Canada's tar sends industry may be hit by a future US emissions clampdown. Credit: Punchstock

When US President Barack Obama visits Canada next week for his first foreign trip, the issues of oil from Alberta's tar sands and, more widely, climate change will be high on the agenda. Alberta's oil is plentiful and handy for US customers, but getting it out of the ground takes a heavy toll on energy and the environment. If Obama stays true to his campaign pledges and initiates tough rules on carbon emissions, this could leave North America's biggest oil field out in the cold.

Alberta's oil is locked up in a tarry mess of sand and bitumen that has the syrupy consistency of molasses. In 2000, the oil was so expensive to extract that it wasn't worth mentioning in global reports of oil reserves. But by 2005 that had changed: technologies had improved and the price of oil from traditional wells had increased, making the tar sands viable. Canada's total recoverable reserves rocketed to 174 billion barrels, second only to Saudi Arabia's 262 billion barrels.

Production from the tar sands in 2008 was about 1.3 million barrels a day, and is forecasted to rise to 3 million barrels a day by 2020. About 99% of this oil is exported to the United States; Canadian oil fulfills about 10% of US needs. Now, however, the price of oil has dropped, and environmental considerations look set to become more important. Together that could put the tar sands in a sticky spot.

Alive and well

Syncrude — the largest company working in Alberta's tar sands — makes a profit selling its oil if prices are above US$30 a barrel. Other companies, whose production lines are not yet running and who face greater capital costs, may need oil prices of $70-$90 to make a profit. Those numbers look vulnerable against the price of oil in the face of a recession. Cut-backs in personal car journeys and a decline in the manufacturing industry have reduced US demand for oil, dropping prices to less than $40 a barrel from a peak of about $147 last year.

That has by no means killed the industry, says Simon Dyer, oil sands expert in Calgary for the Pembina Institute, a non-profit environmental think tank. "Rumours of the death of the oil-sand industry have been greatly exaggerated," he says. The Canadian Energy Research Institute forecasts that prices will hit $70 a barrel by 2010, or by 2012 in the face of a prolonged economic recovery. Buoyed by the assumption that oil prices will rise again, the industry is still increasing oil production, albeit at a slower rate.

But on top of oil prices is the potentially killer blow of environmental concerns. Producing a barrel of oil from the tar sands rather than a conventional well makes 3 to 5 times as much greenhouse gas, and uses up 2 to 4.5 barrels of fresh water that end up in toxic tailing ponds. Although most emissions come from burning oil rather than producing it, this still puts the tar sands at a distinct disadvantage.

Tough talk

Obama has said he wants to wean the United States off "dirty, dwindling and dangerously expensive" oil. He has talked about instituting a cap-and-trade programme for carbon emissions, and a low-carbon fuel standard, which would require fuels to produce lower levels of greenhouse gases throughout their life cycle.

Both moves might make it prohibitively expensive to buy Albertan oil. Canadian Prime Minister Stephen Harper may ask for an exemption for the oil sands as a trade-off for its security as a reliable, friendly source. But this is unlikely to be successful. "I'd be shocked if Canada got an exemption," says David Victor, an energy policy analyst at Stanford University in Palo Alto, California. More likely, negotiations could ensure that clean activities elsewhere are allowed to offset the sins of the tar sands.

A few things might be done to make Albertan oil more palatable. Petroleum products made from the oil could be blended with biofuels, to help lower the carbon footprint. And the Canadian government has already set aside Can$2 billion ($1.6 billion) for demonstration carbon-capture and storage (CCS) projects, which would take carbon dioxide from the tar-sand production line and bury it underground.

But these two initiatives are unlikely to make up the difference. Second-generation biofuels (from cellulose) would likely be needed to buffer tar-sand emissions, says policy expert Dan Woynillowicz at the Pembina Institute, and these are not yet commercially viable. And the Can$2 billion for CCS is aiming to remove just 5 million tonnes of carbon dioxide per year by 2015, compared to current annual emissions of about 29 million tonnes. Even if the programme were accelerated, it would add dramatically to costs — Woynillowicz reckons full-scale CCS could add perhaps Can$20 to each barrel of tar-sands oil.

That would put a serious dampner on expansion of the oil-sands operations. "I don't think we'll see the rate of expansion talked about in the last few years," says Woynillowicz. "The wild card is the potential of accessing other markets that don't care about the carbon intensity of their fuels."

Credit: Punchstock