Bitumen: Its Energy Return on Energy Investment is vastly lower than light oil.Bitumen: Its Energy Return on Energy Investment is vastly lower than light oil.In a previous article, I listed the first five of ten ethical oil challenges Canada faces. Find those here. Two more are presented today, with the final three to be published next week.

Ethical Challenge Six: Diminishing Energy Returns

Since the turn of the century, light oil, the highest quality hydrocarbon, has given civilization extraordinary energy gains and fueled all the trappings of modern life. But the rapid development of bitumen, one of the world’s most expensive and heaviest hydrocarbons, has clearly signaled the end of cheap oil. Like most unconventional fuels, bitumen takes more energy to make than conventional oil. In fact, bitumen production requires so much natural gas for processing and enrichment that it now accounts for one-fifth of Canada’s natural gas demand. The extravagant use of natural gas to produce a lower grade fossil fuel is unprecedented.

Fuels that require lots of energy to make energy ultimately provide fewer returns to society. Economists refer to this challenge as Energy Return on Energy Investment (EROI). At the turn of the century, it took but one barrel of oil to find and liquidate 100 barrels. But ever since the glory days of the Texas oil fields, the EROI ratio has slowly diminished on the continent. Charles Hall, a prominent energy analyst and ecologist at the State University of New York, estimates that EROI for U.S. oil production has dropped from 24:1 in 1954 to 11:1 in 2007. As companies employ more energy to drill or fracture deeper formations, their overall energy returns grow smaller. Hall also calculates that modern civilization requires a high EROI or massive source of moderate EROI fuels that deliver a return of at least 15:1.

However, bitumen, like many so-called green alternatives such as wind, provides poor energy returns. According to Peter Tertzakian, the chief energy economist at ARC Financial Corporation (and a very astute energy commentator), the EROI for the oil sands amounts to 7:1 for extraction and drops to 3:1 after it has been upgraded and refined into something useful such as gasoline. Several industry experts say that oil sand mines have an average EROI of 5:1 or much better returns than Steam Assisted Gravity Drainage (SAGD) plants. In fact, a detailed energy balance analysis sponsored by the Alberta Government for SAGD suggests that its EROI is close to 1:1. That makes bitumen a source of energy as pathetic and tragic as corn ethanol.

A few SAGD projects have even recorded EROI in negative numbers. When a nation gets less energy out of system than it puts into it, “the process is ultimately unsustainable,” explains Tertzakian in The End of Energy Obesity. Given that natural gas has an EROI almost as high as conventional oil, many energy experts regard the use of natural gas for bitumen production as folly.

The low EROI of bitumen (even sugar cane and solar panels have marginally better returns) has other important implications. The United States now spends a billion dollars a day buying oil and 16 per cent of that on Canadian bitumen imports. As the U.S. becomes more dependent on poorer quality oil, its petroleum addiction will enrich a few oil companies and progressively weaken other economic sectors. RSK Limited, an oil advisory group, recently noted that “There are limits to which any nation can continue exporting such large amounts of wealth, but there is little progress in modifying the social and economic structure to reduce oil consumption.”

In other words, high cost hydrocarbons that provide low EROI such as bitumen (and many renewables share this same trait) could cannibalize economies long before this abundant junk crude runs out. The 2010 RSK report asks a significant question: “Which runs out first, the oil or the money?”

Add the group’s analysts: “The alternative to a successful transition from an oil dependent economy could be a very long dark age.” To date, no federal or provincial regulator or major investment group annually reports on the EROI of oil sand projects. Without this important tool, politicians and oil consumers can’t make good decisions on how to regulate the pace and scale of investment.

The returns on renewable energy projects also go unreported and require the same scrutiny. To Hall and other analysts, declining EROI reflects declining efficiencies and “makes a sustainable society increasingly difficult. We must adjust to this new reality by using less, rather than expanding drilling efforts.” In other words, the rapid development of bitumen threatens to sink the North American economy instead of energizing it.

Ethical Challenge Seven: “The Innovation Crisis”

Just about every oil sands developer claims that they can clean up messy bitumen production and its large carbon and water footprint with better technology. “Technology is the key to further progress,” says the American Petroleum Institute in its oil sands propaganda.

But this technology doesn’t exist yet. Although the energy industry may be dependent on technology for making fossil fuels, it doesn’t invest much in innovation. According to Forbes, big energy companies are fat and lazy creatures that devote barely 0.3 per cent of their sales to research and development (R&D). Many have even axed their R&D departments. In contrast, the pharmaceutical industry spends 19 per cent of its sales on research. The auto industry follows closely behind. But not the oil patch. In fact, Canadian energy firms devote no more than 0.2 to 0.7 per cent of sales to research.

Compared to other Canadian industries, big energy companies invest significantly less in research and development.Compared to other Canadian industries, big energy companies invest significantly less in research and development.
How can a country call itself a “global energy superpower,” when its bitumen producers spend almost nothing on energy research? The Danish wind company Vestas, for example, spends more money on research and development than Total, Nexen, Suncor or Shell. U.S. oil analyst Philip Verleger notes that the oil companies profit “not through ingenuity, but through commodity price increases.”

Canadian industry, dominated by commodity exports, shows little entrepreneurial flair, too. Concluded one 2009 report: “The innovation performance of Canadian business, taken as a whole, is significantly weaker than the innovation performance of the U.S. business sector, and in fact weaker than that of many of Canada’s peers among OECD countries.”

The oil sands mirrors this “innovation crisis” in spades. (The term was ironically coined by former Harper advisor, Bruce Carson, a convicted thief and oil sands lobbyist. He’s now under investigation for illegal lobbying.) After the federal and provincial governments spent billions on publicly funded research in the 1980s, the oil sands industry sat on its thumbs. As a consequence, bitumen producers are now running on 20- or 30-year-old technology that is inefficient, carbon intensive and extremely wasteful.

Steam Assisted Gravity Drainage (SAGD) makes a dismal case in point. Industry says that steam plants, which now produce nearly 40 per cent of all bitumen production, represent the new and clean face for the oil sands. Yet the process boils vast amounts of groundwater with extreme volumes of natural gas in order to pipe steam into deep formations and thereby melt bitumen. None of these deposits are homogeneous and controlling steam in deep formations has become as problematic as hydraulic fracturing. In one celebrated case, Total injected steam into bitumen formation at too high a pressure. The steam then blew out a 300-metre hole in the forest in what regulators called “a catastrophic explosion.”

Steam injected into bitumen formation cause the ground to explode.Steam injected into bitumen formation cause the ground to explode.If the technology worked really well, it would use less energy and steam over time to produce more bitumen. But exactly the opposite has happened. In the late 1980s, 2.38 barrels of steam was consumed to produce a barrel of SAGD bitumen. In 2010, the steam industry average increased to 3.3 barrels. That’s a 50 per cent decline in efficiency over a 20 year period. For some companies, such as Opti-Nexen, the steam to oil ratio is now a dismal six barrels. More steam just means more energy and more emissions and less production.

In a recent presentation on technological innovation in the oil sands, University of Calgary petroleum engineer Steve Larter called the lack of innovation a “clear daunting challenge.”

Added Larter: “We have not been revolutionary — steam oil ratios have gotten worse with time as more difficult reservoirs are developed.” He also admitted that technologies that lead to major downward shifts of the invested energy (for example, steam) and emissions versus oil produced have not yet appeared. Moreover, the high capital cost of current oil sands investment curbs innovation. Once Big Oil has invested billions in poor performing steam technology, there is no incentive to develop better technologies that might make their original investment obsolete.

Any industry that employs a technology that actually gets worse with time is profoundly wasteful. (Engineers call it the “broken feedback loop.”) The most efficient steam operators now burn 0.7 GJ of natural gas per barrel of steamed bitumen. But they are the exception and not the rule. Based on greenhouse gas (GHG) intensity, the estimated industry average energy consumption is now 1.8 GJ/bbl, or 2.6 times higher than best practice. Perverse natural gas subsidies (oil sands companies can write off fuel as a cost) partly explain this lack of innovation and wastage.

Larter concluded that there is “no real evidence of a successful competition-based technology drive in energy R&D.” Moreover, the industry, driven by short-term interests, remains as risk adverse and as unimaginative as the government of Saudi Arabia.

As one industry insider confided to the Tyee: “The steam extraction plants being built by industry today consume two to three times more steam than necessary and will burden Alberta’s (and Canada’s) economic productivity for subsequent generations.”

One innovation that could change the game for the oil sands proposes to use microbes to gasify bitumen deposits into methane. The process, which would create fewer emissions than any mining or steaming project, would make Canada an “electricity, technology and gas exporter” of methane instead of oil. But the process might take a decade to commercialize.

In the meantime, innovation and research flounders in Canada’s oil patch.

Next Week: The Conclusion of 10 Ethical Challenges of the Oil Sands

[Follow the link for more Energy reporting on The Tyee.]  [Tyee]