Posted by: Dr Churchill | August 21, 2013


Wall Street and Private Equity should look carefully up North…

North by Northwest from New York’s Wall Street is Alberta and it’s infamous bitumen holding sands.

The euphemistically called Tar sands.

That’s where investors should look and avoid them like the captain who scares away from shallow rocks…


For the sailors of Finance ought to remember good stewardship.

On speaking today to the Private Equity Association of New York, in their plush digs in Wall Street; I studiously avoided the Gulf of mexico Oil spill disaster.

Instead, we spoke about tar sands… and Caveat Emptor…

Now that the public attention is focused on the widespread environmental and financial damage from the Gulf of Mexico oil spill – we must remember  that the environmental and financial risks of producing oil in Canada’s vast tar sands regions may be even greater.

Only Alberta’s oil sands are already the world’s largest energy project, with upwards of $200 billion in funds committed from the world’s leading oil producers, including BP, ExxonMobil and Shell.  However, these producers face numerous environmental, production and distribution challenges that will grow exponentially, as the oil sands industry pushes to boost production amid tighter regulations and resource constraints. tar

Only the Tar sands oil companies in Alberta are already producing 1.3 million barrels a day, and their goal is to triple production by 2030. And that has taken $ 200 Billion of your money so far…

The risks for companies involved in developing Canada’s oil sands are arguably greater than those in the Gulf of Mexico. The energy-and water-intensive nature of oil sands, combined with climate change regulations, permitting obstacles and other challenges, are a recipe for diminishing revenues and returns if not properly managed.

Many learned  Economists and long term investors as well as the Environmental parliament’s Econometrics bureau, recommend that oil sands companies and their investors; move quickly to examine and respond to the multiple challenges facing the industry.

And that the main investors should press the companies for such action, too. Investors have already filed shareholder resolutions on the oil sands topic with Royal Dutch Shell, ExxonMobil, BP and ConocoPhillips to no effect.

However the interesting wrinkle is that  the Shell resolution will be voted on at tomorrow’s annual corporate meeting in London.  ExxonMobil’s shareholder resolution is up for a vote on May 26. I urged everyone in attendance to vote in favour of the Resolution as it will further strengthen their investment.

Prudence along with Conservation are what long term value creation is all about…

That is, after all the fashions have gone home.

While just over half of U.S. oil comes from overseas countries like Venezuela and Saudi Arabia, the fastest growing source is from two North American regions – the Gulf of Mexico and Canada’s vast oil sands region. Oil production from these two areas has grown to three million barrels a day in recent years, supplying more than 15 percent of total U.S. oil needs.

While deepwater oil production in the Gulf has huge environmental risks that are obvious today, this report concludes that long-term risks from development in Canada’s oil sands region are arguably greater. Many of these risks stem from already-high financial costs and the environmental impacts of transforming highly viscous bitumen into synthetic crude oil – a process that requires vast amounts of energy and water.

Investors need to question whether this is a wise use of resources in light of the inevitable clean up costs. It is those very same costs that haven’t been taken into account although the humongous bill will arrive sooner rather than later.  It is the Investors who will be called upon to ay the Piper here – again.

The veritable oil bubble might explode and fill us all up with tar in the face. No joke but there has been a bubble in the oil stocks for some years now.

Yet back in the oil sands…

The oil extraction process takes tremendous energetic inputs to get oil out of the rocks.

Massive amounts of cheap [and subsidized to be almost free] natural gas is used up  the process. Gas is the cleanest-burning and lowest-carbon fossil fuel and we waste vast amounts of it; to turn one of the dirtiest and highest-carbon fuels into a saleable product.

Pure Insanity.

Then think of the water:

Huge volumes of freshwater are also consumed in the process, and they end up in toxic tailings ponds.  Most of this toxic water makes it’s way into the underground aquifers and the underground rivers and all the Native people living around the Tar Sands have increased rates of Cancer and other toxic poisoning illnesses.  Toxic spill related class action law suits have already been filled.

This is Devil in the works… as well as in the details.

It’s like the Gulf of Mexico spill, but playing out in slow motion.

From a climate and ecological perspective, we’re really screwed too.

But the Financial risk to investors in reality is that someone has to pay for the clean up costs of these underground and overground  waters…

An impossible task as the overground rivers are now polluted as well as the aquifers.

We want to make it crystal clear that investors of public funds and Private Equity as well as Public Banks and Financial Institutions and in the final analysis the very same Tar sand oil companies must do a hell of a lot more to analyze the far-reaching risks from current and future production in the tar sands of Canada.

The CEO of the California State Teachers’ Retirement System (CalSTRS), Jack Ehnes, the Pension Funds’ Chief Executive Officer  on reviewing the investments of the nation’s second largest public pension fund. He has this to say: “With nearly $1.9 billion invested in the equity securities of BP, Shell, Exxon and ConocoPhillips combined, we have quite of teachers’ money at stake here. We need to ensure these companies are properly recognizing and managing oil sand risks.” That is echoed by CALPERS President too.

The costs of producing oil sands – already the world’s most expensive source of new oil –  are rising and will continue to do so due to the onset of carbon pricing, higher input commodity prices, and rising costs for water treatment and land reclamation. As a result, global oil prices will need to remain high – possibly approaching $100 per barrel – to ensure a competitive rate of return on $120 billion in planned expansion projects. Oil sand operators must also be mindful that if global oil prices get too high, between $120 and $150 a barrel, it will likely reduce global oil demand and shift markets in favor of alternative fuels.

Presently, the vast majority of of the 1.3 million barrels being produced every day flows to the United States. Long-term access to this market is jeopardized, however, by emerging low-carbon fuel standards in the U.S. that will require a lower carbon intensity in transportation fuels. These fuel standards, already adopted in California, will put carbon-intensive oil sands fuel at a distinct disadvantage because oil sands output will likely have to be mixed with next-generation biofuels that are not yet being produced on a commercial scale.

Transporting expanded oil sands production west to China and other Asian markets is another alternative. However, there is strong opposition to building pipelines to Canada’s West Coast from Aboriginal communities who have significant rights under the Canadian constitution.

Oil sands production is highly water intensive, with up to four barrels of freshwater consumed for every barrel of oil produced from surface mining extraction. Water withdrawals from the Athabasca River watershed are already restricted during winter months to protect fish habitat. If oil sands production volume grows according to companies’ estimates, some oil sands mining operations could exceed their wintertime allowances as early as 2014, causing possible production interruptions. Climate change may also exacerbate this situation; glaciers feeding into the Athabasca River watershed are already shrinking.

After 40 years of production, nowhere and certainly none of the Tar Sand oil companies have been able to reclaim the scarred earth they left behind.

Not one of the extensive tailings ponds used for holding polluted wastewater can be brought to some semblance of Life. This is because the fine tailings in these ponds take decades to settle out. These tailing ponds, already covering an area the size of Washington D.C., pose risks of contaminating adjoining lands and water resources, and present health problems in downstream communities.

Canadian and Albertan laws and legislation and even the reasonable treaty called Directive 74, requires oil sands companies to speed up remediation of existing ponds. Of course they are required to bring up the ENvironment to a pristine state with boreal forests covering it. An impossibility this century at least…

Still the Canadian directive 74 is an order that creates especially large liabilities for the industry’s legacy oil miners such as Suncor and BP and Syncrude and Shell and ExxonMobile and even all the other oil majors who are all involved directly or indirectly through their subsidiaries, with the production of the Tar sands in Canada and are responsible for the full Clean up Bills and the Restoration of the pre-existing Boreal forests…

We call on all of the Tar sand oil companies to take a cautious, incremental approach to oil sands expansion. An approach that fully analyzes and plans for managing these multiple risks before making additional major investments. Same goes for the Private Equity investors.

Caveat Emptor applies here as always and a lot more liability spreads the risks here. So Buyer beware:

Yet most important is that all Investors should require this follow on process before renewing investments, rolling over old ones or entering into any of their new tar sands tranches:

Five simple things – easy to remember.

1) Review the long term Environmental Plan and the lasting impact of the tar sand oil companies’ proposed development plans and pursue more pro-active, incremental strategies to manage environmental and social risks.

2) Ask for and also create and provide guidance for assumed oil, natural gas and carbon prices in future production forecasts. And for the economic effects of mini, midi, or maxi oil and toxic pollution disasters.

3) Do a better job of articulating to community groups and other stakeholders their strategies for land use planning, water management and carbon mitigation.

4) Disclose information from these more detailed evaluations to investors and apprise them of the risk of imminent and unavoidable in the long term disasters.

5) Develop stronger ties and show Investment interest towards the U.S. biofuels industry both for speeding up development of advanced biofuel capacity and sharing existing infrastructure, such as oil sands pipelines that already feed into the U.S. Midwest.

All oil is getting dirtier and harder to produce. With Chinese investment and demand set to grow outside the U.S., oil sands production is likely to grow. Investors need to be aware of the environmental and social risks and engage oil sands companies to improve disclosure, operational performance and to make technological investments to reduce environmental and social impacts.

We recognize that oil companies will continue to invest in the oil sands, but they shouldn’t do so blindly. Investors need assurances that the risks outlined in this report are being taken into account.

This includes the fact that carbon will be regulated, that water will be increasingly scarce and therefore cannot be wasted, that tailings ponds need to be cleaned up, and the forest must be replanted and protected.  And that doing all this will be freaking expensive.

Shareholders ought to speak to the meetings and the Investment Funds and Pension Funds along with Companies need to build solutions and protections; up front.

Insurance is good, but let them buy that now. In the Post Gulf Spill world nobody will insure these risks. No Lloyd is strong enough to take this massive hit alone. Reinsurers and syndicators of course exist but not for this. After all all the big companies are self insured as BP is right now in the Gulf… and so is Shell and Exxon and all the others operating in the Gulf and the Canadian Tar Sands.

By investing in these stocks you are becoming an owner and a liable shareholder…

Think of that.

A shareholder of Equities that no insurer will touch…




Having flown above the tar sands projects and having spent time on the ground there with the Indian people – I can vouch that seeing this much Evil at work and such vast Environmental catastrophe is a Life altering Experience.

A far more disturbing landscape than the vast Oil slicks in the Gulf of Mexico. I’ve seen these too; and my comparison is unbiased, as both disasters, represent reprehensible crimes against Humanity and nature.

But the Tar Sands are on a league all their own… Much worse and probably much mote expensive to clean up.

Either let them insure these operations through third party reinsurers or they shouldn’t be building these projects at all in the first place, and thus forgo the tar sands production nightmare altogether…

Smart Investors don’t want this sick toxic legacy.

Who wants that kind of baggage?

N’est pas?


Carbonomics is a new book by Dr Pano Kroko  due to come out this Autumn published from Oxford University Press.

The above is an excerpt from the upcoming book by the same title: CARBONOMICS

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