Skip to main content

The Fort Hills project is located in the Athabasca oil sands region approximately 90 kilometres north of Fort McMurray, Alberta.

In the first signal that Alberta's new oil sands rules could be costly, UTS Energy Corp. said it has trimmed its oil sands reserves because complying with environmental regulations will make them too expensive to extract.

The proposed Fort Hills oil sands project will be unable to economically mine 490 million barrels of crude if it abides by standards for treating mine waste that Alberta released last year, UTS said Friday.

Although that is a substantial chunk of the total Fort Hill resource, estimated at 2.1 billion to 4.35 billion barrels, that oil could still be mined some day if crude prices surge, and both investors and other companies dismissed the financial risk as small.

Still, the new reserves estimates are an important glimpse into the impact of Directive 74, a new standard unveiled last year that obliges energy companies to speed the process of drying out oil sands tailings. Most tailings currently accumulate in large liquid pools the size of small lakes. To dry them requires spreading them on the ground, which takes up more space than pits. As a result, those accumulated tailings will make it more difficult, and expensive, to mine the bitumen beneath.

For UTS, which owns 20 per cent of Fort Hills along with several other projects, that means 147 million barrels out of its 1.7-billion-barrel portfolio can no longer be profitably extracted, according to a new analysis completed by independent evaluator Sproule Unconventional Ltd.

UTS estimates that bitumen covered by dry tailings will be $3 to $4 a barrel more expensive to produce. That's a slim enough figure that rising oil prices should cover the difference when the mine needs to process that land in two or three decades, said chief executive officer Will Roach.

He likened the new tailings rules to mandatory catalytic converters for vehicles, which increased car costs in the name of environmental advance.

"You can do these things, but there's a cost to everything you do," said Mr. Roach, who nevertheless dismissed the reserves change as a "non-issue."

UTS is the sole company to report such costs. Suncor Energy Inc., which is a 60-per-cent partner in Fort Hills, does not expect its other reserves to be affected by the new technology. Imperial Oil Ltd. is similarly unaffected, a spokesman said, and none of the other oil sands players who have submitted dry tailings plans to Alberta's Energy Resources Conservation Board - which has yet to approve any of them - have indicated they are facing a similar problem, said spokesman Davis Sheremata.

Investors, too, dismissed the reserves change as inconsequential.

"I don't think it's that big of an issue," said Mark Bridges, a portfolio manager with Connor, Clark & Lunn Financial Group.

Still, Mr. Sheremata said Alberta's energy regulator is willing to re-examine its tailings directive if it turns costly.

"Our regulations always evolve," he said. "The goal was not to significantly increase the overall costs of mining the resource. And so if we are hearing that this is going to result in overall mining costs increasing for an entire project, that's something that we would be willing to look at."

But Simon Dyer, oil sands program director at the environmentally-focused Pembina Institute, urged the regulator not to budge. "For the credibility of the regulations, they do need to stand firm on environmental performance," he said.

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe