Oil Change International

Exposing the true costs of fossil fuels

“Shock waves of anxiety” over Shell’s tar sands move

tartrucksRemarks made by Shell CEO, Peter Voser to the Financial Times Energy Editor that his company has “clearly scaled down” its plans for a massive expansion of tar sands production should send waves of anxiety through the Canadian oil industry and a serious rethink among energy security hawks in Washington.

Since the middle of last year I have been writing about the vulnerability of the tar sands industry to a slow down in the growth rate of oil demand. With some of the most expensive cost structures in the oil industry, the future growth of tar sands production requires oil prices to stay high over the long term.

But high oil prices exert a deflating effect on the economy and in turn reduce demand and prices.Compounding this effect is the fact that high oil prices have made large economies that are increasingly dependent on oil imports, such as the USA and China, painfully aware of their economies’ vulnerability to the rising cost of oil.

As a result policies to decrease oil use are gathering strength and this is being further reinforced by climate change policy.

Forecasts for oil demand in the 2020-2030s have been progressively reduced by agencies such as OPEC and the IEA over the last four years based on the emerging realisation that governments can and will implement demand reduction polices to protect their economies and address climate change.

These policies will mostly take advantage of the huge scope for efficiency in the private transport fleet meaning more efficient traditional engines as well as increasing diversification into electrification.

The net result is that the highest cost barrels in the market (read tar sands) may not reap the profits in the long term that oil companies have been hoping for.

So when a company like Shell, the biggest international oil company in the tar sands that has stated on several occasions that its ambition is “to be the leading oil sands operator” starts to show signs of an about turn, the rest of the industry should be worried.

Shell spent most of the last decade aggressively ramping up its position in the tar sands. In 1999 it started constructing the Athabasca Oil Sands Project, at the time it was the first major new tar sands project for 25 years.

It went on to acquire some of the biggest leases in the industry and had plans to increase production from 155,000 barrels a day (b/d) today to 770,000 b/d in the 2020s at its mining operation alone.

The company also had plans to develop more energy intensive in situ production to over 100,000 b/d and had made a land purchase in 2006 described by the Wall Street Journal as “eye popping” of bitumen carbonate deposits in Alberta, an as yet un-commercial resource that may require huge amounts of electricity (think nuclear) to bring into production.

In fact together with its endeavours to develop oil shale in the USA, China and Jordan, Shell was clearly positioning itself as the world’s prime developer of energy intensive unconventional oil.

So has that changed? Shell today has 155,000 b/d of capacity at its tar sands mine and is nearly finished a $14 billion expansion that will add another 100,000 b/d. It also has about 35,000 b/d of in situ capacity at two other sites in Alberta.

But Voser’s claim to the FT that it will not seek further expansions at least for the foreseeable future is a significant change of tone compared to the extreme confidence with which any mention of unconventional oil was discussed up to just a few months ago.

Even after the recession put the next phase of expansions at the AOSP project and Shell’s Carmon Creek in situ project on hold, Shell continued to discuss unconventional oil as an inevitable part of the future.

If Shell now feels that unconventional oil may be too risky and, as stated in the FT, plans to refocus on conventional oil and gas, what does that mean for Alberta, Canada, the tar sands industry and US energy security?

It could mean that those of us that have been saying for some time now that real energy security will come from reducing oil demand through efficiency and technology diversity rather than pretending that we can keep paying for more expensive and more environmentally destructive oil are right.

The industry and those in Alberta and Canada that depend on it may have to accept that the dreams of reaching 5 million b/d were never realistic and have led to a dangerous over reliance on tar sands for the companies involved and the Albertan and Canadian economies.

Time will tell but the storm clouds on the tar sands horizon appear to be gathering.

Comments (2)

  1. Larry Wood says:

    Shell has invested in offshore exploration and development off the west coast of Alaska. However, it makes sense to suck it in with the recession. Although, I would have thought that the PRC/Sinopec would have bought anything produced that wasn’t committed to the U.S.?
    I read while, stuck this last summer in Pincher Creek, AB as a guest of Chinook Pipelines, about successful testing of a heated rod scheme to recover the tar sands. That there would be a pilot project this summer, and if successful the eventual plan was to build a nuke plant to eliminate the use of NG for heat in the recovery process. If so, that means more NG will be freed up for use in industry, transportation and home heating.
    The import to Alaska is BP-Conoco’s Denali Project is now dead on arrival, as is Sarah Palin’s AGIA. A big diameter pipe to Alberta is no longer viable–as if it ever was. We figured that the NG would be looped back to Kittimat for export to Asia, anyway.
    Alaska is now feeling the slow down of the economy in a big way, and Gov. Sean Parnell has done little to slow the slide into hard times. The only hope is the all-Alaska natural gas pipeline proposed by AGPA/ANGDA during the Palin/Parnell gubernatorial campaign, which they then turned their backs to upon election. Alaskans mandated that pipeline first in 2002 with the passage of Prop 3 and again in 2006 with the election of Palin/Parnell.
    Shell is not doing anything that will affect its bottom line, and the tar sands are not going anywhere. Therefore, they are just shifting their priorities again for the duration of low demand.
    Interesting. Shell killed AGIA and Denali.

  2. Andy says:

    It’s oil sands not tar sands!!!

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