Opinion: Why Canada won’t skip out on the oil sands

It's too valuable, and letting it be won't necessarily help the planet

December 05, 2011

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Canadians, and I would expect many Albertans, are simply unaware of the scale of the oil sands resource. That needs to change in order for us to have a meaningful discussion with respect to its development, and the conditions under which that development should proceed.

Let’s start with the basics – how much oil is there? If you want to talk about oil in the ground, the number is somewhere between 1.5- and 2.5-trillion barrels of oil, depending on which estimates you use. That number includes resources we know are there but which cannot be extracted profitably given expected oil prices and production costs, or given current technology. If you apply price and technology filters, you get down to the figure of 170 billion barrels, give or take a billion barrels. That’s about 15 per cent of the world’s proven oil reserves, and about half of the reserves not held by member countries of the Organization of Petroleum Exporting Countries.

How much is all that oil worth? In a 2009 report on Canada’s resource wealth, Statistics Canada puts the figure at $441 billion – more than the value of Canada’s coal, conventional crude oil and natural gas reserves combined. If you assume that the reserve quality declines linearly, such that the last barrel in the 170 billion is marginally profitable, the total value in the oil sands reserves would still be over $1-trillion dollars, and that’s likely a very conservative estimate.

Since the oil sands are owned by the Crown, the resource is the property of each and every Albertan, and managed by the government on our behalf. If you think of it like an asset (in the ground instead of a bank), we each have a bank account in northern Alberta that’s worth at least $400,000 and likely two or three times that much, after you pay the service charges to withdraw the funds (since the Statistics Canada reserve value counts revenue net of extraction costs).

This analogy is useful for understanding two common statements made about the oil sands. In some circles, people encourage the province to leave the oil in the ground to abate global climate change, as though doing so were as simple as flicking a switch and carried minimal costs. Opponents of the industry are also quick to say that oil is a “sunset industry,” and for that reason Alberta should give up on bitumen.

Asking Albertans to leave the oil in the ground is roughly akin to asking them to give up a large proportion of their life savings. It’s a big ask, all the more so because there are no guarantees that doing so will produce the desired outcome. That is, it’s not entirely clear that leaving Alberta’s oil in the ground would affect global emissions of greenhouse gases in any meaningful way unless other, more carbon intensive sources such as coal-to-liquids are also excluded from entering the global market.

In other words, in the absence of global restrictions on carbon emissions, we would not be giving up on our savings to save the world. Instead, we’d simply be transferring the value from an account labeled oil sands to accounts labeled coal-to-liquids, biofuels, and gas-to-liquids held by different people in different parts of the world. What would they do? I think you can figure it out.

People will tell you that, if someone offers you a deal where you have to forgo a great deal of your wealth for what seems like an outcome too good to be true, it probably is too good to be true. The same applies here. Until a national or international policy is implemented such that it makes sense for Albertans not to make the most of their resource wealth, it’s unlikely you’ll be able to convince Albertans to transfer that wealth to someone else under the guise of stopping climate change.

But what of those who say oil is “a sunset industry,” and that the world will be off oil before we know it? Well, that’s like the bank calling and saying that it plans to close for good next Friday, and I can choose to come and withdraw my cash or lose the wealth altogether. Even if the lost wealth were donated to my favorite charity, I can’t be worse off by going and withdrawing the money now – I could still donate it all if I so chose. Even if I have to pay a fee to get to my money, it’s likely worth it since the alternative is zero.

In the energy world, this is the green paradox. Oil in the ground is only worth something so long as people want oil. If oil is worth $85 per barrel today, and it’ll be worthless in 30 years, I have no incentive to conserve oil for the future. The optimal strategy is to take it out of the ground as long as you can make a profit at the margin – that doesn’t mean extract it all, it just means you need to re-define your approach to conservation, and not in a way that most of the people pushing the “sunset industry” line will like.

So, before you make easy statements to Albertans like, “Just leave it in the ground,” remember that you’re asking each and every one of us to forgo a significant proportion of our wealth. It’s going to take a lot more than sound bites, false pretenses of solving global climate change, and a few clever protests to start a meaningful discussion.

(Please note that in an earlier version of this column, Statistics Canada’s estimate of the total value of the oil sands was listed as $441 trillion. That error will still appear in the printed December edition of Alberta Oil.)

Andrew Leach is an Associate Professor at the Alberta School of Business. He blogs on energy, environment, and oil sands issues at http://www.andrewleach.ca and is on Twitter @andrew_leach

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