected into bitumen formation cause the ground to explode.If the technology worked really well, it would use less energy and steam over time to produce more bitumen. But exactly the opposite has happened. In the late 1980s, 2.38 barrels of steam was consumed to produce a barrel of SAGD bitumen. In 2010, the steam industry average increased to 3.3 barrels. That's a 50 per cent decline in efficiency over a 20 year period. For some companies, such as Opti-Nexen, the steam to oil ratio is now a dismal six barrels. More steam just means more energy and more emissions and less production.

In a recent presentation on technological innovation in the oil sands, University of Calgary petroleum engineer Steve Larter called the lack of innovation a "clear daunting challenge."

Added Larter: "We have not been revolutionary -- steam oil ratios have gotten worse with time as more difficult reservoirs are developed." He also admitted that technologies that lead to major downward shifts of the invested energy (for example, steam) and emissions versus oil produced have not yet appeared. Moreover, the high capital cost of current oil sands investment curbs innovation. Once Big Oil has invested billions in poor performing steam technology, there is no incentive to develop better technologies that might make their original investment obsolete.

Any industry that employs a technology that actually gets worse with time is profoundly wasteful. (Engineers call it the "broken feedback loop.") The most efficient steam operators now burn 0.7 GJ of natural gas per barrel of steamed bitumen. But they are the exception and not the rule. Based on greenhouse gas (GHG) intensity, the estimated industry average energy consumption is now 1.8 GJ/bbl, or 2.6 times higher than best practice. Perverse natural gas subsidies (oil sands companies can write off fuel as a cost) partly explain this lack of innovation and wastage.

Larter concluded that there is "no real evidence of a successful competition-based technology drive in energy R&D." Moreover, the industry, driven by short-term interests, remains as risk adverse and as unimaginative as the government of Saudi Arabia.

As one industry insider confided to the Tyee: "The steam extraction plants being built by industry today consume two to three times more steam than necessary and will burden Alberta's (and Canada's) economic productivity for subsequent generations."

One innovation that could change the game for the oil sands proposes to use microbes to gasify bitumen deposits into methane. The process, which would create fewer emissions than any mining or steaming project, would make Canada an "electricity, technology and gas exporter" of methane instead of oil. But the process might take a decade to commercialize.

In the meantime, innovation and research flounders in Canada's oil patch.

Next Week: The Conclusion of 10 Ethical Challenges of the Oil Sands

[Follow the link for more Energy reporting on The Tyee.]

Andrew Nikiforuk, whose column Energy & Equity runs regularly on The Tyee, is the author of the national best seller, Tar Sands: Dirty Oil and the Future of the Continent. His award-winning book called for a national debate on the pace and scale of bitumen production and its impact on Canada's politics three years ago.