Just as is the case in the American tight (shale) oil plays, things in the Canadian tar sands are breaking down fast, and for the same reason: wringing the last few barrels of oil out of the earth is proving to be far more expensive than hoped. Two weeks ago the Norwegian energy giant Statoil postponed for at least three years building a new tar sands project designed to pump 40,000 barrels a day; earlier this year Total SA of France, the fifth-largest oil company in the world, suspended operations at its $10 billion oil sands mine while it tries to figure out a way to make a profit; and Shell announced in February indefinite suspension of work on a prospective 200,000-barrel-a-day mine. (The same Shell that has been quietly folding its 13-billion-dollar hand in the US shale-oil bonanza and tiptoeing from the building? Yes, the very same.)
Meanwhile the US government remains catatonic about deciding whether to permit a pipeline to be built from Canada to the Gulf of Mexico to carry a product that no one seems to be able to produce profitably, to refineries whose customers are overseas.
About the product: it’s not crude oil, it’s cruder than that. It is called dilbit, short for diluted bitumen. It’s thicker and more corrosive than crude, making it impossible to pipeline unless it’s diluted with highly volatile and toxic fluids that make dilbit more flammable and toxic than crude, which means more spectacular explosions and sicker people when things go wrong.
And it is hideously expensive to produce. Scraping, washing, or steaming it out of the ground takes copious amounts of fuel for machines the size of apartment houses; heating it to separate the tar from the sand takes enough natural gas to boil the Great Lakes, and washing it takes enough water to fill a Great Lake every day. (these amounts are approximated*, for your easy comprehension).
Seriously, and more precisely, a study last year found that for every unit of energy used to bring crude oil to market, the crude returned 25 units of energy when burned; for dilbit boiled out of the ground, the return was 2.9 units. The author of the study said that if you take everything into account it looks more like 1:1.
After all this, the product must be sold cheaply because from a refiner’s point of view it is a terrible product, much harder to convert to a usable fuel than any crude. The usual discount is $20-$30 per barrel below the prevailing price for crude. Even at crude prices of $100 per barrel, dilbit barely breaks even; now that crude is running $10 below that, dilbit is even more snakebit.
Costs of labor, infrastructure and transportation are rising in the tar pits even as the global price of oil is (temporarily) falling. According to one analyst quoted by the Financial Post, “Even with oil at more than $100 per barrel, some large producers have been cancelling projects because higher costs have crimped returns.” And another said that a number of oil sands projects would be economically impractical at oil prices below $130 per barrel.
Because they are even more exposed to the accursed economics of oil than its other forms, the tar sands demonstrate sooner and more clearly what is happening to the industry: rising prices as the oil gets ever harder to find and extract; falling prices, not because of increasing supply, as the media talking heads would have it, but because increasingly people can’t afford to buy the stuff; and a flight of capital as the Masters of the Universe furiously stuff their cash under their mattresses.
They are beginning to wish they had never touched the tar sands baby.
[* approximated, here as in most other writings about oil, means “made up.”]