More oil sands in the pipeline than the future will want: IEA
Alberta has already approved far more oil sands production than the world will want according to the International Energy Agency (IEA).
If the IEA is right, it means an end to new oil sands project approvals and probably an abandonment of some that have already been approved. It also means Canadians might want to re-evaluate the need for bitterly controversial new tar sands pipelines—like Keystone XL, Northern Gateway and the Trans Mountain twin.
Let's take a look at some of the details.
The IEA has arguably the world's most detailed and comprehensive database on global energy. Their flagship annual report—World Energy Outlook—is an essential resource relied upon by many of the world's major economies, as well as global energy industries. The IEA's 2010 World Energy Outlook report specifically analyzed future oil sands demand under several possible energy scenarios. In every scenario, global demand for oil sands in 2035 was well below what has now been approved.
What makes this analysis so remarkable is that the IEA is a friendly proponent of the oil sands. They open their report saying "production from Canadian oil sands is set to continue to grow over the projection period, making an important contribution to the world’s energy security." No greenie tree-huggers there.
But the IEA are also hard-nosed economists who include in their analysis the reality that high production costs coupled with high carbon emissions will hurt the competitiveness of the oil sands in the future. They conclude that there are already more oil sands projects in the pipeline than will be needed to supply future demand.
My chart below details this oil supply and demand mismatch:
The red column shows that already approved projects will be able to deliver 5.2 million barrels of oil a day (mmbpd). Additional projects to deliver another 3.8 mmbpd are working towards approval. Both the industry and the Alberta government say they are planning for 5.0 mmbpd to be flowing out the taps by 2030, with more supply coming soon after.
For comparison, my chart shows the high-end and low-end of the IEA demand scenarios for the year 2035.
Lowest demand scenario
In the most hopeful IEA scenario, humanity limits climate change to two degrees Celsius—which is more than double warming so far. Two degrees is the threshold above which most climate scientists say an overheating climate becomes dire and dangerous for us.
As US President Obama warned in his acceptance speech last week, the "destructive power of a warming planet" is a growing threat that must be addressed.
In this scenario, the IEA says global demand for oil sands will be 3.3 mmbpd. Over a third of the 5.2 mmbpd the industry already has approval for, and is planning to produce, won't be economically viable.
In fact future demand can be met almost entirely with currently producing projects plus those in construction. About 90 per cent of projects already approved but not being built yet won't be needed.
Highest demand scenario
The IEA's most pessimistic scenario has humanity choosing a dirty energy path leading to a climate "catastrophe" of six degrees Celsius of global warming. As the IEA said when releasing their report: "Everybody, even the schoolchildren, knows this is a catastrophe for all of us." (See: Climate “catastrophe” of 6C dead ahead: IEA.)
But, even in this dystopian future of climate misery, the IEA says that only 4.6 mmbpd of tar sands oil will be economically viable. This is still well below the industry game plan of 5.0 mmbpd by 2030, rising to 6.0 mmbpd by 2035.
However you slice it, it is looking increasingly likely that demand for Alberta's oil sands will fall well short of even today's commitments. The endless growth scenario is looking more like a long walk on a short pier. Albertan's would be wise to protect themselves from this risk while they still can.
A study by Massachusetts Institute of Technology (MIT) titled "Canada’s Bitumen Industry Under CO2 Constraints" backs up the notion that Alberta's oil sands will struggle to compete in a low-carbon future. Its conclusions are blunt:
"The niche for the oil sands industry seems fairly narrow and mostly involves hoping that climate policy will fail..."
"When there is substantial participation of developing countries in a climate policy there appears to be little role for Canadian oil sands..."
"… with CO2 emissions caps implemented worldwide, the Canadian bitumen production becomes essentially non-viable even with CCS technology."
The threat of over-capitalizing the industry leading to many billions in stranded assets and punishing debt burdens is real. For a glimpse of such a future the Albertans can just look across the border at what is happening to the US coal industry.
Fall of the king
As I wrote recently, King Coal is struggling to avoid sliding off just such a carbon cliff. Their plans for rapid growth have quickly morphed into collapse. (See: Rapid collapse of USA coal holds warning for tar sands.)
Major US coal companies have seen their stock prices get slashed in half this year. Billions in assets are being stranded or sold at pennies on the dollar. Credit ratings are plunging as debt load from boom time dreaming is weighing down balance sheets. Energy economists at the US government's Energy Information Administration (EIA) determined that US coal demand would virtually disappear under moderate climate policies. A modest and rising carbon price would see a 92 per cent decline in coal burning by 2035.
It is global warming, stupid
America's coal industry ignored the basic facts that climate change is real, it is dangerous and therefore carbon emissions will become ever more restricted and expensive in the future. Despite clear warnings from top energy economists, the American coal industry gambled big money on expansion plans even as they were plunging headlong into the low-carbon future. That hubris and swagger is now looking like a losing bet for both its shareholders and the coal communities.
Instead of taking the risk seriously and using the value in their resource to fund a graceful transition to a more sustainable future economy, the players on the stage shook their fists in defiance against the coming storm until it literally crashed over them.
The reality is that high-carbon fuels, no matter how abundant, face a very challenging economic future as climate change tightens its grip on our lives. Of all the forms of coping, in the end denial is the least successful.
For decades climate scientists have warned that climate change was coming and it would be nasty if we didn't act.
We didn't. In recent years more and more of the world's top energy economists are starting to warn in very stark language that the dirtiest of our fossil fuels are incompatible with a safe climate system.
We are facing a choice: either we leave the dirtiest fuels in the ground or we inject our climate system with so many "steroids" that increasingly chaotic and extreme weather will threaten our food supply, water supply and trillions of dollars in infrastructure.
The extreme weather we have experienced in recent years comes after just 0.8 C of warming. The IEA says our high carbon path will lead to nearly eight times that much—6.0 C of warming—during the lifetime of today's kids.
Yet even on that miserable path we don't need all the tar sands we have already approved.
Sell by expiry date
Perhaps, the game afoot in Alberta and Ottawa is to off-load on foreigners as much of our tar sands deposits and infrastructure as we can before the expiry date.
Or perhaps, like King Coal, dot-com investors and the recent Romney campaign, the people in charge are just too invested in the dream to accept any unpleasant reality that spoils their narrative. Perhaps Alberta and Ottawa really will fail to act on the clear and present danger. If so, we will all be forced to wait and watch as unpleasant reality crashes the party and we are left to pick up the pieces.