Risk Management

Environmental Risk

We are exposed to the risk of the potential impact of Syncrude’s operations on the environment. Syncrude’s commitment to its objectives of operational, environmental and social excellence is aligned with the mitigation of environmental impacts. Stage 3 incorporates technologies to reduce emissions, improve energy efficiency and upgrade the entire production stream to meet higher specifications for environmental and product quality. We anticipate that, in time, downstream refineries will find our SSP product more valuable than the existing SSB as they will likely use less energy in processing our high quality SSP crude into products, such as gasoline and diesel, that meet new higher environmental standards.

While total CO₂ emissions will increase as production rises and when the higher quality SSP is produced, Syncrude’s investments in energy consumption and environmental mitigation are intended to continue to reduce CO₂ emissions per barrel. However, the risk exists that these mitigation efforts will not meet societal expectations or environmental regulations.

The third fluid coker constructed as part of Stage 3 includes a flue gas desulphurizer (“FGD”) that captures SO₂ emissions. Syncrude has an agreement in place to provide the sulphur from the desulphurization unit to a third party for use in the manufacture of ammonium sulphate fertilizer.

Syncrude also has initiated the SER project, which is expected to significantly reduce total SO₂ emissions as well as other emissions, such as particulate matter and metals. It will involve retrofitting sulphur reduction technology into the operation of Syncrude’s original two Base Plant cokers. Procurement and construction expenditures are scheduled for the next four years. The SER project, together with the flue gas desulphurizer technology incorporated into the Stage 3 expansion, are expected to reduce SO₂ emissions by up to 60% from today’s approved Alberta Environmental regulatory levels of 245 tonnes per day. The resulting SO₂ emissions are also expected to be below new maximum emission levels that will take effect following the completion of the SER project.

Syncrude produces and stores significant amounts of sulphur in inventory blocks at its plant site as there is presently a limited market for the sulphur. There can be no assurance that future environmental regulations pertaining to the use, storage, handling and/or sale of sulphur will not adversely impact the unit costs of production of synthetic oil. Syncrude is exploring the ability to store sulphur blocks underground. Initial information indicates that this may be a viable and environmentally-friendly solution for dealing with the excess sulphur. Syncrude continues to research alternatives for addressing this issue, which also affects other sulphur producers in the petroleum industry. In addition, in 2005 the Trust entered an agreement with a major sulphur marketer to sell our share of Syncrude’s sulphur production at a plant gate market price. The agreement covers an initial five-year term, is renewable at the Trust’s option, and provides that volumes will not be sold unless the price exceeds an established plant gate minimum. Sales under this contract are expected to begin in 2008, following the buyer’s construction of infrastructure to handle the Trust’s sulphur volumes.

Syncrude owners are liable for their share of ongoing environmental obligations for the ultimate reclamation of the Syncrude project. Our share of Syncrude’s ongoing environmental obligations has been and is expected to continue to be funded by our cash from operating activities. The owners also have each directly posted letters of credit with the Province of Alberta to secure the ultimate mining reclamation obligations, of which Canadian Oil Sand’s share was approximately $49 million at December 31, 2006. In addition to the letters of credit posted with the Alberta government, Canadian Oil Sands maintains a reclamation trust fund to help meet this future reclamation liability.

In 2006, we contributed approximately $5 million, including earned interest, versus approximately $4 million in 2005 to our reclamation trust account, resulting in a December 31, 2006 ending balance of approximately $30 million. The funding requirement of the reclamation trust is more fully described in Note 9 to the audited Consolidated Financial Statements.

A number of environmental regulations focus on limiting the emissions of gases and other substances from the Syncrude operations. The Canadian federal government ratified the Kyoto Protocol in 2002 and has indicated that total annual emissions for greenhouse gases for large industrial emitters have been capped at 55 megatonnes with emissions to be reduced by 15% from current business-as-usual levels. The prior federal government had limited the cost of future carbon credit purchases to a maximum of $15 per tonne.

With Russia’s adoption of the Kyoto Protocol in 2004, the Protocol came into effect in Canada on February 16, 2005. The federal government also has recently indicated that it will be considering various limitations and sanctions with regard to the emission of greenhouse gases, either as part of its legislative efforts regarding the Kyoto Accord, or otherwise. Additionally, public announcements regarding the plan to reduce greenhouse gas emissions have raised the question as to what limitations and restrictions may be imposed by the federal government either under the proposed Clean Air Act or other legislation. Sanctions relating to emissions and water quality have not been specified. The federal government has not published specific guidelines or further guidance on these limitations and sanctions. As such, we cannot assess the impact of potential new greenhouse gas emission reduction targets on our operations. We believe that production will continue to be profitable under the current known factors.

There are also various consultation processes underway by the Province of Alberta with regard to water usage in the oil and gas industry and the oil sands sector, in particular. Again, as no conclusions or recommendations have been issued by such regulatory review body, we cannot assess the impact of any such proposals on our operations. Syncrude currently operates within its water license limits and recycles approximately 80% of its total water usage. 

Syncrude has historically worked with the federal and provincial governments to monitor its emissions of greenhouse gases and is constantly working toward reducing the per barrel emissions through greater energy efficiency. Syncrude has also operated below the license limits with respect to its water usage from the Athabasca River. However, as the Syncrude operations involve use of water and the emission of greenhouse gases, legislation which significantly restricts or penalizes current production levels would have a material impact in our operations. The costs of meeting such environmental thresholds would increase operating costs and/or capital costs, and as such, may impact the profitability of the operations.