Viability of extraction questioned

By Mike Scott
Published: September 21 2008 18:02

With more than three-quarters of global oil reserves controlled by governments, the options for the oil groups are diminishing. In a world of high oil prices, Canada’s Athabasca oil sands look like a godsend. Covering an area larger than England, they are estimated to contain at least 1,700bn barrels, – equivalent to all the conventional oil reserves in the world.
But fears over climate change mean sentiment has turned against many fossil fuel projects, as the recent protests in the UK over plans to build a new coal-fired power station at Kings-north in Kent have shown. A significant number of coal-fired plants in the US have also been abandoned or rejected recently.

“This is not the same environment we were in 10 years ago,” says Elizabeth McGeveran, senior vice-president in F&C’s governance and sustainable investment team. “Companies need to think differently about projects with high environmental impacts.”
F&C is among a group of investors, including Calpers and Calstrs, the Californian public pension funds, that have pressed the US Securities and Exchange Commision to require oil and gas companies to factor in the carbon intensity of their reserves in future. “We are concerned climate change, and policies adopted to combat greenhouse gas emissions, could render certain assets – particularly those with high carbon intensity – uneconomic,” says a letter sent by the group.
“Current SEC regulations require the disclosure of known trends that companies can reasonably expect will have a material impact on net sales, revenues or income from continuing operations. For the oil and gas industry regulatory, physical and litigation- related climate risks fall clearly into this category.”
Oil sands are increasingly important for the oil majors’ future strategy, says Ms McGeveran, but they require so much energy to extract at a time of increasing regulation of energy and emissions that there is a lot of risk here for investors.
Producing oil from oil sands causes serious environmental impacts, according to environmental group the Worldwide Fund for Nature, including destruction of forests, depletion and pollution of water, loss of biodiversity, acid rain and air pollution. There are no schemes in place for land reclamation, it adds.
In the UK, Co-operative Asset Management has urged fellow investors to put pressure on the energy companies to think again about their rush into unconventional fossil fuel assets. “We want to alert other investors to what we believe could be a material risk to shareholder value through large-scale, rapid exploitation of unconventionals,” says Niall O’Shea, the group’s engagement manager.
The firm also called for greater transparency from oil groups about their scenario planning around carbon capture and storage, carbon pricing and licence to operate issues.
Environmental groups say oil from oil sands generates 80kg-135kg of CO2 per barrel, against an average of 28.6kg for a barrel of conventional oil. Oil companies need to think again about what they are doing, says Marc Brammer of Innovest Strategic Management. “What they are investing in now is completely unsustainable in every sense.” Instead, he says, the oil groups should hedge against their fossil fuel investments by investing in renewable energy and energy efficiency strategies.
While Alberta – and Canada – have no legislation concerning carbon capture and storage at the moment, this could well change. With a general election imminent in Canada, to be followed by the US presidential contest, the political and regulatory regimes could look much more hostile to this type of investment in six months’ time and lead to significant extra costs.
Shell, whose Athabasca Oil Sands Project currently produces 155,000 barrels per day through mining, says oil sands are only 15 per cent more carbon intensive than conventional sources of oil and that a new high-temperature treatment process will cut energy consumption by 10 per cent. It also intends to install technology at its upgrader facility that would take out another 1m tonnes of CO2.
BP, whose joint venture with Husky Energy is due to come on line in 2012, says: “For us, the issue is providing the energy and products that the world demands. Fossil fuels will continue to be the mainstay of the energy mix for decades to come and we need stable sources of supply – oil sands is part of that.” Its project, still to be approved, uses steam-assisted gravity drainage (SAGD), which it says is more environmentally friendly than strip mining.
However, the logic of SAGD production is likely to come under scrutiny, says Mr Brammer. “A huge amount of natural gas is being used to produce the steam needed to release the oil sands – it makes no sense at all. We are taking a low-carbon product [natural gas] and using it to make a high-carbon product.”
Oil companies should revise their expansion plans to much more moderate levels “and treat oil sands not as a bonanza but an experiment in getting the sustainability issues addressed before going on to a large-scale exploitation, if – and we stress if – this is something that has international political support, by that time”’ says Mr O’Shea. “We remain to be convinced that the sustainability and long-term viability of these projects stack up.“
Copyright The Financial Times Limited 2008