TransCanada stands to lose the most if the project is denied. The entire Keystone pipeline system is nearly fully contracted for a total of 900,000 barrels/day for an average term of 18 years. That is a big loss if the pipeline isn’t built. The largest producer in the oil sands is Syncrude, a joint venture that includes Imperial Oil Resources (wholly owned by Exxon Mobil Corp. (NYSE: XOM)), Suncor Energy Inc. (NYSE: SU), and China Petroleum & Chemical Corp. (NYSE: SNP) — Sinopec — among others. Other producers include ConocoPhillips Corp. (NYSE: COP), Chevron Corp. (NYSE: CVX), Murphy Oil Corp. (NYSE: MUR), Total SA (NYSE: TOT), Royal Dutch Shell plc (NYSE: RDS-A), BP plc. (NYSE: BP), and Devon Energy Corp. (NYSE: DVN).

These companies won’t lose everything because the bitumen from the oil sands will go somewhere, somehow. Unless, of course, the Canadian government decides to shut down every project in Alberta, and that simply will not happen. One of the big problems facing the producers now is that they’re crude is landlocked and sells at a substantial discount to WTI. For the week ending September 23rd, Heavy Hardesty grade crude sold for $78.28/barrel, while WTI sold for $80.29 and Brent sold for $109.17. Getting crude from Alberta to a coast, any coast, is critical for producers.

If the Keystone XL pipeline is killed, an expansion to an existing pipeline system to the US/Canadian west coast could take up some of the slack. Kinder Morgan Energy Partners LP (NYSE: KMP) is investigating an expansion to its Trans Mountain system and Enbridge Inc. (NYSE: ENB) has already begun the permitting process for a similar pipeline to the west.

Another interesting development are proposals from both of Canada’s major railroads to construct a pipeline-by-rail from Alberta to west coast. And while nothing officially like a pipeline-by-rail has been proposed for the run to the US Gulf Coast, rail traffic has already increased substantially from North Dakota south to Cushing and, eventually producers hope, to the Gulf.

In July weekly US rail carloads of petroleum and petroleum products hit a four-year high, and the August total of about 7,400 carloads is even higher. A rail tanker holds about 1,500 barrels, so every day about 1.6 million barrels of petroleum is moving around on the US rail network. Add to that another half a million barrels a day from the oil sands and that puts about another 2,500 tanker cars on the rails every day.

There were 750 reported rail accidents involving hazardous materials in 2010. The odds of a significant oil spill rise if we add more oil transport by rail.

The same is true if the Canadian crude is moved by truck. Truck transportation by surface road is even more expensive and prone to accidents. There were nearly 12,000 road accidents involving hazardous materials in 2010. Besides being much more expensive, more tanker trucks carrying up to 300 barrels of oil each raises again the odds on an environmentally significant spill.

So while pipeline spills are a concern, rail and truck accidents are far more common. The Keystone XL pipeline should be held to a very high safety standard, but it is probably the safest way to move the most Canadian crude.

The argument that Canada should stop development and extraction in the oil sands may make more environmental sense, but until a large-scale alternative transportation fuel is available at a reasonable price, oil sands development will very likely continue. And moving that oil by pipeline is really the only sensible option.

Paul Ausick

AerCap Holdings N.V. (NYSE: AER) Started as Outperform with $16 target at Credit Suisse.
AirCastle LTD (NYSE: AYR) Started as Neutral with $14 target at Credit Suisse.
Best Buy Co., Inc. (NYSE: BBY) Raised to BUy at S&P Equity Research (late Thursday).
BB&T Corporation (NYSE: BBT) Started as Hold at Citigroup.
Chipotle Mexican Grill, Inc. (NYSE: CMG) Raised to Outperform at Morgan Keegan.
Cree Inc. (NASDAQ: CREE) Cut to Market Perform at JMP.
Hewlett-Packard Co. (NYSE: HPQ) Cut to Neutral at UBS; Cut to Neutral at Baird.
JDS Uniphase Corporation (NASDAQ: JDSU) Maintained Buy but cut target to $17 at Argus.
LDK Solar Co., Ltd. (NYSE: LDK) cut to Neutral at Piper Jaffray.
Logitech International (NASDAQ: LOGI) Cut to Underperform as Bear of the Day at Zacks.
Lululemon Athletica Inc. (NASDAQ: LULU) Raised to Equal-Weight at Barclays.
Research in Motion Ltd. (NASDAQ: RIMM) Raised to Hold from Underperform at Jefferies.
Sears Holdings Corp. (NASDAQ: SHLD) Maintained Hold at Argus.
Sina Corporation (NASDAQ: SINA) Cut to Neutral at Credit Suisse.
Suncor Energy INc. (NYSE: SU) Raised to Buy at BofA/ML.
Tesoro Corporation (NYSE: TSO) Maintained Outperform as Bull of the Day at Zacks.
Verisk Analytics, Inc. (NASDAQ: VRSK) Raised to Outperform at KBW.

You are invited to join our free daily email distribution list to hear more about analyst upgrades and downgrades, top day trader and active trader alerts, dividend trends, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

Alcatel-Lucent (NYSE: ALU) Cut to Hold at Deutsche Bank.
American Water Works Co. (NYSE: AWK) Reiterated Buy at Gabelli.
Aqua America Inc (NYSE: WTR) Reiterated Buy at Gabelli.
China Unicom (NYSE: CHU) Cut to Neutral at Credit Suisse.
City National Corporation (NYSE: CYN) Raised to Neutral at BofA/ML.
Commerce Bancshares Inc. (NASDAQ: CBSH) Cut to Underperform at BofA/ML.
Federated Investors, Inc. (NYSE: FII) Cut to Underperform as Bear of the Day at Zacks.
HollyFrontier Corporation (NYSE: HFC) Cut to Neutral at BofA/ML; Started as Outperform at Oppenheimer.
M&T Bank Corp. (NYSE: MTB) Raised to Buy at BofA/ML.
Microchip Technology Inc. (NASDAQ: MCHP) Maintained Buy but cut target to $40 at Gleacher & Co.
Pegasystems Inc. (NASDAQ: PEGA) Cut to Hold at Canaccord Genuity.
SeaCube Container Leasing Limited (NYSE: BOX) reiterated Buy as Value at Zacks.
Sealed Air Corporation (NYSE: SEE) Raised to Overweight at Barclays.
Suncor Energy Inc. (NYSE: SU) named as Bull of the Day at Zacks.
Tesoro Corporation (NYSE: TSO) Cut to Underperform at BofA/ML.

You are invited to join our free daily email distribution list to hear more about analyst upgrades and downgrades, top day trader and active trader alerts, dividend trends, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

The pipeline would be built by TransCanada Corp. (NYSE: TRP) and ConocoPhillips Corp. (NYSE: COP), but would benefit every company with a stake in the oil sands, including Suncor Energy Inc. (NYSE: SU), Total SA (NYSE: TOT), Royal Dutch Shell plc (NYSE: RDS-A), Exxon Mobil Corp. (NYSE: XOM), and BP plc (NYSE: BP).

US approval for the pipeline has been delegated by the President to the State Department, which was supposed to conclude its review earlier this year.  Two State Department drafts have been found wanting by the US EPA, and a new draft is in progress.

While there is a substantial minority opposed to the pipeline, its construction was believed to have been nearly a foregone conclusion. The main opposition to the pipeline is not its routing through six US states (although there is some growing opposition there), but to the environmental damage caused by mining the oil sands in the first place.  When the US EPA relayed its concerns to Alberta, it was told to mind its own business.

Now, a group of activists have called for demonstrations this summer in Washington, D.C., to protest the pipeline. Their hope is to stop construction of the Keystone XL pipeline in an effort to stop the massive pollution attributed to the mining operation itself.

Those who favor the pipeline say that it will end US dependence on Middle East oil. That’s foolish. Those who oppose the pipeline call it the biggest carbon emissions threat on the planet. That’s at least arguable.

What’s not arguable is that there are very few issues left around which to galvanize the environmental movement. The Congress has shown itself to be unwilling or unable to make a commitment on the pipeline. Those who favor more exploration for oil can stymie any attempt to impose stricter regulation and review on fossil fuel energy projects.

Those who want to restrict exploration have been reduced to hoping for the best. They want to change that now, by forcing the State Department and the President to reject the necessary approval for the Keystone XL pipeline. This summer’s protest are being held to attract public attention to the issue, but the protest seems like nothing so much as a last-ditch effort to get the environmental movement back on track.

If Keystone XL is not built, Canada will figure out some other way to get that oil to market. It may be by truck, which is far more costly and environmentally harmful than a pipeline. It may be by a pipeline headed off either to the east or west coast for eventual shipment to the Gulf or elsewhere.

All this is not to say that the extraction process is environmentally harmless. But mining the oil sands could be achieved with more attention paid to the environmental impacts. Of course that would cost money, money that would eventually be paid by consumers.

In the long run, the high cost of the oil sands, and oil in general, will lead to new fuels for transportation. But without a national policy that offers guidelines to get there, we’re going to be fighting battles like this one for many years to come.

Paul Ausick

The coming week’s must see events for traders and investors alike in stocks is as follows: AnnTaylor Stores Corp. (NYSE: ANN), Audiovox Corporation (NASDAQ: VOXX), The Beckman Coulter Inc. (NYSE: BEC), Bristol-Myers Squibb Company (NYSE: BMY), Suncor Energy Inc. (NYSE: SU), Canadian Natural Resources Limited (NYSE: CNQ), DineEquity, Inc. (NYSE: DIN), Goldman Sachs Group Inc. (NYSE: GS), Market Vectors Egypt Index ETF (NYSE: EGPT), Internet Capital Group Inc. (NASDAQ: ICGE), OpenText Corporation (NASDAQ: OTEX), JDS Uniphase Corporation (NASDAQ: JDSU), Kinder Morgan Energy Partners LP (NYSE: KMP), Kinder Morgan Management LLC (NYSE: KMR), KV Pharmaceutical Co. (NYSE: KV-A), Lululemon Athletica Inc. (NASDAQ: LULU), Micron Technology, Inc. (NASDAQ: MU), NASDAQ OMX Group Inc. (NASDAQ: NDAQ), Orexigen Therapeutics, Inc. (NASDAQ: OREX), Questcor Pharmaceuticals, Inc. (NASDAQ: QCOR), and finally SIRIUS XM Radio Inc. (NASDAQ: SIRI).

We have outlined the issue underway or the event upcoming, offered color on each, and added in trading data on the shares if applicable.  Again, these are the non earnings events. A detailed earnings calendar with previews is available here.

AnnTaylor Stores Corp. (NYSE: ANN) was up 3.2% at $23.75 on Friday on 150% of normal volume with some 3.75 million shares traded.  What is interesting is that its options volume was off the chart and it was all one-sided call options trading.  It is possible that these were hedged calls, but the volume looked extreme for a sector that is inundated with consolidation.

Audiovox Corporation (NASDAQ: VOXX) turned in an impressive gain in the after-hours session after news that it will acquire Klipsch Group Inc. for $166 million.  Klipsch is a high-performance audio solutions company serving the residential, professional and personal listening markets.  Trading volume in Audiovox was 11,430 shares but the after-hours trading showed a gain of 7.8% to $8.30 versus a 52-week range of $6.17 to $9.74.  Here is where this gets interesting: Audiovox had a market cap at the close of trading of only $177 million.

The Beckman Coulter Inc. (NYSE: BEC) buyout process is nearing an end and we could have more details over its merger this coming week.  We argued before that the premium price should have been close to full value already.  Speculators will run shares higher and everyone hopes that private equity firms will over-pay.

Bristol-Myers Squibb Company (NYSE: BMY) has an FDA panlel review on FEB. 9 where BMS is seeking initial approval for ipilimumab (Imclone’s Erbitux) for patients who have previously received treatment for melanoma. Recent data showed that survival rates were indeed higher and this could be another blockbuster opportunity for the firm if ultimately approved.  We have a formal approval decision date tentatively set for March 26.  The market cap is roughly $44 billion here.

Canada and oil sands for safe defensive oil… Barron’s highlighted Suncor Energy Inc. (NYSE: SU) and Canadian Natural Resources Limited (NYSE: CNQ) and others this weekend.  These are being touted as larger Canadian oil sands project companies that offer safer oil without political tensions and growth ahead.

DineEquity, Inc. (NYSE: DIN) could have Goldman Sachs Group Inc. (NYSE: GS) as a partner.  Reports late Friday showed that Goldman’s private equity arm is close to buying Applebees’ largest franchise holder.  Who would have known that mediocre chain food restaurants would have such an appeal to billionaires.

The Keystone XL pipeline would be built by TransCanada Corp. (NYSE: TRP), utilizing a piece of its existing Keystone pipeline system that delivers crude to facilities owned by ConocoPhillips Corp. (NYSE: COP) in Illinois and to the Cushing storage facility in Oklahoma. By extending the pipeline to the Gulf coast, oil sands developers gain access to the largest concentration of oil refineries in the Us. They also gain access to Gulf coast ports that could be used to export any Canadian crude not purchased by those refineries.

Besides Conoco, other oil companies with operations in the Alberta oil sands include Suncor Energy Inc. (NYSE: SU), France’s Total SA (NYSE: TOT), Royal Dutch Shell plc (NYSE: RDS-A), Exxon Mobil Corp. (NYSE: XOM) and BP plc (NYSE: BP). The existing pipeline transports about 435,000 barrels/day to Illinois and Oklahoma. The proposed extension would add up to 500,000 barrels/day to that total.

As we pointed out in an earlier article, because the proposed pipeline crosses an international border, the US Department of State must issue a permit for the line.  The State Department’s preliminary environmental impact statement was not deemed adequate by the US EPA, primarily because the document did not provide enough detail about greenhouse gas emissions related to the extraction of bitumen.

The government of Alberta has chided the EPA for sticking its nose into the province’s, and Canada’s, business. Canada’s Financial Post cites a letter to the EPA which states that Alberta “believe[s] that the impacts occurring outside your jurisdiction are not substantive to the assessment of the pipeline.”

The EPA Administrator has replied, “Given that the possible consequences of greenhouse-gas emissions are global in nature, they include potential impacts on the United States, and we believe that it is appropriate that the State Department consider these upstream greenhouse-gas emissions in its evaluation.”

There’s the argument in a nutshell. Canada believes that it is fully capable of determining the environmental impacts of oil sands mining on its own, and the US EPA thinks that Canada needs a little push to come to the right decision.

From a crude oil supply point of view, the Keystone XL pipeline does make economic and energy-source-stability sense. The US would like to increase its imports of crude from Canada, our largest and friendliest trading partner. The pipeline, though, depends on expanded production and that production won’t be expanded until the pipeline receives its required permits. Delaying the pipeline permits for two or three years could effectively kill the $12 billion project

From an environmental point of view, the data is mixed. The Royal Society of Canada study cited in our earlier article found no current threat to the regional water supply and no impact on the health of downstream residents. But the study did note several areas that need additional oversight, such as handling tailings, greenhouse gas emissions levels, and inadequate regulatory oversight.

The Canadian government, and the companies involved in mining and transporting bitumen, want to forge ahead with the Keystone XL project and fix whatever problems there are along the way. Waiting for detailed environmental impact studies could take another two or three years. The US EPA and other citizen environmental groups want to hold off on permits until the detailed studies are complete and a plan is in place to minimize environmental impacts.

We concluded in our previous article that the chances that environmental concerns would trump energy supply were slim and none. There’s really no reason to change the odds at this point.

Paul Ausick

Total will pay about $1.74 billion to Suncor to gain an additional 19.2% stake in Suncor’s Fort Hills project and a 49% stake in Suncor’s Voyageur upgrader project. The deal bumps Total’s interest in the Fort Hills project to 39.2%. Suncor owns 40.8% of the project and is the operator. Teck Resources Ltd. (NYSE: TCK) owns the remaining 20% and is not involved in this deal.

In exchange for the stake in the Voyageur project, Total passes a 36.75% stake in its Joslyn project to Suncor, retaining 38.25% for itself. Total will be the operator at Joslyn. Occidental Petroleum Corp. (NYSE: OXY) owns 15% of the project and Japan’s Inpex owns the remaining 10%, and neither is involved in the announced deal.

Total will also cancel work on an upgrader it had planned as part of the Joslyn project. Instead the Voyageur upgrader will process the bitumen from both Fort Hills and Joslyn at a rate of 200,000 barrels/day once the upgrader is completed, now scheduled for 2016. Suncor expects to more than double its output by 2020, to more than 1 million barrels of oil equivalent per day.

Total’s history in the oil sands is a bit rocky. The company tried in 2009 to acquire UTS Energy, a partner with Suncor and Teck in the Fort Hills project, for about $830 million. Finally in July 2010, the French company coughed up about $1.5 billion for UTS to get its initial 20% stake in the Fort Hills project. Now Total owns nearly 40% of a deposit estimated to equal 3.4 billion barrels of oil equivalent. Total also owns 50% stakes in two other oil sands projects, Surmont (a 50/50 joint venture with ConocoPhillips Corp. (NYSE: COP)), and Northern Lights, another 50/50 joint venture with China Petroleum & Chemical Co., or Sinopec, (NYSE: SNP).

Oil sands development has gotten hammered by environmental groups for its destruction of the environment, its greenhouse gas emissions, and its nearly unquenchable thirst for water. However a report issued by Royal Society of Canada scientists downplays the impacts of oil sands mining but does note that the development accounts for 5% of Canada’s greenhouse gas emission and that as the industry grows so will emissions. The report also states that there is a need to review the adequacy of the financial reserves meant to pay for environmental disasters and to repair damage when projects shut down.

Total committed itself to oil sands development as a way to build its proved reserves at a reasonably affordable price. Even the massive costs of developing an oil sands project pales compared with developing ultra-deepwater reserves.

Paul Ausick

BP has also said that it plans to commit $2.5 billion to the Sunrise oil sands project it owns in a joint venture with Husky Energy Inc. (OTC: HUSKY). Husky is majority-owned by Hong Kong tycoon Li Ka-shing and his conglomerate, Hutchison Whampoa. Husky recently paid about $841 million to Exxon Mobil Corp. (NYSE: XOM) for additional oil and gas properties in Alberta and British Columbia.

BP is getting a late start in the Canadian oil sands, mainly because former CEO John Browne had concerns about both production costs and environmental damage. Suncor Energy Inc. (NYSE: SU) has been producing synthetic crude from the oil sands since 19XX. Earlier this month Suncor said it was producing an average of 275,000 barrels/day in 2010. Husky and BP expect to produce 60,000 barrels/day of bitumen after production begins in 2014 at the Sunrise project. Production could reach 200,000 barrels/day by 2020.

BP claims that by integrating production from the Sunrise project with its refinery in Toledo, Ohio, the company can make the economics of oil sands mining work. To make that idea a reality, BP/Husky needed a pipeline, and Enbridge Inc. (NYSE: ENB) has agreed to build a $475 million pipeline to move the bitumen to its Alberta distribution hub, from where it can flow to Toledo.

That takes care of the economics, but what about environmental damage? BP’s record here is, in a word, awful. Pipeline leaks in Alaska, the Gulf disaster which killed 11 workers, the 2005 Texas City refinery explosion that killed 15 workers, none of these inspires trust in BP’s commitment to safety or environmental concerns. In fact, at the company’s annual meeting in March of this year, about 150 investors charged the company with conducting an insufficient assessment of the environmental risks of developing the Sunrise project. According to the Financial Times,  the projections for development of Sunrise “entail catastrophic consequences for the climate.”

Having gotten rid of some of its Gulf of Mexico holdings and with its reserves in Alaska dwindling, BP wants to stay in North America any way it can. The US Congress has threatened to make it very difficult for BP to operate in the US. Now it’s up to Canada to decide if the company gets the chance.

Paul Ausick

The amount of spillage caused by offshore platforms in 2007 totaled 109 barrels in a total of 18 different incidents. The Deepwater Horizon, owned by Transocean Ltd. (NYSE:RIG) and under contract to BP plc (NYSE:BP), is estimated to be pumping crude into the Gulf at the rate of 5,000 b/d. Unless the flow is staunched soon, this incident will surpass the blow-out offshore of Santa Barbara, California, in 1969, which pumped more than 100,000 barrels into the water.

The oil industry has gotten better at preventing and stopping leaks, but a disaster of the kind that BP is battling now is unprecedented. Trying to stop the leaks is essentially a trial-and-error process that is based on experience gained at shallower depths plugging far smaller leaks. The 1979 blow-out of the Ixtoc 1 Gulf platform operated by Mexico’s Pemex pumped about 3.3 million barrels of oil into the Gulf at a rate estimated at 10,000-30,000 b/d.

This photo shows the oil slick and the Ixtoc 1 platform.

Every US major oil company owns rights to drill in the Gulf of Mexico and in other major offshore fields around the world. Exxon Mobil Corp. (NYSE:XOM), Chevron Corp. (NYSE:CVX), and ConocoPhillips Corp. (NYSE:COP) all have large investments in the Gulf of Mexico and continue to seek new leases as they become available. And while drilling in the Gulf is safer than it’s ever been, the risk of a disaster like the Deepwater Horizon blowout is always present.

But what about companies that don’t drill offshore? Are they safer for workers and the environment and for investment?

The largest publicly traded US company that holds no exposure to offshore drilling in the Gulf of Mexico is Occidental Petroleum Corp. (NYSE:OXY). Oxy Pete, as it’s called, owns and operates leases in North and South America and the Middle East and North Africa. The company does some offshore development in Qatar and Libya in cooperation with national oil companies, but all work in the Americas is onshore. Oxy’s market cap is about $65.5 billion and its forward PE ratio is 10.97, significantly under its current trailing PE of 18.97.

Another large US company that is actively divesting its Gulf of Mexico assets is Devon Energy Corp. (NYSE:DVN). Devon has sold assets to Apache Corp. (NYSE:APA) and others as it has essentially sold off all its deepwater Gulf and international assets to re-focus on developing its onshore properties. As the company chairman/CEO put it recently, Devon is positioned “to deliver low-risk, profitable, organic production growth on a sustainable basis.” Devon’s market cap is about $30 billion, and its forward PE is 10.40, very close to its current trailing PE of 11.02.

A third company with limited offshore work is Suncor Energy Inc. (NYSE:SU). Suncor is based in Canada and holds more than 23 billion barrels of reserves in the Canadian oil sands of Alberta. The company does hold about 4 billion barrels of reserves of the northeastern coast of Canada, but these are not in deepwater and they have been producing for many years in most cases. Suncor’s market cap is about $50 billion, its forward PE is 11.54, and its current trailing PE is 22.11.

A smaller cap company with no exposure to offshore risk is Forest Oil Corp. (NYSE:FST). In many ways, Forest executed the strategy now being followed by Devon, divesting itself of its Gulf of Mexico and Alaska assets to become solely an onshore producer. Forest Oil has a market cap of about $3 billion, a forward PE ratio of 11.27, and a current trailing PE ratio of 7.98.

Finally, an interesting mid-cap E&P company is Newfield Exploration Co. (NYSE:NFX), which expects to get 11% of its total 2010 from the Gulf of Mexico. About 5% of the company’s total reserves are in the Gulf, and Newfield focuses on deepwater plays. The company expects to drill 3-5 new wells a year for several years and to grow its Gulf production by 60% during 2010, mainly through two new wells that are coming on-line later this year. Newfield, unlike Devon and Forest, is not only staying in the Gulf, but is looking to expand its deepwater development. Newfield’s market cap is $7.35 billion, its forward PE ratio is 11.22, and its trailing PE is 18.19.

Most offshore spills are relatively small and most are the result of some issue with transportation, either by tanker or pipeline. A disaster like the one facing BP now is potentially catastrophic because the leak can continue unabated for months until the flow is stopped. The 1979 Ixtoc 1 blow-out took nearly a year to cap.

According to the American Petroleum Institute, there have been 17 blow-outs in US waters since 1964, all but one (Santa Barbara) in the Gulf of Mexico. About 149,000 barrels spilled into the Gulf as a result of those 16 blow-outs. Since 1969, the total amount of oil spillage into the Gulf from platforms is about 176,000 barrels. The API estimates that between 560,000 and 1.4 million barrels of oil enter the Gulf every year through natural seeps.

Oil production in the deep waters of the Gulf is a high-risk, high-reward business. Only the largest companies can afford to take those risks, and that’s probably a good thing. BP is better positioned than all but a small handful of other companies both to try stopping the flow from the Macondo well and to pay for all the clean-up work that needs to be done.

That’s not to say that Devon and the others are avoiding offshore drilling because they’re scared of the consequences. But it’s possible to make a nice profit with minimum risk, and keep your feet dry at the same time. Many feel that the price of crude will only continue to rise, so working where it’s reasonably safe and dry will turn up good profits over time without having to lose sleep over an offshore disaster. It’s almost like taking a value investing approach to exploration & production.

Paul Ausick

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If this is true, it’s very good news for oil sands developers like Suncor Energy Inc. (NYSE:SU), Royal Dutch Shell plc (NYSE:RDSA), Exxon Mobil Corp. (NYSE:XOM), China Petroleum & Chemical Corp. (NYSE:SNP), Marathon Oil Corp. (NYSE:MRO), and many others which have interests and investments in the region.

Sweeney’s view, expressed in a brief interview with the Edmonton Journal, predicts that solar energy will develop to the point that in the next 20 years it will “be huge.” The interview doesn’t offer details, but if solar power is going to dominate in the next 20 years, it will have to become bigger than huge. Way bigger.

First of all, the proven reserves in the Canadian oil sands total about 170 billion barrels, an order of magnitude less that Sweeney’s 1.7 million barrels, but that’s still not trivial. Only Saudi Arabia, with proven reserves of 262 billion barrels, has more.

Current bitumen production is around 1.5 million b/d, and forecast production by 2018 totals 3 million b/d. If production from the sands could double again in another ten years, that would total 6 million b/d, still less than Saudi production today and about two-thirds of current daily US crude oil consumption.

The world’s largest fields face fairly rapid production declines. Estimated decline rates run between 4.5%-6.5%. Development in the oil sands, even on the aggressive schedule in the previous paragraph, is growing at less than 2% annually.

Of course the oil sands aren’t the only source of new oil, but forecast production growth is never more than 2% annually, from all sources. How the Canadian oil sands can change this calculation is not apparent, and is likely in fact to be illusory.

Another point Sweeney alludes to in his interview is the failure of the environmental movement to deter development in the oil sands. Apparently the effects of the Great Recession have opened people’s eyes to the need to just “Drill, baby, drill.” That is possible, but if true, it’s a call from US citizens, not Canadians. The effects of the recession on Canada have been relatively mild, and there has not been an outcry from Canadians for more development in the oil sands.

If anything, the contrary is true. The Canadian First Nations (the name Canadians use to refer to indigenous native peoples) have strongly opposed the environmental damage caused by oil sands development. Strip mining accounts for about 60% of production, with the rest being in situ production using steam injection to heat the tarry deposit enough so that it will flow through the well pipe.

Once the bitumen is mined, it is either mixed with chemicals that make it flow through pipelines to an upgrading facility or the bitumen is upgraded on site. The upgraded bitumen is essentially crude oil and can be shipped to refineries for further processing into gasoline and other refined products.

All this digging and upgrading takes energy and water, and lots of both. The energy used to mine the oil sands emits between 130-350 pounds of CO2 per barrel of synthetic crude from strip mining and upgrading, and about 210-380 pounds of CO2 per barrel from in situ mining. These emissions figures are roughly 3-5 times the average for conventional crude production.

Developers are allowed to withdraw more than 475,000 acre feet of water annually from the Athabasca River, none of which can be returned because of the toxins that are generated in the mining and upgrading processes. All the water is sent to holding ponds, where some is reused and the rest is allowed to evaporate. The tailings that are left now cover about 130 square kilometers and none of the ponds has been reclaimed to date.

The Canadian and provincial governments have not really addressed these issues head-on, preferring instead to allow the developers to press ahead and deferring decisions on how to reduce CO2 emissions, what to do with tailings, and how to reclaim the land. Sweeney is correct to say that environmentalists have not deterred development, but that is not the same thing as to say that everyone is satisfied with the way things have worked out so far.

Just last month an environmental group had this to say about the federal government’s effort to avoid performing a thorough environmental assessment of development in the oil sands: “Over the past several years the Government of Canada has tried to dodge its responsibilities for environmental assessment of proposed oil sands developments. This has led to a number of successful court challenges in which it was deemed that the government was not fulfilling its obligation to assess projects and protect the environmental interests of Canadians.”

The Canadian oil sands are huge, but their role as a peacekeeper in the global struggle for more oil can do no more than keep things from getting worse. That may be helpful, but it’s no game-changer. Until there is some reasonable, and reasonably cheap, alternative to oil as transportation fuel, we’re stuck with the black stuff.

Paul Ausick

Photos: David Dodge, The Pembina Institute

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