Tar sands refinery projects face a sticky future

Sheila McNulty, January 5, 2009, Financial Times -- US refineries are expanding operations to process oil from Canada's tar sands just as efforts are building to limit the use of the more polluting fuels.

There have been at least two proposals for new refineries in the US and about two dozen expansions to process tar sands oil. Canada's tar sands - the largest proven reserves outside Saudi Arabia - have become the focal point for the world's leading oil companies, which are increasingly being blocked from new opportunities by nationalism in oil-rich countries.

While the drop in oil prices, the credit crisis and slowing global economy could stall some projects on either side of the border, many refinery expansions are already under way, including those by BP, ConocoPhillips, Valero and Marathon.

Analysts estimate pipeline companies and refiners plan to invest more than $31bn by 2015 to export, process and distribute oil sands products. Investments in new tar sands production have risen in recent years as oil companies rush to the tar sands' 175bn barrels of reserves.

But business and environmental questions are rising over tar sands just as public opinion turns against them.

Peter Tertzakian, chief energy economist at investment company ARC Financial, says one must challenge the assumption that there is a ready and willing market for an unlimited amount of tar sands oil.

Producing a barrel of synthetic crude from oil sands results in greenhouse gas emissions three to five times greater than a barrel of conventional crude. It also does enormous damage to one of the planet's biggest carbon-storage banks - known as the boreal forest - as trees, peat and soil are ruined.

Politicians are also moving against the tar sands. Congress last year upheld a recent law barring the use of fuel from Canada's oil sands while US mayors encouraged cities against using it.

"What we're seeing is a lot of growing risk in tar sands,'' said Susan Casey-Lefkowitz, an attorney at the Natural Resources Defense Council, an advocacy group.

The new law prohibits the federal government from procuring fuels with a higher greenhouse gas content than conventional fuels, such as that from Canada's oil sands. While Congress has yet to enforce that law, it is likely to be given serious consideration under Barack Obama's presidency and could affect billions of dollars in trade in oil as the Department of Defense alone is the world's largest buyer of light refined petroleum.

The US Conference of Mayors also passed a resolution this year encouraging mayors to stop purchasing higher-carbon unconventional or synthetic fuels such as oil sands for city vehicles.

Mayor Kitty Piercy of Eugene, Oregon, who submitted the resolution, said: "We don't want to spend taxpayer dollars on fuels that make global warming worse."

Refineries, which account for almost 15 per cent of the carbon dioxide emitted from industrial processes in the US, are already coming under fire as big pollutants from a group of states.

Environmentalists believe investment in tar sands production will go down, leaving refiners with excess capacity.

"The number of people betting this was going to be the next big thing is clearly changing,'' said Steven Kallick, director of The Pew Environment Group's boreal conservation project.

Falling petrol demand dims outlook

While US refiners are placing long-term bets on growing production from Canada's tar sands, their short-term decisions are based on falling commodity prices, writes Sheila McNulty in Houston .

Valero, the biggest refiner in the US, notes that while crude oil prices have dropped, which ordinarily would be good for refiners, prices for the refined product, petrol, have dropped even further. Indeed margins on petrol have been negative for the past couple of months.

Bill Klesse, Valero's chief executive, said he expects refiners to cut back on petrol production until the margin environment improves.

"The outlook is not great,'' said Neil McMahon, senior analyst at Bernstein Research. Yet he believes Valero is likely to fare better than anyone given its diversified asset base.