Monday, July 17, 2017

Bitumen: The people, performance and passions behind Alberta's oil sands

My latest book is now available through Amazon.
The title is Bitumen: The people, performance and passions behind Alberta's oil sands, and I consider it to be my magnum opusTo whet your appetite, here is the Foreword, by petroleum historian Earle Gray.* Enjoy!

Bitumen is a powerful addition to the corpus of writing about Canada’s petroleum industry. But it is more than history: it is an account of current challenges and visions of future possibilities. While he focuses on the vast oil deposits in the Alberta oil sands, McKenzie-Brown also sheds wide-ranging light on other aspects of the Canadian petroleum industry’s history.

He has weaved his story from an impressive array of diverse sources, as well as intensive and extensive research. The result is a must-read for anyone interested not only in the history of the Canada’s oil business, but perhaps more importantly, Canada’s economic history.

For the oil sands, it has been a history of eight decades of formidable challenge, big hopes and plans, tenacious perseverance, scientific and technical study, and repeated failures until sustained commercial oil production was finally achieved in 1967. The challenges facing the oil sands today are no less formidable, including economic, environmental, technical, regulatory, and competition from lower-cost oil production from tight formations, induced by “fracking” and horizontal drilling.

Vociferous critics of oil sands development are entirely correct in their profound concerns about how oil sands production, with its heavy emissions of carbon dioxide, contribute almost as much as coal to the rise of global warming, and its existential threat.

Yet some critics too often forget a few things. The clamour for non-carbon fuels sometimes seems to lose sight of the fact that large-scale development will require decades. The world does need to curb its appetite for fuel, and reduce the role of fossil fuels in the energy mix, but large volumes of oil and gas will still be needed for as long as the future can reasonably be anticipated. And the oil sands offer availability insurance.

It is easy to forget that, starting in the early 1960s, billions of dollars, in today’s money, were invested to develop commercial oil sands before there was any generally understood concern or awareness of the impending risks of global warming. Global warming was not an issue before the 1980s. More than just financial gain motivated leaders who risked more than just investments in efforts to develop commercial production. Yes, as McKenzie-Brown points out, there were frauds and con artists in early years, such as Alfred Hammerstein and A.F.A. Coyne.
Earle Gray

Yet not just industry leaders, but virtually the whole country viewed the development of this energy as a boon to both national and North American interests. None were more motivated by a concept of a North American common interest than J. Howard Pew, the patriarch of the family that controlled Sun Oil Company. Other Sun Oil directors saw more assured and profitable opportunity, under then-existing conditions, in developing oil production in Venezuela. Pew made it clear that if the company’s board did not agree to finance the first commercial oil sands venture, he would finance it himself. He saw the oil sands as key to North American energy concern, and was clearly motivated by that as well as by commercial opportunity.

It is too easy to take for granted, to forget how virtually every aspect of modern life is dependent on oil and gas, not merely for fuel but for everything of made of plastic, the asphalt shingles on our roofs, the carpets on our floor, untold thousands of other items we use virtually every hour of every day, not to mention the food we eat. Eight barrels of crude oil and equivalent natural gas, 283 U.S. gallons, was required in 2003 to raise a 1,250-pound champion steer, perhaps three-quarters of a gallon for every pound of butchered beef. It is too easy to ignore how long it will take and how much it will cost to replace even a meaningful portion of the trillions of dollars of facilities that make it possible to supply the world with 90 million barrels of crude oil every day. Oil sands may supply only a small element of the world’s oil demand, but it looms large in the North American context, and even the knowledge that much greater quantity can be made available is important to energy security.

It is too easy to forget how much the prosperity of every economically advanced country depends on oil and none more so than Canada. The oil sands have become cornerstones of the economy. Any cutback in oil sands production would be a blow to the economy, and even a slowdown in the pace of development could send tremors. Yet the risk of this cannot be discounted.

In a 2013 forecast the Canadian Association of Petroleum Producers foresaw a tripling of oil sands production during the 19-year period to 2030, rather than cutbacks. That would have boosted oil sands production from 1.8 million to 5.2 million barrels a day, and total Canadian oil output to 6.8 million barrels a day, two-and-a-half times as much as Canadians now consume. With little increase anticipated in domestic consumption, Canada would have to increase its net oil exports by some three million barrels a day to achieve the CAPP forecast. The only export market now available is the United States, which seems in no need for any additional imported oil. Indeed, the U.S. Energy Information Office recently ruminated briefly about difficulties in absorbing all the oil supplies now available, including imports from Canada. CAPP has since backed off that forecast.

Long-term and even medium-term forecasts of oil supply, demand and prices, by industry, government, and academics, have been mostly useless, or worse. Almost all have been far off the mark. This book recounts the record of erroneous oil forecast in the early decades of the industry’s history, as reported in Ida Tarbell’s seminal History of the Standard Oil Company. But the trend has been sustained throughout the industry’s history of almost 160 years. When Prime Minister Pierre Trudeau  and Alberta Premier Peter Lougheed drank champagne on September 1, 1981 to celebrate an Alberta-Canada revenue sharing agreement, it was based on a predicted steady rise in oil prices from $45 to $80 per barrel. Instead of rising, oil prices were already heading steadily down, to $19 over an eight-year period. A trio of once widely acclaimed 21st century end-of-oil-type forecasts are the latest to get it wrong, including Hubbert’s Peak: The Impending World Oil Shortage, by Kenneth S. Deffeyes, in 2001; The End of Oil: On the Edge of a Perilous New World, by Paul Roberts, in 2004; and Why Your World is About to Get a Whole Lot Smaller: Oil and the End of Globalization, by Canadian economist Jeff Rubin, in 2009.

The ink was hardly dry on the last of these books before the extent of a profound revolution in both oil and gas supply, wrought by directional drilling and hydraulic fracturing of tight oil and gas formations, was fully apparent. Instead of falling off a cliff, the world’s estimated remaining oil reserves increased over a 20-year period by 440 per cent, to 1,688 billion barrels at the end of 2013. Nothing, as an old saying has it, is as difficult to predict as the future.

By far the most dramatic change in oil supplies has been in the United States, where oil production had been in what seemed like an inexorable decline, falling, for example, from 8.4 million barrels a day in 1994 to 6.7 million in 2008. But the trend was reversed the next year, climbing to 10 million barrels a day in 2013, with a further increase to 12 million barrels a day in 2015 anticipated by the U.S. Energy Information Agency. A country that has increased its oil production by 5.3 million barrels a day hardly looks like an assured bet to buy an addition three million barrels a day from Canada, or from anyone else. Sustained development of additional oil sands production – or perhaps even maintaining the existing production rate – would seem to require sales to China, India or elsewhere.

Nothing is likely to impact oil sands development more than government regulation to curb emissions of global-warming carbon dioxide. As this is written, long anticipated federal government regulations are still awaited. Regardless of what these may entail, carbon pricing seems almost certain to ultimately emerge as a key element of global effort to curb global warming. Critics like to call this a tax, but it is not. Carbon pricing means including some element of the cost of mostly CO2-induced global warming in the price of fossil fuels. This would set the price closer to the full cost of production and consumption. The greater the CO2 content, the greater the external cost, and the greater the carbon price for any fuel.

Carbon pricing appears to be the government mechanism most acceptable to the oil industry. More importantly, it is seen by crucial global agencies – the International Energy Agency, the World Bank, the International Monetary Fund, the Intergovernmental Panel on Climate Change, and the 34-nation Organization for Economic Cooperation and Development – as the main element of any effort to combat global warming. “Credible and consistent carbon pricing must be the cornerstone of government actions to tackle climate change” by stimulating energy conservation and development of non-carbon fuels, an OECD statement exclaims. ExxonMobil, British Petroleum, Shell, Chevron, ConocoPhillips and 24 other major corporations have already incorporated carbon pricing in planning future operations and investments, the New York Times reports.

How much might carbon pricing cost? Don’t be surprised at a carbon pump price of $1 a litre, based on the carbon content of today’s gasoline. That would bring the North American price to about what most Europeans already pay. And it will not be as painful as you might expect. The U.S. government has already mandated an almost two-fold increase in the average fuel economy of new cars and trucks, to 54.5 miles per U.S. gallon (more than 60 mpg for the more Canadian-familiar Imperial gallon) by 2025. If cars travel twice as far on a gallon or litre of gasoline, a carbon price is unlikely to pinch motorists, assuming that the carbon price is introduced over an appropriate period of time. The American mandate for motor fuel economy will perforce become the Canadian mandate, unless Canada acts to set its own standards. Canada stands to become a follower, not a leader, in this and all aspects of carbon pricing, if it is not prepared to act on its own. What happens here would be determined in Washington and elsewhere if Canada is not proactive.

Carbon pricing might just turn out to be more opportunity than threat for the oil sands. Ultimately, the long-run viability of the oil sands hangs on the industry’s ability to reduce CO2 emission, as well as the use of water and other resources. Carbon pricing will give the oil sands industry a greater incentive, and perhaps the ability, to pursue and invest in those goals much more aggressively. Such high-cost, non-carbon fuels as cellulosic ethanol could emerge as the market competition facing the oil sands, and the lower the CO2, the greater the ability to compete. Absent some form of carbon pricing, alternative government actions to curb global warming might slowly squeeze the life out of the oil sands, as they are now squeezing the life out of coal-fuelled thermal electric power plants in the United States.

But what if carbon pricing is the impetus that, after 90 years of promise and frustration, unlocks the potential of firefloods to cut in half the CO2 emissions in producing the 80 per cent of the bitumen in the Athabasca oil sands that can be recovered only in-situ, as opposed to mining? Burning underground 10 per cent of the bitumen to separate 90 per cent from the sand would confer other major environmental advantages in addition to cutting CO2 emissions. What if using super-hot heat buried deep under the surface is used to generate electricity and steam, rather than burning gas? What if carbon pricing results in the capture and underground storage of virtually all the CO2 emissions not only from the production and upgrading of bitumen, but also the enormous amount of CO2 emitted by Alberta’s coal-fired thermal electric power plants?

Will such things be accomplished with carbon pricing? Will they slash carbon dumping enough to make the oil sands competitive with non-carbon fuels? I have no idea. But they at least hint at the possibilities.

If the possibilities are there, so is the vision. McKenzie-Brown quotes oil sands leaders, such as Clement Bowman, who share progressive views on contentious issues of energy and environment. Bowman, a leader in the development of oil sands technology that minimizes not just cost but the use of resources and environment impact, sees Canada’s energy resources as an integrated system embracing oil sands, coal, hydro, nuclear and renewable energy. Bowman argues that we must learn how to use our nation’s gift of energy resources “without using the environment as a dump for waste products.” He says, “Canada has an opportunity to provide global leadership in addressing the collision between [petroleum fuels] and the environment, the dominant issue facing our planet in this century.”


*The author of eight books, Earle Gray was editor of Oilweek magazine for nearly 20 years and, in the 1970s, public affairs director for a consortium that planned and researched a multi-billion dollar gas pipeline from Alaska’s Prudhoe Bay and the Northwest Territories to southern Canada. He has contributed to the Canadian Encyclopedia, Maclean’s, Financial Post, Toronto Star, Canadian Business, and others. He is the recipient of numerous writing awards, a lifetime achievement award from the Petroleum History Society and the Samuel T. Pees Keeper of the Flame Award from the US Petroleum History Institute. 

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