Is Bitumen Good for Canada?

This year is a critical one for Canadians. Through the course of 2013, major decisions are being made that will determine the scale and magnitude of Canadian oil development for decades to come. The US government will decide whether or not to approve the construction of the Keystone XL pipeline to carry bitumen from Alberta to Texas. Heated negotiations are ongoing over the proposed Enbridge Northern Gateway pipeline, which would transport bitumen to the British Columbian coast and then into Asia-Pacific markets aboard massive supertankers.

This year is a critical one for Canadians. Through the course of 2013, major decisions are being made that will determine the scale and magnitude of Canadian oil development for decades to come. The US government will decide whether or not to approve the construction of the Keystone XL pipeline to carry bitumen from Alberta to Texas. Heated negotiations are ongoing over the proposed Enbridge Northern Gateway pipeline, which would transport bitumen to the British Columbian coast and then into Asia-Pacific markets aboard massive supertankers. There is also the proposed Enbridge Line 9 flow reversal project, which would move Alberta crude to Eastern Canada to be refined. To add to the hyperactivity, our politicians are jetting around the world trying to drum up support for these pipelines and to find new buyers for bitumen.

The approval of these pipelines would cement the tar sands as the centrepiece of Canada’s energy economy for decades to come. But Canadian citizens must ask themselves: Are these pipelines the best options available for the inevitable development of Northern Alberta’s tar sands? Do we fully understand the range of effects tar sands development is having on our society and our economy? Is the Harper government’s desire for tar sands expansion in the best interest of the Canadian people?

To encourage a deeper understanding of the looming impact of Canada’s current tar sands development strategy, the Canadian Centre for Policy Alternatives (CCPA) published a report in February 2013 called The Bitumen Cliff: Lessons and Challenges of Bitumen Mega-Developments for Canada’s Economy in an Age of Climate Change. The report describes how the tar sands are affecting our country’s economy, society and environment in ways that are much more complex than most of us realize, especially if we only consider the Harper government’s talking points.

Economic Impacts

Alberta’s bitumen boom is having both positive and negative impact on the Canadian economy. tar sands development is a powerful revenue generator for Alberta (the province collected $4.5-billion in royalties from tar sands projects in fiscal year 2011/12), but it is resulting in many complicated economic effects. It starts with the “staples trap.” Canada has historically been a global supplier of raw materials and the tar sands are continuing this role. However, by supplying bitumen to the world on a much larger scale, Canada risks falling into a self-reinforcing staples trap. A staples industry such as the tar sands incurs high fixed costs (to buy giant, expensive machinery, for example) and thus it also comes with a high motivation to rapidly export unprocessed, raw resources to pay off those costs.

However, the current rapid export of raw crude to limited markets is driving down unit prices, resulting in lower revenues. For example, Alberta-based companies currently have little choice but to sell heavy crude at a discounted price to US refineries, their biggest market. With little capacity to refine raw crude domestically, Canada continues exporting unprocessed bitumen, and the country eventually ends up buying back processed, value-added oil products at a higher cost. The more unprocessed bitumen Canada exports, the less diversified and resilient our economy becomes – hence the self-reinforcing staples trap.

Other economic effects of the tar sands are an overvalued dollar and a deterioration of Canada’s non-petroleum export performance. According to purchasing power comparisons the Canadian dollar is currently almost 25 per cent above fair value. The dollar’s appreciation over the last decade is in large part due to high oil prices, booming oil production and direct investment by foreign companies. While petroleum exports have increased during the same time period, the overvalued dollar has had negative impacts on Canada’s non-petroleum export industries, such as manufacturing, tourism, business services and transportation. According to CCPA, the drop in non-petroleum exports has been 8.5 times greater (as a share of GDP) than the increase in petroleum exports, contributing to a severe account deficit and a poor export performance overall.

It’s also likely that the tar sands are hurting Canadian innovation. The Organization for Economic Co-operation and Development’s 2012 Economic Survey of Canada found a strong negative relationship between the country’s reliance on resource extraction and its business research and development efforts. “Resource-rich countries like Canada, New Zealand and Norway all appear to underperform when it comes to innovation (controlling for GDP), whereas their resource-poor counterparts like Israel, Korea and Japan are highly innovative,” explains the Bitumen Cliff report (see pages 59 and 83 for more details). In Canada, business R&D is disproportionately concentrated in Ontario and Québec, and stagnant GDP trends in Central Canada are hurting the country’s already poor innovation performance.  

The resource boom is also leading to a growing regional inequality between provinces, which can be measured by federal transfer payments that equalize provincial revenue between “have” and “have-not” provinces. Traditionally, Alberta and Ontario were “have” provinces that paid more tax money than they received from the federal government. Today, Alberta and other energy-rich provinces like British Columbia, Newfoundland and Saskatchewan have become “have” provinces; by contrast, a manufacturing slump in Ontario has made it a net recipient of transfer payments – $3.2 billion for 2012-2013.

In public discussion, the tar sands are often touted as an important job creator. While this is true, it is important to put the numbers into perspective and look at the overall job creation picture in Canada. The Bitumen Cliff reports that the petroleum industry created 16,500 direct jobs in oil and gas and 5,000 direct jobs in mining during the decade that ended in 2011, excluding pipeline and plant construction. However, these job figures represent less than one per cent of all new jobs created by the Canadian economy over that time period, during which 520,000 of the country’s manufacturing jobs were lost. As of 2011, a total of 116,000 people were employed by Alberta’s upstream energy sector (tar sands, conventional oil, gas and mining). Despite this, the tar sands sector has demonstrated a weak job creation record compared to other economic sectors.

Environmental Impacts

It is well-known that bitumen production is more carbon-intensive than conventional oil production. The Pembina Institute reports that greenhouse gas (GHG) emissions from tar sands extraction and processing are 3.2 to 4.5 times more intensive than conventional crude oil produced in Canada or the US. In absolute numbers, producing one barrel of synthetic crude from the tar sands results in an average of 111 kilograms of CO2 equivalent emissions. On average, conventional crude oil production in Canada releases 35.2 kg of CO2 equivalent emissions.

Although per-barrel GHG emissions in the tar sands are decreasing, total emissions are growing due to increased production. GHG emissions from the tar sands have nearly tripled in the last two decades, and they are projected to spike again between 2010 and 2020, from 48 million to 104 million tonnes. Pembina has concluded that Canada’s projected annual increases in GHG emissions between 2005 and 2020 will come almost exclusively from tar sands expansion and not from other sectors. Therefore, the carbon footprint of tar sands production is a significant issue, compounded by the fact that increased production will pump more bitumen into the global system, resulting in even more GHG emissions once it is burned by users.

Recently retired NASA Goddard Head scientist James Hansen has bluntly said that if the tar sands continue, “it will be game over for the climate.” This statement irked Natural Resources Minister Joe Oliver, Canada’s top minister on the tar sands file, who fought back with his own harsh words. In an interview in Washington in April, Oliver publicly criticized Hansen’s statement, calling his words “exaggerated rhetoric,” “frankly nonsense,” and adding that “he should be ashamed of having said it.” Hansen responded to Oliver’s comments, telling CBC’s Evan Solomon, “Well, the current government is a Neanderthal on this issue. Many of the governments are denying and trying to ignore what’s going to happen a few decades downstream. They’re only worried about the next two or three years.”

Hansen is certainly not the only one trying to counter the Harper government’s messaging about tar sands production and its relationship to climate change. A recent analysis by the Pembina Institute found serious issues with the government’s primary talking points. On May 9, 2013, a dozen Canadian academics sent a letter to Oliver, asking him to seriously consider the consequences of his support for tar sands expansion.

Beyond climate impacts, heavy investment in the tar sands sector is also locking Canada into a carbon-dependent development path, just as other countries shift aggressively toward low-carbon strategies. The CCPA predicts that foreign markets for Canadian bitumen will deteriorate, tying up bitumen resources and investments. One of Canada’s top environmental economists, Mark Jaccard, says that the federal government and the oil industry are on a high-risk path that could leave billions of dollars in stranded assets, including pipelines like Keystone XL. Jaccard also agrees that heavy tar sands investment is damaging the growth of Canada’s domestic clean energy industries, effectively constraining our ability to compete with the rest of the world and our capacity to adapt to climate change.

Societal Impacts

While dialogue and debate about the tar sands has focused mainly on the economic and environmental implications, there has been very little discussion of how the pace and scale of development is impacting Canada’s identity. In many ways, the tar sands are changing the very nature of the Canadian federation. For instance, the petroleum industry is exerting a disproportionate political influence on provincial and federal public policy. Table 1 in the CCPA report (see page 34) shows a high frequency of meetings and communications between oil and gas companies like TransCanada, Suncor and Enbridge with high-level Canadian government officials in the span of a year. TransCanada alone had 117 meetings with MPs, bureaucrats and ministers between September 2011 and September 2012.

Clearly these meetings speak to broader strategic actions taken by both the Alberta and federal governments to protect and expand tar sands production. Alberta has set one of the lowest royalty rates in the world for companies that extract bitumen. The Harper government is running taxpayer-funded ads that target US lobbyists and lawmakers, and the Prime Minister Harper and Natural Resources Minister Oliver are in the US and Europe this month to promote tar sands development. The Alberta government has defamed scientists like Peter Lee and Kevin Timoney for publishing peer-reviewed data on contaminants from the bitumen sands, accusing them of lying and cooking data – two examples of a much larger controversy over the muzzling of federal scientists in Canada. (Those particular accusations resulted in a retraction and an apology from the attorney general’s office.)

Moreover, the Harper and Alberta governments have continually refused to respect the internationally recognized principle of “Free, Prior and Informed Consent” in situations that involve First Nations or Indigenous peoples being impacted by oil and gas activities. The federal government has repeatedly engaged in “consultation” instead of seeking “consent” before approving resource extraction on traditional lands. At least one First Nation in British Columbia has filed a constitutional challenge against the Enbridge Northern Gateway pipeline approval process, claiming the infringement of aboriginal rights. “We’re treated as a stakeholder in this process,” explains Carrie Henchitt, lawyer for the Heiltsuk Nation. “We are not just stakeholders. We have specific rights very different from other interest groups.” 

Less tangible but also pivotal is how rapid tar sands development is changing Canada’s international reputation. A report by CBC’s The Current about how Canadians are expiencing this transition puts it well: “Canadians aren’t used to seeing screaming Americans protesting pipelines that carry Alberta oil. We aren’t used to seeing Americans paying much attention to us at all. And international disappointment over Ottawa’s withdrawal from the Kyoto protocol may have many Canadians wondering if they should hide their maple leafs when abroad.”

While it is clear that the tar sands are causing complex effects on the Canadian economy, society and environment, the big question remains: What is the future of Canada’s tar sands? The CCPA suggests two recommendations for development. The first is that “powerful efforts must be made to more tightly regulate the bitumen industry, with the goal of slowing the pace of extraction, enhancing its net benefits to Canadians, and attaining a better balance between sectors and regions in the national economy.” The second recommendation is to “energetically re-orient Canada’s economy around more balanced, innovative and low-carbon industries, thus catching an economic upside from coming necessary investments in sustainable products and services.”

For deeper analysis of the implications and possibilities of tar sands development in Canada, check out the full CCPA Bitumen Cliff report.