Trying to read the Rune’s on the future oil market must be a tough proposition for North American oil refiners. They not only have to predict the direction of oil prices and of likely demand but also second guess the pace and direction of environmental legislation impacting their industry. That may seem like a no-brainer. It will get tougher you would say, but at the same time that President Obama is making pro environmental noises ultimately ineffective, at the failed Copenhagen summit his administration had already approved a 1000 mile pipeline to carry up to 800,000 barrels a day of oil from Canada’s oil sands deposits to American refineries. The project, likely to cost some USD 2bn, has faced tough opposition from environmental groups keen to keep Athabasca oil sands crude out of the US.
Meanwhile the refineries are making massive investments to accommodate the heavy high bitumen and sulfur containing crude from the oil sands in the belief this will be a long term feature of the refining mix in North America in the future. At least two proposals for new refineries and about a dozen expansions to process tar sands have been made in 2009 according to an article in the Financial Times. The article says many refinery expansions are already underway including those by BP, ConocoPhillips, Valero and Marathon. Analysts are quoted as estimating pipeline companies and refiners plans to invest more than USD 31bn by 2015 to export, process and distribute oil sands products creating a huge opportunity for stainless and steel suppliers to the industry. You can understand the refiners’ enthusiasm. The tar sands reserves are estimated at 175bn barrels of oil and they could see oil companies making plans to pour money into oil sands production as the oil price rose in 2007/8. But some of the steam has gone out of that market as environmental pressures have mounted. Shell is raising its tar sands production with the $14bn expansion of its 60% owned Athabasca Oil Sands Project to a capacity of 255,000 barrels a day due to be completed next year but have shelved earlier plans to raise production to 700,000 barrels a day. It’s not just the oil price either. Operators are reducing project cost estimates as post recession costs feed through and a switch to more conventional technologies is adopted. Husky Energy and BP have reduced their cost estimates at their Sunrise project to USD 2.5bn from an earlier USD 3.8bn. The scaling back of project plans has more to do with concerns over the medium to long term viability of tar sands extraction that emits high levels of green house gasses. In an increasingly carbon centric investment environment, oil companies worry that they should not over invest in a resource where producing a barrel of synthetic crude from oil sands results in greenhouse gas emissions three to five times greater than a barrel of conventional crude.
So although the Canadian tar sands are known to contain the second largest probable reserves after Saudi Arabia, unless a wholly new and much less polluting way of extracting them is developed they are likely to remain very much a marginal source for US oil supplies. The refining capacity may be in place and a new pipeline can move the raw material from source to market but if producers are not willing to pour the billions into developing the extraction facilities the Athabasca oil sands reserves will remain a sideshow.