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Aishwarya Nair
economically viable at world oil prices exceeding $35-$40 a barrel. Newer projects, on the other hand, require the price of light sweet crude (WTI) to be sustained at significantly higher levels $60$70 per barrel in order to be profitable1 (Levi, 2009). It is for this reason that the last five years have seen oil sands projects treble throughout Alberta. But while significantly higher oil prices would offset the vulnerability of oil sands economics and improve the financial attractiveness of these projects, industry experts are agreed that there is a limit to how high the price of oil can go (CERA). Should oil prices rise above $120 - $150 per barrel, the world would be led into a demand-destroying recession. With the break-even point currently set at $95 per barrel (for in-situ projects), there is little flexibility in the economic viability of the oil sands industry. For Western Canadian producers, refining capacity and competition in the midcontinental U.S. and Canadian markets is also an additional factor. Costs Capital intensity is another major factor in the deciding the viability of an oil sands project. The costs of capital vary depending on the extraction method but generally range between 8 and 10 percent (RBC Capital Markets, 2010). The National Energy Board of Canada (NEB) estimates operating costs per barrel of oil range from $4 to $14 for
*Author Aishwarya Nair is a graduate student in University of Pennsylvanias Master of Environmental Sciences program focusing on energy and business. Her contact is nairaish@sas.upenn.edu. **IGEL is a Wharton-led, Penn-wide initiative to facilitate research, events and curriculum on business and the environment. IGEL Research Briefs are written by students on relevant issues in business and the environment and do not represent the views of Penn, Wharton or IGEL. Learn more at http://environment.wharton.upenn.edu 1 Oil sands producers receive a lower price for their heavier products than those that prevail for more desirable crudes; this is already reflected in this estimate.

t is no surprise that the Canadian oil sands excite both political and industry antennae, given that it is the worlds third largest deposit of hydrocarbons, and the largest open to private investment. For oil investors, Canadas far north is crucial for their long-term financial future. For politicos on both sides of the 49th parallel, it represents a source of employment, revenue, and energy security. But not only are the oil sands the worlds most expensive source of major oil, the environmental liabilities associated with their development (and subsequent reclamation) are extensive, expensive, underestimated and often undisclosed. Canada remains in a unique position to contribute towards meeting the demand in growth of energy from the U.S. and Asia. Already the preferred trading partner of the U.S., the oil sands production provides a secure and reliable supply (CAPP report, June 2011) which would reduce reliance on foreign imports, while providing economic growth in both Canada and the U.S. But with each barrel of oil from the oil sands creating three times as much carbon dioxide than a barrel from Saudi Arabia, and pipelines traversing across the continent over ecologically critical areas, criticism of these projects is growing louder. There is much concern that the oil sands are counterproductive to moving towards a green future. This paper will start with a brief overview of the economics associated with oil sands projects in Canada. The second section will explore the relationship between the oil sands and the environment, as well as the relationship with the socio-economic impacts of the projects. Two case studies showcasing these will be presented in the third section: the Keystone XL pipeline debate, which analyses the Canadian connection with the U.S. market, and the Enbridge Northern Gateway pipeline that aims to create links with Asia. The final section will provide a conclusion and recommendations. Production Economics The real determinant of oil sands development is the price of oil. The current consensus is that production from existing oil sands projects will continue to be
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bitumen, and $12 to $18 for synthetic crude oil. The supply cost, which includes the operating costs, capital costs, taxes, royalties and the rate of return on investment, is double these figures. The supply cost of a barrel of oil from the oil sands is most sensitive to changes in the capital cost; it is worth noting, however, that prices of inputs such as steel and cement are generally locked in through long-term contracts and are not affected as much by immediate market fluctuations. Inputs such as natural gas and water present some additional non-market barriers to entry into oil sands development. Current methods of exploiting the oil sands require large amounts of natural gas.2 Projections from NEB see natural gas demand from the industry rising substantially by 2015, with roughly 40 to 45 million cubic metres (1.4-1.6 billion cubic feet) per day being used. The volatility of natural gas markets therefore must also be factored into the costs of an oil sands project.3 It is worth noting that natural gas prices have been bottoming in recent years due to a continued oversupply in the North American market that is projected to last till 2015 (Nair, 2011). In addition, with most of Canadas unconventional gas being situated in Alberta, like the oil sands, it is unlikely that the provincial government will artificially restrict gas availability to the oil sands.
Environmental Externalities In addition to the production costs associated with developing an oil sands project, there are also significant costs to the environment. The majority of these externalities are generally not monetised and internalised as financial obligations. Therefore, an accurate well-towheels cost of a project is often not presented to the public, government and investors, and they have little access to reliable data accurately reflecting reclamation costs. Despite the Alberta government requiring accurate reclamation costs to be submitted, the industry discloses only a minor portion of liability. The Pembina Institute estimated that the unaccounted liabilities in
2 Natural gas supplies come from the Western Canadian Sedimentary Basin which has between 376 and 947 trillion cubic feet (Tcf) of gas that is recoverable from unconventional resources (Nair, 2011). 3 It is worth noting that natural gas prices have been bottoming in recent years due to a continued oversupply in the North American market that is projected to last till 2015 (Nair, 2011). In addition, with most of Canadas unconventional gas being situated in Alberta, like the oil sands, it is unlikely that the provincial government will artificially restrict gas availability to the oil sands.

Canadian tar sands pictures. Photo Credit Flickr user Jungbim

2008 for oil sands mines alone amounted to $15 billion, a figure that could rise up to $33 billion by 2035 (Lemphers et al., 2010). The marginal economics of oil sands production means that these projects are uniquely vulnerable to anything that either increases the cost of production or decreases the price of oil. While companies do not stop producing even if prices do drop below threshold levels for several months due to the large restart costs of projects, the fragility of oil sands economics was clearly illustrated by the recession; approximately 45 percent of new build 2015 production being officially delayed or deferred (RBC Capital Markets, 2010). The Impacts of Oil Sands Much concern has been raised about the scale and the pace of oil sands development, both domestically and internationally, and this has brought a mixed bag of after-effects. Oil Sands and the Environment With heavier forms of crude oil (as that contained in the oil sands) requiring more energy and resources to produce, there have been several well documented, and widely publicised, environmental effects associated with oil sands. GHG Emissions As the scale and intensity of oil sands production increase, so do the emissions. Environment Canada forecasts that GHG emissions from the oil sands will triple
4 National Inventory Report & Statistics Canada, with data from 1990, 2000, 2004 and 2008. This figure includes only production data and total emissions data that occurs in Canada. No upstream gas production or downstream upgrading occurring in the U.S., refining, or combustion is included.

Water The removal of water from the watershed (surface and groundwater), the creation and expansion of large tailing ponds, and the risk of unplanned releases of contaminants through oil sands production all pose considerable threats to aquatic ecosystems. While effort is made to recycle5 the water used in the processes, a significant amount is suspended in tailing ponds which becomes a danger to both humans and wildlife in the area.6
Source: Government of Canada, Turning the Corner: Canadas Energy and GHG Emissions Projections

to 92 million metric tonnes by 2020, from a base level of 30 million metric tonnes in 2005. While improvements in technology have helped curb emissions, per barrel emissions intensity for oil sands has improved only by just over 3 percent between 2004 and 2008.4 Although both in-situ and mining operations are on growth trajectories, in-situ operations are more GHG intensive due to their copious use of natural gas needed to heat the bitumen in place. Mining, extraction and upgrading projects use natural gas and other fuels to generate both heat and electricity to run operations. With in-situ operations set to overtake mining by 2017, industry wide GHG intensity can be expected to increase. Nor does the current administration have any plan to reduce emissions; if anything, their decision to exit the Kyoto Protocol suggests a contrary agenda.

The water used in oil sands mining operations comes primarily from the Athabasca River. All existing and approved oil sands projects are required to obtain licenses allowing them a percentage of water withdrawal rights. But although the Alberta government does have a framework in place for river water withdrawals (as high as 15 percent of river flow during most years), this is seldom monitored and in recent years, various watchdog organisations have questioned how much water is actually being taken from the river. In-situ operations are not as water-intensive as mining operations due to their ability to recoup and reuse up to 90-95 percent of water once they are in full operation. These operations are also increasingly moving towards using saline/brackish groundwater sources to reduce their impact. However, the effects of groundwater withdrawals and the re-injection of process water from in-situ operations back into the ground are still being studied. Land Use Land use impacts differ between mining and in-situ production. Mining operations are the more landintensive of the two. All vegetation and top soil must be removed stored for later reclamation for access to the oil sands, and result in large scale (temporary) removal of all wildlife and wildlife habitat from the area. In-situ extraction, though not as widely destructive, also cause habitat loss and forest fragmentation, and might influence more extensively than just the area directly affected by the operation (Jordaan et al., 2009). A point in favour for insitu operations is that they do not require additional land for tailing ponds as do mining operations, and reclamation could be achieved quicker.7 Given the long time frames and massive scale of oil
7 As far as the author is aware, there have been no reports on in -situ reclamation efforts to confirm this statement.

5 In mining operations, 7.5-10 barrels of water is used for each


barrel of SCO. With 40-70 percent recycling rates, this shrinks to 3.5-4 barrels. In-situ operations use about 2.5-4 barrels of water per barrel of SCO, or 0.5 barrels with recycling.

6 Tailing ponds are created at oil sands mining operations

from leftover water, clay and sand of the bitumen separation process. Currently they cover over 65 square miles (or 223 billion gallons of toxic water) of what was once Boreal forests and wetlands in Alberta and their reclamation are an average of 40 years. Leaks from these ponds (estimated at 11 to 12 million litres per day) end up in the environment, which have directly affected animals, aquatic life there are multiple recorded instances of fish with tumours and deformities as well as human health and activities. In addition, the tailing ponds also pose significant danger to birds. In 2008, 1600 migratory waterfowl died when they landed in one of Syncrudes toxic tailing ponds. Although Syncrude was fined CAD$3 million, the maximum penalty, its record has not improved; three days after the hearing, 230 ducks had to be euthanized after they landed in a toxic tailing pond also owned by Syncrude. This is not to say that reclamation efforts are wasted; Suncor Energy is working towards successfully reclaiming a 550-acre area in Wapisiw that was once a tailing pond.

sands production (40-60+ years), reclamation does not happen quickly. Nor is the restored area expected to be similar to its undisturbed state. Rather, it is expected that the reclaimed land will include forests, prairie, wetlands, and native vegetation to support forestry, wildlife, aboriginal land use and biodiversity (Alberta, 2006). The cost to companies to reclaim land is very high for example, Syncrude paid $46,282 per acre to reclaim a 659 acre upland site and so far, only a very small percentage of disturbed land has been certified reclaimed by the provincial government. Oil Sands and Socio-Economic Impacts The socio-economic impacts associated with the oil sands only serve to underscore their complexity. Though most of the attention is focused on the economic and environmental effects, the social aspect must be included in any discussion of the oil sands. Economic Development Given Canadas vast resources, it is no surprise that the energy sector is a major economic driver. In 2008, approximately 276,000 people 1.9 percent of total employment in Canada were directly employed8 by the energy sector; 145,000 of these were in the mining, oil and gas extraction sector which includes the oil sands. Alberta especially benefits: the energy sector accounted for 30.8 percent of the provinces GDP in 2008, over $3 billion in royalties were collected in 2009/2010,9 and approximately $44 billion is forecasted to be invested into the sands by companies in 2011.10 The Canadian Energy Research Institute (CERI) expects the sands to contribute over 11 million person-years of employment to Canada and $1.7 trillion to the economy over the next 2 years. For the U.S. as well, the oil sands bring promise, with 80,000 jobs supported in 2010, and a boost of $210 billion to GDP expected between 2010 and 2035. Energy Security The prospect of sourcing oil from a nearby, friendly country is naturally appealing to U.S. policymakers. The non-nationalized nature of Canadas energy sector is seen as leverage against price manipulation by OPEC and other national governments, as well as protection from politically motivated supply disruptions. The oil sands are also an alternative to oil revenues going towards empowering nations whose interests often conflict with the U.S. Skeptics however play down the purported benefits of Canadian oil since the oil is still traded on global markets; im4

portance, they say, must be placed rather on expanding access to alternatives and cutting U.S. consumption. Health The possibilities of ecosystem disturbances and potential degradation of local fish and wildlife due to oil sands operations has raised many questions. Adding to this has been the increased rate of illness, especially the preponderance of some cancers amongst residents of the community of Fort Chipewyan.11 Due to the naturally occurring contact between the oil sands and the watershed, it has been difficult previously to determine if the toxins in the water had anthropogenic origins. A recent industrygovernment panel, however, did link thirteen toxic pollutants found in the Athabasca River directly to oil sands mining.12 Aboriginal Concerns There are seventeen First Nations, with a combined population of 16,000 people living on-reserve, and six Mtis settlements with approximately 6,000 residents living within the oil sands area in Alberta (Alberta Factsheet, 2010). These communities rely on the land, water and wildlife for hunting, trapping and harvesting, recreational, ceremonial and navigational activities. With illnesses increasing, their lifestyles being disrupted, and the watershed being af8 Does not include downstream petroleum product retailing jobs 9 Government of Alberta, Energy Statistics. Last revised: 4th November 2011 10 Canadian Association of Petroleum Producers report 2010 11 Fort Chipewyan is located on the western tip of Lake Athabasca, adjacent to Wood Buffalo National Park, approximately 230 km north of Fort McMurray, the biggest strip mining operation in the Athabasca oil sands. 12 Mercury, thallium and other heavy metals were found in higher concentrations in snow-packs and waterways near and downstream from oil sands development than in remote areas. 13 The Obama administration called for another review of the impacts of the proposed pipeline on November 10th, 2011. No decision is now expected till 2013. In the meantime, the GOP is trying to introduce legislation to force President Obama to pass the Keystone XL proposal within the next 60 days, or show that it is not in the countrys national interest. 14 TransCanada, the owner and operator of the pipeline, announced on 14th November after the decision by the government to review the pipeline that it is willing to discuss an alternate route with environmental groups and the State of Nebraska that will avoid the Sandhills area.

fected, these communities are questioning the pace and scale of oil sands development. The Keystone XL Pipeline: Boon or Bane? The proposed extension to the already controversial Keystone pipeline would bring up to 830,000 barrels of crude oil per day nonstop from Canada to market hubs in Oklahoma and Texas. The 1700 milelong, $7 billion extension has faced strong opposition from environmental groups, the public and from within both governments before being postponed by the Obama Administration.13 In its original plan,14 the pipeline would have passed through over Nebraskas ecologically sensitive Sandhills area and the Ogallala aquifer, which supplies drinking water for 82 percent of the regions population and 30 percent of the nations irrigation. An oil spill in this region, where water tables are particularly high in many places, could have a disastrous effect. Proponents for the pipeline state that it would help create desperately needed jobs in the U.S. TransCanada pledges that the pipeline will put 140,000 Americans back to work in construction, manufacturing and indirect jobs not including employment created in heavy and commercial industries through a secured oil supply. But amid allegations of ties between lobbyists, TransCanada and the government,15 an independent study released by Cornell University claimed that nearly one-third of these supposed jobs would not exist, and many of the jobs that did would be temporary. Furthermore, 50 percent or more of the steel pipe, the main input to be used for Keystone XL, is likely to be manufactured outside the U.S. The study concluded that one year of additional fuel costs in the Midwest, rising costs due to climate change, pollution, and possible spills as a result of the pipeline could in fact negate some or all of the jobs created by the project. As well as escalating the aforementioned effects linked with oil sands production, Keystone XL will have a direct and negative impact on caribou herds. Already a threatened species in Alberta and Canada, the relentless destruction of boreal forest wilderness will deprive caribou of their life requisites while exposing them to levels of preCanadian oil sands Photo Credit: Peter Rizov

dation they did not evolve with or are capable of adapting to. Consequently, caribou are on a slide to extinction16 and it is expected that they will disappear in 70 years and as soon as 30 years in areas open to rapacious oil sands development. The Enbridge Northern Gateway Pipeline: The Other Frontier Rather than leaving all its eggs in one basket, the Enbridge Northern Gateway pipeline is Canadas bid to become a global player in the petroleum market. The 731 mile double-barrelled pipeline from Alberta to Kitimat, British Columbia would carry oil west and send condensate, a liquid used to dilute thick crude so it flows, to the east. Also proposed is an oil/ LNG port in Kitimat that would open up Albertas oil sands to the Asian market,17 allowing super tankers with up to 2 million barrels of crude to navigate between the jigsaw of islands to and from the port. Current federal regulations state that, should there be a tanker spill, Enbridge would not be responsible nor would they be legally obliged to pay damages or help with the cleanup effort. No less critical is the impact of the pipeline on the Great Bear Rainforest, a 250 mile stretch of western red cedar, hemlock, and spruce forest along the BC coast, and the only home of the white spirit bear in the world. Earlier a battleground between environmentalists and timber companies, today the war is against tanker traffic. The smallest human error in these twisting channels could result in a devastating oil spill which would destroy economically important salmon habitat, as well as the habitat of whales, orcas, marine life, bears and humans whose lives that depend on these coastal waters and forests.
15 The State Department allowed Cardno ENTRIX of Houston to conduct the Keystone XL economic impact study. The company had done previous work for TransCanada and identified them as one of its major clients. 16 It was previously assumed that the drop in caribou population was due to wolves, which led to mass extermination of wolves in an effort to protect. A recent study found that the steep decline in caribou herds is directly linked to human activities (timber, oil sands) in the area, rather than predator populations. 10 Canadian Association of Petroleum Producers report 2010 17 Sinopec, Chinas state-owned oil company, is among the Asian and Canadian firms that have invested $105 million into moving the Northern Gateway through the planning and permitting stage. 18 Over 61 have signed the Save the Fraser Declaration which bans pipelines through the Fraser River watershed. It also prohibits crude oil tankers in the ocean migration routes of the Fraser River salmon.

The pipeline also traverses through traditional lands of First Nations tribes in BC, whose unceded territory encompasses the entire coastline. There are currently over 130 First Nations from Haida Gwaii to the Northwest Territories who are in opposition,18 with concerns about the impacts on the habitats of salmon, shellfish and the endangered Nechako white sturgeon in the Skeena and Fraser Rivers that sustain them. As the existing laws and jurisdictions of indigenous people in BC have never been extinguished, and are recognized by Canadian and international courts, governments and companies alike must get consent from First Nations to have pipelines and tankers in their territories. Conclusion This paper has sought to outline some of the benefits and challenges surrounding the development of the oil sands in Canada. The scale of the resource, and the impacts associated with it, has put the oil sands firmly at the nexus of the debate around the desire for sustainable development and the current reliance on fossil fuels. As the sole customer of the Canadian oil sands (99 percent), the U.S. has considerable ability to influence and improve environmental management north of the border. Should the Keystone XL pipeline be built, there will be nearly a 50 percent increase in oil sands production, and if allowed to develop without checks, this will come at considerable environmental and social costs.

recoverable. Of Canadas 175 billion barrels of crude oil reserves, 170 billion lies in the oil sands. The choice of extraction method is determined by the geology. Deposits that lie up to 100 meters of the surface are recovered through surface (open-pit) mining techniques and then processed in facilities where the bitumen is extracted. About four-fifths of Albertas deposits are buried much deeper and can only be produced using in-situ methods. The most common of these are cyclic

Source: Canadian Association of Petroleum Producers, 2011

steam simulation (CSS) and Steam Assisted Gravity Drainage (SAGD): in both processes, steam is injected into wells drilled down to the deposit to separate the bitumen from the sand, enabling it to be brought to the surface. It is worth mentioning that operating costs do also vary between different in-situ operaSimilarly, resource-rich Canadians cannot be forever tions. Plant gate supply costs for a barrel of CSS reexpected to remain hewers of wood and drawers of covered oil is about $42; SAGD oil comes in at about water. Instead, there must be more focus on how to $38 per barrel. The bitumen recovered through either develop these resources more holistically, addressing mining or in-situ processes is then upgraded at a all three aspects of the triple bottom. It cannot be deseparate facility to synthetic crude oil (SCO). Dependnied that the oil sands are crucial for Canadas develing on the degree of upgrading, SCO must be proopment but they must be only one piece of the puzzle. cessed in refineries tailored to light crudes or heavy Obsession over the oil sands would be a dangerous crudes. distraction; instead they must be part of a much broader strategy and should not detract Canada from its much applauded commitments to a greener, more Works Cited sustainable future. Appendix: Overview of the Oil Sands The oil sands are a mixture of sand, clay, water and a tar-like substance known as bitumen, oil that is too heavy to flow or be pumped up without first being heated or diluted. Largely contained to the province of Alberta, there are three main deposits the Athabasca, Peace River, and Cold Lake totaling close to 2 trillion barrels of oil, 10 percent of which is currently
6 CAPP. Environmental Challenges and Progress in Canadas Oil Sands. April 2008. Print. CAPP. About Canadas Oil Sands. April 2009. Print. CBC News. Oil Sands Mining Linked to Athabasca River Toxins. August 30th, 2010. http://www.cbc.ca/news/ technology/story/2010/08/30/oil-sands-athabascariver.html CTV News. Opposition Growing to Northern Gateway

Pipeline. November 30th, 2011. http://www.ctvbc.ctv.ca/ vs. Climate Change. May 2009. Council on Foreign Relaservlet/an/local/CTVNews/20111130/ tions. Print. bc_northern_gateway_pipeline_opposition_111130/201111 30/?hub=BritishColumbiaHome Nair, Aishwarya. Economic Possibilities for Canadas Unconventional Gas. July 2011. The Pacific Gateway Series, The Economist. Canadas Tar Sands: Muck and Brass. Canada West Foundation. Print. Jan 20th 2011. http://www.economist.com/ node/17959688 National Geographic. The Canadian Oil Boom. March 2009. http://ngm.nationalgeographic.com/2009/03/ The Economist. A Sticky Ending for the Tar Sands. Janu- canadian-oil-sands/kunzig-text/1 ary 15th, 2009. http://www.economist.com/ node/12932252 The Pembina Institute. Full Disclosures: Environmental Liabilities in Canadas Oil Sands. http://pubs.pembina.org/ The Economist. The Other Keystone Debate. October 1st, reports/full-disclosure.pdf. June 2011. 2011. http://www.economist.com/blogs/ americasview/2011/10/canada%E2%80%99s-oil-industry The Pembina Institute. Pipeline and Tanker Trouble: The Impact to British Columbias Communities, Rivers, and Financial Times. North America: US has its eye on oil inPacific Coastlines from Tar Sands Oil Transport. Novemdependence,. December 2nd, 2011. http://www.ft.com/ ber 2011. http://pubs.pembina.org/reports/nrdc-pipelineintl/cms/s/0/cf1f1eca-19b8-11e1-ba5dand-tanker-trouble-for-web.pdf. 00144feabdc0.html#axzz1fWP7PFtR The Pembina Institute. Keystone XL in context: oilsands Grant, Jennifer, Simon Dyer, Daniella Droitsch and Marc and environmental management. September 2011. http:// Hout. Solving the Puzzle: Environmental Responsibility in pubs.pembina.org/reports/oilsands-enviro-mgmt-fsoilsands development. April 2011. http:// 201109.pdf pubs.pembina.org/reports/solving-puzzle-oilsands.pdf RBC Capital Markets. Economics of Oil Sands March IHS CERA. Break Point Revisited: CERAs $120-$150 Oil 2010. http:// Scenario, May 2008. http://www2.cera.com/news/dew.nationalbuyersellerforum.ca/2010_presentations/ tails/1,2318,9475,00.html March_25/Kent_Ferguson.pdf IHS CERA. Ratcheting Down: Oil and the Global Credit Websites Accessed: Crisis (2008). http://www.ihs.com/products/cera/energy- TransCanada Corporation: www.transcanada.com Enbridge Northern Gateway: www.northerngateway.ca report.aspx?ID=106591844&pu=1&rd=cera_com CERI: www.ceri.ca CAPP: www.capp.ca Levi, Michael. The Canadian Oil Sands: Energy Security
Alberta Oil Sands Photo Credit: Peter Rizov

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