Here’s How Canada’s Oil Sands Could Collapse by 2030
Alberta's bitumen may be obsolete much sooner than you think.
Art by. Noel Ransome
According to the oil industry our society will keep burning oil for a long time. The low oil prices that have wreaked havoc in Alberta and other oil-producing jurisdictions for the past several years are just a temporary slump. Prices will soon rise. Global demand will grow. Canada's oil sands will expand by 53 percent. Any talk of the industry soon collapsing is "greatly exaggerated," argues the Canadian Association of Petroleum Producers.
But more and more evidence suggests sunny predictions such as these are dead wrong. The global oil industry could be on the brink of a rapid and irreversible decline. If and when it begins, Canada's oil sands would be one of the first major casualties.
This is a scenario that few people in Alberta want to acknowledge. Just the mere mention of it causes defensiveness and outrage. "We're not going anywhere," said Alberta Premier Rachel Notley after Prime Minister Justin Trudeau raised the prospect of an oil sands phase-out earlier this year.
"If Mr. Trudeau wants to shut down Alberta's oil sands, and my hometown, let him be warned: he'll have to go through me and four million Albertans first," warned the Wildrose Party's last leader Brian Jean.
Yet VICE spoke with two prominent economists—one in the US and one in Canada—who think we should take the prospect of an oil sands collapse very seriously. They think it could happen within the next decade. And there is little that anyone in Alberta, or Canada for that matter, can do to stop it.
They think the collapse could be set in motion by electric cars, self-driving technology, new business models for transportation and the international fight against climate change. They believe global oil demand will peak within the next few years. Oil prices will crash. High-cost sectors like the oil sands will shrivel while companies like Suncor and Exxon struggle to survive.
This will be financially devastating to the province of Alberta—as well as any other place on the planet that relies heavily on oil revenues. Alberta will lose a key source of income at the same time that it becomes liable for billions of dollars in ecological cleanup costs. Yet overall the Canadian economy will be fine. Oil is a small enough part of Canada's GDP that the country as a whole won't suffer catastrophic losses.
If you accept this scenario is a likely possibility—and there are compelling reasons to do so—then we should be doing all we can to help places like Alberta transition off oil. Because in the end, building more oil pipelines while denying the looming threats on the horizon will only screw us further.
Most people imagine societal change as a slow and linear process. But in reality, change can often be the result of sudden and unforeseen disruptions. Tony Seba is fascinated by these disruptions. He's spent years studying them. And the Stanford University futurist and economist regularly tries to predict when and how they'll occur. Seba's most recent prediction is a doozy. He argued in a report this spring that gasoline and diesel-powered vehicles will effectively vanish from American roads by the year 2030. Large fleets of self-driving electric vehicles will replace them. "It's going to make no economic sense to own a car—ever," Seba argued.
Here's how he thinks this scenario will unfold: Though electric vehicles make up a tiny percentage of vehicle sales, there is clear evidence that this is changing. Volvo will only build electric and hybrid models starting in 2019. Large European cities are moving to ban combustion engines. Tesla has a higher market valuation than General Motors. China is eager to get into the market. It's not hard to see where all this leads. "The cost of electric vehicles is coming down substantially," Seba said.
That's only part of the story though. The model of car ownership is also changing. Only a decade ago, the idea that you would pay for access to a fleet of vehicles via a powerful computer in your pocket was unthinkable. But Uber is now valued at $68 billion and Car2Go has over two million members. Companies like these are making it culturally acceptable to think of vehicles as a service instead of a consumer good. And they are building a vast digital infrastructure for ride-sharing in the process.
Now take these two trends and add a third: self-driving technology. California is currently pushing legislation to allow the autonomous vehicles being developed by companies like Google and Tesla on public roads across the state. And Seba thinks US regulatory approval could come by 2021 (a prediction at least one of his peers calls "highly doubtful"). But if Seba is right, the economics of vehicle usage would rapidly change. Electric vehicles have fewer engine components than traditional vehicles, and hence are cheaper to maintain. Fleets of cars are more economically efficient than private vehicles, which sit empty most of the day. And autonomous technology obviates the need to pay a driver or cover high insurance premiums.
The implications are profound. A robot-driven electric car hailed within minutes from your smartphone could make your life more convenient. You wouldn't have to worry about parking. The data gathered from the vehicle's computer system would cut down on gridlock. More importantly, though, such technology could potentially be 10 times cheaper than purchasing and operating a gas-powered vehicle. Faced with the choice between the past and the future, Seba thinks the answer to most people will be obvious: "I'm going to save $9,000 a year and not buy a new car."
If all this proves correct (and there are plenty of "ifs" in Seba's scenario) the global oil industry would be utterly ravaged. The price of oil could permanently plummet to $25 a barrel by the mid-2020s. Only the cheapest oil in places like Saudi Arabia could be economically produced. Canada's oil sands, where most projects need an oil price of $60 to $80 a barrel just to break even, would cease to make financial sense. "If you can't compete at $25, you're out," Seba explained. "Places like the Canadian oil sands are going to be stranded—essentially [they're] out of luck."
Jeff Rubin has been sounding this alarm for years. He's a former CIBC economist and a best-selling author. Rubin is now at a think tank called the Centre for International Governance Innovation. He sees evidence oil companies are taking threats to their future seriously. In the last year, Shell, BP, Chevron, ConocoPhillips and Statoil have sold off their investments in the oil sands. Total is scaling back. And Exxon had to write down 3.5 billion barrels of oil sands from its official proven reserves. These projects are too expensive to be feasible at today's oil price of $50 a barrel. "We've seen basically the multinational [companies] lose faith in the sector," Rubin said.
They're also losing faith in new oil sands pipelines. When Donald Trump approved the Keystone XL pipeline earlier this year it was a blow to activists who spent years convincing Barack Obama to reject it. Yet recent media reports have suggested the pipeline's builder is now struggling to find customers. "TransCanada can't even get shipper agreements to fill Keystone XL," Rubin said. "Shipper's agreements are like long-term supply contracts which you need to get before you finance a pipeline."
Oil sands leaders argue all this is evidence of a temporary slump. They plan to keep producing oil until the economics get better. "Canada will need more pipelines built [by] 2030," argues CAPP, in order to transport "an additional 1.3 million barrels per day of oil sands production." The industry doesn't have any choice but blind optimism.
Exxon and Imperial Oil, for example, have spent $21.8 billion developing the Kearl oil sands mine. "You can't just walk away," Rubin said. But investors have recently downgraded Imperial Oil based on that project. And Rubin thinks it won't be long before they leave oil sands completely: "People are not going to give the oil sands the benefit of the doubt. They're going to say, 'well, if you can't make money in today's market the chances of making money in tomorrow's…market are far less.'"
Tomorrow's market, after all, is one where fossil fuel-powered vehicles will have to compete directly with electric vehicles. Countries around the world will be pushing to meet the climate targets they agreed to at the COP21 talks in Paris. And this will cause global oil demand to peak and then start declining, a scenario even a multinational oil company like Shell thinks may occur "somewhere between five and 15 years hence."
The impact of these trends on the oil sands will not be slow and gradual. Rubin predicts that there will be a mass exodus of investment. Oil production will rapidly dry up. Many oil projects will be outright abandoned. "They're going to be pushed out of the market," Rubin said.
This has positive and negative implications for the environment. If the oil sands industry continues to expand over the next decade, Canada has virtually no hope of meeting the 2030 climate target it agreed to in Paris. New oil sands emissions would "more than offset all the emission reductions that have occurred elsewhere in the Canadian economy," Rubin wrote in a 2016 report for the Centre for International Governance Innovation. But if oil sands production plummets, so would Canada's CO2 emissions. It would be a "game-changer" in the fight against climate change.
The collapse of the industry could also create a new ecological crisis. Decades of oil sands mining have left 220 square kilometers of toxic tailings ponds in the Alberta Boreal forest, an area nearly double the size of Vancouver. Companies are required to pay into a reclamation fund that covers the cost of repairing the wilderness. But in reality those payments only cover a tiny fraction of a cleanup that may exceed $10 billion. "It's the Alberta taxpayers who will pick up the bill," Rubin said. "And that will probably be the biggest clean-up bill in the history of Canadian mining."
Alberta will be doubly screwed, because with oil no longer flowing it will lose a gigantic source of provincial revenue. There could be mass layoffs, home defaults and bankruptcies. It will mean a new era of austerity. "It's not great," Rubin said. "The sooner they come up with Plan B the better."
Outside of Alberta many of the economic impacts will diminish. The oil, gas and mining sector is at most about 8 percent of Canada's GDP. And the national economy has already absorbed three years of low oil prices. A full-on oil sands contraction would for sure hurt. But it wouldn't be a total disaster—at least not compared to countries like Russia and Venezuela that rely much more heavily on oil. Canadian energy stocks fell 22 percent this year, for instance, and yet Canada's main stock index may still hit a new high in 2018.
The world is clearly moving away from oil. Electric vehicles, new models for car ownership and autonomous technology will hasten its death, as will the global fight against climate change. Even if economists like Seba and Rubin are incorrect about the pace of change, the future of the oil industry is not in any way secure. And once global oil demand peaks, high-cost industries such as Canada's oil sands will be first to collapse. This is a not a scenario anyone should relish. There will be real human suffering. We should be doing everything possible to prepare for it. There's a steep price to pay for denial. And building more oil pipelines merely makes it higher.
Geoff Dembicki is author of Are We Screwed? How a New Generation is Fighting to Survive Climate Change, which be published August 22. Follow him on Twitter.