This House would exploit unconventional oil

This House would exploit unconventional oil

There are several types of unconventional oil, like oil sands and oil shale. Oil sands, tar sands, or bituminous sands are ‘unconventional petroleum deposits’, basically sand and mud mixed with extremely viscous oil (‘bitumen’). This thickness makes it difficult to extract and refine petroleum from these sands. Oil sands are found in large amounts in many countries throughout the world, but are found in extremely large quantities in Canada and Venezuela.

Oil shale is an organic-rich fine-grained sedimentary rock that contains basic material for oil. Mining shale oil can be complicated. The mining is done by open cast mining, and then the bitumen needs to be extracted from what has been mined. This involves adding hot water at 50-80˚C which forms slurry where it is separated with the bitumen recovered by flotation as bitumen froth. The recovered bitumen froth is then cleaned to get rid of solids and water. There are also now alternatives for if the mining is not on the surface but is underground whereby steam is injected so as to make the sands into a liquid so that it can be pumped like conventional oil.

Unconventional oil has become politically and economically relevant only recently: given the finite supply of ‘conventional’ oil, rising oil prices and technological advances, unconventional oil seems to have become viable for commercial exploitation. This casefile looks at the costs and benefits involved, from a public perspective. 

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Points-for

Points For

POINT

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.

COUNTERPOINT

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. 

POINT

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. 

COUNTERPOINT

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. 

POINT

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.

COUNTERPOINT

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). 

Points-against

Points Against

POINT

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.

COUNTERPOINT

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. 

POINT

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. 

COUNTERPOINT

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. 

POINT

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.

COUNTERPOINT

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). 

POINT

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)

COUNTERPOINT

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.   

POINT

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)

COUNTERPOINT

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).

POINT

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)

COUNTERPOINT

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).

Bibliography

Amy Myers Jaffe, Kenneth B. Medlock III, Ronald Soligo, ‘The status of world oil reserves: conventional and unconventional resources in the future supply mix’.  October 2011, published by the James Baker III Institute. URL for download: http://bakerinstitute.org/publications/EF-pub-WorldOilReserves-101911.pdf  Last consulted: December 21, 2011

ArabNews, ‘Unconventional oil shifting the energy balance of power’, November 22, 2011. http://arabnews.com/economy/article536856.ece Last consulted: December 21, 2011

BusinessWire, ‘Enbridge and PetroChina Sign Gateway Pipeline Cooperation Agreement’, April 14, 2005. URL: http://www.businesswire.com/news/home/20050414005512/en/Enbridge-PetroChina-Sign-Gateway-Pipeline-Cooperation-Agreement Last consulted: December 22, 211

Cutler J. Cleveland and Peter A. O’Connor, ‘Energy Return on Investment (EROI) of Oil Shale’, 2011. Sustainability, 2011, Volume 3, p. 2307-2322. URL for PDF: http://www.mdpi.com/2071-1050/3/11/2307/

The Economist, ‘Tarred with the same brush’, August 5, 2010. URL: http://www.economist.com/node/16743977?story_id=16743977 Last consulted: December 22, 2011

Fernandez, Jose W., and Jones, Kerri-Ann, ‘Review of Draft Environmental impact Statement for the Keystone XL project’, United States Environmental Protection Agency, 16 July 2010, http://yosemite.epa.gov/oeca/webeis.nsf/%28PDFView%29/20100126/$file/20100126.PDF?OpenElement

IHS CERA, Oil Sands, Greenhouse Gases, and US Oil Supply: Getting the Numbers Right. 2010. URL for download: http://www.ihs.com/products/cera/energy-industry/oil-sands-dialogue.aspx Last consulted: December 22, 2011

Indigenous Environmental Network, ‘Athabasca Chipewyan First Nation serves Shell Canada with intent to Sue over tar sands projects’, 2011. URL: http://www.ienearth.org/tarsands.html  Last consulted: December 22, 2011

International Energy Agency, World Energy Outlook 2008. 2008. URL for PDF: http://www.iea.org/textbase/nppdf/free/2008/weo2008.pdf Last consulted: December 22, 2011

International Energy Agency, Medium Term Oil and Gas Markets 2011. 2011. URL for PDF: http://www.iea.org/Textbase/npsum/mtogm2011SUM.pdf Last consulted: December 22, 2011

International Energy Agency. World Energy Outlook Factsheet. 2011. URL for PDF: http://www.iea.org/weo/docs/weo2011/factsheets.pdf Last consulted: December 19, 2011.

Michael C. Lynch, ‘Closed Coffin: Ending the debate on ‘the end of cheap oil’, september 2011. URL: http://sepwww.stanford.edu/sep/jon/world-oil.dir/lynch2.html  Last consulted: December 21, 2011

National Energy Board, ‘Canada’s Oil Sands – Opportunities and Challenges to 2015: An Update – Questions and Answers’, 28 October 2011, http://www.neb.gc.ca/clf-nsi/rnrgynfmtn/nrgyrprt/lsnd/pprtntsndchllngs20152006/qapprtntsndchllngs20152006-eng.html

The National Post, ‘Oil sands necessary: Greenpeace co-founder’, September 27, 2011. URL:http://www.nationalpost.com/sands+necessary+Greenpeace+founder/5462081/story.html  Last consulted: December 22, 2011

Peak Oil, ‘New oil reserves pose threat to OPEC dominance’, november 27, 2011. URL: http://peakoil.com/geology/new-oil-reserves-pose-threat-to-opec-dominance/  Last consulted: December 21, 011

Alvin M. Saperstrein, ‘The prediction of unpredictability: applications of the new paradigm of chaos in dynamical systems to the old problem of the stability of a system of hostile nations’, 1997. In: L. Douglas Kiel & Euel Elliott (editors), Chaos Theory in the Social Sciences. Foundations and applications. 1997, The University of Michigan Press, Ann Arbor.

David Strahan, ‘Can non-conventional oil fill the gap?’, 2009. URL: http://www.davidstrahan.com/blog/?p=408  Last consulted: December 22, 2011.

US Energy Information Administration, ‘Arctic Oil and Natural Gas Potential’, October 2009. URL: http://www.eia.gov/oiaf/analysispaper/arctic/index.html  Last consulted: December 21, 2011

Kenneth Waltz, ‘The Spread of Nuclear Weapons: More May Better’, 1981. Adelphi Papers, Number 171, International Institute for Strategic Studies, London. URL: http://www.mtholyoke.edu/acad/intrel/waltz1.htm  Last consulted: December 22, 2011

Wikipedia, ‘Peak Oil’.URL:  http://en.wikipedia.org/wiki/Peak_oil Last consulted: December 21, 2011

Wikipedia, ‘Oil reserves in Venezuela’. URL: http://en.wikipedia.org/wiki/Oil_reserves_in_Venezuela  Last consulted: December 21, 2011

Wikipedia, ‘Atbasca Oil Sands’, URL: http://en.wikipedia.org/wiki/Athabasca_Oil_Sands  Last consulted: December 22, 2011

WF, Unconventional Oil: Scapring the bottom of the barrel? 2008. URL for PDF: http://wwf.panda.org/wwf_news/?142181/Scraping-the-bottom-of-the-oil-barrel-a-significant-new-climate-risk Last consulted: December 22, 2011

WWF, ‘Oil Sands’, http://www.wwf.org.uk/what_we_do/changing_the_way_we_live/oilsands.cfm

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