To date, the pros and cons of oil sands development in Alberta have not been evaluated by comprehensive cost-benefit analysis (CBA).To datethe economic impacts of oil sands projects have been assessed using the method of economic impact analysis, a method widely criticized for its ignoring of opportunity costs and environmental externalities. In this paper we present the results of a preliminary in medias res CBA of the Kearl oil sands mine using information available by mid-2010 to provide insight into the social value of this development to Canada. The preliminary results indicate that the project generates a net social benefit at bitumen prices above $42.50 per barrel (the equivalent in the case of this project to a Western Texas Intermediate oil price of $94.44 per barrel). While this preliminary analysis is subject to many qualifications and uncertainties, the analysis illustrates the usefulness of CBA as a tool for future oil sands project evaluation.
The case study for the CBA is the Kearl oil sands mine. Kearl is a standalone mine being developed just north of Fort McMurray, Alberta by Imperial Oil (70% interest) and Exxon-Mobil Canada. The project involves construction of 310,000 barrels per day (bpd) of bitumen production capacity. Operations are planned to run for 51 years, and five years of reclamation are planned at the end. The proponents applied to the ERCB for approval in 2005. In February 2007 the Joint Review Panel (JRP) charged with reviewing the application approved the project. Legal wrangling then ensued between environmental groups and the federal government, but in June 2008 the project was re-granted approval. Construction began shortly after approval in 2008 and production is expected to commence in 2012 and ramp up to full production by 2021.
We defined the value of the project to society as the net social benefit it generates. Formally, the analysis entails solving the equation:
where NSB is net social benefit, R is revenue, C is the cost of production, r is the discount rate, t is the year, and n is the number of years in the project. Environmental externalities are treated as costs. We did not consider social externalities in this analysis, and we assumed that there will be no legacy benefits or costs occurring after project close. We report all monetary values in 2010 Canadian dollars.
The impacts of the project explored in the CBA include revenue from bitumen production, costs of production incurred by the proponents, costs to government (operations and infrastructure), interference with other economic actors in the region, depletion of natural capital, air pollution, climate change caused by GHG emissions, degradation of the landscape, water withdrawal, water pollution, and the risk of reclamation failure. Some of these impacts were deemed too small or too uncertain to include in the analysis.
Using a base case discount rate of 10%, the net present value of the project in the base case varies between $10 billion and $11 billion. The net present values of each of the project’s impacts are shown in table 1.
Table 1. Net present values of project benefits and costs.Item / NPV ($ billion 2010 CDN)
Revenue from bitumen production / 36.0
CAPEX, OPEX, and reclamation costs / -21.1
Government costs / -0.5
User cost / -0.3
GHG damages / -3.1
Land damages / -0.1
NPV excluding user costs / 11.3
NPV including user costs / 10.1
For this preliminary study we only conducted sensitivity analyses of two parameters: discount rate and bitumen price. Across discount rates (8%, 10%, and 12%) the project is a net social benefit. However, when the low price forecastof the US Energy Information Administration is used, the project is a net social cost. The break-even average bitumen price is about $42.
Although CBA is the most appropriate method for project evaluation, it has not to date been used to comprehensively assess the pros and cons of oil sands development. In this study we conducted a preliminary CBA of the Kearl oil sands mine using up-to-date information to estimate the costs and benefits of the project. The results indicate that the mine appears to generate net social benefits across a plausible range of discount rates but is sensitive to bitumen price. This finding is subject to a number of qualifications and limitations that need to be addressed in a more comprehensive CBA, including more sensitivity analysis of additional parameters. Despite these limitations, the study shows that CBA provides a useful framework for assessing the net impacts of projects and identifying issues of societal importance that should be examined further in regulatory review processes. Our preliminary application demonstrates that CBA is superior to the more commonly used method of EIA which provides misleading estimates of project benefits and costs. Consequently, we encourage governments and other stakeholders to utilize CBA in assessing oil sands development.