Risk from Canada’s oil sands reputation is as challenging as costs

CALGARY (Bloomberg) -- Canada’s oil sands industry faces an equal risk from its reputation as an environmental laggard, as from high operating costs, industry observers said.

The failure to win approval for pipelines like TransCanada Corp.’s Keystone XL and Enbridge Inc.’s Northern Gateway is tied to concerns about carbon emissions with oil production, Ed Whittingham, executive director of the Pembina Institute, said at the Bloomberg Economic Series Canada summit in Toronto. “The oil sands feeds into concern about the climate,” he said. “The primary driving concern is climate.”

Campaigns by environmental groups against the oil sands have been enormously successful. A wave of negative media coverage has hurt the Canadian brand worldwide, feeding the repeated delays on the Keystone XL pipeline from Alberta to the U.S. Gulf coast, and a proposed fuel directive in Europe that would penalize the carbon-intensive bitumen production.

Producers, already hit by the slump in crude prices, haven’t been able to turn around the industry’s image as a growing emitter of greenhouse gas and toxic by-products in the absence of tougher regulations. Oil companies have been slow to grasp the risk to their businesses from this reputation, said Todd Hirsch, chief economist at ATB Financial, the Alberta government-owned bank. “The rest of the world looks at us critically,” he said. “It makes us easy targets. We need to do better.”

Daryl Hannah

The environmental cause has attracted the likes of actress Daryl Hannah and rock legend Neil Young. Just last week, Rockefeller Brothers Fund, which provides grants related to sustainable development and had its roots in the petroleum industry, made a splash by joining the divestment movement.

“There’s a big risk of stranded assets” in the oil sands, said Robert Mark, director of research at MacDougall, MacDougall & MacTier Inc. The inability of Canadian oil producers to compete with Saudi Arabia in an era of low prices is also a big challenge, he said.

To tackle costs, Canada’s petroleum companies may cut investment by $23.2 billion in the coming 12 months, according to data compiled by Bloomberg. That’s a 29% reduction from the previous 12 months and the biggest since at least 2007, according to data on 70 companies with a minimum market value of C$500 million ($410 million).

A new left-of-center government in Alberta headed by New Democratic Party Leader Rachel Notley promises to offer a “reset button” for the industry and its flagging image, said ATB’s Hirsch. “The previous government had lost all credibility,” he said. “I’m optimistic.”