Tar Sands: Big Oil's Subprime Lending Collapse in the Works?

An eager reader recommends this article from the UK Guardian which highlights a new report that claims tar sands could turn to financial quicksand for Big Oil.

To review: tar sands are basically a mix of sand or clay, water, and really heavy oil called bitumen. It's hard to extract: instead of just punching a hole in the ground and drinking the milkshake, you have to use all sorts of steam, filters, chemicals, and whatnot just to separate the bitumen before it can be refined into usable fuel. All that extra work means extra expense. Extracting that "unconventional" oil from the muck only became profitable recently as conventional oil prices shot up.

We have tar sands in Utah; the Canadians have the mother lode in Alberta. That's the stuff TransCanada hopes to be pumping through our fair state in a couple years (and probably the stuff Hyperion hopes to be refining in Union County).

But now some market analysts worry that BP and Shell, the biggest backers of tar sands development, may be risking financial disaster by investing in the petro-equivalent of subprime loans, a risky investment that ignores market fundamentals:

Mark Hoskin, senior partner at the ethical investment advisers Holden & Partners, expressed concern about the increasing focus on tar sands at a time when oil companies are being shut out of traditional drilling areas such as Russia and Venezuela.

"The recent banking crisis has shown how the financial markets can totally misjudge both the risks and values inherent in company balance sheets," he said. "Oil companies depend on oil reserves for their market values. BP and Shell are two of our most trusted UK stocks, but it is a shocking fact that 30% of Shell's oil reserves are in tar sands.

"This report unveils how dangerous this approach is. There is a good chance that tar sands could be to the oil industry what sub-prime lending was to the banking sector" [Terry Macalister, "Tar Sands: The New Toxic Investment," Guardian UK, 2008.09.17, p. 27].

Greenpeace and Platform, co-sponsors of the report, cite four big factors that could negate the profitability of tar sands development:

1. Low carbon fuel standards under consideration by US presidential candidate Barack Obama and already implemented in California threaten to close sections of the American market to products derived from tar.
2. Acute labour shortages and the rising cost of delivering gas to the tar sands threaten to stifle the planned expansion of the sector.
3. An unrealistic reliance on untested carbon capture and storage (CCS) technology risks leaving the companies with huge stranded assets in the future, as international climate change regulations are strengthened at Copenhagen next year.
4. The extensive clean up operation and potential future litigation from local communities carry significant brand risk.

I suspect Big Oil won't be persuaded directly. The analogy to subprime lending feels tenuous. I get the feeling, though, that Greenpeace is trying a different tactic: instead of fighting directly with the industry, they are working on the investors, the fickle stock market speculators who are much more susceptible to whim and worry. By making even a metaphorical link between the great fiscal demon of the moment, subprime lending, to what some consider the greatest environmental demon of the decade, tar sands opponents hope to frighten some capital away from Big Oil.

No one said an argument has to be rational for the strategy to be effective. (Just ask the McCain campaign.)