The Murky Future of Tar Sands Oil

Murky Future for Tar Sands OIl

The murky future of tar sands oil is due to three factors — lack of new capital, uncertainty around pipelines, and ESG factors such as regulations and divestment. There has been a precipitous drop in capital investments for tar sands exploration, coupled with underutilization of and uncertain funding for the pipelines that deliver the oil. After enjoying unprecedented growth in investments prior to 2014, the tar sands energy sector is currently reeling from a one-two punch of extended low crude oil prices and an increasingly hostile regulatory climate.

The most damning indictment of the future of tar sands oil comes from the industry itself.  A recent publication from Oil Change International reveals a dramatic decline in the approval of new tar sands capacity since 2013. Whereas 2013 saw the approval of over 400,000 barrels per day (BPD) in new capacity, no new capacity has been approved (to date) in 2017. This follows on the heels of three straight years of less than 50,000 BPD of approved new capacity. As a result, total production from all tar sands oil is projected to peak at 3M BPD in 2025, before starting an inexorable decline.

Because of their remote locations, tar sands oil mining sites rely on an array of expensive and controversial pipelines to deliver the oil to refineries or shipping facilities. Perhaps the best known is the Keystone XL pipeline, which was rejected by the Obama administration, only to be resurrected by the present administration. However, resurrection is not to be confused with operation, a point that is driven home by the inability of TransCanada to find customers willing to commit to long term contracts. As reported by the Wall Street Journal, at present shippers are relying on rail to move tar sands oil, in spite of its increased costs, since shipping by rail does not require an a priori commitment.

The third leg of the triad is divestment. In the wake of the Dakota Access Pipeline debacle tremendous pressure has been brought to bear on financial institutions that fund the pipelines. One of the first to respond to this pressure was U.S. Bank, which stated its intent to stop what is known as “project funding” for pipeline projects. While welcome news to activists, U.S. Bank’s does not immediately imply a cessation of pipeline funding, a subtlety not lost on the writers of a recent piece on the continued financing of pipeline construction by U.S. Bank.

It is worth remembering that the main driver of the fate of the tar sands oil fields and their pipelines remains the current low price ($47 per barrel) of crude oil, which is not predicted to exceed $55 per barrel even by 2025. This price is well below the $75 per barrel (sustained over a 20-25 year period) considered necessary to support production of the tar sands oil fields. However, it would be incorrect to conclude that price is the sole determining factor. Given the near universal understanding of the incompatibility between production of tar sands oil and the Paris Accord climate goals, it is hopeful that Canada will embrace the connection between the inevitable decline of its tar sands oil fields and its Paris commitments.

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