Between Cheap Gas And Carbon Caps, Oil Sands Face Uncertain Fate

Dec 14, 2015
Originally published on December 16, 2015 7:09 pm

Canada has the world's third-largest oil reserve, and it's worth hundreds of billions of dollars. Nearly all of that crude is contained in Alberta's oil sands. Getting the oil from underground and into your car requires an extraordinary mining effort that has significant effects on the environment and is expensive.

In a world concerned about climate change and in which oil prices have plummeted, the oil sands industry faces an uncertain future.

Stand on the edge of Shell's Jackpine Mine near Fort MacKay, Alberta, and all the senses are occupied: This time of year, it feels very cold outside. There's a faint smell of oil in the air; you get why critics call these "tar sands." And you can hear the constant hum of huge shovels filling massive trucks. But it's what you see that's overwhelming: a very large strip mine. This used to be a dense forest. Now it's a 20-square-mile hole in the ground.

"We're running the largest trucks in the world," says Luke Killam, senior adviser for asset operations at Shell Albian Sands.

The tires on these "heavy haulers" are 13 feet tall. While most trucks have a few steps for a driver to get into the cab, this one has a staircase. Shell has more than five-dozen of these trucks here hauling 400 tons of earth away at a time. And that's just one company. There are others operating in northern Alberta, such as Suncor and Syncrude.

The Alberta government requires companies to fill in these open pit mines and reclaim the land for nature. That can take more than a decade after a mine closes. Companies say they've learned a lot in recent years about how to do that process better, but it still comes with environmental risks. For example, companies have to keep migrating birds out of grimy water that collects at reclamation sites. They use hazing systems with fake birds of prey and air cannons.

Some companies are able to produce this crude without strip mining by injecting steam underground. That method presents its own environmental challenges.

The Carbon Cost Of Turning 'Play-Doh' Oil Into Fuel

Beyond these issues, all oil sands companies face one big environmental challenge connected to climate change: Producing this crude emits more greenhouse gases than traditional drilling. That's because when the oil sands are mined from the ground, they're not yet ready to be refined into gasoline. Technically, what comes out of the ground is called bitumen; in its raw state, it feels like sandy Play-Doh.

Even separated from the sand, it's very thick. "The bitumen in its pure form is extremely high in viscosity. It's more viscous than molasses," Killam says.

The bitumen has to be diluted with hot water and chemicals so it can be piped about 300 miles south to a plant called an "upgrader" near Fort Saskatchewan. Only then does it become the type of oil that can be refined into fuel for your car.

All this extra work requires more energy and releases more carbon dioxide into the atmosphere than a barrel of oil produced in Texas or in Saudi Arabia. That fact is a major focus for oil sands critics.

"The tar sands are one of the largest climate polluters in Canada," says Mike Hudema, climate and energy activist for Greenpeace Canada.

Hudema is among those campaigning to keep this oil in the ground to address climate change.

"Canada needs to do its part. We need to be an active and progressive player, and what that means is that we need to stop the expansion," he says.

Keeping Carbon Underground

Activists have celebrated a few victories recently. Last month, President Obama rejected the Keystone XL pipeline, which would have transported oil sands crude from land-locked Alberta to the U.S. Gulf Coast, giving producers access to the world market.

Another victory for environmentalists came when Alberta Premier Rachel Notley announced that her government will limit carbon emissions from the oil sands business at 100 million tons a year. That could put a damper on the industry's projected growth and prevent Alberta from taking full advantage of its huge oil reserve. That is, unless companies can figure out how to develop the resource and prevent carbon pollution. Shell believes it has a solution.

In November, Shell CEO Ben van Beurden was among dignitaries who turned a big, yellow ceremonial valve to mark the opening of the Quest carbon capture and storage project.

It captures about one-third of the carbon dioxide emissions from Shell's oil sands upgrader plant. Then the company injects that CO2 deep underground so it stays out of the atmosphere.

"Canada and Shell have some very good reason to feel some pride in Quest, and we invite the world to follow," van Beurden said at the opening ceremony.

Van Beurden says Shell will share what it has learned from building Quest, and says projects like this will get cheaper as they're replicated. Right now, though, capturing and storing carbon is expensive. Quest was built with about $630 million in government subsidies.

Because oil prices plummeted over the past year, companies are looking for ways to save money, not spend more.

Making A Profit — Barely

Lower oil prices also present an economic challenge for Canada's oil sands business. This crude is some of the most expensive oil in the world to produce, since it has to be mined and processed before it's refined.

Shell responded to lower oil prices by trimming expenses in its oil sands business up to 30 percent. The company placed limits on overtime, cut back on how long contractors remain on-site and shut down a subsidized Tim Horton's restaurant, a Canadian institution famous for coffee and doughnuts, at its mine site.

"It's probably the hardest decision we had to make," Donna Kett, finance manager for Shell Albian Sands, says with a laugh.

The cost-cutting worked. Shell is producing oil sands crude for about $25 a barrel now. At current prices, that leaves some room for profit — but not much.

Cutbacks like these have been felt in nearby Fort McMurray, says Melissa Blake, mayor of the Regional Municipality of Wood Buffalo, a sprawling area that includes Fort McMurray.

"The rate of growth that we had experienced was anywhere from 7 to 10 percent for every year in the past 15 years," Blake says. Now she says it's down to about 4 or 5 percent.

The Official Outlook: Optimism

Locals say restaurants aren't as busy as they were a few years back when the oil sands business was booming. But residents are optimistic about the future.

"The oil sands always bounce back," says Allison Frenette, a student at Keyano College studying environmental technology. But not everyone is convinced that's the case.

The environmental and economic challenges facing Canada's oil sands business may end up working in favor of those who want this crude left in the ground.

"Some portion of oil reserves — perhaps a third — can never be produced, given the need to address the global warming problem," says Philip Verleger, an energy economist who owns an independent consulting firm. Verleger describes a race among oil reserve owners to get their crude out of the ground before the world decides no more can be produced. And that race favors those with the cheapest oil.

"If I have $3 [per barrel] costs or $2 costs — as they do in the Middle East — that oil is going to flood the market and essentially make it impossible to make money in Fort McMurray," Verleger says. It's a race he says Canada's oil sands business can't win. That kind of thinking is not popular in Alberta, where officials prefer optimism.

Asked about the challenges facing the oil sands business, Alberta Energy Minister Margaret McCuaig-Boyd says, "I think with good old Alberta innovation, we're going to come through and be able to manage it."

For now production is continuing at about 2.3 million barrels a day. But the growth in that number has slowed, and companies are canceling expansion plans. Shell halted its Carmon Creek project in October, a decision that will cost about $2 billion.

Mayor Blake says the oil sands business is vital to Fort McMurray, which now has about 77,000 residents. She says many families, like her own, moved here for the financial security that comes with working in the oil sands business. Just a few years ago, that looked like a sure way for many to improve their lives. But now the future of the oil sands business is less clear.

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STEVE INSKEEP, HOST:

Now let's report on a place in Canada that is blamed for adding to climate change. The oil sands in Alberta province hold much of Canada's oil reserves. Oil worth hundreds of billions of dollars is in the ground. Now the people who produce that oil are looking for a way to stay in business in an era of increasing restrictions on carbon emissions. Here's NPR's Jeff Brady.

JEFF BRADY, BYLINE: Stand at the edge of an oil sands mine and all the senses are occupied. It feels very cold outside this time of year. You can smell oil in the air. And there's the hum of huge shovels filling massive trucks. The overwhelming part is what you see, a very large strip mine.

LUKE KILLAM: You're right. It is - it is massive. We're running the largest trucks in the world.

BRADY: Luke Killam, with Shell Oil Company, stands next to what used to be a dense forest. Now it's a 20-square-mile hole in the ground.

(SOUNDBITE OF TRUCK HORN HONKING)

BRADY: We head over to the shop for an up-close look at one of those big trucks. When it's dumping a load, the top of the truck is five stories high. And instead of a few steps to get into the cab, there's a staircase. Shell has more than five dozen of these trucks hauling away 400 tons of earth at a time. The Alberta government requires companies to reclaim this land for nature. But that can take more than a decade after a mine closes. Companies will build lakes where there were none before. Until the water is clean enough for wildlife, migrating birds have to be kept away with hazing systems. They use fake birds of prey and air cannons.

(SOUNDBITE OF AIR CANNON FIRING)

BRADY: Some oil sands companies produce this crude without strip-mining by injecting steam underground. That comes with its own environmental problems. But all the companies face one big challenge. Making this oil usable requires more energy and creates more pollution than traditional drilling. At Shell, Luke Killam shows me what comes out of the ground. It's called bitumen.

KILLAM: Once you've got the protective gloves on, you can pick some up.

BRADY: It feels like - like really sandy Play-Doh, very sticky.

KILLAM: And it's very tacky as well - yeah, absolutely. The bitumen in its pure form is extremely high in viscosity. It's more viscous than molasses.

BRADY: Before this can be refined into gasoline for your car, it has to be mixed with hot water and chemicals, then piped about 300 miles south to a plant for more processing. That requires energy, which means burning fossil fuels to make fossil fuels.

MIKE HUDEMA: The tar sands are one of the largest climate polluters in Canada.

BRADY: Mike Hudema of Greenpeace Canada is campaigning to keep this oil in the ground to address climate change.

HUDEMA: Canada needs to do its part. We need to be an active and progressive player. And what that means is that we need to stop the expansion of this project.

BRADY: Environmentalists celebrated last month, when President Obama rejected the Keystone XL pipeline, which would have transported oil sands crude to market. And they cheered again when Alberta Premier Rachel Notley pledged to limit carbon pollution from the oil sands industry.

(SOUNDBITE OF ARCHIVED RECORDING)

PREMIER RACHEL NOTLEY: Friends, the government of Alberta is going to stop being the problem. And we are going to start being the solution.

(APPLAUSE)

BRADY: Those new limits could make it difficult for companies to expand their oil sands operations as planned. But Shell has a potential solution.

(SOUNDBITE OF ARCHIVED RECORDING)

BEN VAN BEURDEN: Yay.

(APPLAUSE)

BRADY: Last month, Shell CEO Ben van Beurden officially opened what his company calls the Quest carbon capture and storage facility. Van Beurden says it will capture a third of the carbon pollution from an oil sands processing plant and store it deep underground.

(SOUNDBITE OF ARCHIVED RECORDING)

VAN BEURDEN: Canada and Shell have very good reason to feel some pride in Quest. And we invite the world to follow. Thank you very much.

(APPLAUSE)

BRADY: Capturing and storing carbon is expensive. Oil prices plummeted over the past year along with profits. Companies want to save money, not spent more. That leaves no easy answers to the environmental challenges facing Canada's oil sands business. Jeff Brady, NPR News. Transcript provided by NPR, Copyright NPR.