RNNR Committee Report

Recent developments

In the mid-1990s, the National Oil Sands Task Force projected that production of oil from the oil sands would reach 1 million barrels a day by 2020. That level of production was in fact achieved in 2004, or sixteen years “early”. While production of conventional crude oil in Canada has been rather flat for the last ten years and is projected to decline, the oil sands have experienced tremendous growth (see chart, below), and are expected to more than compensate for any decline in the production of Canadian conventional crude oil. Indeed production from the oil sands now exceeds conventional crude oil production in western Canada and will soon surpass total Canadian production of conventional crude oil.

Canadian Crude Oil Production, 1989-2005

Source:    Statistics Canada, Energy Statistics Handbook, 2^nd Quarter 2006.

Future growth

The National Energy Board (NEB) envisages oil sands production reaching 3 million barrels a day by 2015 while the Canadian Association of Petroleum Producers (CAPP) calculates that oil sands production could reach 3.5 million barrels a day by 2015 should all announced projects go ahead as planned. According to the NEB over 40 major bitumen recovery projects have been announced for the period 2006-2015.¹ Investments are expected to average about $10 billion per year over that period. The result of such investments is that Canada could soon emerge as one of the largest oil producers in the world, climbing from 7^th largest producer in the world in 2005 (see chart, below) to 4^th or 3^rd largest by 2015 according to CAPP’s analysis.²

Oil Production³ by Country, 2005

Source:    BP Statistical Review of World Energy 2006.

Natural Resources Canada (NRCan) officials told the Committee that by 2030 up to 5 million barrels a day could be extracted from the oil sands.⁴Interestingly, development may not be constrained to Alberta. The National Energy Board testified that there are oil sands deposits in certain regions of Saskatchewan (e.g. in the northwest and eastern central regions of the province).⁵According to NRCan there is burgeoning interest in the development potential of that resource.⁶The estimates by the NEB and NRCan suggest a wide range of development potential for the oil sands including 3 million barrels per day by 2015 and potentially up to 5 million barrels per day by 2030 from the current level of 1.1 million barrels per day. The Committee did note, based on evidence from the developers, that constraints to development could well curtail development or cause some projects to be delayed. As a result, the range of production could be less than the projected amounts as provided by the NEB and NRCan which will impact the economics and the environmental aspects of these projects.

And while about two-thirds of the oil sands in place cannot currently be extracted by either mining or in situ methods,⁷ it is conceivable that new technologies could one day be developed that would allow for the development of that untapped resource. Such developments would further cement Canada’s reputation as a top tier energy producer.

Risks to this outlook

With oil prices hovering between US$50-60 per barrel, the incentive to develop the oil sands is enormous and indeed in most cases compensates for the risk and expenses involved in developing such long-lived, capital-intensive projects. As George Eynon of the Canadian Energy Research Institute cogently told the Committee, under current market conditions “There’s an economic incentive for the owners of the [oil sands] leases to monetize their assets.”⁸

That is not to say that oil sands projects are without risk. In fact, the costs of extracting and upgrading bitumen are significant and have recently been exacerbated by rising material, labour and natural gas costs. According to the National Energy Board’s latest assessment of the oil sands, it can cost up to CAD$40 to supply synthetic crude oil from the oil sands, and this even before accounting for the environmental costs
associated with greenhouse gas (and other) emissions. The NEB testified before the Committee that should oil prices fall into the US$35 to US$40 per barrel range, “it’ll result in a significant slowdown” in the industry.⁹

Other challenges also exist. If production from the oil sands is to continue to grow rapidly in the coming years, new upgrading facilities and pipelines will be needed. In fact, the National Energy Board believes that production from the oil sands could outstrip pipeline capacity as early as this year.¹⁰ New upgrading capacity is also needed to process increasing volumes of bitumen since most refineries can only process very limited quantities of raw bitumen. Additional sustainable investments in upgrading and refining, both value-added activities, should be encouraged, with a view that such investments would provide substantial economic benefits to Canada. While it is up to the relevant companies to make the necessary investments, federal, provincial and territorial governments can help by working together to ensure that proposed projects are reviewed in a timely and rigorous manner.

Finally, though Canada is increasingly characterized as an energy superpower, largely because of the development of the oil sands, it risks also becoming known as a major polluter unless innovative policies and technologies are adopted to reduce the environmental impacts of oil sands activities. The needs of the people and communities most directly affected by oil sands projects must likewise be addressed if Canada’s reputation as a responsible global energy player is to be upheld.¹¹

The oil sands—a resource of strategic importance to North America

The oil sands are of great strategic importance for Canada. Importantly, production from the oil sands is offsetting the decline in conventional oil production from the Western Canada Sedimentary Basin, historically Canada’s richest oil-bearing zone.¹² This allows Canada to benefit from secure revenues derived from oil exports and provides Canada with a natural resource which today is a cornerstone of our modern way of life.

The United States, Canada’s largest trading partner and the world’s largest consumer of oil, is striving to diversify and secure its energy supplies and in that context recognizes the strategic importance of the oil sands. Indeed the production of crude oil from Canada’s oil sands displaces oil imports from overseas.¹³ As Tony Clarke of the Polaris Institute noted in his appearance before the Committee, “clearly, from the United States’ standpoint, from Washington’s standpoint, having access to Canadian oil—certainly in terms of the potential reserves that the oil sands project—ensures a secure supply, a safe supply, and a friendly neighbour supply.”¹⁴

Until alternatives become economical and are commercialized on a wide scale, Canadians and Americans alike will continue to depend on liquid hydrocarbons to meet many of their energy needs, beginning with transportation energy needs. A growing portion of such energy needs will be met by production from the oil sands, a vast resource located “right in our own backyard.”¹⁵

Operators of oil sands projects are therefore investing billions of dollars in new oil sands extraction and upgrading projects, confident in the knowledge that demand for oil, within North America and in emerging Asian markets, will continue to increase and that prices will likely remain high by historical standards.

But though hydrocarbons, including oil sands, will likely continue to be the dominant source of energy supply for some time yet, mounting environmental and social costs associated with oil sands activities in particular make it increasingly clear that it would be irresponsible to continue on a “business-as-usual” course. It is time to begin the transition towards a clean energy future. The development of the oil sands is a great Canadian technological and economic achievement. With the right mix of innovative policies and technologies, Canada could harness the energy that the oil sands offer while minimizing the social and environmental impacts of such activities, making the oil sands part of a clean energy future and capping this great Canadian success story.