Are the Canadian Oil Sands Stranded Assets?

[RichardC]

In recent interviews, Jeff Rubin, author of “The Carbon Bubble” and former Chief Economist of CIBC World Markets, has characterized Canada’s oil sands as being “stranded assets”. The following 20 numbers appear to support his characterization of the oil sands - what are the arguments to the contrary?

1. 2000% - the typical cost disadvantage of oil sands production[1] (relative to the lower cost producers such as Saudi Arabia[2]). Overcoming this enormous cost disadvantage requires strong continuing growth in the demand for oil, and the absence of lower cost alternatives. Neither condition seems likely to be satisfied, in either the short term or the long term.

Short Term – Decreasing Demand and Increasing Supply Will Suppress Prices

1. 800 million barrels – the approximate reduction in annual US oil consumption over the past 10 years.[3] In recent years US demand for oil has remained flat despite continuing economic growth.
2. 80% - the decline in the percentage of fuel oil being used to generate electricity, from 50% in 2002 to 10% in 2012.[4]
3. 33% - the reduction in the percentage of the world’s energy supplied by oil from 1973 to 2012 (from 46% to 31%).[5]
4. 80% – the approximate increase in US oil production over the past 10 years,[6] from approximately 5 million barrels per day to approximately 9 million barrels per day, principally from shale oil production.
5. 1.1 billion barrels – the amount by which the projected US oil production in 2020 has increased between the 2013 and 2015 according to the US Energy Information Administration. Some commentators are suggesting that shale oil, which is plentiful in many countries around the world, will suppress the prices below those required for the profitable extraction and exploitation of bitumen.[7]
6. US$109 billion - the amount that the Saudis have pledged to invest in renewable power by 2040.[8] This project is meant in part to free up more oil for export and reflects the fact that the use of oil to generate electricity no longer makes any economic sense.

Medium to Long-Term – Demand Replacement by Renewables and Electric Vehicles

1. 2030 – the expected end of the oil age, according to the former Saudi Oil Minister, Sheikh Yamani, who fifteen years ago was quoted as saying:

“Thirty years from now there will be a huge amount of oil - and no buyers. Oil will be left in the ground. The stone age came to an end, not because we had a lack of stones, and the oil age will come to an end not because we have a lack of oil.”[9]

1. 70% - the approximate percentage of oil used in the US for car, trucks and other ground transportation.[10]
2. US6 cents / kWh – the cost of electricity from solar parks being built today. The cost of solar generated electricity is expected to fall to US2-4 cents per kWh by 2050.[11]
3. 20 cents per liter – the price that gasoline would have to sell for in order for gas cars to compete on energy costs with electric cars. Electric cars typically achieve approximately 5 km per kWh, or 2 cents per km (at 10 cents per kWh). Gasoline would have to sell for 20 cents per liter in order for a 10 l/100km gas car to achieve the same operating costs for energy.
4. 90% - the average annual increase in worldwide electric car sales. Since 2011, when plug-in electric cars were first sold in significant volumes, annual sales have increased by an average of approximately 90% per year, and to the end of 2014 have totaled over 712,000 cars.[12]
5. 4 – the number of consecutive years that plug-in electric cars have received the highest Consumer Reports customer satisfaction ratings[13] (the Chevy Volt winning in 2011 and 2012, and Tesla Model S winning in each of 2013 and 2014).
6. 30 – the number of highway-capable plug-in electric cars offered for sale by major manufacturers.[14] The manufacturers currently offering electric vehicles include BMW, Mercedes, Audi, Porsche, VW, Volvo, Tesla, Cadillac, Nissan, Chevrolet, Honda, Ford, Toyota, Kia, Fiat, Mitsubishi, and Renault.
7. US$100 / kWh – the electric car battery cost at which the purchase price of mass market electric cars will be fully competitive with that of gas cars (as well as being cheaper to operate). This cost is expected to be reached over the next few years (and by 2024 at the very latest).[15]

Climate Change Impacts and Implications

1. 80% - the percentage of current economic fossil fuel reserves which must remain in the ground in order to avoid dangerous climate change.[16]
2. 116 kg per barrel - the CO[SUB]2[/SUB] emissions released from extracting and refining oil from Canadian bitumen using in situ production (which is substantially more than twice the greenhouse gas emissions which result from conventional oil production).[17]
3. 0% - the amount by which Canadian bitumen production and Arctic oil production can be increased, consistent with efforts to limit average global warming to 2 °C, according to a recent study published in Nature.[18]
4. 90% - the percentage of oil sands reserves that the Carbon Tracker Initiative has warned investors are at risk from eroding oil prices.[19]
5. 68% - the fall in price of the iShares Oil Sands Index Fund since its peak in June 2008.

[1] See: http://www.bankofcanada.ca/wp-content/uploads/2015/01/remarks-130115.pdf#chart9 As noted by Timothy Lane, Deputy Governor of the Bank of Canada, at the Madison International Trade Association on January 13, 2015: “oil from Canada’s oil sands costs closer to $60 to $100 a barrel”.

[2] See: http://www.washingtonpost.com/blogs...ces-go-welcome-to-the-oil-markets-old-normal/ As noted by Saudi Arabia’s oil minister Ali al-Naimi: “Production costs in Saudi Arabia are about $4 to $5 a barrel”.

[3] See: http://www.bloomberg.com/graphics/2014-america-shakes-off-oil-addiction/, slide 4.

[4] See: http://blogs.platts.com/2014/04/17/fuel-oil-consumption-declines/.

[5] See: http://www.bloomberg.com/news/artic...falling-demand-for-oil-is-the-biggest-concern.

[6] See: http://www.bloomberg.com/graphics/2014-america-shakes-off-oil-addiction/, slide 2.

[7] See: http://www.forbes.com/sites/timwors...if-fracked-shale-isnt-the-high-cost-producer/.

[8] See: http://www.bloomberg.com/news/artic...falling-demand-for-oil-is-the-biggest-concern.

[9] See: http://www.telegraph.co.uk/news/ukn...-predicts-price-crash-as-age-of-oil-ends.html. Reports that Saudi Arabia’s acquiescence in the recent dramatic declines in the price of oil reflect Saudi concerns that: “Demand will peak way ahead of supply” are consistent with the understanding expressed fifteen years ago by Sheikh Yamani. See: http://business.financialpost.com/n...hen-it-blindsided-oil-markets?__lsa=b8f5-b49b.

[10] See: http://en.wikipedia.org/wiki/Energy_in_the_United_States: “In 2010, 70.5% of petroleum consumption in the U.S. was for transportation. Approximately 2/3 of transportation consumption was gasoline.”

[11] See: http://energytransition.de/2015/05/the-solar-price-revolution/.

[12] See: http://en.wikipedia.org/wiki/Electric_car_use_by_country.

[13] See: http://pressroom.consumerreports.org/pressroom/2013/11/my-entry-2.html.

[14] See: http://cleantechnica.com/car-answers/ and http://en.wikipedia.org/wiki/List_of_electric_cars_currently_available.

[15] See: http://www.fool.com/investing/gener...rs-incs-gigafactory-may-be-more-revoluti.aspx.

[16] See: http://www.nationalobserver.com/2015/05/14/news/climate-number-changes-everything.

[17] See: http://www.scientificamerican.com/a...eystone-xl-pipeline-impact-on-global-warming/ and http://www.scientificamerican.com/a...ar-sands-could-mean-game-over-climate-change/.

[18] See: http://www.nature.com/nature/journal/v517/n7533/full/nature14016.html and http://www.theguardian.com/environm...stay-buried-prevent-climate-change-study-says.

[19] See: http://www.carbontracker.org/in-the...ands-projects-at-risk-from-eroding-oil-price/; and http://www.carbontracker.org/wp-content/uploads/2014/11/Oil-Sands-FactSheets-Designed.pdf

 

[glhs272]

I sure hope so...

My brother works for a certain Milwaukee based mining equipment manufacturer. I have talked to him about this a lot. He spends a lot of his time in Canada with these guys. It seems the Canadians themselves are oblivious to the issue. They seem to think they can stay profitable at sub $60 per barrel. They are going gang busters on ordering new large capital equipment...

 

[AudubonB]

I can attest to the veracity of post #2. There is, indeed, an immense amount of new CapEx occurring in the oil sands patch - I can see it from the activity of the players who also are in Alaska, with what they are doing & the time they are spending in northern Alberta.

As far as discussing "stranded assets": it ever has been the case that a commodity - whether crude oil or copper or silicon chips - has different players operating at different price points along the supply spectrum. Certainly, the lowest-cost producer has an advantage over each other producer; that is a given. There are, nevertheless, natural barriers to entry or local market considerations that come into play as a second order effect - geography, chemical makeup and sensibilities of national security are easy such examples; a third order effect would be long-term time considerations.

With all that, entities that are publicly traded in the US have strict requirements mandated by the SEC; for this discussion, oil extractors need adjust their balance sheets to reflect appropriately their assets given current and short-term market conditions. A company cannot claim to have X barrels of reserves if those reserves are not profitably extractable at today's....and a reasonable estimate of "tomorrow's"...crude prices. Thus, many billions of barrels of US reserves vanished over the past year, for no reason other than in order to comply with the SEC, American producers had to write down play after expensive play that might have been justifiable at $130/bbl but aren't at $60. Likewise, the oil sands in Alberta provide the same situation.

Now, from a non-economist's point of view, the appropriate questions were present albeit not, in my opinion, well-formed, amongst the OP's citations. They best can be summarized by "Will (static) global demand for oil diminish at a rate greater than or less than the expected global production profile of crude? Ceteris paribus - i.e., without a disruptive change brought about by, for example, the immense global energy market alteration that a combo PV + battery storage revolution could provide - I am very, very certain that the question's answer is "less", because demand won't be dropping at all - it will rise. Take away that ceteris paribus - i.e., throw in the revolution - and all bets are off. If "our" revolution occurs, then, the extent to which it is successful (meaning: d(price) and d(volume) being large, Very Large or GINORMOUS {industry terminology } ) directly determines whether only the Ghawar Field and other lowest-cost producers will remain viable; whether oil sands, Pennsylvania stripper wells and other ultra-high-cost producers can remain pumping, or somewhere in between.

Conclusion: place your financial bets within the oil producers in accordance with your considered assessment of the size of and the timing of the Disruptive Force (and you know what that is). I have not even discussed the two other important sectors associated with crude producers, which are the pipeline and refinery sectors; they have market dynamics very different from those of the producers.

 

[cpa]

I can attest to the veracity of post #2. There is, indeed, an immense amount of new CapEx occurring in the oil sands patch - I can see it from the activity of the players who also are in Alaska, with what they are doing & the time they are spending in northern Alberta.



With all that, entities that are publicly traded in the US have strict requirements mandated by the SEC; for this discussion, oil extractors need adjust their balance sheets to reflect appropriately their assets given current and short-term market conditions. A company cannot claim to have X barrels of reserves if those reserves are not profitably extractable at today's....and a reasonable estimate of "tomorrow's"...crude prices. Thus, many billions of barrels of US reserves vanished over the past year, for no reason other than in order to comply with the SEC, American producers had to write down play after expensive play that might have been justifiable at $130/bbl but aren't at $60. Likewise, the oil sands in Alberta provide the same situation.

Yes, we bean counters value inventory on the balance sheet at the "lower of cost or market." In other words, if it costs $100/barrel to extract and refine one barrel of oil, but the market price at the balance sheet date is $80, we have to reduce the carrying value of that barrel downwards by $20, thereby hitting the bottom line. (The converse is not true: we do not increase the value on the balance sheet if market prices are > $100.)

Then, there is the whole "impaired asset" valuation that must be performed for each accounting period. This is similar to the valuation of inventory mentioned above. If a company has invested $100 million to lease, improve, purchase equipment, and whatever else that goes into developing and producing these outlying sources of petroleum, and the depreciation taken thus far has been $10 million, the "net book value" of this asset is $90 million. However, if market forces are such that if the company were to sell off these assets, and the "fair market value" of all this stuff is $50 million, then they have to take a current write down on their balance sheet of $40 million because that asset is "impaired." Similarly, if production wanes so that only half of the potential is idle and likely not to be utilized for the foreseeable future, that value must also be reduced.

These valuation techniques are frequently headaches and conflicts for both the companies (they want no or a small write-down) and their auditors who need to be able to justify the amounts that ultimately appear on the financial statement and disclosed in the footnotes. It becomes a battle of opposing engineers and consultants to determine the amounts that would not be considered "materially misleading."

 

[RichardC]

Thanks for the feedback. Our (collective) experience with computers, demonstrate just how quickly entire industries can be supplanted by a disruptive new technology. In the case of typewriters, it seemed as though one day the industry was there and the next it was gone, completely superseded by word processors.

In the case of batteries, I have modelled below a couple of projected cost curves. Since 2007 the cost has been falling at a rate of 16% per year compounded. The set of calculations on the left assumes this rate of cost decline will continue for the next couple of decades, the set of calculations on the right assumes that the rate of decline will fall to 10% per year (starting in 2015).

I have also provided a few additional articles, immediately below, on the growing cost competitiveness of electric cars, which seem to roughly align with the cost curves.

http://electricvehicle.ieee.org/veh...be-cost-competitive-with-gas-powered-in-2017/
http://qz.com/#313162/heres-how-electric-cars-could-be-cheaper-than-gas-guzzlers-within-a-decade/
http://insideevs.com/falling-gas-prices-vs-falling-battery-prices-wins/
http://thinkprogress.org/climate/2015/04/13/3646004/electric-car-batteries-price/
http://gas2.org/2015/04/18/battery-prices-falling-faster-expected/

Battery Cost Reduction Curves
Cost Reduction Percentage		Cost Reduction Percentage
16.00%	From 2007			10.00%	From 2015
Year	Price/kWh	Percent Reduction	Year	Price/kWh	Percent Reduction
2007	$1,000.00	0.00%		2015	$250.00	0.00%
2008	$840.00	16.00%		2016	$225.00	10.00%
2009	$705.60	29.44%		2017	$202.50	19.00%
2010	$592.70	40.73%		2018	$182.25	27.10%
2011	$497.87	50.21%		2019	$164.03	34.39%
2012	$418.21	58.18%		2020	$147.62	40.95%
2013	$351.30	64.87%		2021	$132.86	46.86%
2014	$295.09	70.49%		2022	$119.57	52.17%
2015	$247.88	75.21%		2023	$107.62	56.95%
2016	$208.22	79.18%		2024	$96.86	61.26%
2017	$174.90	82.51%		2025	$87.17	65.13%
2018	$146.92	85.31%		2026	$78.45	68.62%
2019	$123.41	87.66%		2027	$70.61	71.76%
2020	$103.66	89.63%		2028	$63.55	74.58%
2021	$87.08	91.29%		2029	$57.19	77.12%
2022	$73.15	92.69%		2030	$51.47	79.41%
2023	$61.44	93.86%		2031	$46.33	81.47%
2024	$51.61	94.84%		2032	$41.69	83.32%
2025	$43.35	95.66%		2033	$37.52	84.99%
2026	$36.42	96.36%		2034	$33.77	86.49%
2027	$30.59	96.94%		2035	$30.39	87.84%
2028	$25.70	97.43%		2036	$27.35	89.06%
2029	$21.58	97.84%		2037	$24.62	90.15%
2030	$18.13	98.19%		2038	$22.16	91.14%

 

[RichardC]

More than 100 leading North American scientists and academics have come together to oppose further development of the oil sands in North America.

See: http://www.oilsandsmoratorium.org/

...based on these 10 reasons.

No new oil sands or related infrastructure projects should proceed unless consistent with an implemented plan to rapidly reduce carbon pollution, safeguard biodiversity, protect human health, and respect treaty rights.

The following ten reasons, each grounded in science, support our call for a moratorium. We believe they should be at the center of the public debate about further development of the oil sands, a carbon-intensive source of non-renewable energy.

REASON 1: Incompatible with climate protection
Continued expansion of oil sands and similar unconventional fuels in Canada and beyond is incompatible with limiting climate warming to a level that society can handle without widespread harm.

REASON 2: Slowing the shift to clean energy
Oil sands should be one of the first fuel sources we avoid using as society moves to non-polluting forms of energy, not the next carbon-intensive source we exploit.

REASON 3: Inadequate monitoring and enforcement
Current oil sands environmental protections and baseline data are largely lacking, and protections that exist are too seldom enforced.

REASON 4: Contamination of the landscape
Contaminants from oil sands development permeate the land, water and air of the Canadian boreal landscape, and many of these impacts are difficult to mitigate.

REASON 5: Insufficient reclamation
Less than 0.2% of the area affected by Canadian oil sands mining has been reclaimed, and none restored to its original state.

REASON 6: First Nations treaty violations
Development and transport of oil sands is inconsistent with the title and rights of many Aboriginal Peoples of North America.

REASON 7: International implications
What happens in North America will set a precedent for efforts to reduce carbon pollution and address climate warming elsewhere.

REASON 8: Economically affordable alternatives
Controlling carbon pollution will not derail the economy.

REASON 9: Cumulative impacts ignored
Debates about individual pipeline proposals underestimate the full social costs of the oil sands, and existing policies ignore cumulative impacts.

REASON 10: Canadians demand solutions
A majority of North Americans want their leaders to address climate change, and they are willing to pay more for energy to help make that happen.

 

[TheTalkingMule]

If it has no value, it's not really much of an asset. Once we have sustainable energy sources ramped up, who in their right mind would go through all of that trouble and expense just to obtain an obsolete petroleum product?

 

[wayner]

Jeff Rubin isn't always correct - previous books talked about how high oil prices will reverse the trends toward globalization as it will be too expensive to ship goods from China to the US. How's that trade working out right now with $60 oil? What matters is not the ratio between the oil sands and the lowest cost producer (which is Saudi Arabia) but the difference between Oil Sands and the current marginal producer. And that is not 2000%.

I am not pro-carbon as I own a Tesla, have PV panels on my house and a solar pool heating system. But I think the Oil Sands will continue to be developed. They should do as much as possible to reduce the carbon and water intensity of the production, particularly of the open pit operations. But some other types of production are even worse in terms of carbon production - like California Heavy Oil. Don't forget that the bulk of the carbon (70%) is actually released when the final product is burned and for that it doesn't matter how it came out of the ground.

We will never get 100% away from oil as we will always need it for some purposes like plastics and for some forms of transportation, at least until Tesla starts making passenger jets.

The analogy of typewriters vs computers is not really relevant here as it is not that easy to switch from oil to most substitutes as you need to build trillions of $ of infrastructure to get it to consumers. Electricity is pretty much the exception to this so it is one reason why EVs may make more sense than Hydrogen vehicles. Peter Tertzakian wrote a good book on this called 10,000 Barrels per Second.

But the other limiting factor of switching to EVs may be the source materials for the batteries. There were about 85 million cars sold in 2014. How long would it take to ramp up lithium production to be able to make the batteries for that many cars? Is there even enough lithium in the world to do that?

Incidentally, Warren Buffett recently made a large investment in Suncor which is one of the largest companies operating in the Oil Sands.