I recently spoke with Yulia Reuter from the firm Riskmetrics, she has just authored a report on the potential clean-up costs for the oilsands based on Directive 74 issued by the Alberta government. With sludge ponds spanning over 50 square kilometres, it is no surprise that the costs are staggering. We discuss some of her assumptions and what the implications for the industry might be. The report itself is only available to RiskMetrics clients, but you can get a good summary here: costs of clean-up in the oil patch.
Jonathan Brun: Hi I’m Jonathan with Nimonik and today I’m with Yulia Reuter, I hope I pronounced your name correctly, who is an analyst at RiskMetrics and she recently wrote a report about the potential clean-up costs of the oil, the tailings out in Alberta. These costs as you might imagine are quite impressive or quite staggering. So Yulia, I was hoping you could give us a quick overview of your firm, RiskMetrics, what you do, your specialty, and then we can dive into some questions.
Yulia Reuter: Sure, thanks Jonathan. And thanks for having me over. I am a sustainable energy research analyst in the Toronto office at RiskMetrics. I had the energy team with the environmental social and governments team. RiskMetrics is a provider of financial risk management services for credit, market, accounting, regulatory, and other risks. And at the ESG division, what we do is we assess environment impacts of environmental and social factors on the company’s core business activities. As we all know, energy companies have always had a substantial impact on water, land, and air resources. However, in the last couple years as the industry moves from conventional to unconventional oil, these impacts are magnified, and so is the regulator’s response. So our job is to monitor this progress and to see how this affects the financial performance of the company. In terms of my professional qualifications, I’m a chartered financial analyst and I’ve been doing these sustainable energy research analyses at RiskMetrics since 2007.
Jonathan Brun: Ok. So, the recent report that you released about the clean-up costs out in Alberta was primarily based on the Directive 74 which was passed back in February. And I was curious for your comments on how real do you think this directive is in the sense that . . . I mean the directive states that agreements can be reached independently of the directive between oil and gas companies and the government. And so how real is the directive in the sense that, how widely applicable will it be and will it really be applied or really be just more of a guidance document than anything else.
Yulia Reuter: Well, we think that the Directive 74, which was outlined in February of 2009, is really one of the few and most pronounced forms of environmental regulation in Alberta. You know, we’re yet to see whether it has teeth, and whether it’s going to be implemented, and it does look like just one of the oil tailings producers, Sun Core Energy, is capable of being in compliance with the directive. The other producers would most likely have challenges complying. So, we’re yet to see because as you can imagine there’s a clear pressure on the industry side. However, what’s important to understand is that according to the regulatory filing of themselves, currently 13,000 hectors occupied by the tailing ponds and we estimate that 3.2 billion barrels of tailings are currently sitting on the landscape. The industry produces daily 3 million barrels of tailings a day. And so, I think there’s a clear understanding out their that the current path involvement is unsustainable, and the tailings have become one of the biggest public relations nightmares for the industry. And so I think the regulators are clearly interested in getting the industry on a more sustainable development path.
Jonathan Brun: So, for your report specifically, I was curious what, if any, there’s always some base assumptions in terms of the calculations of the costs and are the costs that you discussed entirely based on the existing technologies that are available today to these companies, existing technologies that have been applied to past clean-up projects? Or do you include some speculative technologies, technologies that are not yet operational or are in pilot project? Do you include those as part of the potential costs of cleaning up? Or are all your calculations based on what can we do today with what’s out there?
Yulia Reuter: This is a good question. We in fact have a different approach, I guess, that the industry is proposing to take. We know that the operators are working on a number of different remediation methods. And some of them are using consolidated tailings called CT technology that adds gypsum into the mixture to solidify the waste. Some of them are using MFD drying technology. Some of them are injecting carbon dioxide into the mixture. But we don’t know what the actual costs are, because these technologies are typically developed in house, they’re proprietary, and this information is typically not available to the public. However, what we’re noticing is that most of these technologies are just involved in the mechanical treatment of the mixtures. So, they’re moving the material from one pond to another and they’re not actually addressing the cause of the suspension, the cause of the tailing accumulation, which is the organic contamination. So, the fine particles in the sand in an unremediated mixture remains suspended in the petroleum film which floats on top of the water because petroleum is lighter than the water. So, we’re finding that none of the producers are actually addressing the issue at hand, and what we’ve done, we’ve said, “Ok, well let’s see who actually does this type of work,” and we’ve spoken with a few bio-remediation specialists that do this work on a daily basis, they do it all over the world. We’ve talked to [???] technologies that does this work in Nigeria and the UK., and it’s based on the existing technology. So, bio-remediation work that’s done using existing methods. And our research suggests that the costs of using bio-remediation to deal with the tailing ponds can range anywhere between 15 to 50 Canadian dollars per ton. That’s the remediate the tailing ponds that are already accumulated. To treat the tailings that are continuously coming out of the production process, that would come in at a lower cost, anywhere between 1.2 Canadian dollars to 4 dollars per barrel of production.
Jonathan Brun: Why is the cost so much dramatically lower on a per ton basis for the incoming tailings as opposed to the tailings that are already there. Is the composition of the tailings different?
Yulia Reuter: It’s just easier to set up your process from the get go, essentially. So once the tailings have already been deposited into the pond, what you need to do is first you need to drain it, you need to introduce a larger amount of agent to treat the mixture, you know, you need a different infrastructure and different facilities. But if you set your process from the get go and just deal with the waste from the outset, operationally it’s an easier process. So the cost differential is actually quite dramatic. Which again gives the producers an incentive to to deal with the waste from the outset.
Jonathan Brun: And I mean, beyond Directive 74 and the general tendency toward more regulations when it comes to environment, do you see any other major liabilities for oil [???] producers, oil and gas producers out in Alberta, when it comes to their operational risks?
Yulia Reuter: We actually think that water shortage may be a significant issue going forward. According to our estimates, on average 3.5 barrels of water are used in the mining process and about a half a barrel in the [???] development. And the way the regulations currently set up is that the provincial regulator mandates the amount of freshwater, for example out of [???] River. And what we did, we looked at the historical river flow, we looked at the projections of how the river is going to behave, and we looked at the projected production guide, meaning how much oil the company is going to produce and how much water they’re going to need for this production. And we found that towards 2014, some of the producers may actually experience water shortages.
Jonathan Brun: Based on your report, and the other liabilities you see out there, do you get the sense that companies are taking this seriously in terms of reinforcing dams, or investing in technologies for potential clean up down the road? Are they considering this a serious threat to their business, or I imagine it varies from one company to another. You mentioned Sun Core as being a bit more progressive than the others. Are they doing anything to prepare for these risks, really?
Yulia Reuter: Well, the information from companies is few and far between, so we don’t always know what the companies are doing. My guess is that some of them are taking these issues seriously. As I said, the tailing ponds for example, have become one of the biggest public relations nightmares, and it has affected the company, the industry’s relation with the stake holders and the politicians. And so, as I said, Best Practices you may look at companies such as [???] oil and the region operator, Sun Core here in Canada, and [???] but there are few producers, for example [???] that we’re finding are not developing or following the best practices in the industry.
Jonathan Brun: Yeah, well let’s hope they all get their act together and change a bit. But, I just wanted to thank you for taking the time to speak with us. I’ve been speaking with Yulia Reuter from RiskMetrics and she just put out a fantastic report of the potential clean-up cost of the tar sand operations out in Alberta, and we will have a link up to your website on this video so anyone who is interested in this report or curious about your business activities can certainly go visit the site. Thanks again for taking the time to speak with us.
Yulia Reuter: Thank you for your invitation, Jonathan.
Jonathan Brun: My pleasure.