Greens and nationalists draw North-South lines in oilsands

VANCOUVER — Alberta and Venezuela host most of the world’s heavy oil deposits, with both areas containing recoverable reserves comparable to those of Saudi Arabia. But given the choice between investing in Venezuela and Alberta, Western oil giants can only opt for the latter since the Venezuelan government effectively nationalized the oil-rich Orinoco River basin by doubling its share of exploration and development ventures to an average of 78% and raising taxes and royalties.

U. S. oil giants Exxon Mobil (XOM-N) and ConocoPhillips (COP-N) pulled out of their Venezuelan projects, but several European firms accepted the “take-it-or-leave” ultimatum delivered by Venezuela’s Oil Minister Rafael Ramirez, that now includes a 50% tax on foreign oil companies when crude tops US$70 per barrel, rising to 60% when the average monthly price exceeds US$100.

Venezuela’s state-run oil company Petroleos de Venezuela (PDVSA) is still looking almost exclusively to foreign companies to develop heavy oil projects in the Orinoco basin, but its new partners and suitors are almost exclusively state-owned oil companies from China, Iran, Russia, Cuba, Ecuador and Bolivia, among others. Most of these companies have little or no heavy oil mining and upgrading expertise.

Venezuela’s Orinoco Belt produces an estimated 600,000 barrels per day of ultra-heavy crude oil and the government is looking to triple production over the next five years. This poses a challenge as development of extra-heavy crude oil — viscous material similar to Alberta’s oilsands — is less than a decade old in Venezuela, except for about 100,000 barrels per day of Orimulsion, a cheap but dirty bitumen-in-water emulsified fuel used in thermal power plants, mostly in Third World countries. To make matters worse, almost half the workers at PDVSA went on strike in 2002 to protest new government polices and almost 18,000 were fired soon after. Many of them have since migrated to oil patches around the world, including Canada.

In contrast, Canadian oilsands development began in the 1960s, accelerated in the 1980s and 1990s, and now accounts for more than half the 1.9 million barrels of ultraheavy oil produced worldwide. According to the Canadian Association of Petroleum Producers (CAPP), oilsands production in Canada averaged 1.1 million barrels per day in 2006, and is expected to rise to 3 million barrels per day in 2015, and 3.8 million by 2020.

A 2007 study from the Canadian Energy Research Institute (CERI) is more bullish and projects that production could climb to almost 6 million barrels of raw bitumen per day by 2018, assuming a goahead for all projects on the drawing board. Even under a more realistic assessment factoring in delays and deferrals, CERI still projects that oilsands production will reach 6 million barrels per day, but not until 2022-26.

Conventional thinking is that Venezuela’s nationalist policies will delay or impair development of its new heavy-oil projects. The nation’s total oil output fell 5% in 2007, according to Venezuela’s central bank, a figure often touted by critics as grossly understated or as a harbinger of things to come.

Canada has serious challenges too, according to investment firms. In a less-than-subtle swipe at Alberta Premier Ed Stelmach, Deutsche Bank released a report last fall entitled The Bolivarian Republic of Alberta, which claimed that Alberta was following Venezuela’s lead on several fronts through its “power to the people” policies advocated by “Stelmachistas.”

“Despite the fact that Canada is in no danger of being overthrown, a succession of changes to the fiscal environment in Canada puts a serious dent in one’s ability to refer to Canada’s investment environment as particularly ‘stable,'” the report stated, citing cancelled tax incentives, greenhouse gas regulations and proposed royalty and tax changes.

Deutsche Bank warned that these issues threatened an industry already struggling with escalating costs and labour issues, and which already had some of the lowest rates of return and highest inherent risks.

While Alberta’s proposed new royalty rates faced strong industry opposition in late 2007, the final outcome was not as severe as feared. In response to industry pressure, Alberta introduced a sliding-scale royalty regime for oilsands ranging from 1-9% prepayout and 25-40% post-payout, depending on the price of oil. The government has since introduced two new royalty programs designed to encourage the development of deep, high-cost oil and gas reserves in response to concerns that some projects could become uneconomic under the new royalty framework.

The Alberta government allowed the environmental “costs of doing business” as eligible expenditures in the formula used to determine when a project has reached payout status. This policy acknowledged the serious environmental challenges faced by the oilsands industry, notably the perception that further development will make it impossible for Canada to achieve its commitments to reduce greenhouse gases under the Kyoto Protocol.

Some oil companies are being challenged on both environmental and nationalist fronts. Exxon Mobil made headlines around the world when it sued PDVSA for expropriating its investments in Venezuela’s oil industry, a move described as “judicial terrorism” by Hugo Chavez, Venezuela’s bombastic president and architect of the “Bolivarian Revolution.” In Alberta, Exxon Mobil and affiliated operating partner Imperial Oil (IMO-T, IMO-X) were sued by a consortium of environmental groups hoping to block development of their Kearl oilsands project north of Fort McMurray.

Kearl is a proposed open-pit mine being developed in stages, starting as early as 2010 at about 100,000 barrels per day. Two additional phases will follow in 2012 and 2018, for a maximum production of 345,000 barrels per day. Based on drilling to date, total recoverable bitumen is estimated at 4.6 billion barrels. Capital costs were estimated at $5-8 billion in 2005, but have likely escalated significantly since then.

Environmental groups focused on the Kearl project after a joint review panel was established by the federal environment minister and the Alberta Energy and Utilities Board (EUB) to assess the environmental effects of the proposed project, pursuant to the Canadian Environmental Assessment Act (CEAA).

The panel considered two applications — one to build and operate the oilsands mine and another for an associated co-generation facility — at public hearings for two weeks in November 2006. In early 2007, the panel approved the applications and concluded that the project was “not likely to cause significant adverse environmental effects,” provided that certain proposed mitigation measures and recommendations were implemented.

After joining forces with Toxics Watch Society, Prairie Acid Rain Coalition and Sierra Club of Canada, the Pembina Institute filed an application for judicial review of the decision with a federal court, contending that the joint panel had “failed to comply” with the mandatory steps prescribed by CEEA and the joint panel agreement. They specifically cited three key issues: cumulative effects management related to watershed management and landscape reclamation; endangered species; and greenhouse gas emissions.

The court found no reviewable errors on the first two grounds, but concluded that the joint panel had “failed to provide rationale” in support of its conclusion that the project “is not likely to result in adverse environmental effects to air quality, providing that mitigation measures and recommended proposals are implemented.” The court remitted this matter back to the joint panel, directing it to provide additional rationale for this conclusion.

The ruling sent shock waves through the industry as the environmental groups had successfully challenged the mechanism of project assessment, which is based on intensity targets rather than net greenhouse gas emissions from the projec
t. Kearl is but one of 46 existing and proposed oilsand projects, encompassing 135 individual project expansion phases in various stages of execution, with collective capital costs expected to exceed $200 billion.

Under intensity-based targets, Imperial Oil could mitigate emissions from Kearl through greenhouse gas reduction programs unrelated to the project. But the court sided with environmental groups that argued Kearl would lead to a 3.7-million-tonne increase in greenhouse gas emissions, “equivalent to 800,000 passenger vehicles,” or about 1.7% of Alberta’s total emissions. Based on this court decision, the federal fisheries department then revoked its water permit, which had allowed Imperial to prepare the site for mining activities.

The joint panel was reconstituted on April 11, 2008, in order to provide a rationale required by a federal court judge in support of its conclusion. It came to the same conclusion that the project would not adversely effect “air quality,” but emphasized — as it had before — that “the governments of Canada and Alberta must address the issue of greenhouse gas emissions and other key issues with urgency if development of the oilsands is to continue at the proposed pace.”

The environmental groups went on the offensive again, claiming that the panel had “confused the issues of greenhouse gas emissions and smog-generating air pollutants.” While these groups have been accused of doing the same thing when it suits their purposes, they did succeed in putting the contentious issue of greenhouse gases on the boardroom table and back in the government’s lap.

Imperial, meanwhile, went back to court arguing that the government had erred by voiding the fisheries permit and warning that the decision could delay the project by a year or more. In mid-May, a federal court backed the previous decision, stating that the government had indeed acted properly.

With the updated rationale by the joint panel now in place, Imperial’s permit could be granted this summer. In the meantime, the company says it is working with the government to comply with the process to reissue the authorizations required to allow the Kearl project to proceed. If the permit is not granted, the governments of Alberta and Canada will be under intense pressure to clarify uncertainties related to greenhouse gases and mitigation measures.

Venezuela is also a signatory to the Kyoto Protocol and has envistream, ronmental groups critical of heavy-oil development in the Orinoco River region, which is world famous for its biodiversity. But their message isn’t resonating in a gas-guzzling nation that views cheap oil as a birthright or with a government that takes pride in providing oil at low cost to struggling socialist nations (such as Cuba) that support its Bolivarian Revolution.

Venezuela believes it can continue to produce ultra-heavy oil more cheaply than Canada, because of its lower labour costs and more favourable geological and climatic conditions. Critics — Exxon Mobil among them — believe PDVSA will not have an easy time attracting the immense capital and technical talent needed to make deep heavy-oil projects a success.

The American oil giant is toeing the line in Alberta, but hasn’t backed away from its battle with Chavez, entrenching its status as the oil company the world loves to hate.

As one senior Exxon executive told a business school audience: “Someone has to put a stake in the sand and say, ‘Look, if you do this and these new terms allow you to do this, it’s a slippery slope.'” –The author is a Vancouver-based freelance writer specializing in mining issues, and a former editor of The Northern Miner.