This House would exploit unconventional oil

According to Shell geoscientist Marion King Hubbert, the production rate of a limited resource will follow a roughly symmetrical logistic distribution curve (similar in shape to the bell-curve) based on the limits of exploitability and market pressures. The peak of world oilfield discoveries occurred in 1965 but global energy demands are still rising (wikipedia, Peak Oil). This means we’ll likely hit ‘peak oil’ in the coming decades, after which global oil production will decline rapidly. The effects of this will be devastating: oil prices will rise, global transport chains will fall silent and the use of many other oil-related products, like plastics, in our everyday life will be near impossible.

The reserves of unconventional oil, however, are so massive that they dwarf the current reserves of conventional oil, the tar sands in Canada alone have estimated reserves of 1.7 trillion and possibly as much as 2.5 trillion barrels of oil equivalent, so that we can effectively postpone ‘peak oil’ for decades, if not centuries (New oil reserves pose threat to OPEC dominance, 2011 and The Status of World Oil Reserves, 2011). This would provide more than enough time to be changing to using other technologies and away from dependence on oil towards more renewable energies.

The threat of peak oil is exaggerated

Sure, one day in the far off future we’ll have finished up the last barrel of oil – assuming we haven’t succumbed to the devastating effects of climate change by then. But that day is definitely not as close as the prophets of peak oil claim. The argument for Peak Oil in the short term relies on a generalization from the production curve of a particular oil field to global oil production. But because many oil fields are government owned, and because they have strategic incentives to mystify how much oil they actually have, the data on which the Peak Oil prediction relies is unreliable. In fact, we have already ‘missed’ several predicted peaks (Closed Coffin, 2001). Another crucial fact Peak Oil doesn’t discount is the ‘unknown unknowns’: we might suddenly make a new discovery of an oil field. For example, the US Energy Information Administration announced in 2009 that they believe that the Arctic region might hold 22% of the world’s undiscovered conventional oil supplies (Arctic Oil and natural gas potential, 2009). With conventional oil not running out in the short term yet, we have more important things to focus on than developing unconventional oil. 

The production costs per barrel of oil from oil sands is somewhere between $40 to $80 per barrel, and from oil shales somewhere between $50 to over $100 per barrel (World Energy Outlook 2008, 2008). The International Energy Agency expects oil prices to be around or over $100 per barrel in the coming decade (Medium Term Oil and Gas Markets 2011, 2011), rising to $120 per barrel in 2035 (World Energy Outlook 2011 Factsheet, 2011), this is exactly what should be expected with surging demand for oil while supply does not keep up. Moreover, with technology advancing, the production cost per barrel for unconventional oil is likely to decline even further as fields are developed (Can non-conventional oil fill the gap?, 2009). That means this is a sound investment decision. 

The production costs the International Energy Agency estimates do not include the costs associated with carbon dioxide emissions (World Energy Outlook 2008, 2008) or any other negative externalities. Given the many other ‘externalities’, like pollution and social cost, the actual cost to society of unconventional oil is a lot higher than the monetary cost. Given the estimates the proposition provides for costs provide relatively little profit margin unconventional oil could easily become unviable should the costs of pollution be brought into the costs of production, for example if a carbon tax was imposed.                         

Moreover, the so-called ‘Energy Return on Investment’, a figure describing the relation between the energy input and output of the production process, for oil shale at least is around 1.5 to 1 (Energy Return on Investment (EROI) of Oil Shale, 2011). In lay terms, that means that unconventional oil requires a whole lot of energy for very little energy gain. 

Currently, global oil supply is dominated by the OPEC-cartel, consisting of countries like Venezuela and Saudi Arabia. In 2010, OPEC-countries held about 80% of the world’s global proven conventional oil reserves, with the bulk of this in the Middle East. This creates a dangerous dependency for all oil-importing countries. Suppose the United States or the European Union would face a serious deterioration in diplomatic relations with the Middle East, after which OPEC would decide to cut oil supplies – the consequences would be dire, as the 1973 oil crisis showed.

Since unconventional oil is found in many places around the world, it offers oil importing countries the possibility to diversify their energy import portfolio, thus lessening the risk of being cut off for political reasons (Unconventional oil shifting the energy balance of power, 2011). Problems affecting the flow of oil from the Middle East are unlikely to affect the flow of unconventional oil from Canada at the same time. 

A lot of the world’s unconventional oil is outside of OPEC. For example, the second largest world oil reserve lies at the Athabasca oil sands deposit in Canada, which is not a member of OPEC (wikipedia, Athabasca oil sands). The United States and other oil importing countries could lessen dependence and thereby stop financing corrupt Middle Eastern regimes via oil imports (Tarred with the same brush, 2010).[1]

[1] In conjunction with this there is a debate in the United States about whether to build a new pipeline system, Keystone, in order to transport oil from tar sands to US markets.

If a nation-state’s energy security works like an investment portfolio, investing in ‘oil’ to diversify from ‘oil’ is not diversification at all, since the two types of oil are assets whose returns correlate. Also, Venezuela, who has the world’s largest proven oil sands deposit, is a member of OPEC, and its leader Hugo Chavez is famously anti-American, so the actual diversification happening is only marginal.

More importantly, energy security is a matter of global energy politics, not markets: OPEC is a political instrument, as shown in 1973 when OPEC punished the West for supporting Israel in the Yom Kippur war. In global political terms, what an investment manager calls ‘diversification’, an international relations theorist calls ‘multipolarity’: instead of one actor calling the shots in the political arena, there are several, competing blocks.  A multipolar strategic arena (i.e. where countries ‘diversify’ from OPEC) is inherently more unstable than a unipolar (i.e. an OPEC-dominated) strategic arena: the opportunity for strategic interactions, thus also strategic miscalculations, is higher, causing systemic unpredictability (see for example The spread of nuclear weapons, 1981 and The Prediction of Unpredictability, 1997). The example of the Athabasca oil sands proves this: whereas previously oil importing nations were ‘price takers’ following OPEC with no conflict between them, suddenly energy rivals China and the USA find themselves in diplomatically fraught negotiations within the borders of a neighbor of the USA (Enbridge and PetroChina Sign Gateway Pipeline Cooperation Agreement, 2005). 

According to Shell geoscientist Marion King Hubbert, the production rate of a limited resource will follow a roughly symmetrical logistic distribution curve (similar in shape to the bell-curve) based on the limits of exploitability and market pressures. The peak of world oilfield discoveries occurred in 1965 but global energy demands are still rising (wikipedia, Peak Oil). This means we’ll likely hit ‘peak oil’ in the coming decades, after which global oil production will decline rapidly. The effects of this will be devastating: oil prices will rise, global transport chains will fall silent and the use of many other oil-related products, like plastics, in our everyday life will be near impossible.

The reserves of unconventional oil, however, are so massive that they dwarf the current reserves of conventional oil, the tar sands in Canada alone have estimated reserves of 1.7 trillion and possibly as much as 2.5 trillion barrels of oil equivalent, so that we can effectively postpone ‘peak oil’ for decades, if not centuries (New oil reserves pose threat to OPEC dominance, 2011 and The Status of World Oil Reserves, 2011). This would provide more than enough time to be changing to using other technologies and away from dependence on oil towards more renewable energies.

The threat of peak oil is exaggerated

Sure, one day in the far off future we’ll have finished up the last barrel of oil – assuming we haven’t succumbed to the devastating effects of climate change by then. But that day is definitely not as close as the prophets of peak oil claim. The argument for Peak Oil in the short term relies on a generalization from the production curve of a particular oil field to global oil production. But because many oil fields are government owned, and because they have strategic incentives to mystify how much oil they actually have, the data on which the Peak Oil prediction relies is unreliable. In fact, we have already ‘missed’ several predicted peaks (Closed Coffin, 2001). Another crucial fact Peak Oil doesn’t discount is the ‘unknown unknowns’: we might suddenly make a new discovery of an oil field. For example, the US Energy Information Administration announced in 2009 that they believe that the Arctic region might hold 22% of the world’s undiscovered conventional oil supplies (Arctic Oil and natural gas potential, 2009). With conventional oil not running out in the short term yet, we have more important things to focus on than developing unconventional oil. 

The production costs per barrel of oil from oil sands is somewhere between $40 to $80 per barrel, and from oil shales somewhere between $50 to over $100 per barrel (World Energy Outlook 2008, 2008). The International Energy Agency expects oil prices to be around or over $100 per barrel in the coming decade (Medium Term Oil and Gas Markets 2011, 2011), rising to $120 per barrel in 2035 (World Energy Outlook 2011 Factsheet, 2011), this is exactly what should be expected with surging demand for oil while supply does not keep up. Moreover, with technology advancing, the production cost per barrel for unconventional oil is likely to decline even further as fields are developed (Can non-conventional oil fill the gap?, 2009). That means this is a sound investment decision. 

The production costs the International Energy Agency estimates do not include the costs associated with carbon dioxide emissions (World Energy Outlook 2008, 2008) or any other negative externalities. Given the many other ‘externalities’, like pollution and social cost, the actual cost to society of unconventional oil is a lot higher than the monetary cost. Given the estimates the proposition provides for costs provide relatively little profit margin unconventional oil could easily become unviable should the costs of pollution be brought into the costs of production, for example if a carbon tax was imposed.                         

Moreover, the so-called ‘Energy Return on Investment’, a figure describing the relation between the energy input and output of the production process, for oil shale at least is around 1.5 to 1 (Energy Return on Investment (EROI) of Oil Shale, 2011). In lay terms, that means that unconventional oil requires a whole lot of energy for very little energy gain. 

Currently, global oil supply is dominated by the OPEC-cartel, consisting of countries like Venezuela and Saudi Arabia. In 2010, OPEC-countries held about 80% of the world’s global proven conventional oil reserves, with the bulk of this in the Middle East. This creates a dangerous dependency for all oil-importing countries. Suppose the United States or the European Union would face a serious deterioration in diplomatic relations with the Middle East, after which OPEC would decide to cut oil supplies – the consequences would be dire, as the 1973 oil crisis showed.

Since unconventional oil is found in many places around the world, it offers oil importing countries the possibility to diversify their energy import portfolio, thus lessening the risk of being cut off for political reasons (Unconventional oil shifting the energy balance of power, 2011). Problems affecting the flow of oil from the Middle East are unlikely to affect the flow of unconventional oil from Canada at the same time. 

A lot of the world’s unconventional oil is outside of OPEC. For example, the second largest world oil reserve lies at the Athabasca oil sands deposit in Canada, which is not a member of OPEC (wikipedia, Athabasca oil sands). The United States and other oil importing countries could lessen dependence and thereby stop financing corrupt Middle Eastern regimes via oil imports (Tarred with the same brush, 2010).[1]

[1] In conjunction with this there is a debate in the United States about whether to build a new pipeline system, Keystone, in order to transport oil from tar sands to US markets.

If a nation-state’s energy security works like an investment portfolio, investing in ‘oil’ to diversify from ‘oil’ is not diversification at all, since the two types of oil are assets whose returns correlate. Also, Venezuela, who has the world’s largest proven oil sands deposit, is a member of OPEC, and its leader Hugo Chavez is famously anti-American, so the actual diversification happening is only marginal.

More importantly, energy security is a matter of global energy politics, not markets: OPEC is a political instrument, as shown in 1973 when OPEC punished the West for supporting Israel in the Yom Kippur war. In global political terms, what an investment manager calls ‘diversification’, an international relations theorist calls ‘multipolarity’: instead of one actor calling the shots in the political arena, there are several, competing blocks.  A multipolar strategic arena (i.e. where countries ‘diversify’ from OPEC) is inherently more unstable than a unipolar (i.e. an OPEC-dominated) strategic arena: the opportunity for strategic interactions, thus also strategic miscalculations, is higher, causing systemic unpredictability (see for example The spread of nuclear weapons, 1981 and The Prediction of Unpredictability, 1997). The example of the Athabasca oil sands proves this: whereas previously oil importing nations were ‘price takers’ following OPEC with no conflict between them, suddenly energy rivals China and the USA find themselves in diplomatically fraught negotiations within the borders of a neighbor of the USA (Enbridge and PetroChina Sign Gateway Pipeline Cooperation Agreement, 2005). 

A report by the World Wildlife Fund (WWF) finds that exploitation of North America’s shale and tar-sand oil reserves could increase atmospheric carbon dioxide levels by up to 15% (Unconventional Oil, 2008). This calculation is not only based on the additional amount of carbon dioxide that using this fossil fuel will generate, but also the amount of carbon dioxide emitted during the extraction of oil and the amount of so-called ‘carbon sinks’, natural resources that absorb carbon dioxide, destroyed. The Environmental Protection Agency estimates that the greenhouse gas emissions from Canadian oil sands would be about 82% greater than average crude refined in the U.S. on a well-tank basis.(United States Environmental Protection Agency , 2010)

Research done by independent energy consultants IHS CERA finds that unconventional oil from Canada’s tar sands would emit 5% to 15% more carbon dioxide ‘from well to wheel’ than regular crude (Oil Sands, Greenhouse

Gases, and US Oil Supply, 2010). That’s an increase, but by far not as much as the opposing side claims. Moreover, new technologies like carbon capture and storage can mitigate the extra emitted carbon dioxide, making this a feasible alternative.   

Developing unconventional oil requires large amount of land and water – land and water that people use to live off. The environmental hazards translate to severe health risks, like concerns over increased rates of cancer (Unconventional Oil, 2008). Moreover, the ‘boom town development’, where suddenly large groups of oil workers arrive in local communities, disrupts their normal patterns of living. That’s why, for example, Canada’s First Nations have resisted development of oil sands (Athabasca Chipewyan First Nation serves Shell Canada with intent to Sue over tar sands projects, 2011)

This is not an argument against oil sands per se: most mining goes on in unpopulated areas. The impact that development of unconventional oil has on local communities is something that should be carefully regulated by governments. In the example of Canadian oil sands, even while there is no evidence that exploiting oil sands leads to increased cancer rates, the Royal Canadian Society still recommends that both government and oil companies monitor the situation closely so as to address First Nations’ concerns (Environmental and Health Impacts of Canada’s Oil Sands Industry, 2010).

Oil sand operations lead to deforestation, particularly when the mining is on the surface, and damage to peatland and wetlands. These landscapes are the home to (endangered) species. The production of oil sands is also water intensive, averaging three barrels of water to produce a single barrel of oil. The wastewater gathers in ‘tailing ponds’, which contain high levels of napthenic acids from the bitumen, which is toxic to wildlife and aquatic life (Unconventional Oil, 2008). In the case of Canada’s Athabasca tar sands these ponds cover 130 sq km and are leaking 11 million litres of toxic water into the Athabasca river and groundwater every day.(WWF) Finally mining is also energy intensive in itself; 1,200 cubic feet (34 m3) of natural gas is required to produce one barrel of bitumen from sub surface and about 700 cubic feet (20 m3) for surface deposits. This is however a large energy gain as a barrel of oil equivalent is about 6,000 cubic feet (170 m3) of gas.(National Energy Board, 2011)

The Royal Society of Canada researched the environmental and health impact of exploiting oil sands. For many of the problems mentioned, they concluded that there are strategies available to reduce the environmental impact to zero. Forests can be replanted and tailing ponds can be reclaimed (Environmental and Health Impacts of Canada’s Oil Sands Industry, 2010). Oil companies in Canada are actually taking the effort to do this, so much so that Greenpeace Canada co-founder Patrick Moore concluded that the oil companies leave the environment better off than it was before (Oil sands necessary, 2011).