Canadian Oil Sands' Greatest Asset Now Worst With Carbon Curbs

  • Risk of stranded oil-sands barrels with oil below $40
  • Energy industry accounts for 10% of Canada's economy

Canadian oil-sands producers like Suncor Energy Inc. like to tout the long life of the world’s third-largest crude reserves as their greatest asset. That longevity may now be their biggest liability with a new global agreement to curtail carbon emissions.

Alberta is one of the costliest -- and most carbon intensive -- places in the world to produce oil. With prices below $40 a barrel, oil-sands growth has already ground to a halt. Hopes of a return to the boom years are fading amid limits on emissions and the uncertainty of future fossil fuel demand.

“There’s a risk of stranded barrels in the oil sands,” said Laura Lau, a portfolio manager at Brompton Funds who oversees about C$1 billion ($729 million) in assets including Suncor. “Part of this would have happened because of the economics, but with these carbon constraints, it gets worse.”

Governments from 195 countries committed over the weekend in Paris to reduce greenhouse gas emissions to head off dangerous climate change. Canada, as the Group of Seven’s largest oil exporter and with its natural resources-weighted economy, faces more risk than other industrialized nations from the limits.

Fifth-Largest

Canada is the world’s fifth-largest producer of both crude oil and natural gas, and the 12th-biggest of coal. The energy industry accounts for 10 percent of the national economy, compared with about 2 percent of the U.S. economy that is dependent on energy production, according to the U.S. Energy Information Administration.

Canada’s fossil-fuel dependence helped ease the country through the global recession six years ago. That strength is now a weakness, especially for investors who have suffered a 46-percent decline of the S&P/TSX energy sub-index since June 2014 and the risk of a further decline in what was once Canada’s biggest growth sector.

“If you’re on the high end of the cost curve, this ought to put a lot of fear into you as a producer,” said Andrew Logan, director of the oil and gas program at Ceres, an investor network promoting sustainable business practices. Ceres represents investors with $14 trillion worth of assets.

Exports of fossil fuels from Canada have grown since 1990, the base year for the first global agreement to limit GHG emissions. For October, fossil fuels made up C$5.8 billion ($4.23 billion), or 13.5 percent of total national exports, compared with C$1.2 billion, or 9.2 percent of national exports in October 1990, according to the national statistics agency.

Owners of older oil-sands assets that generate a lot of cash flow could use that money to transition to new areas such as renewable electricity generation, said Logan. Those decisions may determine which companies survive in the coming years.

“Environmental sustainability is at the heart of our resource sector,” Finance Minister Bill Morneau said in a speech in Toronto on Monday. “Canada, with its North American partners, can and should be one of the world’s most efficient and responsible energy producers.”

Commodity Prices

While carbon limits will play a role longer term, commodity prices will likely be more important in limiting Canada’s oil-sands expansion, said Samir Kayande, vice president of energy research at ITG Investment Research in Calgary. Only a fraction of Canada’s 168 billion barrels of oil sands reserves are likely to be harvested in the current low-price environment.

“I see the issue of price and the place of oil sands on the cost structure as being far more important than greenhouse gas emissions limits,” Kayande said, characterizing the climate polices as an issue that investors should pay attention to beyond the current investment horizon of the next three years.

Only 9 billion barrels can be economically recovered with U.S. crude below $50, he said. Climate policies will have a greater impact on development when prices rise as the most attractive oil-sands projects, which use steam to coax crude from well bores, need crude higher than $60 a barrel to make sense, he said.

Innovation will be the key to making the transition to a low-carbon economy, said Trevor McLeod, director of natural resources policy at the Canada West Foundation. Without changes to technology and processes, it will be very difficult to meet even the existing carbon emissions targets.

For now, the oil sands will continue to bear the brunt of opposition to fossil-fuel use, as demonstrated by President Barack Obama’s turning down a permit for TransCanada Corp.’s Keystone XL pipeline, said Robert Skinner, executive fellow at the University of Calgary’s School of Public Policy.

“The oil sands has a huge bullseye on it and it has enormous symbolic value,” he said. “It’s an energy intensive process and there’s no getting around that.”

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