RAND Study Concludes Oil Sands Synthetic Crude Can Be Cost-Competitive with Conventional Petroleum Even Over a Wide Range of CO2 Prices

Jose Michael

Estimated unit costs of SCO from steam-assisted gravity drainage (SAGD) with upgrading, with and without CCS, and of conventional crude oil in 2025, versus different costs of CO2 emissions. Click to enlarge. Source: RAND

A new report from RAND concludes that in 2025, synthetic crude oil (SCO) produced from oil sands can have a cost advantage over conventional petroleum at a wide range of CO2 prices, even though it is more CO2-intensive (15-20% on a life-cycle basis). Coal-to-Liquids (CTL) transportation fuels can also be cost-competitive with conventional petroleum, although the degree of cost-competitiveness is more sensitive to the price of oil and the CO2 emission cost, the report says. CTL fuels can be approximately twice as CO2-intensive on a full life-cycle basis as conventional petroleum fuels.

Current methods for oil sands production require large quantities of water and can harm local water quality, the report notes. Development of oil sands can also cause large-scale disturbances of land and habitat. Both resources also represent potentially significant sources of carbon dioxide emissions. The study was funded by the National Commission on Energy Policy.

Because the potential environmental impacts are considerable, decision makers need to assess the economic and other benefits of alternative fossil fuels relative to these environmental concerns.

The most important constraints for oil sands are the local environmental impacts and demand for water. Since major investments in coal-to-liquids become more likely if environmentally sound carbon capture and storage can be commercialized at relatively low cost, the future expansion of this fuel source will be strongly influenced by future private sector and government initiatives to support such commercialization.

However, even with carbon capture and storage deployed, neither alternative fuel offers a path toward large long-term reductions in total carbon dioxide emissions to limit climate change. There will still be a need to develop lower-carbon fuel options, such as fuel synthesized from a mixture of coal and sustainably grown biomass.

—Mike Toman, lead author of the report

The study, Unconventional Fossil-Based Fuels: Economic and Environmental Trade-Offs, assesses the potential future (in 2025) production levels, production costs, greenhouse gases (GHGs), and other environmental implications of synthetic crude oil (SCO) produced from oil sands and transportation fuels produced via a variety of CTL processes. Production of liquid fuels from a combination of coal and biomass is also considered.

Although oil shale is also a significant potential unconventional fossil fuel resource, the RAND team opted not to include it in the report because “fundamental uncertainty remains about the technology that could ultimately be used for large-scale extraction, as well as about its cost and environmental implications.”

Key findings of the report include:

  • Even with future policy constraints on CO2 emissions and their associated costs, SCO seems likely to be economically competitive with conventional petroleum unless future oil prices are relatively low. The main constraint on SCO appears to be its local and regional environmental impacts.

    Because SCO’s increased GHG burden compared to conventional petroleum is relatively low (15-20%), it is less sensitive to CO2-emission costs than CTL.

  • The economic competitiveness of CTL is more dependent on future oil prices, carbon dioxide–sequestration costs, and the stringency of future carbon-dioxide limitations. For CTL to be cost-competitive with conventional fuels, one of two distinct conditions needs to be met. The first is that either the future cost of CO2 emissions or the cost of CCS is low. The second is that the price of crude oil in the longer term is significantly above EIA’s 2007 reference level. This would make investment in CTL with CCS attractive.

  • Higher oil prices or significant energy-security premiums increase the economic desirability of both synthetic crude oil and coal-to-liquids.

  • Unconventional fossil fuels do not, in themselves, offer a path to greatly reduced carbon-dioxide emissions, though there are additional possibilities for limiting emissions. Even if successful on a large scale, applying CCS to producing CTL and SCO would still leave unaddressed the CO2 emissions from final combustion of the fuels.

    Investments in expanding SCO or CTL do not, in themselves, offer a path toward the very large reductions in long-term CO2 emissions from use of liquid fuels that would be needed to stabilize atmospheric concentrations of CO2, a major consideration for those concerned with the long-term threats of climate change. Aside from some hypothetical future breakthrough in end-use capture and storage of CO2 emissions, the path toward very low transportation-sector emissions is often seen to involve biofuels or very advanced electric vehicle technologies.

  • Relationships among the uncertainties surrounding oil prices, energy security, sequestration costs, and carbon dioxide–control stringency have important policy and investment implications for coal-to-liquids.

    The RAND analysis concludes that adding CCS to CTL is a good hedge against the cost of future CO2 limitations if CCS can be realized on an adequately large scale, if CTL and CCS costs are in the lower part of the range of costs considered, and if future oil prices do not fall well below reference levels. If CTL and CCS costs are higher, however, the value to the CTL supplier of adding CCS to hedge against a high cost of future CO2 controls is positive only with higher long-term oil prices.

    From a societal perspective, it is desirable to reduce the need for bearing higher long-term costs of more-aggressive and -costly CO2-emission reductions. On the other hand, nearer-term concerns about energy security could lead to a situation in which there is a desire to keep nearer-term CO2 limitations relatively modest while putting more emphasis on significant CTL investments even if they were made without incorporating CCS.

    Neither CTL investors nor policymakers have many options for reducing long-term oil price uncertainty. Moreover, there is a risk to the economic value of CTL investment just from the possibility of relatively low long-term prices. On the other hand, policymakers do have options for reducing the uncertainties surrounding CTL and CCS costs. There is a large social benefit from government financing for both continued R&D for CCS and initial CCS-test investments at a commercial operating scale to further assess the technical and economic characteristics of CCS.

Other authors of the study are Aimee Curtright, David S. Ortiz, Joel Darmstadter and Brian Shannon.

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