Our Tar-Sands Outlook, Part 1: Costly Opposition, in Perpetuity

By TOM SANZILLO

The bottom line on the financial analysis we published last week around Canadian tar-sands development is that public opposition has cost and will continue to cost the industry billions of dollars in lost revenues.

These are not untold billions. Our analysis shows that half of these lost revenues from 2010-2030 — $17 billion — have come or will come from public opposition that has forced delays or cancellation in developing the tar sands. These are real, material risks.

For their business model to work, tar-sands producers will require improved access to global markets, and better prices for what they’re selling. Current transportation bottlenecks are a major factor in the industry’s inability to get higher prices. More pipeline capacity would provide the access they seek and a crucial revenue boost to improve profit margins, stock performance and to meet company growth projections.

Put another way, pipeline expansion is vital to the industry for the simple reason that it would go a long way toward achieving objectives that include production expansion from 2 million barrels to 4.8 million barrels per day.

Recent events suggest that such goals are unachievable. The Canadian Association of Petroleum Producers and others have indicated that aggressive plans for tar-sand development will probably not materialize as originally thought. Three significant projects sponsored by foreign investors have been cancelled recently. Our report notes also that recent public policy and market changes in Canada are posing market access problems for many of the smaller, Canadian based tar-sands companies.

A substantial force behind these changes is the opposition that has taken root and is spreading, showing a strength and resilience that can be seen in four characteristics especially:

Permanence. Public-accountability campaigns have become a permanent fixture in the public-policy dialogue around tar-sands development. Public sentiment toward specific projects — the best-known example being the opposition to the Keystone XL pipeline — and a more general concern around climate and environmental issues.

Talent. The many campaigns against tar-sands development bring together a capable and savvy group of people who run the gamut from concerned workaday citizens to committed billionaires who share a common vision for another way forward.

Resources. These campaigns against tar-sands development are well equipped — intellectually, financially and politically — to use the tools of public accountability to demand that standards of public health, environmental protection and climate mitigation are taken seriously by the institutional caretakers of this public trust.

Sophistication. These campaigns have put forth thoughtful and informed financial critiques of fossil-fuel development and the risks. Our paper last week furthers the literature on cumulative financial risks facing large scale fossil fuel investments.

That paper, which we published in partnership with Oil Change International, is the first of many we’ll be doing on the topic. The push for tar-sands development continues, of course, but it proceeds against the growing material risk of public opposition.

Tomorrow, my colleague Deborah Rogers will post a blog entry here that provides further analysis on the broader financial status of the industry, the constellation of risks facing it and the financial reasons for why we see a retreat from the large-scale capital expenditures planned.

The fact is that there’s a growing wave of awareness about how energy development like that epitomized by the tar-sands industry poses a threat to the global environment — and by extension to the global economy.

This is a measurable industry risk that has been averted elsewhere, in another industry. A decade ago, public campaigning in the U.S. thwarted a coal industry effort to build 150 new coal-fired electricity plants. Investors responded to the risks that campaign created by diverting several hundred billions of planned capital expenditure from coal-generation projects into other profitable forms of energy investment.

It’s happened before. It will happen again.

Tom Sanzillo is IEEFA’s director of finance.