Correspondence between the Canadian federal government and the Canadian Association of Petroleum Producers (CAPP) shows that behind closed doors, the tar sands industry recognizes that it is plans to expand tar sands would production are quite vulnerable to even the smallest increase in costs. Facing proposed oil and gas regulations that would increase production costs by less than a dollar a barrel, the tar sands industry notes that its production is already on the edges profitability and adding a few cents per barrel in additional production costs would be very likely reduce production and revenue. These revealing documents rebut a key argument made by the tar sands industry to U.S. policymakers that if Keystone XL is rejected, tar sands expansion will occur at the same pace and scale using more expensive alternatives such as rail. Keystone XL’s proponents argue that because tar sands expansion is inevitable, the Obama Administration need not consider the significant carbon emissions associated with projects like Keystone XL. But behind closed doors, the industry recognizes that its carbon intensive production plans are on the thinnest margins of profitability, and even small increases in costs will reduce tar sands production and associates carbon emissions. This is why Keystone XL is a linchpin for the industry’s expansion plans and the significant carbon emissions associated with it.
The documents reveal that the tar sands industry is not prepared to deal with any sort of increased costs from regulations, even though they continue publicly claim their willingness to turn to more expensive transportatin option if Keystone XL is rejected. The strongest regulations suggested in the correspondence would cost less than one dollar per barrel. CAPP argues that even this extra cost would “very likely” impact production and revenue:
- “Oil sands is already economically challenged relative to other North America oil and gas plays.”
- “Will higher stringency requirements impact production and revenue? Very likely. Adding a regressive charge the oil sands, one that bites harder at low prices than high prices, introduces additional cost and risk. This will impair recovery of marginal resource associated with existing projects. And make new projects less competitive from a portfolio perspective.”
- “Regulatory requirements have already added to cost and decreased economic viability. Additional burdens such as carbon tax increases are further reducing economic viability.”
- “We would highlight that anything more stringent than today’s system will increase costs, possibly lowering investments and reducing production.”
- “This could lead capital to flow from Alberta to other jurisdictions in North America and abroad.”
In public, companies say that rail—at anywhere between $5 to $20 a barrel in additional costs—is affordable and will allow production to grow. In private, they say that regulations increasing production costs by $0.81 a barrel regulations will “very likely” reduce production.
The reality is that even with cheap pipeline transport and weak regulation, tar sands production is economically marginal. Industry’s correspondence with the Canadian government implicitly recognizes that by providing a low cost transportation solution, Keystone XL would reduce costs and enable significant additional expansion of tar sands production. Keystone XL fails the President’s climate test, is not in the nation’s interest and should be rejected.