Solutions to the high costs of future water restrictions for new oil sands industry along the Athabasca River

Limits on water diversions from the Athabasca River may affect the growing oil sands industry in the medium term. For new entrants, the costs of future water restrictions may be high due to the combination of a strict water conservation regulation, a profitable oil sector that relies on fresh water, and water allocation in order of licence seniority. Though river flows would, for the most part, be preserved and well within 90% of the flows recorded upstream of industry, the future value of water for oil production is estimated to be up to $80 per cubic metre in a single period (peak spot value, approx.), and $72,000 per megalitre if drawn annually as an ongoing, continuous demand (average marginal value in present terms). These results are based on certain model assumptions, including flows that are 10% less than the historic record, a simplified depiction of the production costs and revenues of oil producers, and no access to technologies that may reduce the cost of water restrictions. Using a medium-term (~2020) static demand scenario, a policy and two technologies to reduce the costs of water restrictions are assessed. A combined policy-technology response was found to be the most cost effective. As various technologies that lower costs are already planned or in use, further consideration of an efficient water allocation policy, such as water charges, that may reduce costs by providing incentives for efficiency and technology investment across all firms – not just new entrants – is recommended. In general, the results of this study indicate the importance of designing regulations that encourage conservation goals to be achieved at least cost. Future studies may consider the water diversion limits in the Athabasca River, including whether the costs of conservation are commensurate with the economic value of in-stream flows.