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Canadian Government Plans to Force Carbon Capture on New Oil Sands and Coal Projects
11 Mar 08
The federal government of Canada has introduced new rules taking effect from 2012 onwards that will require new oil sands projects to install carbon capture and storage technology.
Global Insight Perspective | | Significance | The Canadian government has introduced a variety of initiatives aimed at controlling greenhouse gas emissions in the country. | Implications | Among the initiatives is a requirement that new oil sands developments and coal-fired power plants from 2012 onwards come built with carbon capture equipment. The government will also introduce an intensity-based carbon trading scheme to take effect from 2010. | Outlook | While the moves arguably stand to benefit the environment over the long term, the short- to medium-term benefits are less clear, especially for the oil sands industry, which is continuing to ramp up production levels to a hoped-for 3 million b/d by 2015. |
Under plans announced yesterday by the Canadian federal government, new oil sands and coal projects beginning from 2012 onwards will by necessity have to include carbon capture and storage (CCS) technology into their designs. The initiative has been introduced to help get Canada back on track with its greenhouse gas emission controls, which have thus far proved ineffective. The country intends to introduce a carbon-trading scheme within two years, as well as reduce aggregate carbon dioxide (CO2) emissions by a fifth from 2006 levels by 2020, in line with government promises made in April 2007. The government remains rhetorically committed to reducing greenhouse gas emissions up to 70% by 2050. The carbon-trading component of the scheme will begin from 2010, applying to several large industries. In all, some 16 sectors will be required to engage in carbon trading, from the oil industry to paper mills. Hard carbon-emission caps will not be set, but rather companies will be subject to carbon-intensity targets to push down CO2 emissions, with ageing facilities subject to increasingly tight standards. New coal-fired power plants meanwhile have also come in for attention, with the plan effectively representing a ban on new build from 2012 on unless the facilities in question also come with CCS technology as part of the package. The new plans have not been without their share of critics, who have argued that the moves do not go far enough in reducing carbon emissions either quickly or deeply enough. They have pointed out that many oil sands projects currently under development are due to be ready by 2012, meaning they will not be required to build CCS infrastructure. Furthermore, they argue that using intensity caps for carbon trading means that companies are free to increase total emissions assuming they manage to reduce emissions per unit of output. The 2050 time-frame being discussed by the government has itself been lambasted for being so far away that it effectively passes on the problem to the next two generations. Given how poorly the country has fared, however, in getting a handle on its CO2 emissions—which have grown when they were supposed to have dropped, in line with its Kyoto commitments—such criticisms, while certainly meriting discussion, need to be viewed in wider context. While the government has lamented the country’s inability to meet its Kyoto targets, it has also noted that having done so would have imposed an unacceptable economic cost. Outlook and Implications Canada’s oil sands projects, meaning by implication those in Alberta, have until now not faced the environmental constraints that many have argued are necessary in an industry that is otherwise extremely polluting and environmentally damaging. The country hopes to more-than-double oil sands output to nearly 3 million b/d by 2015, so the pollution directly attributable to oil sands projects will almost certainly increase as well. Given the expected level of growth here and the royalty income that will accrue to both Alberta and Canada more generally, politicians will be keen to ensure that while they are being seen to be doing something to help limit environmental damage, their moves do not immediately sound a death knell for the oil sands industry. Already, questions are beginning to be asked on what exactly the new rules mean for business. While the rules should go some way in helping to reduce CO2 emissions to a lower level than they would otherwise have been, the main risk for producers is that uncertainty surrounding the costs of implementing carbon capture and storage technology could put future projects on the line, thus jeopardising the future of the industry. Carbon capture remains untested on a commercial scale, and the uncertainty involved here will likely prompt some firms to reconsider the risk they are taking on when moving forward with an investment decision. With oil prices above US$80/b, even hitting new records over US$108/b today, such risks are easier to stomach. The danger of course is a deluge of factors all coming into play that together effectively alter the business environment for the worse. What would happen, for example, if the industry were to experience not only further royalty increases, as have already been seen, but also much lower long-term crude oil prices, and a government requirement to introduce CCS technology? This is a question that many strategy executives with longer-term horizons will be pondering at some depth this morning.
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