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Can Canada's Oil Sands Solve the Energy Crisis?

The Wall Street Journal may not like T. Boone Pickens' clean energy plan, but it has a lot of merit. What Pickens sees -- and the WSJ ignores -- is that our oil-driven global economy is stretched to the limit and is likely not sustainable. A telling indicator is an enormous oil-extraction project in Alberta, Canada -- an enormous energy-intensive, financially questionable undertaking that oil companies are now treating as the next great oil bonanza.
by Mindy S. LubberHarvard Business Review Posted on Aug 13, 2008

The Wall Street Journal may not like T. Boone Pickens' clean energy plan, but it has a lot of merit. What Pickens sees -- and the WSJ ignores -- is that our oil-driven global economy is stretched to the limit and is likely not sustainable.

A telling indicator is an enormous oil-extraction project in Alberta, Canada -- an enormous energy-intensive, financially questionable undertaking that oil companies are now treating as the next great oil bonanza.

Fueled by rising oil prices and declining global oil reserves, US and Canadian oil producers are knocking down millions of acres of Alberta's pristine boreal forest to produce oil from a sticky mud-like substance known as oil sands.

Vastly different than traditional oil drilling, oil sands production has doubled over the past 10 years, to about 1.3 million barrels a day. Output is expected to double or triple by 2015, making it one of the biggest producing oil fields on Earth. Oil companies are spending tens of billions of dollars a year on the project right now and UBS analysts have reported that it represents more than half of the industry's "investable assets" globally.

Many on Wall Street believe the project makes perfect sense. "The oil sands play represents a compelling prize," says Jeffrey Rubin, chief economist at CIBC World Markets Inc. "What makes the oil sands properties so valuable is is that there are few others places where production can grow, and even fewer where you can invest."

What Rubin and the rest of the capital markets are ignoring are the project's far-reaching environmental impacts that could make this an unsound investment in the end.

There's growing evidence these days of capitalism and sustainability being increasingly interrelated -- that environmental and social impacts need to be included along with quarterly sales projections in corporate strategies and the financial bottom line. But, for many companies and investors, this is still more a concept than a reality, especially when it comes to global warming.

Much of the problem is our reliance on outdated accounting systems. Our economy uses accounting systems that are precise in measuring capital goods and profits, but weak in measuring natural and human resource impacts. This narrowly-defined accounting system means that companies are often able to "externalize" natural resource costs. In other words, they can emit global warming pollution for free without paying for environmental damage. Society and taxpayers shoulders these costs instead.

We're now seeing the capital markets begin to incorporate the external costs of global warming, especially in Europe where government-supported trading systems and pricing mechanisms (a price for every ton of carbon dioxide emitted) have fostered a $30 billion a year carbon emissions trading program. But we still have a long way to go, especially here in North America.

If ever there were a project where sustainable accounting is needed, Canada's oil sands extraction is it. Greenhouse gas pollution associated with oil sands development is three times higher than traditional oil extraction and refining. Related mining and processing require huge amounts of water, much of which ends up as pollution-laden wastewater in tailings ponds that stretch for miles and miles. So toxic are these ponds that birds have literally dropped dead after landing on the water.

There has been some progress in incorporating environmental costs into financial accounting, but not nearly enough. A key next step is for financial institutions to evaluate these kind of projects with shadow carbon prices that reflect their true long-term costs once carbon-reducing regulations told hold around the world.

Until we see these sorts of practices in the financial community, there's little reason to expect oil companies to abandon oil sands production anytime soon.

Mindy S. Lubber is president of Ceres, a leading U.S. coalition of investors, environmental groups and other public interest organizations working with companies to address sustainability challenges such as global climate change. Lubber also directs the Investor Network on Climate Risk, a network of 65 leading investors with collective assets totaling $5 trillion focused on the financial risks and opportunities from climate change.

Read the post at Harvard Business Review

Meet the Expert

Mindy S. Lubber JD, MBA

Mindy S. Lubber is the president of Ceres and a founding board member of the organization. She also directs Ceres’ Investor Network on Climate Risk (INCR), a group of 100 institutional investors managing nearly $10 trillion in assets focused on the business risks and opportunities of climate change. Mindy regularly speaks about corporate and investor sustainability issues to high-level leaders at the New York Stock Exchange, United Nations, World Economic Forum, Clinton Global Initiative, American Accounting Association, American Bar Association and more than 100 Fortune 500 firms. She has led negotiating teams of investors, NGOs and Fortune 500 company CEOs who have taken far-reaching positions on corporate practices to minimize carbon emissions, water use and other environmental impacts. She has briefed powerful corporate boards, from Nike to American Electric Power, on how climate change affects shareholder value.

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