“Investors need to question whether this is a wise use of
resources,” says Doug Cogan, a report co-author and director of
climate risk management for RiskMetrics Group.  “The oil sands
process takes natural gas-the cleanest-burning and lowest-carbon
fossil fuel-to turn one of the dirtiest and highest-carbon fuels
into a saleable product.  Large volumes of freshwater are also
consumed in the process, and end up in toxic tailings
ponds. 

It’s like the Gulf of Mexico spill, but playing out
in slow motion.  From a climate and ecological perspective,
we’re really no better off.”

“This report makes clear that oil sands companies must do more
to analyze the far-reaching risks from current and future
production in Alberta,” said Jack Ehnes, chief executive officer of
the California State Teachers’ Retirement System (CalSTRS), the
nation’s second largest public pension fund. “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.”

The Ceres/RiskMetrics report examines how new carbon-reducing
and land reclamation regulations, climate change and other
environmental and social issues could create additional cost- and
profit-margin constraints on future oil sands production.

Among the report’s key findings:

Shrinking profit margin: 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.

Vulnerability to changes in U.S.
Markets: 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.

Other Distribution Obstacles:
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.

Water and Other Resource Constraints:
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.

Growing Land Reclamation
Costs/Liability: After 40 years of production, no oil
sand companies have yet fully reclaimed the extensive tailings
ponds used for holding polluted wastewater. 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.
Alberta’s Directive 74 requires oil sands miners to speed up
remediation of existing ponds - an order that creates especially
large liabilities for the industry’s legacy miners such as Suncor
and Syncrude.

The report calls on oil sands companies to take a cautious,
incremental approach to oil sands expansion that fully analyzes and
plans for managing these multiple risks before making additional
major investments.

The report specifically recommends that oil sands producers:

• Review the lasting impact of their proposed development plans
  and pursue more pro-active, incremental strategies to manage
  environmental and social risks;



• Provide guidance for assumed oil, natural gas and carbon prices
  in future production forecasts.



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



• Disclose information from these more detailed evaluations to
  investors;



• Develop stronger ties with 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,” Bob Walker, vice president of sustainability at Northwest
and Ethical Investment in Canada.

“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,” continued Lubber, “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,
that tailings ponds need to be cleaned up, and that doing all this
will be expensive. Companies need to build solutions in up front or
they shouldn’t be building these projects at all.”

The full report is available at href=”http://www.ceres.org//oilsandsreport”
target=”_blank”>http://www.ceres.org//oilsandsreport and href=”http://riskmetrics.com/”>http://riskmetrics.com