15 April 2010

Oil Sands and a Price on Carbon

Last summer I noted that the Obama Administration gave the go-ahead for the building of a new pipeline to bring petroleum from Canadian oil sands to the United States. I am sure that I wasn't alone in wondering why they would do this at the same time that they were pushing to create a cap-and-trade program to put a price on carbon. I got the answer in today's FT in an article on investors who are seeking to increase disclosure from BP on tar sand development.

It turns out that development of Canadian oil sands in insensitive to the price ceiling that was being discussed under the Waxman-Markey bill. From the FT (emphasis added):

At the heart of BP's resistance to its dissident shareholders' resolution on oil sands is a point of principle: managers should be free to manage.

Yet it is also engaged in a vigorous debate over the details.

The resolution, backed by investors including Co-operative Asset Management of the UK, and Calpers and Calstrs, the California state pension funds, is on the face of it quite uncontroversial.

A Greenpeace-backed attempt last year to use a shareholder vote to force Statoil, Norway's state-controlled oil company, to pull out of Canada's oil sands was unsuccessful.

The resolutions proposed this year for BP and Royal Dutch Shell, backed by FairPensions, a British campaign group, are less ambitious.

They simply demand that the companies commission reports setting out the assumptions they make when deciding on oil sands investments, including factors such as oil prices, the cost of greenhouse gas emissions, and "legal and reputational risks arising from local environmental damage and impairment of traditional livelihoods".

The reports would be presented to the companies' annual general meetings next year. That might not sound like a lot to ask, especially as BP has already released much of the information.

It has made clear it uses an oil price range of $60-$90 per barrel, and an assumed carbon price of $40 per tonne of CO 2 when appraising projects.

The proposed project assumes a carbon price much higher than the ceiling that Waxman-Markey would have established. The then leads to a question: If cap and trade, as proposed, would not halt oil sands development due to simple economics then how exactly would it compel innovation in the renewable energy sector?

Anyone looking for BP's presentation on the oil sands project can find it here in PDF. Kate Mackenzie at the FT Energy Source has more here.

7 comments:

  1. Environmentalists also forget that a carbon price cannot exceed the cost of shipping the bitumen to the coast. If it does it will be shipped to China and beyond the reach of the carbon nanny's

    http://www.financialpost.com/news-sectors/energy/story.html?id=2801979

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  2. @Raven

    Canada is already working diligently to sell oil to China - they don't need high carbon prices for that. It's a done deal.

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  3. Looks like Roger has made an excellent argument for raising the price of carbon further.

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  4. The oil sands are going ahead whether Obama or America cares one way or the other.

    The broker America gets, the deeper Obama digs your nation into a pending fiscal disaster, the greater the need for petroleum products in America, the more the development in the Oil Sands will happen.

    Here's a clue about the future of the Canadian Oil Sands . . . the current are being developed in Alberta is the small area. The big regions are in Saskatchewan and they are just starting to get going there.

    By the time they develop they big areas all this carbon pricing global warming thingy IPCC wealth redistribution nonsense will be as obsolete and past tense as the Club of Rome nonsense and the Population Bomb nonsense.

    Its over now, the corpse is still twitching and some people think it can be revived.

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  5. Tar sands is a crucial issue as it also affects the backup conspiracy theory of peak oil.

    Some of the biggest tar sand reserves are in Venezuela, which like Russia is not a Goldman Sachs friendly country.

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  6. All cap and trade does is move the 'future price' forward.

    It will have some negligible impact on long term investments.

    I.E If coal if $80/tonne today and it will have a $40/tonne tax. Then when evaluating whether to build a coal fired power plant one needs to look at it's cost competitiveness over 40 years.

    In electricity generation $4/MBtu is the 'rule of thumb' when nuclear becomes cost competitive.

    A tonne of Appalachian coal has 25 million Btu's. If it's effective cost is $100/tonne is it on parity with nuclear power.

    Of course a tonne of Appalachian coal is already $60. So if we use 2 tonnes of CO2 to one tonne of coal then a $40/tonne CO2 tax makes it $140/tonne. Almost $6/MBTU's.

    Building a coal fired power plant doesn't make any sense in this case. No matter how 'clean'.

    Oil still dominates in the transportation market. It's current price of $13/million BTU's already prices it out of the electrical generation business. Of course we already have transportation fuel taxes, so more taxes aren't likely to bring on a 'new wave' of non oil based vehicles.

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  7. "The proposed project assumes a carbon price much higher than the ceiling that Waxman-Markey would have established. The then leads to a question: If cap and trade, as proposed, would not halt oil sands development due to simple economics then how exactly would it compel innovation in the renewable energy sector"

    I'm going to assume that this is a serious, rather than tongue-in-cheek question aimed at your students. Or maybe I've got it backwards :)

    Roger:
    1. do the math on $tCO2/gallon of gasoline.

    2. show the impact of various carbon prices relative to normal and projected fluctuations in gasoline prices.

    3. Observe how even under the most extreme scenario (e.g. $100/tCO2e) the relative impact on pump prices are small to moderate (i.e. close to a $1 per gallon @ $100 per ton) relative to recent and projected price fluctuations.

    4. Note that gasoline demand is MUCH more inelastic relative to other carbon emitting activities.

    5. discuss carbon policy implications with class.

    Remind me again how carbon pricing is supposed to shut down oil sands development and who has made that claim. I trust it's not a strawman that you've setup for instructional purposes :)

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