Why Canadian Tar Sands Oil May Be Doomed

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Fort McMurray, Alberta, Canada, oil sands refinery with smokestacks and snow in the background
Fort McMurray, Alberta โ€“ Operation Arctic Shadow. Credit: Kris Krรผg, CC BYโ€“NCโ€“ND 2.0

At current prices, Canadian tar sands oilย producers are losing money on every barrel of oil they dig out. Despite signs earlier this year the industry would โ€œturn profitable in 2018,โ€ a much more likely scenario at this point is a fourth straight year ofย losses.

Producers are forced to keep cranking outย product and selling it at a lossย to cover the massive costs required to start one of these sprawling unconventional oilย operations, a point made painfully clear when Alberta wildfires in 2016 forced some tar sands operators to shutย down.

โ€œI do think they’ll start up quickly once the danger from the fire is gone because there is a lot of motivation to do that,โ€ Jackie Forrest, an energy economist for Arc Financial Corp, told The Globe and Mail. โ€œThey have a lot of fixed costs so they’re going to be motivated to get some revenue to pay for those costs that aren’t goingย away.โ€

In the face of such challenging economics, what are Canadian tar sands producers doing? Tapping more oil thanย ever.

In Juneย 2018 Canada set a new record for exportingย oil to the U.S., hitting well over three million barrels per day. This record coincided with another oneย for oil exported by rail from Canada to the U.S. The U.S. is currently the only majorย market for Canadian crude, with 99 percentย of its exports going to either U.S. refineries orย portsย forย export.


Source: U.S. Energy Informationย Administration

America Is Maxing out on Canadianย Crude

American refineries certainly enjoy buying Canadian crude at such low prices. How low are the prices? As the Financial Post reported in mid-October, Western Canadian Select (WCS) was $19 a barrel โ€” approximately $50 a barrel cheaper than a barrel of theย American oil standard known as Western Texas Intermediate (WTI).

Without a competingย market in sight, American buyers likely will continue receivingย huge discounts on Canadian oil. Asย Sandy Fielden, director of oil and products research at Morningstar, toldย Reutersย in 2016:ย โ€œIf Canada canโ€™t get their oil to another market besides the U.S. [market], youโ€™ll always be a price taker, not a priceย maker.โ€

Even under these economic conditions, one company,ย Teck Resources,ย is proposing to build a new tar sands mining operation. Projections estimate theย costย to produce a barrel of oil atย this operation will be aroundย $85 a barrel. That’s quite the mismatch with what a barrel of Canadian crude oil is fetching these days, and doesn’t bode well for a sustainable businessย model.

Another complicating factor is that even at such low prices, American refineries only want and need so much tar sands oil, which is a heavy, lower-quality oil. America isย experiencing a boom in production of theย light fracked crude oil from shale basins, which is not only more valuable to refineries but requiresย much lower transportation costsย than importing crude from Alberta, the tar sands capital of Northย America.

As The Energy Mix reportedย recently: โ€œPermian Basin oil is a far better fit for the only U.S. refineries capable of handling more bitumen [tar sands oil], and will likely be for at least the nextย decade.โ€

As an example of that preference,ย Exxon just announcedย plans to expand its Beaumount, Texas, refinery by 300,000 barrels per day, which would make it the largest refinery in America. This additional capacity is for light crude oil, not heavy Canadianย oil.ย 

Still, American refineries are importing, and refining, record amounts of Canadian oil right now, but at massively discounted prices compared to average global oil prices, which helps lead to huge profits for Americanย refiners.

Yet another complication for tar sands producers is that, asย The Energy Mix highlighted,ย โ€œIn reality, virtually every refinery in America that buys heavy crude is operating at full capacity. That is why there are no buyers willing to pay higherย prices.โ€

Economics 101. Ifย supply is higher than demand, prices go down. Andย sellers in that market have to take whatever price they can get, even if that means selling at aย loss.

To help extract itself from this difficult situation, Canada is looking to build pipelines, such as the still-uncertain Trans Mountain pipeline expansion,ย to transportย its landlocked oil to tidewaters,ย where companiesย theoretically can sell the oil to Asia’s rapidly growingย market.

Never Get Involved in an Oil War With Saudiย Arabia

Shell tar sands mine in Alberta
Shell Jackpine tar sands mineย in 2014.
Credit:ย Julia Kilpatrick, Pembina Institute,ย CC BYNCNDย 2.0

Canadaโ€™s tar sands pipeline plans have several fatal flaws. The first is that tar sands oil is heavy and not the most desirable oil on the market. The second is that Canada is late to the game, with some rather formidable competition from the U.S., which isย exportingย oil to Asia at ever increasing rates, and also from the Middleย East.

While Canadaโ€™s tar sands proven oil reserves are the third largest for any country in the world, Saudi Arabia holds the number two spot (Venezuela isย number one). Unlike the stiff production costs Canadian tar sands operators face, Saudi Arabia has production costs in the range of $10 per barrel. Plus, Saudi Arabia is producingย more desirable grades of oil and has easy access to ports, giving the country aย strong competitiveย edge.

However, Saudi Arabia still needs to secure markets for itsย oil and has been striking deals and partnerships around the world to ensure itsย oil is the oil that meets future global demand. It has begun shipping oil to one of these joint venture projects in Malaysia and is helping finance projects in China, South Africa,ย India, Pakistan,ย and South Korea. French oil company Total SA is also partnering with the state-owned Saudi Aramco on a huge refinery and petrochemical complex in eastern Saudiย Arabia.ย 

Saudi Aramco even ownsย the largest oil refinery in America, in Port Arthur, Texas, where itย processes large amounts of oil imported from Saudi Arabia. Aramco’s plans toย expandย the facility are centered onย petrochemical production,ย an area many oil producers see as the future for growth in the business and not one that will require tar sands oil asย feedstock.

In the near term, Canada faces competition with America’s booming fracked oil trade, and in the long term, Saudi Arabia is locking up deals to supplyย the foreign markets Canada eventually hopes to reach if it can ever build pipelines toย export its oil. Even then,ย The Energy Mix predicts thatย Canada would require prices of โ€œupwards of U.S. $100 per barrel for decades.โ€ย ย ย 

This is allย assumingย a significant reduction in global oil consumption doesn’t occur in the coming decades in order to address the climate crisis. Years of successful pipeline protests and global oil economics may end up keepingย a large portion of the Canadian tar sands oil โ€œin theย ground.โ€

Canadian Prime Minister Justin Trudeauย most likely wouldn’t be pleased at that prospect. In 2017 he told an oil industry conference: โ€œNo country would find 173 billion barrels of oil in the ground and leave them there.โ€ย But a country might if the oil were sold at aย loss.

Looking forย Bailouts

A good indicator of the failed tar sands modelย is howย many major oil companies sold their positions in Canadian tar sands and took their losses. Their main explanation? No one could make money on those projects at current oilย prices.

The remaining companies apparently haveย to rely on government bailouts. The first bailout signaling trouble forย the industryย was when the Canadian government bought the Trans Mountain pipeline expansionย projectย from Texas-basedย Kinder Morgan for CAN $4.5 billion. A federal court ruled that the pipeline didnโ€™t get the proper approvals, which means it is now in legal limbo and may not be built โ€” but Kinder Morgan still gets its $4.5 billion. A big win for Kinder Morgan, perhaps less soย for the people ofย Canada.

Embed from Getty Images

Trudeau and the Canadian oil industry need this pipeline if they have any hopes of exporting tar sands oil to Asia. Energy East, the other large pipelineย designed for exports, was canceled in 2017.ย As the delays continue and the economics remain unfavorable for Canadian tar sands, other suppliers such as Saudi Arabia are securingย future oil exportย markets.

More recently โ€” indicatingย how desperate the situation is for tar sands producers โ€” Alberta Premier Rachel Notley pitched the idea that the Canadian government shouldย invest in the oil-by-rail business to helpย tar sands producers, which sounds a lot like corporate welfare toย support aย failing businessย model.

This request comes despite oil producer Cenovus signingย a deal in September to move more of its oil by rail, and this deal reportedly isn’t the only one of its kind. Canada is set up to move far more oil-by-rail than ever before, despite the obvious risks to safety andย environment.

Moving oil by rail isย more expensive than by pipeline but does offer the advantage ofย reaching ports where the oil could be exported โ€” and a desperate Canadian oil industry has very fewย options.

Technology Not theย Savior

Canadian tar sands oil hadย very different prospects in 2010. The American shale oil and gas revolution had just begun, and producers were trying to figure out which shale plays would actually produce oil. It did not seem like a threat to the massive Canadian tar sands oil industry at theย time.

Meanwhile in Canada, the industry knew where the bitumen was and how much was there (a lot). In a 2010ย articleย in The Globe and Mail, Darin Barter, a spokesman for Albertaโ€™s Energy Resources Conservation Board, noted that unlike the traditional oil industry, exploration costs for the tar sands industry wereย โ€œzero.โ€

โ€œWe know the oil is there, the bitumen is there, the technology may not be there,โ€ Barter said in 2010, โ€œBut we all know how quickly technology moves forward when there is a financial reward at the end.ย โ€œ

In 2018, the technology is definitely there. The bitumen can be mined and diluted and pumped through pipelines and into rail tank cars. But the financial rewardย that Barter was expecting technology to deliver has notย materialized.

Almost 10ย years later, the financial payout for tar sands oil looks less likely thanย ever.

Main image:ย Fort McMurray, Alberta – Operation Arctic Shadow.ย Credit: Kris Krรผg,ย CC BYNCNDย 2.0

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Justin Mikulka is a research fellow at New Consensus. Prior to joining New Consensus in October 2021, Justin reported for DeSmog, where he began in 2014. Justin has a degree in Civil and Environmental Engineering from Cornell University.

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