Oil sands: Citi gives a tick for carbon costs, but a cross for emissions

One focus of BP’s annual general meeting today is the company’s plans for tar sands (aka oil sands), the heavy, emissions-intensive crude that is abundant in Canada. A campaign led by FairPensions is calling for more disclosure about the economic, financial and environmental reasoning behind both BP’s and Shell’s investments in oil sands projects.

Citi’s oil industry analysts have looked at many of the current and planned oil sands projects and given them a nod for carbon price risk — but not for emissions. That could be a problem, because campaigns like FairPensions’ one are making investors wary of putting money into companies perceived as dirty – CalPers, the US’s largest public pension fund, has already joined the tar sands campaign.

But Citi’s analysts warn that the companies should expect  campaigns to continue. For its part, BP will maintain its plans and argues that it has already disclosed its oil sale price estimates ($60 – $90) and carbon price range (up to $40) on which it says its oil sands projects will remain financially viable.  Shell has brought forward the release of a report on its projects, but will be under pressure to provide more detail at its AGM later this month.

Citi says that the CO2 price, at least, does not appear likely to pose a problem for tar sands operators:

Shell is currently paying around $2/tCO2 for emissions across the Athabasca Oil Sands Project (AOSP) with less than 1% impact on project NPV. Under our most aggressive (and unlikely) scenario, assuming no improvement in emissions and extension of CO2 cost to total emissions, this would only rise to 3%.

For example, if Shell had to pay $15 for every tonne of CO2 equivalent emitted in its Athabasca projects in 2008, this would have resulted in a charge to the company of $31.5m. Yet that would have equated to just 3.3 per cent of the project’s net present value.

As for end user standards, such as the Low Carbon Fuel Standard being adopted in California, Citi believes that “significant engagement” by the industry will result in a relatively favourable outcome for the tar sands industry; and consumers, they add, will likely bear the additional costs in any case.

BP and Shell are not off the hook by any means, however. Citi says the likelihood of big reductions in emissions being effected are unclear, at best.

Shell’s efficiency efforts in Athabasca, it notes, haven’t stopped emissions intensity actually rising between 2005 and 2008, while carbon capture and storage is questionable in terms of both cost and scalability. New, cleaner in-situ extraction techniques, which avoid actually mining, are still being tested and little data is available on their effect. Steam-assisted gravity drainage (SAGD), comes in for particular criticism – to significantly reduce emissions it would need to be powered by nuclear, something that appears highly unlikely.

The analysts also criticise BP for the lack of comparable emissions data on the proposed Sunrise in-situ project, saying this “is at best irritating for sustainability analysts, and at worst inflaming anti-oil sand campaigns, and we would urge greater disclosure from project operators.”

Citi says from its conversations that it is confident the companies are taking the questions over the viability of tar sands projects seriously, and that the financial risks are low. But it concludes (Citi’s emphasis):

Oil sand extraction today is more carbon intensive than it could be, and more
polluting than some other sources of fuel. It is not a fuel source that sits
naturally within a low carbon economy and is unlikely to be a strategic winner
as climate regulation tightens, albeit gradually, in North America.

For all the effort spent in explaining projects to improve efficiency and capture
emissions, companies are only aiming to bring tar sands derived fuels down to
the average conventional fuel
, sometimes including a caveat that over time the
average CO2 intensity for conventionals will naturally rise.

Tar sands are not, and are unlikely to become, a low carbon fuel option. We
therefore expect institutions marketing products based on climate-aware
investment strategies to continue being challenged by their clients and
environmental campaigners if found to be exposed to this industry.

A bit of a mixed report, then.

Related links:

How the majors see ‘business as usual’ on oil and climate - FT Energy Source
Do peak demand plus tar sands spell doom for oil majors? - FT Energy Source

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