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Syncrude and the oilsands : an economic evaluation May, Gerry


In recent years, Canada's previously stable energy economy has undergone a series of remarkable changes. The early seventies, and particularly the dramatic OPEC price increases of 1973, have marked the advent of a new era in energy policy. Canadian governments seem unwilling to accept the fact that national net self-sufficiency in energy, particularly in oil, may well be a thing of the past. Thus, mammoth energy projects have been proposed or undertaken by industry and government alike, in a desperate attempt to reduce dependence on foreign sources of supply. This new sense of urgency has led to unprecedented co-operation between government and industry, while increasing the traditional tension amongst different levels of government. Typical both of the novel pattern of development and of the unusual government-industry alliance is the Syncrude project, the latest attempt at exploiting the Alberta oil sands. This paper investigates the potential role that the oil sands might play in Canada's energy future. Mora specifically, the economics of Syncrude itself are analysed, and conclusions of a general nature are based on this case study. In section 1, the reader is introduced to the topic through a description of the oil sands, a review of currently available recovery and refining methods, and a short history of oil sands development. Sections 2 and 3 constitute the main body of the paper, dealing first with the expected costs and benefits of the Syncrude project and, second, with the likely macroeconomic consequences. Finally, section -i explores the implications of more substantial oil sands development, compares the various techniques that might be employed in the future, and discusses the oil sands' role in the national energy policy. The conclusions of the paper have several dimensions. With regard to the cost-benefit analysis, Syncrude as a whole seems to be a rather marginal venture. Particularly interesting is the manner in which the returns are distributed among the various consortium members, as alberta and the private industry participants are subsidized by Ontario and the federal government. Although consideration of sunk costs at the time of Syncrude's "go" decision somewhat improves the basic economic picture, an analysis of risk and uncertainty demonstrates how sensitive returns are with respect to several unknown parameters. Some of the special arrangements of royalty and taxation that distinguish Syncrude from the petroleum industry in general are quantified, thus demonstrating the extent to which this project is being subsidized relative to others. Also, a crude appraisal of the scale economies in oil sands development is attempted. On the macroeconomic side, a dynamic simulation model of Syncrude is incorporated into RDX2, an aggregate econometric model of the Canadian economy. This enables an appraisal of the likely consequences that oil sands development may have for the national economy. The major conclusion is that such projects can hardly be justified on the basis of their aggregate effects, if the cost-benefit results are unfavourable. In the final section, an analysis of more intensive oil sands development (several Syncrude-size plants) shows that the present government-industry arrangements are unlikely to apply to future oil sands ventures. Thus, private industry will probably be dissuaded from engaging in further surface-mining schemes, pending some major cost-rsducing technological breakthrough and/or a substantial increase in the relative price of oil. Although similar financial and technical problems currently haunt 'in situ' development, it is believed that this recovery method will play a greater part in the oil sands' future. Finally, some critical remarks are included on the national energy policy and the governments' handling of Syncrude. An attempt is made to analyze why Ottawa, Alberta and Ontario decided to join the companies in an obviously marginal and risky undertaking. Sy results suggest that little, if any, analysis preceded either the federal or the Ontario government's decision to participate in the project. In this regard, I conclude that Syncrude could set a dangerous precedent for the future management of the country's resources.

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