Scraping Barrell

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Unconventional OilScraping the bottom of the barrel?

Theco-operative bank

insuranceinvestments


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WWF, one o the worlds most experienced conservationorganisations, addresses global threats to people and nature suchas climate change, the peril to endangered species and habitats,and the unsustainable consumption o the worlds natural resources.

We do this by inuencing how governments, businesses and peoplethink, learn and act in relation to the world around us, and byworking with local communities to improve their livelihoods and theenvironment upon which we all depend. WWF uses its practicalexperience, knowledge and credibility to create long-term solutionsor the planets environment.

I everyone in the world consumed natural resources and generatedcarbon dioxide at the rate we do in the UK, we would need threeplanets to support us. The impacts which include climate change,deorestation and biodiversity loss are starting to aect us all. WWFhas a vision or a One Planet Future a world in which people andnature thrive within their air share o the Earths natural resources.

That is why WWF is working to develop a One Planet Financesystem, where the investments made by individuals and institutionscontribute to this vision. This includes holding the owners andmanagers o capital to account on how unds are used because itwill be essential to direct ows o capital away rom carbon-intensiveactivities and towards low-carbon opportunities.

The Co-operative Financial Services (CFS) is part o TheCo-operative Group, the UKs largest consumer co-operative.CFS is the group o businesses that includes The Co-operative

Bank, The Co-operative Insurance and The Co-operativeInvestments. CFS puts the social concerns o its 6.5 millioncustomers at the heart o the way it does business.

In 1992, The Co-operative Bank became the frst UK high streetbank to launch a customer-led Ethical Policy. Through the policy, thebank sets out where it will and will not invest its customers money.

In June 2005, The Co-operative Insurance became the worlds frstinsurance company to launch a customer-led Ethical EngagementPolicy. It directs how The Co-operative Insurance and TheCo-operative Investments use their inuence as shareholders to

push or positive change within the companies in which they invest.

About WWF

Acknowledgements

The report was written by James Leaton o WWF-UK, withcontributions rom Colin Baines o The Co-operative Group,Niall OShea o The Co-operative Investments, and Anthony Footitto the Tyndall Centre or Climate Change Research. The authorswould also like to thank Gary Kendall, Rob Powell, Hadley Archer,Mark Eckstein, Francis Grant-Suttie, Arlin Hackman, Julia Langer,

Louise Hotchkiss, Peter Denton and Alun Evans or theircomments and contributions.Photography: Jiri Rezac / WWF-UK unless stated otherwise.

About The Co-operativeFinancial Services


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1

Its one thing or society to be saddled with an existing energystrategy that could result in dangerous climate change; its anotherthing when new technologies are exploited that push us closer to

climate disaster - and that is what the commercialisation ounconventional ossil uels would do.

One can provide good social, environmental and economicrationales or why the commercialisation o unconventional oils byrich developed countries is wrong-headed, but the long and shorto it is that it is plain and simply wrong. How can we expect thedeveloping world to emerge along a low carbon path when (a) thevast bulk o CO2 already in the atmosphere is rom us and (b) we thengo on to exploit even more climate hostile sources o energy.

The Co-operative Group, and particularly our fnancial servicesbusinesses, intends to devote a not insignifcant amount o time,energy and money to this issue, and with the support o ourcustomers and members we hope to help secure a saer,low-carbon uture.

Paul MonaghanHead o Social Goals and Sustainability

The Co-operative Group

Foreword


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Extraction as ar as the eye

can see in Alberta.


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Contents

Executive Summary

Oil Sands

Climate Change

Boreal Forests

Water

Oil Company Involvement

Oil Shale

Climate Disaster

Investor Risk

Recommendations

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400 tonne trucks, the size o a house,

at the Shell Albian mine.


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This report highlights perilous trends in the oil sector, whereincreased investment in unconventional ossil uels, such asCanadian oil sands and US oil shales, may dangerously contributeto climate change and cause local ecological disaster. The report

also demonstrates the signifcant investor risk associated withthese unconventional oils.

The vast resources o oil shales and sands (unconventionals) couldredraw the world oil map. Canada is already promoting itsel as anenergy superpower, touting its reserves o 174 billion barrels o oil,which places it only second to Saudi Arabia. Oil shale is lessdeveloped than oil sands, but the renewed interest shows the sectoris heading in the wrong direction at present. Extracting thesereserves would entail huge cost. Financially, operators haveproposed more than C$125 billion o projects by 2015, which willneed the backing o investors. However the proposed activities alsoinvolve huge social and environmental costs that would be elt interms o local and global impacts.

Climate ChangeIn order to avoid dangerous levels o climate change, it is likely thatglobal emissions must peak by 2015 and all by at least 80%compared with 1990 levels by 2050. This imperative makes itessential that we rapidly develop a low carbon economy. The cost oinaction on climate change in terms o lost GDP outweighs the costso taking action to cut emissions.

The energy intensity o unconventional ossil uels poses starkchoices or oil companies, governments and investors. Oil sandsextraction produces three times the carbon emissions oconventional oil production, whilst oil shale extraction produces upto eight times as much. In terms o the quantity o oil potentiallyavailable, ultimate Canadian oil sand reserves are thought to be inthe region o 1.7 trillion barrels, with 315 billion probable barrelsaccessible using technology currently under development. US oilshale deposits are estimated at 1.5 trillion barrels o reservesthere are currently only estimates as to what proportion may berecoverable, but the fgure used by the US government is800 billion barrels.

I all 1,115 billion barrels o these recoverable unconventionalreserves in North America were exploited, it would result inestimated well to wheel emissions o 980 Gt CO2, equating to anestimated increase in atmospheric CO2 levels o between 49 and

65ppm. This could be catastrophic given that our atmospheric levelsare already at 430ppm CO2e and we risk a new global extinctionevent i we pass the 450ppm CO2e stabilisation target and triggerglobal mean temperature increases above 2C.

As Jim Hansen, Director o the NASA Goddard Institute and AdjunctProessor o Earth and Environmental Sciences at ColumbiaUniversitys Earth Institute, has said, squeezing oil rom shalemountains is not an option that would allow our planet and itsinhabitants to survive.

Canadas greenhouse gas emissions were already 26% above its

1990 levels by 2006, compared with its Kyoto target o a 6%reduction. I Canadian oil sands development continues to expandat the pace currently desired by the industry, the production and useo the uel would account or 87% o the maximum emissions romOECD countries in 2050 under a 450ppm stabilisation pathway.

Operators have huge oil sands expansion plans, having announcedover US$125 billion o projects to be developed by 2015. The largeroperators, including Shell, ExxonMobil, BP and ConocoPhillips, arelooking to each produce several hundred thousand barrels per dayrom the oil sands by 2020. Companies are currently looking to buildmulti-billion dollar trans-continental pipelines to supply the gas to

extract more tar rom Canadas sands. Oil shale is still at a moredevelopmental stage, but billions are going into research in order tomake it viable. In the US, companies are pushing engineeringboundaries to develop a reeze wall technology, which can provide arozen retaining wall to surround a super-heated oil shale core. Thehuman race is going to extreme lengths to recarbonise its activities,at a time when rapid decarbonisation is needed.

Executive Summary

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Regulation is essential i a low carbon economy is to be achieved,Caliornia has already developed legislation that stipulates a LowCarbon Fuel Standard, which calls or a reduction o at least 10% inthe liecycle carbon intensity o states transport uels by 2020. Thiswould eectively prohibit uels with liecycle CO2 emissions greaterthan those derived rom conventional sources. Other US states and

Canadian provinces have indicated they are to ollow suit. The USEnergy Independence and Security Act 2007 could also restrict themarket or unconventional oils and urther measures can beexpected rom a new US President in 2009.

Most operators point to potential technological solutions such ascarbon capture and storage (CCS) and the Canadian governmenthas proposed a requirement or all oil sand projects rom 2012 to beCCS-eective by 2018. However, CCS is still up to a decade awayrom being testedon a commercial scale and realistically will not be aviable solution or decades to come. Additionally, operators insistthey require heavy subsidies to develop CCS and ensure proft

margins remain worthwhile. They also do not want to be heldresponsible or legacy issues, such as what the stored carbon mightdo in the uture. It is not acceptable to use a promise o CCS as alicence to signifcantly expand the exploitation o unconventionalossil uels when its viability remains in the balance and i ts availabilityon a sufcient scale is decades rom being achieved.

Boreal ForestThe oil sands cover 140,000 sq km in the primary boreal orest oCanada, an area larger than England. Due to oil sands operations,the Alberta landscape may never look the same again, with the

primary boreal orest criss-crossed with seismic lines, huge open-cast mines and tailing ponds flled with toxic wastewater, and pipesand inrastructure spreading across the scenery. Canada is home tohal the remaining boreal orest in the world, and (not includingtundra and wetlands) contains 11% o the global terrestrial carbonsinks. Oil sand operations are leading to signifcant deorestationand damage to peatland and wetlands, eroding the carbon storagevalue o these areas. Deorestation has been identifed by the IPCCas a major contributor to climate change. Due to its key role incarbon storage, Canadas boreal region has been described as alie support system or the planet. In May 2007, 1,500 scientists

rom more than 50 countries called on the Canadian government toprovide more protection or the boreal orest.

The boreal orest is also home to caribou, which avoid theragmented orest created by oil sands activities. Unique wetlandssuch as the McClelland patterned en vital or migratory birds are under threat. Oil sand licences are granted on the basis thatoperators will return areas to at least the same condition in whichthey were ound. However, ater decades o activity only 104

hectares have been certifed as reclaimed by the Albertagovernment. Most companies admit it is impossible to artifciallyreturn boreal orest to the same condition as they ound it; insteadreclaimed land will have much lower levels o carbon density andbiodiversity than previously existed.

Water Intensity and Toxic WasteThe production o oil sands is also water intensive, averaging threebarrels o water to produce a single barrel o oil. The primary sourceo water is the Athabasca River, which is already down to criticallevels as disturbance o the Athabasca wetland catchment reducesthe amount o runo and groundwater reaching the river andextraction rom the river increases. The average summer ow o theriver declined by 29% between 1970 and 2005, whilst currentlicences to extract 2.3 billion barrels per year are set to increase to3.3 billion barrels, threatening its ecological unctions.

It is possible to reuse more than 90% o the water extracted, butultimately only 5-10% is returned to the river the rest being tootoxic. The huge volumes mean that enormous amounts o toxicwastewater are produced. Individual tailing ponds are up to 50 sqkm in size and can be seen rom space. The dam structures usedare among the largest in the world. Ater decades o operations,

there is no evidence that reclamation o tailing ponds is possible.Containing high levels o napthenic acids rom the bitumen, thewater in the tailing ponds is acutely toxic to aquatic lie and wildliethat comes into contact with the water. Concerns have beenexpressed that contaminated water may leach out over time, theecological impacts o which would be serious and persistent.

Oil shale production would also be water intensive and ecologicallydamaging. Mining oil shale requires between two and fve barrels owater or each barrel o oil produced. Extraction levels o three millionbarrels per day would thereore require six to 15 million barrels owater per day; this in an area where the US Department o the I

nterior has announced special measures to tackle a drought whichhas been occurring or the last eight years.

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Airborne emissions rom oil shale production are expected to includesulphur dioxides, nitrogen dioxides, particulates, ozone precursorsand carbon monoxide. Research in China indicates that an oil shalewaste site experienced contamination o soil and groundwater byheavy metals and carcinogenous hydrocarbons.

CommunitiesCanadian First Nations indigenous communities who live and fshdownstream rom the oil sands mines are also concerned aboutwater quality, and the level o toxins in both the water and the fsh.Further research is needed to establish the risk to local people andthe sources o contamination. The Canadian health authorities arenow investigating reports o unusual incidences o cancer in the FortChipewyan community. Indigenous groups are also starting to uselegal routes to challenge oil sands leases where they eel their rightsto consultation have been ignored. The Assembly o First Nations

Treaty Chies have issued a call to implement a ull moratorium on oilsands development.

INVESTOR RISK

The fnancial sustainability o unconventional oil is dependent on ascenario with limited regulation, a high oil price and a low carbonprice. Policy makers, and energy and utility companies agree thatlimited regulation and a low carbon price will not last long.

Oil sands are the most carbon intensive uel currently beingexploited and thereore the least efcient in a carbon constrainedeconomy. Oil shales present an even more carbon intensive option. Government measures are in development, which could restrict

access to primary markets by prohibiting uels with liecycle CO2emissions greater than those derived rom conventional sources. Expanding oil sand capacity is already capital intensive, currentlyup to 20 times more so than conventional oil. When there are cheaper conventional resources available, whichare sufcient or maximum possible exploitation in a carbonconstrained economy, this lavish capital expenditure may producestranded assets. Spiralling labour and inrastructure costs in the sector will urtheradd to capital costs. I approved, uture gas pipelines will add to expense and

environmental liabilities. Non-approval would limit growth.

Although ar rom commercial viability, the requirement or CCS willurther add to capital costs and sequestered carbon will present along-term environmental l iability. Operational licences are increasingly being challenged in thecourts on environmental grounds and have been suspended. Requirements to reclaim boreal orest to the same condition as

ound present a signifcant long-term environmental liability, and dueto lack o success, a signifcant risk. As a result o unsustainable water usage, operators can expectaccess to water to be restricted or costs to rise, limiting growth orurther increasing capital intensity. Management o tailing ponds presents a long-term environmentalliability and signifcant risk due to size and toxicity. Damage to sensitive and globally important ecosystems, plus theloss o wildlie, present signifcant reputational risk. Concerns over health impacts on First Nation communities andpotential litigation present a risk.

Oil companies have hardly begun to actor in the externalities thatare currently imposed on the environment and local communities,yet are rapidly expanding unconventional oil developments in thehope o uture technological solutions, subsidies, and avourablegovernment intervention to reduce companies exposure toenvironmental liabilities. This is a complacent attitude.Shareholders should challenge those oil companies that ail tosteward investment responsibly.

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8

RECOMMENDATIONS

GOVERNMENT

Halt the licensing o new unconventional ossil uel operations. Introduce low carbon uel standards to prohibit uels with liecycle well towheel carbon emissions greater than those derived rom conventional sources. Implement eective measures to reduce absolute carbon emissions rom

existing operations. Deliver on Kyoto commitments and agree strong targets post Kyoto. Hold companies accountable or environmental and social impacts, includingcarbon emissions, deorestation, water usage and toxic waste management. Protect sensitive and endangered biodiversity and carbon sinks. Investigate the relationship between oil sand operations, water contaminantsand downstream water quality and health. Improve monitoring o tailings ponds and introduce mandatory independentassessment o operations.

OIL COMPANIES

Report on all risks associated with the environmental and social liabilities o oilsands operations, including energy intensity and carbon emissions,deorestation and land reclamation, community health and saety, water intensityand long-term toxic waste management. Publicly disclose strategies or addressing and reducing these risks in thecontext o a low carbon economy, and report progress o implementation. Until these strategies are in place and their success proven, halt the expansiono oil sand operations. Justiy the competitiveness o unconventional ossil uels in a carbon-constrained economy. Evaluate uture uel technologies or development based on their potential to

meet low carbon uel obligations, and switch research and developmentexpenditure away rom carbon-intensive uels such as shale oils to sustainablealternatives.

INVESTORS

Consider the competitiveness o unconventional ossil uel investment in acarbon-constrained economy. Question the strategy o oil companies. Include long-term environmental liabilities such as toxic waste managementand community health and saety in investment decisions. Engage with oil companies to report on risks associated with theenvironmental and social liabilities o unconventional ossil uel exploitation,and to introduce strategies to address. Evaluate uel technologies or investment based on their potential to meetlow carbon uel obligations.

Satellite view ooil sands production. Google


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Background

What are they?

Oil sands (also known as tar sands) consist o oil trapped in acomplex mixture o sand, water and clay. The most prominent theory

o how this vast Canadian resource was ormed suggests that lightcrude oil rom southern Alberta migrated north and east with thesame geological pressures that ormed the Rocky Mountains.Over time, the actions o water and bacteria transormed the lightcrude into bitumen a much heavier, carbon rich, and extremelyviscous oil.1 The proportion o bitumen in an oil sands mixture canrange rom 1-20%.

Where are they?

The oil sands cover 140,000 sq km in the boreal orest o Alberta an area larger than the 130,000 sq km o England.2 The deposits arein three main regions: Athabasca, Peace River and Cold Lake, as

can be seen on the map below (Figure 1). Exploration leases aretypically provided or fve years. Areas that have been surveyed in thepast, but not considered viable, are now being revisited and 75% oleases are still available. Venezuelas Orinoco Belt is the only otherregion with signifcant oil sands reserves and production, althoughsmaller natural bitumen deposits are ound in many other countries.3

The extraction process

Oil sands deposits can be divided into surace deposits (up to 75min depth)4 that are extracted by open pit processes, and deeperunderground deposits that are extracted in situ. O the establishedreserves, 82% require in situ extraction rather than open mining.5

Mining has accounted or the majority o projects to date, but moreexpensive deeper deposits are economically viable at todays oilprice.

Surace Mining

Surace deposits can be mined using more traditional methodssimilar to open pit mining. To produce one barrel o oil rom suracemining, at least two tonnes o material is mined.6 The oil sands aremoved by huge 400 tonne trucks to a cleaning acility where thematerial is mixed with warm water to remove the bitumen rom thesand. Open pit mines are much more obviously destructive in termso excavation, but the surace activities o in situ extraction canalso have signifcant impacts on land cover. Some o the hugemines can be seen rom space.

Oil sands

Figure 1:Map o main oil sands regions

in Alberta, Canada

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In situ Processing

For oil sands reservoirs too deep to support economic suracemining operations, some orm o in situ recovery is required toproduce bitumen. In situ oil sands production is similar to that oconventional oil production in that oil is recovered through wells.However, the heavy, viscous nature o the bitumen means that it will

not ow under normal conditions. The large areas required or steamgeneration plants, well pads, roads, 3-D seismic lines and pipelinesor these processes means they disturb signifcant areas o land.Even more water and energy is required or in situ than mined oilsands.

Upgrading

Upgrading is the energy-intensive process by which heavier oilractions are converted into more useul/desirable petroleumderivatives. This is done either by removing carbon (coking) oradding hydrogen (hydrocracking).7 Hydrotreating is a secondaryprocess to remove sulphur and nitrogen and metals using a catalyst.

In the oil sands, bitumen is converted into a higher quality, lightercrude oil. This is known as synthetic crude oil or syncrude.Increasingly, companies are seeking to integrate the upgrading andproduce higher value products, rather than bitumen. The Premier o

Alberta, Ed Stelmach, has expressed his desire to retain as much othe value-adding upgrading north o the border as possible.8However, this will bring the associated emissions and increasepressure on inrastructure.

Refning

Oil companies in North America have to reconfgure their refneries ithey want to accept large volumes o these synthetic heavy oils;

indeed this was a precursor or BPs asset swap with Husky inDecember 2007, which provides vertical integration o Huskysextraction with BPs refneries. BP announced a US$3bn investmentin its Whiting refnery in 2006 and a US$3.6bn upgrade o its Toledorefnery in 2007.9, 10 While BP has been slower to invest in upstreamoil sands, the company is a signifcant player in United Statesdownstream activities, (BP is the second largest refner in the US at1.5 million barrels per day (bpd)), and as a result has a big interest inwhich uel stocks are used.11 There has been local opposition to theexpansion o refneries to receive oil sands production due toconcerns over local air quality and health impacts. Community

groups staged protests outside BPs Whiting refnery in Indiana.12Most expansion in oil sands production is destined or the US.

The scale of the industry

Canadian oil sands production has seen signifcant growth in recentyears to 1 million bpd. Even more rapid growth is projected by theindustry, with orecasts predicting 5 million bpd between 2020 and2030. The graph below (Figure 2) is based on The Canadian NationalEnergy Board base case expansion scenario to 2030, splitting the

output by upgraded synthetic crude and non-upgraded bitumen.

Figure 2: Oil production from Canadas oil sands

Source: Canadian National Energy Board13

Estimates o capital expenditures to construct all announcedprojects over the period 2006 to 2015 total C$125 billion.14 TheAlberta oil sands region is set to become one o the largest oildevelopments in the world. Oil sands are a capital-intensive activityconnecting with a revenue-rich oil industry, which is desperate toincrease both production and reserves.

To illustrate this, conventional oil capacity can be added at $5,000per barrel o production capacity, compared with the oil sands,where the cost can be as high as $100,000 per extra barrel oproduction.15,16,17 Integrated operations have seen lower expansioncosts o $30,000 per barrel, but these fgures are rising all the time

linked to the increase o materials, equipment and labour costs.18In its 2008 annual report, Shell reported that operating costs hadincreased 50% in two years.19

800

700

600

500

400

300

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2000 2005 2010 2015 2020 2025 2030

Thousand cubic metres per day

ForecastHistory

Million barrels per day

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Oil Sands Non-upgradedOil Sands upgraded

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The province o Alberta is set to become the pollution capital oCanada. It has proven reserves o 174 billion barrels o oil, and 315billion probable barrels using technology currently underdevelopment.20 Ultimate reserves are thought to be in the region o1.7 trillion barrels.21 In terms o proven reserves, 174 bill ion barrelsplaces Canada second only to Saudi Arabia.22 Saudi Arabiaproduced 10.9 million bpd in 2006, ollowed by Russia with 9.8million and the US with 6.9 million.23 The Prime Minister o Canadahas talked o his country becoming an energy superpower ininternational orums as a result.24

Energy Intensity

It takes energy to make energy and in the case o oil sands, anunusually large amount, used in a highly inefcient manner. For oilsands this is the equivalent o up to 30% o the energy contained inthe extracted oil,25 which is around three times as much as typical oilextraction.26 In order to meet the energy demand that would resultrom growth in oil sands, companies are looking to increase natural

gas supply. The rapid projected growth o oil sands would need tobe mirrored by increasing energy supply. In 2004, the oil sands used0.6 billion cu t o gas; this is projected to reach a demand o 2.3billion cu t by 2015.27

The current gas usage is already equivalent to that required to heatthree million o Canadas 12 million dwellings.28 I the predictedexpansion occurred, the oil sands would use enough gas to heatthem all.

Pipelines

As a means o supplying more gas, a 1,200 km gas pipeline through

the Mackenzie Valley (see Figure 3 opposite) is currently beingconsidered by a joint territorial and ederal review process.29This $16.2 billion project is proposed by a consortium includingExxonMobil (and its subsidiary Imperial Oil), Royal Dutch Shell andConocoPhillips. This could provide gas to uel oil sands expansion.WWF has intervened in the process, concerned that the hugeinrastructure development in a globally signifcant wetlandecoregion would impact upon it irreversibly. WWF has proposed aConservation First approach, which would establish a network oprotected areas that unction at an ecosystem level, prior to anyexploitation o mineral resources.30 There is still no plan proposedthat would not cause signifcant degradation o this ecosystem.

Another potential supply route is the $42 billion Alaska natural gaspipeline which would bring gas rom Alaskas Arctic slope, acrossthe Yukon to Alberta and on to Chicago.31 BP announced in April2008 it would be joining orces with ConocoPhillips to deliver thisproject.32 At 5,600 km, this is an even longer pipeline that is likely toace signifcant challenges rom native communities andenvironmental groups in Alaska. The Alaska Governor is not keen onthe terms proposed, and land claims would have to be resolved; theproject would also have to be climate change resilient, as permarostmelts in the decades to come.

The gas supply rom either the Mackenzie or Alaska pipelines wouldbe a key driver in oil sands expansion. The map below (Figure 3),rom the Alberta Energy Department, shows the proposed gas linksto the oil sands. Exploration is also taking place in British Columbia.

A carbon and water intensive alternative would be to tap into coalbed methane in the south o Alberta.

Nuclear

There has been some talk o developing small-scale nuclear plantsin the oil sands region. While this is not seen as a likely option, theact it has been considered demonstrates that energy supply is alimiting actor the industry is concerned about, particularly i somegreenhouse gas limits are imposed. Alberta Energy has launched anassessment o the viability o nuclear energy being developed in theoil sands, to come online in a decades time.

Figure 3:Map o proposed

gas supply pipelines to

the oil sands

Source: Alberta Energy Department 33

Alaska Highway (Southern)

McKensie Valley Pipeline

Over-the-top (Northern)

ALBERTA HUB

Fort McMurray

Whitehorse

Inuvik

Yellowknie

Edmonton

Fort Simpson

Proposed Northern Pipeline

Prudhoe Bay

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Conclusions

Unconventionals are ar more energy intensive to extract andproduce, and thereore more carbon intensive. Their increasingexploitation is a warning sign that the industry is recarbonisingat a time when we need to urgently tackle climate change.

The context o a high oil price and concerns about energy securityhas renewed interest in unconventionals. In terms o its reserves,Canada has risen dramatically up the ranks o oil nations as a result.

Canada is in a position where it risks damaging its physicalenvironment and international reputation, as well as contributing toglobal climate change, in order to supply the US with oil. Using acleaner uel such as natural gas to produce dirty transport uels isirresponsible.

As the largest consumer per capita o energy, North America

needs to consider how it can reduce demand, not just increasesupply.

Expanding oil sand capacity is capital intensive up to 20 timesmore so than conventional oil. When there are cheaper conventionalresources available, which are sufcient or maximum possibleexploitation in a carbon constrained economy, this lavish capitalexpenditure may produce stranded assets in the more carbonconstrained world to come.

As we will see rom looking at the impacts o these activities, the truecosts o the liecycle o oil sands have not even begun to be

assessed properly. Oil companies and the long-term investor shouldsee that unconventionals, in addition to being climate-hostile, startto look even less economic when their true cost (including relevantexternalities such as properly mitigating ecological impacts) isconsidered.

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In order to avoid dangerous levels o climate change, we need tolimit global mean temperature increases to 2C above pre-industriallevels by stabilising atmospheric CO2-equivalent levels at around450 parts per million.34 In order to achieve this, it is likely that ouremissions must peak by 2015 and all by 80% compared with1990 levels by 2050. 35, 36

The world has already consumed 1 trillion barrels o oil. We cannotaord to exploit this amount again, especially rom unconventionaloils, i we wish to remain within the sae threshold o globalwarming.37 As outlined in the WWF Climate Solutions report,38

it is both pragmatic and essential to shit to the least carbon intensiveuels available and use them in the most efcient way, to meetenergy demand.

The oil sands represent a carbon intensive option:

For a conventional barrel o oil, 28.6 kg o CO2 is emitted in itsproduction. For an average barrel rom the oil sands, 85.5 kg CO2 is released inits production.39

These are average industry fgures, which vary depending on thedepth o the oil sands, the uel used and the age and efciency o theequipment and techniques used. They also do not include ugitiveemissions such as those rom orest carbon sinks destroyed ordamaged during construction and operational phases, or romtailings ponds (large lakes o slurry). Thereore in reality we believethe total fgures rom oil sands are even higher. It has been calculatedby the Tyndall Centre or Climate Change that total greenhouse gas(GHG) emissions rom the planned expansion o oil sands will morethan double between 2004 and 2015, even with efciencyimprovements.40

Goverment actions

Currently the only project approval conditions or reducing emissionsrelate to a requirement to apply the Best Available TechnologyEconomically Achievable (BATEA). This is obviously open tointerpretation, and provides little incentive or reducing emissions.Recent air emissions legislation, (Canadian Clean Air Act 2006),41 hasocused more on reducing non-GHG emissions such as NOx and SOxto improve air quality. Some improvements have been made toimprove efciency and recover heat; but the growth in emissions romthe proposed tripling o production by 2015 would dwar any efciencygains.

Imperial Oils Kearl development has been delayed by a legal challengerom Ecojustice, which was upheld in March and May 2008. Thesuccessul claim exposed the ailure o the governments jointassessment panel to consider how the intensity targets proposed by

Imperial would tackle the problem o rising absolute greenhouse gasemissions, which it had too easily dismissed as insignifcant.42

Kyoto Protocol targets

Canada has a Kyoto target to achieve a 6% reduction in GHGemissions by 2012 rom 1990 levels.43 Since the Montreal climatechange conerence in 2005, a new Canadian conservativegovernment has been appointed in January 2006 and has alreadyannounced that it will abandon Canadas Kyoto targets, with GHGemissions already 27% above 1990 levels in 2006.44 As more andmore oil sands expansion has been announced, so the projected GHGemissions levels have grown, resulting in an increasing Kyoto gap

between emissions and targets.

The ollowing graph (Figure 4) orecasts the emissions that would resultrom the oil sands expansion scenarios outlined by the National EnergyBoard (NEB) o Canada.45 These range rom the low (2m bpd in 2015),through the base case (3m bpd in 2015) to all projects (4.5m bpd in2015). The province o Alberta produced 12% o Canadas GHGemissions in 1990, compared with 20% by 2006. The graph also plotsthe emissions that would be permitted i Alberta were to limit oil sandsemissions according to these proportions o its share o the nationalKyoto target. The dierence between the two is the Alberta oil sandsKyoto gap. I all projects were to progress, this Kyoto gap would be90 million tonnes o CO2 equivalent by 2015, based on Albertas2006 projections.

Climate Change

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Figure 4:The Kyoto gap between projected emissions and Canadas

commitments or the Alberta oil sands

Source: Tyndall Centre or Climate Change Research46

A review o the Canadian governments attempts to regulate GHGemissions in relation to the oil sands was conducted by the TyndallCentre or Climate Change in 2007. The government proposedplans setting intensity targets relative to GDP contribution, ratherthan absolute emissions caps. It claimed these targets wouldreduce emissions to 20% below 2006 levels by 2020. Canadianemissions were already 27% above 1990 levels in 2006, and 35%above the Kyoto target.47

The Tyndall Centre review concluded that the intensity-basedtargets mooted by the ederal government would not deliver anymeaningul reductions, as they were no more ambitious thanindustrys existing efciency plans, which all way short o CanadasKyoto commitment. Indeed, the scheme was so generous that i theoil sands delivered urther cuts, they would be able to claim creditsworth up to $700 million.48 So while oil sands production tripled, andCO2 emissions more than doubled, the oil companies would pocketa credits windall, and the gap to Canadas Kyoto commitments

would grow.The 2006 Report o the Commissioner o the Environmentand Sustainable Development (Ofce o the Auditor General)concluded that:

Oil and gas production, particularly the rapid development oCanadian oil sands, is signifcantly increasing greenhouse gas

emissions. Yet ew ederal eorts are under way to reduce these

emissions, and those eorts have had minimal results to date. For its

part, the ederal government is counting on regulatory and long-term

technological solutions to achieve uture reductions in this sector.

However, it is not leading the way by clearly stating how and to what

degree Canada will reduce greenhouse gas emissions when oil and

gas production is expected to increase. 49

At present Canada is likely to be penalised or breaching its Kyotocommitments. And civil society groups are seeking to hold thegovernment accountable or this ailure. Clearly urther regulation oGHG emissions in Canada is both necessary and likely, providingregulatory risk to oil sands operators. An investor with an eye to theuture must consider that large-scale expansion o oil sands at least without some magic bullet to solve the emissions problem will provoke regulatory shocks down the l ine.

140,000

120,000

100,000

80,000

60,000

40,000

20,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

CO2 emissions (000s tonnes)

Oil sand target = 12% o Albertas 30% o Canadas Kyoto

Oil sand target = 20% o Albertas 30% o Canadas Kyoto

Oil sand target = 12% o Alberta per GDP Emissions Target

Oil sand target = 20% o Alberta per GDP Emissions Target

NEB All Projects CO2 emissions

NEB Base Case CO2 emissions

NEB Low Case CO2 emissions

14

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Carbon Intensity Fuel Standards

The majority o uture unconventionals production is presentlydestined or the US. Caliornia has already developed legislation thatstipulates a Low Carbon Fuel Standard (LCFS), as well as havingquotas or hybrid vehicles. The Caliornian LCFS calls or a reductiono at least 10% in the liecycle carbon intensity o Caliornias

transport uels by 2020.50

Other US states and Canadian provinceshave indicated they are to ollow suit. The US Energy Independenceand Security Act 2007 could also restrict the market orunconventional oils.51

Section 526 o the Act limits US government procurement o uels tothose rom which the liecycle GHG emissions are equal to or lessthan those rom uel rom conventional petroleum sources. There iscurrently a debate over the scope o application o the Bill, withCanada lobbying or an exclusion or oil sands, while North

American NGOs are calling or a strict application o the Bill. 52, 53It would appear an unair application o trade rules i GHG standards

were imposed or biouels that were not required or oil sands.

Figure 5:Greenhouse gas emissions or ossil hydrocarbon uels production

Figure 5 below indicates how (upstream) production emissions romunconventionals such as oil sands and oil shale are signifcantlyhigher than or conventional oil. Regulation is essential i our uels areto become less carbon intensive, rather than making the situationworse. These fgures do not include ugitive emissions. Thereore in

reality we believe the total fgures rom oil sands are even higher.Figure 5 also brings in another dangerous threat to reducingemissions: Coal-To-Liquid (CTL) synthetic uels. The option oconverting coal to liquid uels demonstrates how the world is 95%reliant on oil or its transport uels. With high oil prices and energysecurity concerns, the worlds largest oil consuming nations arelooking to their coal reserves to meet growing demand. Analternative is obviously to better manage demand, and to seek moreefcient alternative transport solutions. A more complete discussiono the consumption o oil, and the domination o the internalcombustion engine, is contained in the WWF publication Plugged In:

the end o the oil age.55 Oil companies are also pursuing CTLtechnology: or example, Royal Dutch Shell is developing plantswith partners in China and the US.56

1,000 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000

Increasingly uncertain resourcesReserves

Potential or liquid hydrocarbon production (Gbbl)

Tar sands

and heavy oil

Oil Shale

CTL synuels

GTL synuels

Upstream emissions

Fuel emissions

Conv.Oil

EOR

80

60

40

20

TotalGHGemissions(gCeq

.perMJofnaluel)

EOR Enhanced Oil RecoveryGTL Gas to Liquids

CTL Coal To Liquids

Source: Brandt and Farrell (2006)54

15

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Supplying the US makes the oil sands l iecycle even less efcientbecause North American vehicle eets are the least efcient in theworld. A joint study by Natural Resources Deense Council, PembinaInstitute and Western Resources Associates concluded that unlesswe take swit action, US transportation emissions, which alreadycontribute over one third o total US global warming pollution, willdouble by 2050.57

In 2006, Canadian oil production was around 2.4 million bpd, witharound hal o this coming rom oil sands, and 1.6 million bpd o oilexported to the United States.58 By 2015, exports are expected tonearly double to more than 3.1 million bpd with the growth allcoming rom the oil sands while conventional production declines.59Canada supplied around 12% o total US oil demand in 2006. Thecurrent inrastructure and difculties associated with alternativeexport routes means that the US is currently the only signifcantmarket or oil sands production. Both Chinese and Indiancompanies have shown interest in investing in the oil sands.

However, numerous new pipeline proposals and expansions oexisting pipelines have been announced in recent years, withproducers and shippers now assessing the alternatives to determinewhich projects will get market support. Proposals currently includepipelines to Vancouver and Puget Sound on Canadas west coast,Portland on the US east coast, and numerous pipelines to theGul o Mexico.

In the short term, US demand would be seriously restricted i eitherederal or state low carbon uel standards are implemented. The USpetroleum industry is currently investing in heavy oil inrastructure,expanding and upgrading refneries to take oil sands production.

There has been local opposition to refneries as well, withcommunities resistant to the air quality impacts and concernedabout health risks. Consumers are baulking at the rising cost o fllingup their cars, as high oil prices are passed on to them.

The expansion plans ace urther potential regulatory risk, especiallywith a new US President due in 2009. Moreover, unconventionals,because o their carbon intensity, are likely to become more andmore unpalatable in markets where parallel eorts are being made tocurtail carbon. The economic viability o oil sands would be uncertainin any carbon-constrained economy o the uture.

16

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The inecient US vehicle feet

is driving demand.

17

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I Shell were able to achieve absolute emission reductions o 50%,which looking at its strategy, does not appear to be the case, itwould still mean that the products emissions are higher than thoserom conventional ossil uel production. The liecycle analysisapplied or market standards (or example the Caliornia Low Carbon

Fuel Standard) should not permit the inclusion o unrelated carbonosets, as this would distort the comparison. As part o Shellscommitment to reduce emissions, it is considering a large-scalecarbon capture project, which would store more than 1 milliontonnes o CO2 per year rom Shells Athabasca Scotord Upgrader.However, the likelihood o this being in place by 2010 is very slim.

Company efforts

There is very limited action by most oil companies to reduce theiremissions in respect o oil sands, which reects the vacuum oeective regulation. In 2007 the Ethical Funds Company o Canadareview o climate change risks in the oil and gas sector in Canadaconcluded that most operators had ailed to take action to reduce

emissions.60

Only a handul o companies had an action plan toreduce emissions or actored the costs o carbon into investmentdecisions.

The only oil sands producer that has set a GHG reduction target isShell, which has introduced a voluntary target to reduce emissionsby 50% rom the original specifcation or its Athabasca Oil SandsProject (AOSP)by 2010.61 A presentation rom Shell indicates theollowing breakdown o how the 50% will be achieved:

Source: Shell Climate Change & GHG Strategy Manager presentation62

Energy Efciency

Domestic Osets

International Osets

Carbon Capture

29%

20%

17%

34%

I hope that I dont have the ollowing conversation with

my granddaughter twenty years rom now:

Grandpa, did you really do that? Do what, Masha?

Did you take natural gas rom the Arctic down to Alberta to

boil water to make steam to melt tar out o the oil sands, then

use more natural gas to produce hydrogen to make the tar

molecules into gasoline so North Americans could drive our

tonne vehicles fve kilometres to sports clubs to spend fteen

minutes riding stationary bikes; did you really do that,

Grandpa? Ahhhh, yes, Masha, I am araid we did.Proessor Robert Skinner o the Oxord Energy Institute

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The re-elected Alberta government is placing a major emphasis oninvestment in this technology in order to limit the growth ogreenhouse gas emissions.71 Although CCS technology has thepotential to play an important role in mitigating climate change,it is still at the research and development stage and the required

inrastructure does not exist in Alberta. Given the timescalesrequired or development, it is not a viable solution or cuttingemissions by 2015, as is required. It is not acceptable to use apromise o CCS as a licence to signifcantly expand the exploitationo unconventional ossil uels when its availability on a sufcient scaleis decades rom being achieved, and so many contingencies leaveits viability hanging in the balance.

For instance, the companies insist they require heavy subsidies toensure that proft margins remain worthwhile and they do not wantto be held responsible or legacy issues such as what the storedcarbon might do in the uture. Should and will government accept

liability? A global carbon trading regime needs to be in orce tocreate the right price or carbon to turn CCS and cleanertechnologies into commercial opportunity, not just coststo be borne. A correct price or carbon, which does include its truecost, is indeed desirable but the global regime envisaged is someyears away, at best. In the meantime, investors should bequestioning the judgement o oil companies whose strategiesare dependent on indefnite fnancial support rom government,through subsidy and bail-out.

Carbon capture and storage (CCS)

Most operators point to potential technological solutions such ascarbon sequestration and an industry group, the Integrated CO2Network, has been set up to call or a Canadian carbon capture andstorage initiative.63 The oil and gas reservoirs in the Western CanadaSedimentary Basin potentially suitable or CCS are around 500 km

rom the oil sands.64 The Tyndall Centre has conducted an analysisshowing that the costs o recovering carbon emissions are marginalper barrel o oil, even at todays least optimistic estimated costs.65However, oil companies are still seeking a subsidy or carboncapture rather than taking responsibility or their own emissions.

The industry has acknowledged that CCS will not come on streamor another decade.66

In a speech in April 2008, Nobuo Tanaka, the Executive Director othe International Energy Agency gave an indication o the timescalesrequired or CCS when he said: In carbon capture and storage, wewould need to build at least 20 demonstration plants by 2020, at a

cost o US$1.5bn each. Such a construction program should beviewed as a l itmus test o our seriousness towards combatingclimate change. 67 This indicates CCS is still ar rom being a viablecommercial scale solution and realistically will not be viable ordecades to come. In 2007, the World Energy Council predicted CCScould reach its ull potential within the next 30 to 40 years, 68 theIPCC believes ull potential to be 20-40% o global ossil uelemissions, and due to technical limitations does not believe it to beachievable until 2050.69 According to the United NationsDevelopment Programme, CCS technology is projected to comeon-stream very slowly in the years aheadAt this rate, one o the

key technologies in the battle against global warming will arrive onthe battlefeld ar too late to help the world avoid dangerousclimate change. 70

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The ederal government has proposed a requirement or all projectsinitiated rom 2012 to have CCS eective by 2018; and NaturalResources Canada has announced a C$125 million R&D und.72, 73Given it is unlikely that CCS will be viable by then, this could restrictgrowth at this time. Canada was criticised or misrepresenting thisproposal uture in its latest submission to the UN Climate ChangeConerence in Bangkok in April 2008, claiming it as a contribution to

the current Kyoto period, despite not coming onstream until post-2012.

The other impacts o oil sands should not be orgotten. The potentialor CCS helping to mitigate climate change impacts should not beseen as a green light or unettered expansion o the oil sands. TheGHG picture cannot be seen in isolation rom the ecosystem eects:not rom an ethical point o view, nor rom a fnancial point o view.Limits or greenhouse gases, water use, orest degradation andspecies loss should be considered as part o a package that cannotbe unbundled.

How much carbon emissions would result?

I all the oil sands were exploited and consumed, the greenhousegas emissions would be signifcant. The level o emissions woulddepend on the rate and method o extraction and the availability oany technological efciency and mitigation improvements whichmay be applied over time. These calculations are based on a well-to-wheel emissions rate o 638.5 kgCO2 per barrel o transport uelused in central North America.74 The table below shows that theexploitation and use o just the proven reserves would result in morethan 100 Gt CO2. Global anthropogenic greenhouse gas emissions

were 49 Gt CO2 equivalent in 2004.75

Total emission Well to Wheel (WTW) (Gt CO2eq)

Proven reserves (174 billion barrels) 105Probable reserves (315 billion barrels) 183

The current oil sands production level o more than 1 million bpd isaround 2% o global production. I the oil sands industry achievesthe higher rates o production planned by 2020 o around 5 millionbpd, or nearly 1.825 billion barrels a year, this would representaround 10% o current global annual consumption o oil. By 2050,around hal o the proven reserves could have been exploited idevelopment proceeds at a rapid pace. This would mean that the oil

sands would be responsible or more than 50 Gt CO2 by 2050.

The larger the proportion o oil production rom unconventionals witha higher carbon ootprint, the urther the world will get rom theemissions pathways needed. Companies are putting a large amounto eort into trying to make unconventional oils no worse thanconventional oil, when in act solutions are needed to rapidlyproduce a lower emissions trajectory.

Figure 6 below shows how the development o oil sands as aresource or transport uels in North America is heading in the wrongdirection. By 2050, this activity alone could account or the majority

(87%) o emissions that can be produced rom OECD countries inorder to have a chance o stabilising at 450ppm. The diagram showsoverall Well to Wheel (WTW) emissions or the rising oil sandsproduction based on the Alberta Energy and Utilities Boardorecast.76 This is compared to the Intergovernmental Panel onClimate Change (IPCC) stabilisation pathways or the world and orOECD countries.

I oil companies are to be part o the solution rather thanexacerbating the problem, they will need to decarbonise their energyportolios. Investors will need to start valuing companies in a dierentway, which takes into account the reduced value o ossil uels in acarbon-constrained world. Governments also need to take greateraction to ensure strong emissions reduction targets are set and met.In the absence o the required government intervention, and as thescale o oil sand exploitation increases unchecked, the scenariocould get even worse.

I all 315 bill ion barrels o probable reserves were ully exploitedwithin the next century, it would result in emissions o 183 GtCO2.It is estimated that this would lead to an increase in atmosphericCO2 levels o between 9 and 12 parts per million.77

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Conclusions

Humans have discovered adequate conventional ossil uelreserves to cause dangerous climate change by 2050. Putting moreeort into perpetuating this model is detracting rom fnding

alternative solutions. The world can only aord to use the least carbon-intensive uelsavailable. Oil sands are the most carbon-intensive uel sourcescurrently being exploited, and thereore the least efcient in a carbonconstrained economy.

Producing oil rom oil sands creates on average three times asmuch GHG emissions as conventional oil.

Canada has a target to reduce GHG emissions by 6% between1990 and 2012, but in 2006 emissions were 27% above 1990 levels.

The oil sands developments are the astest growing contributor to

Canadas GHG emissions and current plans guarantee Canada willcontinue to ail its Kyoto targets.

I the oil sands continue to expand at the pace desired by theindustry, the production and use o the uel would account or 87%o the maximum allowable emissions rom OECD countries in 2050under a 450ppm stabilisation pathway.

There is currently inadequate regulation o GHG emissions inCanada. I expansion goes unchecked, the result would becatastrophic or climate change.

Internationally, low carbon uel standards are required to prohibit

uels with liecycle well to wheel CO2 emissions greater than thosederived rom conventional sources.

Oil companies and investors should note the development ogovernment measures to reduce CO2 emissions, including those inthe US to prohibit uels with liecycle CO2 emissions greater thanthose derived rom conventional sources. There are leadingindicators that these regulations may restrict access to the primarymarkets or Canadian oil sand derived uels.

This capital intensive industry will see already high costs urtherincrease by the need to reduce emissions.

2000 2010 2020 2030 2040 2 050 20 60 2070

9.0

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0

World WRE 450ppm stabilisation PostRES scenario

OECD WRE 450ppm stabilisation PostRES scenario

Estimated Oil sa nds Well-To-Wheel Total Emissions

Figure 6:Annual emissions o oil sands expansion compared to those under a 450ppm

stabilisation scenario or the world and OECD

Based on calculations by the Tyndall Centre or Climate Change Research


24/52

Intact boreal orest

home to the caribou.


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Exploration and inrastructure

is ragmenting the orest.

24


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The orest and peat covering the oil sands act as a huge carbonreservoir, and the deorestation and removal/drying o the peat isreleasing this carbon. The scale o Canadas unction in this regard isglobally signifcant. The boreal orest is the single largest terrestrialcarbon storehouse in the world, and deorestation has beenidentifed by the IPCC as a major contributor to climate change.

The scale o the clearance or oil sands can only be appreciated romthe air. A closer look in Alberta reveals a criss-cross o cleared lines,where seismic exploration or oil sands has ragmented the habitat.In places these lines are six metres wide and just 40 metres apart.Drilling pads, access roads and pipelines also require clearance oorest. In addition, the processing plants cover a large area o land.So while in situ projects do not involve a large hole in the ground,they are capable o degrading the useul ground cover rom anecological perspective.

The orest is home to many species such as caribou, which requireconnected areas o intact orest that have sufcient buers romsuch disturbance. At present there is no maximum density o activitythat is applied to prevent cumulative impacts that destroy habitat.Studies have shown that orests within 1 km o roads and well sitestend to be avoided by caribou and that roads urther ragmentcaribou habitat by acting as barriers to movement.78, 79 Up to 80% othe surace area o current in situ developments provides less than a250 metre buer distance rom industry disturbance.80 Studies bythe Canadian Parks and Wilderness Society and other studiesindicate caribou populations have declined in recent decades due to

a range o anthropogenic actors, including unsustainable loggingand oil sands exploration.81

Some o the boreal orest is en (peatland) which provides importantecosystem unctions. More research is needed to better understandthese subsurace processes which are critical or the ongoingunctioning o the wetlands. For example, Petro-Canada has so arresisted entering McClelland Fen, hal o which overlaps with one oits oil sands licences. McClelland Fen is one o the worlds bestexamples o an ancient patterned en, which provides a crucialhabitat or migrating wildowl such as the endangered whoopingcrane, as well as being home to some species that are uniqueto the region.82

Government actions

In May 2007, 1,500 scientists rom more than 50 countries called onthe Canadian government to provide more protection or the borealorest. This initiative was supported by the Canadian Boreal Initiative,which includes oil companies, First Nations (aboriginal) groups andconservation organisations among its members. Canada is home tohal the remaining boreal orest in the world, and (not includingtundra and wetlands) contains 11% o the global terrestrialcarbon sinks. The boreal orest has an ecosystem carbon densityo 164.8 t/ha.83

The oil sands licences have been granted on the basis thatoperators will return areas to at least the same condition in whichthey were ound described as equivalent land capability by the

Alberta government. 84 Companies have been conducting researchinto how best to recreate the boreal orest, with limited success.While some small areas have seen some tree growth, the harsh

conditions and scale o the task mean that limited activity has takenplace so ar to reclaim a signifcant area. Almost 42,000 hectares arecurrently active or oil sands mining and almost 6,500 hectares werebeing reclaimed by the end o 2006.

Ater decades o activity, only 104 hectares have been certifed asreclaimed by the Alberta government. Suncor Energy collected thetopsoil rom its mining in the 1980s and has managed to use thismaterial as the basis or orest cultivation. No company hasmastered the challenge o reclaiming a tailings pond. Mostcompanies admit it is impossible to artifcially return the land tothe same condition as they ound it; instead boreal land will have

much lower levels o carbon density and biodiversity thanpreviously existed.

Boreal forests


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4


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Oil sands waste sites are

supposed to be reclaimed

to wetland.

27


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Huge amounts o water are used in extracting and processing oilsands. High levels o reuse have been achieved, with more than 90%being recycled in the process, but ultimately only 5-10% is returnedto the river the rest being too toxic.88 The huge volumes involvedmean that enormous amounts o wastewater are produced. There iswidespread concern over whether there is sufcient water to meetboth ecological needs and supply the existing oil sandsdevelopments, let alone the proposed expansions.

Processing 1 m3 o bitumen produces 6 m3 o tailings.89 Between 2 and 4.5 barrels o water are used to produce a barrel osynthetic crude oil.90 The average is 3 barrels o water. Oil sands water consumption is expected to more than doublerom 5 to 13 million m3 by 2015.91

Approved oil sands leases currently have licences to divert 370million m3 (2.3 bill ion barrels) o reshwater a year rom the

Athabasca river. Planned expansions would increase this to 529million m3 (3.3 bill ion barrels) a year, equivalent to 15.7% o currentlow ows.92

The Athabasca river is a primary source o water or many o theAthabasca oil sands operations. The disturbance o the Athabascawetland catchment by oil sands is also reducing the amount o runoand groundwater reaching the river.93 As a result there is less water inthe river, while abstraction is increasing. The average summer ow inthe Athabasca declined by 29% between 1970 and 2005.94 In lowow seasons, there are concerns that the river is reaching levelsbelow that needed to maintain its ecological unctions. In particularthe river suers rom low oxygenation in the winter and is at risk otemperatures lethal to fsh during the summer, according to theUniversity o Alberta.

Government actions

The absence o an eective management plan or the Athabascahas been highlighted or many years. Despite a CumulativeEnvironmental Management Association being set up to look at theissue, and the problem being raised during applications or specifcoil sands projects, no agreement has been reached.

Given that the river is already reaching levels which indicate acuteecosystem stress in winter, allowing more extractions with owsdeclining cannot add up to a unctioning Athabasca. ProessorDavid Schindler, the leading expert on the Athabasca rom theUniversity o Alberta, states, Current production levels may alreadybe unsustainable due to poor water planning and climate change.95

Alberta Environment is refning the management plan to beimplemented in 2010, and must come up with a stricter regime thatprevents dangerously low levels and manages the cumulativeimpact on the river system.

In 2007, the Oil Sands Ministerial Strategy Committee an advisorygroup to the Alberta government concluded that the administrationhad ailed to provide timely advice and direction to industry relativeto water use and had inadequate capacity to enorceenvironmental laws.96 It recognised that the Athabasca river maynot have sufcient ows to meet the needs o all the planned miningoperations and that the government had ailed to determine i therewas sufcient water available rom the North Saskatchewan River tosupport the seven proposed upgraders.

Historically, licences or extracting water have been issued tooperators without any consideration o the cumulative impacts onwater bodies. Alberta Environment is now issuing shorter licences orconsidering non-renewal o licences. This provides an opportunityover the coming years to reduce extraction o water. There hasalready been a declaration that there will be no more licences on theBow river, or example.

Water


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McClelland patterned en is vital

or birds but is under threat.

29


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Company activities

Some companies have achieved urther improvements in waterefciency, reducing the need or new extraction licences to eed theexpansion o production.

Operators are also considering alternative water sources or in situprojects such as saline aquiers. There are dierent concerns relating

to this, in terms o leakage and salinisation o wetlands, andupsetting the balance o the aquiers. Producing steam rom salinewater produces a more concentrated waste which needs to bedisposed o. The use o reshwater aquiers brings issues relating todrainage o the wetlands, which are essential or maintaining theboreal orest habitat.97

Some companies are also researching drier technologies that heatoil sands using an element rather than steam. But such technologiesare not expected to come online or 10-20 years.

Because o concerns that water availability will constrain production,

some operators are investigating storage during higher ows to actas a reserve or low ow periods or example, Petro-Canada hasincluded storage or 45 days o water in the plans or its Fort Hillsplant.98 This storage option is still at a hypothetical stage, and it is notclear what the ecological eects o manipulating the ow regimes inthis way would be. Experience o regulated ows downstream odams suggests that disrupting the equilibrium in this way can havedamaging eects and aect channel dynamics.

At present oil companies pay no charges relating to the volume owater they use. Payment is an option that could be explored, toensure that sufcient water or ecosystem services and other

essential uses is available. Oil companies may expect some kind olevel playing feld with other industries such as agriculture (irrigation)that also withdraw water in Alberta but the act remains that morethan three-quarters o withdrawals rom the Athabasca River are orthe oil sands industry.99

Toxic waste

The waste ows contain water, sands, silt, clay and residualbitumen, and are sent to tailings ponds (large lakes o slurry) to settleover decades. Individual tailings ponds are up to 50 sq km in sizeand can be seen rom space. The dam structures are among thelargest in the world. Contaminants include high levels o napthenicacids rom the bitumen. This water is acutely toxic to aquatic lie andnoise guns have to be used to prevent wildowl landing on the water.Syncrude issued a public apology in May 2008, ollowing an incidentwhere several hundred migratory birds were killed becauseprotective measures were not activated on a tailings pond.100

The proximity o these huge toxic storage lakes to the Athabascariver some are only metres rom the bank is particularly worrying.

Any breach o these dams would lead to a catastrophic impact onthe river a major environmental risk or operators.

Limited inormation is available on how the toxic material iscontained in the tailings ponds. Concern has been expressed that

some o the contaminated water may leak out over time.101Operators conduct their own monitoring o the situation. The extento independent monitoring is not adequate to capture thisinormation and needs to be improved. Investing in the Future, areview by the Alberta government, described the provinces capacityto enorce and monitor environmental standards as inadequate.102

Very limited data is available rom the authorities, with only minimaldata collected by the industry association.

Suncor expects the frst major reclamation in 2010 rom its originaltailings pond that was started in 1967.103 Over the decades osettling and evaporation, large quantities o volatile hydrocarbonswill have been emitted rom the water surace. Suncor has beenrequired to provide security or reclamation liabilities to AlbertaEnvironment or its Millennium and Steepbank mines, which totalledC$163 million or the fnancial year 2006-07.104 It is not clear whetherinsurance is available or environmental damage rom dam ailures.


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Tailings ponds are vast

lakes that store toxic sludge

or decades.

31


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Water quality and health issues

Representatives o the Mikisew Cree First Nations community live inthe small town o Fort Chipewyan, on the shore o Lake Athabasca,downstream o the oil sands operations. Dr John OConnor was thedoctor or this community, and has raised the alarm over an unusualnumber o victims o a rare bile duct cancer in this town. Theincidence is normally only one case in 100,000, yet he has seen fve

cases in the community o around 1,200 people.105 The doctor hasalso observed an atypical number o thyroid problems and otherimmune system-related conditions. Local fshermen have alsoreported catching fsh with lesions and boils in Lake Athabasca,downstream rom the oil sands.106

At present no direct causality has been proven with the oil sandsactivities. Dr OConnor and his patients called or an investigation by

Alberta Health Department into the unusually high numbers o casesin Fort Chipewyan. A recent study o the water and sedimentrevealed contaminants o concern including arsenic, mercury andpolycyclic aromatic hydrocarbons (PAHs).107 Mercury levels in fshused or human consumption present a serious concern. I USEnvironmental Protection Agency standards are applied, all walleye(pickerel), all emale whitefsh, and some 90% o male whitefshexceed subsistence fsher guidelines or mercury consumption.

The Chipewyan Prairie First Nation are suing the Albertagovernment, claiming that they were not consulted over thelicensing o areas to MEG Energy, which they consider the breadbasket o traditional lands that have supplied fsh, game and otherresources or generations o native groups.108 The Canadian Houseo Commons Environment Committee is set to investigate water

issues relating to the oil sands. Meanwhile the Alberta Cancer Boardwill conduct a joint investigation into the unusual level o healthproblems experienced in Fort Chipewyan.109

Conclusions

Availability o water could be a signifcant limiting actor toexpansion and is a business and ecological sustainability issue.Government needs to set a regulatory ramework and charge orwater. Operators need to develop new water management plans toprevent impacts on operations and ecosystems.

As water demand increases and river ows decrease to dangerouslevels, companies can expect costs to rise or access to water to berestricted, limiting growth or increasing operating costs and capitalintensity. The Athabasca river is already over-exploited andexperiences low ows that impact the ecological unctions o theaquatic ecosystem.

Decades o legacy contamination are building up in tailings ponds.The management o these tailings, due to their size and toxicity,represents a long-term environmental liability and signifcant risk.

Ater decades o operation, there is no current evidence thatreclamation o tailing ponds is possible.

Loss o wildlie which come into contact with tailings pondspresents a reputational risk.

Concerns over health impacts on First Nations communitiesdownstream rom the oil sands need ull investigation to establishthe causes o abnormal rates o serious medical conditions.

The independent monitoring system or water quality downstreamrom oil sands activities is inadequate and needs to be improved, toensure the polluter pays.


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Local shermen on Lake Athabasca are

concerned about water pollution.

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In the last ew years, high oil prices have led not only to a resurgenceo interest in the oil sands, but also a rat o project announcementsand proposals. This has been complemented by multinational oilcompanies acquiring smaller operators who held leases, causing ashit away rom Canadian ownership o the operations and profts.

Statoil bought North American Oil Sands, Total acquired Deer Creek,and BP partnered with Husky Oil. Royal Dutch Shell bought out theremaining shares in Shell Canada that it did not already own. Manyoperators are still planning or developing their projects, but theprojection or production in 2020 indicates a dierent picture, withmany o the bigger players aiming or more than 500,000 bpd.

Recent years have seen a ood o investment by major oilcompanies in the oil sands: In January 2008, Suncor outlined a C$20 bil lion expansion plan orits Voyageur project.110

In December 2007, BP announced a $5.5 billion partnership withHusky Energy. Petro-Canada committed to the C$26 billion Fort Hills project inJune 2007.111

CNRL is completing the frst C$7 billion phase o its Horizonproject, with up to C$4 billion o urther investment expected. In April 2007, Statoil paid $2 billion to acquire North American OilSands, then spent a urther $2 billion acquiring leases rom EnCana. In March 2007, Royal Dutch Shell completed the 3.8 billionacquisition o the 22% o Shell Canada that it did not already own.112

In October 2006, ConocoPhillips and EnCana Corp announced a$10.7 billion partnership to boost Canadas oil production anddeepen its access to the US market.113

ExxonMobil (through Imperial Oil) has applied or a $6.8 billiondevelopment o its Kearl oil sands 4.4 billion barrel reserve.114 Total paid $1.7 billion in 2005 or Deer Creek Energy. In May 2007it announced plans to spend $15 billion over next decade in oilsands.115

Further investment is being directed to upgrading acilities in order toprocess the bitumen, as well as increasing refning capacity. TheSyncrude Company is a joint venture between a number o the moreestablished operators (Canadian Oil Sands Limited, ConocoPhillips,Imperial Oil Resources, Mocal Energy Limited, Murphy Oil Company

Ltd, Nexen and Petro-Canada) and has both mines and upgrading

acilities. The collaborating oil companies utilise Syncrudestechnology and acilities and have an interest in its expansion.116Beyond this there is increasing vertical integration o extraction,upgrading and refning, as demonstrated by the Husky/BP andConoco/EnCana tie-ups.

It is clear that a number o major oil companies are intending to havesignifcant production o several hundred thousand barrels per dayrom oil sands in 2020. This reliance on unconventional production isa strategy which backs a high oil price and a low carbon price.Meanwhile, the companies do not appear to be backing sufcientalternatives to liquid hydrocarbons to provide energy or transport.

Oil company involvement

Table 1:

Summary o current and proposed output by company

(Thousands o barrels per day) Mining In situ Total

Company Operating Planned Operating Planned 20202006 2020 2006 2020

CNRL 0 577 50 240 817

Suncor 276 324 68 376 700

Shell 155 570 12 100 670

Syncrude 291 593 593

EnCana 50 500 500

ExxonMobil/Imperial 300 140 170 470

Petro-Canada 190 34.5 274.5 464.5

Total/Deer Creek 200 2 42 242

BP/Husky 0 230 230OPTI/Nexen 2.5 218.5 218.5

Statoil/North American 160 160

Synenco 100 100

Conoco Phillips 100 100

Devon 70 70

JACOS 10 60 60

MEG 25 25

Black Rock 0.5 20.5 20.5

Connacher 10 10

Orion 2 0

TOTAL 722 2854 371.5 2596.5 5450.5

Source: Strategy West117


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Oil sands scraping the bottom

o the barrel?

Strategic direction: UK companies

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Most operators in the Canadian oil sands claim to be investing inresearch and energy efciency initiatives and technologies to reduceemissions rom their operations. However, there is little evidence oprogress actually being achieved. Shell is making more eort thanmost, in 2006 it introduced Shell Enhance, a roth treatmentprocess, which, it claims, improved energy efciency by 10%.118

Shell is one o only a handul o companies that have disclosed an

action plan to reduce and oset emissions. However, as this reportdemonstrates, these measures are insufcient to mitigate thepotential climate change impacts arising rom oil sand exploitation,and rather than putting a large amount o eort into trying to makeunconventional oils no worse than conventional oil, solutionsshould be sought that rapidly produce a lower emissionstrajectory. Shell has stated in its annual report that it is aimingor up to 15% o its production rom unconventionals by 2015,up rom less than 5% now. Worryingly the proposed expansionprojects, such as Shells expansion o its Albian plant, have loweremissions perormance that the existing plants due to relying

on high carbon energy supplies.Shell is a supporter o on-shore wind in the United States, withestimated installed capacity o over 400MW orecast or 2008-9,and has invested in R&D in third generation marine algae biouelsand new generation thin flm solar technology.119 However, in recentmonths, as it has signifcantly increased investment in oil sands, ithas also divested rom renewable energy. The company sold itssolar business o bit by bit during 2007120 and has ollowed this in2008 by pulling out o the London Array the largest proposed windarm in the world.121 The reason, Shell says, is to divert capital tobetter opportunities. Previously the company had publicly

recognised that oshore wind is vitally important to delivering theUKs renewables target and that wind energy has real potential orthe UK as it has the best wind resource in Europe122

Shell has published its latest iteration o scenarios or energy utures.The scramble scenario in this document outlines an undesirableuture. Investors should consider how companies are utilising capitalto avoid this situation:

How unconventional oil rom oil sands, shale, and coal is developed

provides a typical Scramble example o solutions being introduced

with immediate benefts to energy security but some later negative

consequences. Throughout the 2010s, investors pour more and

more capital into unconventional oil projects that make an important

contribution to addressing supply pressures. Nevertheless, these

attract increasing opposition rom powerul water and climate

lobbies that oppose the environmental ootprint o additional

developments. This ultimately provokes a political backlash that

challenges even the best-managed projects.123

In 2005, BP set up an Alternative Energy division, which pledged toinvest $8 billion by 2015, to deliver a business with a turnover o $6billion per annum. This compares to the $20 billion per annum

invested in the hydrocarbons business. The Al ternative Energy unitincludes not only wind, solar and hydrogen, but also natural gas. Theinclusion o natural gas masks the precise extent o this activity thatis not hydrocarbon based. BPs agship hydrogen power and CCSproject at Petershead, Scotland, was shelved in May 2007 ater itailed to secure the subsidy it wanted rom the UK government.

Both BP and Shell have also been researching the potential orbiouels, as countries attempt to meet their obligations in Europe toprovide 5.75% o alternative uels to petrol and diesel or transportby 2010. The complexity o issues relating to the sustainability oproducing large quantities o biouels which can deliver signifcant

carbon emission benefts without compromising ood production orbiodiversity habitat mean that this is not a large scale solution in itscurrent orm.

The amount o green advertising rom both Shell and BP isdisproportionate to their eorts on actually delivering renewables.Shell has run a global advertising campaign talking about oil sandsbeing difcult yes, but impossible no.124 But all that has changed isthe oil price, not the environmental cost o producing it rom oilsands. The advert continues, As long as we have innovation andingenuity on our side, theres no energy challenge we cantovercome. We thereore challenge Shell and other oil companies to

develop an alternative to liquid hydrocarbon transport uels, ratherthan perpetuate the status quo.


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Background

What is it?

The term oil shale generally reers to any sedimentary rock that

contains solid bituminous materials (known as kerogen) that arereleased as petroleum-like liquids when the rock is heated.125

How is it extracted?

To obtain oil, the shale must be heated to around 400C and theresultant liquid captured. Processing has traditionally taken placeonce the rock is mined, but research is now ocusing on ways toextract the liquid in situ underground.126 The liquid that is producedneeds to be upgraded to a light enough oil to be refned intopetroleum products.

Shell has been developing advanced heating systems to use super-

heated steam to heat the oil shale underground.127 The majorchallenge is then how to prevent the liquefed hydrocarbons romowing through the porous rock. Shells answer to this is itsreezewall technology. This involves the creation o rozen barriersaround the edge o the extraction area. Shell is testing this on anarea o land the size o a ootball feld, which involves drilling 157holes around the edge to a depth o 550 metres. An ammonia-based rerigeration system will be installed through these holes, tocreate a wall o rozen ground around the oil shale to be extracted.

While this may be a eat o engineering, it is clearly a highly inefcientprocess i rock has to be rozen on the outside at the same time asthe centre is being super-heated to 400C. This is a prime exampleo how the technical expertise o the major oil companies is beingmisdirected to extracting inefcient liquid hydrocarbons, rather thandeveloping alternatives. They are trying to make oil shaleeconomically viable; given this is the charge levelled by oilcompanies at renewables that the return on investment is notadequate why can they not ocus their eorts on clean solutions?

Where is it?

The largest known oil shale deposits are in the US, where there arean estimated 1.5 trillion barrels o reserves. There are only estimates

as to what proportion may be recoverable, but the mid-pointcurrently used by the US government is 800 billion barrels. This isequivalent to three times the reserves o Saudi Arabia.

Other countries with signifcant oil shale reserves (more than 15billion barrels) include Australia, Brazil, Canada, China, Congo,Estonia, Italy, Jordan and Morocco.128 O these, only Brazil, Chinaand Estonia are currently exploiting oil shale. Estonia mainly utilisesits oil shale in a similar manner to lignite coal or electricitygeneration; however, it is scaling down this part o its energyproduction as part o its accession to the European Union, and dueto the products non-competitiveness compared with alternative

uels.129

Figure 7:Location o the Green River Formation oil shale and its main basins

Source: US Department o the Interior, Bureau o Land Management

Oil shale

G i

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Government actions

The US government has promoted oil shale development on manyoccasions and has expressed renewed interest, as laid out in the2005 Energy Policy Act:130

Section 369 o the Energy Policy Act o 2005 (the Act), Public Law109-58 (H.R. 6), enacted August 8, 2005, directs the Secretary o

the Interior to make available or leasing such BLM-administeredland in Colorado, Utah, and Wyoming as the Secretary considers tobe necessary to conduct research and development activities toacilitate the recovery o liquid uels rom oil shale and tar sands onpublic lands. Furthermore, Section 369 directs the BLM to prepare aProgrammatic Environmental Impact Statement (PEIS) or acommercial leasing program or oil shale and tar sands resources onpublic lands.131

As a result o this legislation, the Federal Bureau o LandManagement (BLM) issued a licensing round and acceptedapplications or leases rom Shell, Chevron and EGL Resources.132

These leases grant rights to develop oil shale resources on tracts notexceeding 160 acres o public land or lease. These tracts wereidentifed in proposals submitted by the companies in June 2005.

The initial term o the leases is 10 years with the option o extendingup to fve years with proo o diligent pursuit o commercialproduction levels. The leases also contain a preerential right toconvert the acreage, plus adjacent acreage up to 4,960 acres, to a20-year commercial lease once commercial production levels havebeen achieved and all requirements have been met. The oil shale isound in Colorado, Utah and Wyoming, with the largest area beingthe Green River Foundation.

Climate change

Energy Intensity

A 2005 study by the RAND Corporation estimates it would require a1,200-megawatt power plant to unlock just 100,000 barrels o shaleoil a day. Large enough to serve hal a million people, the power plantalone would burn fve million tons o coal each year and release 10million tons o GHG emissions.133 A plant o 1,200 MW is enough topower 300,000 homes in the US more than enough or the wholeo Denver, the largest city in Colorado. Shell alone is looking or

production fve times this level. The plant would also place urtherstress on water resources to provide cool ing water.

As Figure 5 indicates, production emissions rom oil shale aresignifcantly higher than or conventional oil and even higher thanoil sands.

What emissions would result?

The amount o emissions associated with oil shale would obviouslydepend on the exact technologies used, and the extent o anymitigation measures or carbon capture technologies. The ColoradoEnergy Institute, which works closely with the US government on oilshale issues, has estimated that the power plants and chemicalreactions required would generate 350 million tonnes o carbondioxide a year once production is established at three million barrelsa day. This represents about 5% o current annual US GHGemissions o 7.26 Gt CO2.134

Figure 5 shows that the production o oil shale can easily producethe same emissions as the use o the uel. I this is the case, the

production and consumption o all 800 billion barrels could result inan estimated 797 Gt CO2 rom oil shale exploitation. It is estimatedthat this would result in an increase in atmospheric CO2 levels obetween 39 and 53ppm.135

Water

Water quantity may also be an issue, as signifcant quantities in theorder o several barrels or each barrel o oil produced are requiredor processing and cooling.136 Mining oil shale requires between twoand fve barrels o water or each barrel o oil shale. Extraction levelso three million bpd would thereore require 6 to 15 million barrels o

water per day. In situ processing requires the groundwater to bepumped out o the rozen extraction area. Water is used or steamand or cooling. Process waters are likely to have highconcentrations o soluble organic materials, along with very highconcentrations o ammonia nitrogen, alkalinity, chlor

Scraping Barrell

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