Over the past few months, I’ve had a set of conversations with entrepreneurs, academics, and engineers engaged in new technical solutions for cleaning up the tailing ponds that follow on from oil sands petroleum extraction and hard mineral mining. There are some key insights I’ve gained from this that will shape cleanup of the mess the petroleum industry leaves behind as it dwindles.
The fading of the industry is something I’ve assessed and published on regularly. Most recently, it was the fiscal implications of a stock market subject to the fragile and volatile commodity prices of oil and gas. Much of the recent loss of the Dow Jones Index was from that sector, a trend which started in roughly 2015, and is just exacerbated by the pandemic. The industry is rife with debt and bloated executive compensation packages, which combined with the projected reductions in future demand is leading major global banks to pull financing and seize assets, not giving fossil fuel companies the opportunity to shift assets around under cover of bankruptcy.
The particulars of Alberta’s cleanup mess was an other subject of assessment. As I wrote at the beginning of the year, the industry’s cleanup liabilities are close to a quarter of a trillion dollars in that province alone, and they’ve set aside less than 10% of that, something mirrored more than not globally. Canada’s ‘ethical oil’ doesn’t look that ethical in light of the toxic mess it will leave behind. As I said then, the cleanup would end up being a Canadian federally funded ongoing project, like Superfund sites in the US. And it’s coming to pass.
The Trudeau Liberals are already looking at what comes after the immediate bailout package, and funds are being earmarked for cleaning up Alberta’s unfunded liabilities. This comes on top of the annual billions in Canadian subsidies for the industry, the 2018 $1.5 billion bailout of the industry in Canada, the 2019 major Alberta corporate tax cuts for the industry, the regular-as-clockwork royalty reductions for the industry in Alberta, and the likely multi-billion dollar federal bailout this year with the pandemic fallout. Yes, the industry has received tens and hundreds of billions already, and now we are going to spend more.
But why is oil and gas cleanup so problematic? It’s highly similar to the challenges faced by mining, but mining has mostly managed to keep its messes intact. And discussions with the chemical industry entrepreneurs developing nanotech- and emulsion-based next generation tailing pond cleanups consistently tell me that they are getting much more traction with the mineral industry than the petroleum industry.
Why is oil and gas not like mineral mining?
I put it down to three things, something I see varying globally, but intersecting strongly in Alberta and Canada more generally: net-present value of money, technical arrogance, and regulatory capture.
Let’s talk about time value of money. That’s a simple concept. A dollar today is worth a lot less than a dollar 30 years ago. Every year of 1-3% inflation means that a dollar buys a little less. A $100 dollars in 1980 is the equivalent of almost $330 dollars today. That’s fine, but it’s the inverse that’s interesting for this discussion. A liability that will be incurred in 40 years is costed in future dollars, which are then discounted to current dollars.
Why is this important to mining vs oil sands? One lasts a lot less time than the other. When I was engaged in early stage discussions of a Ring of Fire mineral mine in Northern Ontario — my company’s part would have been focused on zero-emissions, autonomous operations, and tele-operations for a mine of the future — the entire lifespan of the project was under 20 years, including remediation. Oil sands operate for 40 years.
That means that the remediation net present value is almost nonexistent for oil sands, but it’s a clear economic business case factor for mineral mining. They don’t get funded unless they account for it in the mineral sector. In oil sands, it becomes a rounding error, and is in any event so far in the future that no one considers it. And so liabilities were shifted to the next generation by the oil and gas industry.
The second factor is technical arrogance. There are a lot of engineers in both petroleum and mining, but there are very different ratios of different types of engineers. There are a lot of geological and mineral engineers in mining, unsurprisingly, and a lot fewer chemical engineers. By comparison, there are a lot more chemical engineers in the petroleum industry.
And cleaning up tailing ponds is a chemical engineering specialty.
All of those petroleum chemical engineers think that their expertise in getting oil out of the ground means that they are also expert in getting rid of tailings. But that’s a specialization. There are people who spend entire academic and industry careers just working on tailings. I’ve now spoken to several of them.
What this results in is that the mineral industry is much more open to innovative technologies for cleanup, while the petroleum industry thinks that it has that expertise in house and doesn’t engage external companies nearly as often as it could or should. Combined with underfunding cleanup and not giving it significant corporate attention except where PR demands it, it’s a death knell for oil sands tailing ponds clean up.
Then there’s the third issue, regulatory capture. Alberta’s economy is an oil and gas economy more than anything else, not a mineral mining economy. And the oil and gas industry captured the Alberta Energy Regulator (AER) early and maintained its capture of it. Oil sands talent flowed between the AER, the oil sands majors, and lobbying roles which were especially cozy with the decades of conservative administrations in the province. The toxic stew of influence meant that the Albertan equivalent of Norway’s Sovereign Fund was not funded strongly every year, but instead languished and asset-stripped by conservative governments buying elections. The AER was toothless. Cleanup remained an afterthought. The history of regulatory capture certainly includes mineral mining regions, but that’s not what’s happening in Alberta.
And so here we are in 2020. The oil and gas industry in Canada is cratering, just as it is globally. The price war between Russia and Saudi Arabia is just the latest round in a battle which turned from keeping supply low and prices high in the previous high-demand era, to low-cost producers fighting to kill higher-cost producers so that they will have revenue in 5 and 10 years. Russia and Saudi Arabia are strategically killing North American producers so that they can keep their petro-economies afloat a while longer as demand dwindles. With the coronavirus adding a thumb to the scale, every formerly marginal producer is deep underwater.
Alberta oil sands cleanup plans were a Ponzi scheme. They were going to use future high-priced oil profits to pay for future cleanup. But Canada’s crude was selling recently for $5 per barrel, well under the cost of extraction. It’s never going to be high enough to pay for any cleanup again.
This will end with Canada shouldering the burden of cleanup, just as Trudeau and the Liberals are projecting for future budgets. This has been clear to many for a decade. But it’s a unique problem for Alberta’s oil sands in terms of how huge the liability is and how they’ve been allowed to get away with it by bad financing and governmental laxness. That time is over.
My recommendation to the tailing pond entrepreneurs I’ve been speaking to is to focus on the minerals side. The chemistry is different in any event, so they have to focus to deliver value. The oil sands are a strategic cleanup under federal money, probably with a federal governmental organization creating RFPs and funding them as federal works projects. That’s several years down the road, possibly as late as 2030. The mining industry wants new, cheaper solutions because it helps their business cases. The oil and gas industry is arrogant, not fiscally motivated to solve the problem and not mandated by strong regulation to do so.
The firms I’ve spoken to, however, are Calgary-based. Everyone keeps telling them that they should be focusing on the oil sands, because Calgary’s business, entrepreneurial and academic community is myopically oil focused. Like the AER, they’ve been captured by the petroleum industry and are unable to raise their heads above the level of the sludge in the tailing ponds that cover much of northern Alberta. And now they are personally stuck with declining property values and declining governmental services under a government that’s throwing money into the past instead of the future. Personal and professionally, it’s a deeply challenging situation to be in.
The oil and gas industry will shudder slowly to a halt. It will collapse, leaving the remediation to Canadian tax payers. The entrepreneurs I’ve dealt with will be part of the solution, when that occurs, but it’s years away. And when it emerges, it will be under federal procurement approaches, not oil sands major approaches. The difference is immense, although not as immense as the mess.