CAPP didn’t make constructive contribution to drafting of Carbon Competitiveness Incentives, hasn’t yet completed its analysis
The gloves are off. Canada’s biggest oil and gas trade group came out swinging against Rachel Notley and her Climate Leadership Plan Monday with an op-ed by CEO Tim McMillan in the Calgary Herald. With all respect to the Canadian Association of Petroleum Producers, its argument is flimsy and doesn’t stand up to even prima facie scrutiny.
“We share Alberta’s desire to reduce emissions while protecting jobs and ensuring the competitiveness of the energy sector. However, the government’s model, as presented last week, will be harmful to these goals,” McMillan wrote.
To be clear, the “government’s model” he’s referring to is the Carbon Competitiveness Incentives program launched Dec. 7. Alberta oil and gas producers have been working hard for years to lower their greenhouse gas emissions, as McMillan rightly points out. I’ve written many columns and news stories describing the commitment of oil sands companies like Suncor, Cenovus, and CNRL to be “carbon competitive” by innovating and adopting new technologies, like replacing steam with solvent for in situ fields using the SAGD (steam assisted gravity drainage) process.
The NDP’s objective is to speed up that process so that the carbon-intensity of a barrel of Alberta crude oil can be driven lower and lower even as output from the oil sands grows by 1.3 million b/d from now until 2030.
The oil sands currently emits 70 mega-tonnes (MT) a year, according to Natural Resources Canada, accounting for 9.3 per cent of total Canadian emissions in 2014, which clearly paints a bulls-eye on the back of the Alberta industry for the Canadian government, other provinces that resent Alberta’s out-sized contribution (267 MT) to national emissions (726 MT), and environmental groups.
The Carbon Competitiveness Incentives applies a $30/tonne carbon levy to Alberta oil and gas production and uses output-based allocations to reward efficient producers with low emissions and tax those with high emissions.
In the oil sands, where all of the supply growth will come from, it’s all about cutting or eliminating the use of natural gas to create steam.
Companies talk about the “steam oil ratio,” which is the measure of how many units of steam it takes to produce a unit of oil. A higher number, like Husky Energy’s 8 to 1 in the Suncrise field, means a lot of steam – and burning more natural gas – to produce a barrel of crude. And Cenovus’ 1.7 to 1 means a lot less steam.
The carbon levy is the stick, especially as it rises over time.
The carrot is the $440 million Alberta has committed from the carbon levy to subsidize oil sands innovation that lowers GHG emissions. McMillan claims the amount “pales in comparison to the $1.33 billion industry has already invested through Canada’s Oil Sands Innovation Alliance” and “undermines the spirit of industry collaboration.” He also says it pits “companies against each other.”
But the head of CAPP conveniently ignores the rest of the $1.4 billion Innovation Fund, of which at least another $465 million is available to the industry, by my reckoning.
How does making as much as $915 million available to support existing and new innovation efforts undermine industry collaboration?
I suppose some companies, like carbon-intensive Husky, will get more more innovation money than more efficient producers like Cenovus, but Cenovus will also receive more credits under the plan. Seems like mostly a wash.
Energy economist Jennifer Winter told me that the Carbon Competitiveness Incentives was well designed policy and likely to meet the government’s objective. Pembina Institute analyst Andrew Read says that 92 to 95 per cent of companies will pay less than $1 of carbon levy. And economist Kent Fellows explained in an interview that output-based allocations are an efficient way to encourage GHG-reduction behaviour with the lowest possible cost to oil and gas producers.
And let’s not forget the 2017 study by the Canadian Energy Research Institute that showed adopting new solvent substitution technologies would lower SAGD production costs by 34 to 40 per cent over the next decade.
Or my interview with Cenovus VP of technology Harbir Chhina in which he told me that reducing natural gas consumption is part of the company’s plan to lower cash operating costs – already down to $7 to $10 a barrel – by another 20 per cent in the near future while at the same time reducing the carbon-intensity of its crude to that of an average American crude oil.
The economists, analysts, and industry representatives I’ve interviewed on this issue almost universally contradict McMillan’s contention that the Carbon Competitiveness Incentives program undermines “our international competitiveness at a time when our energy industry is already cost constrained and faces intense competition for investment globally. This model makes doing business in Alberta more difficult.”
CAPP has provided no data to back up that argument.
In fact, CAPP hasn’t even finished its analysis of the Carbon Competitiveness Incentives program. The Pembina Institute at least provided some preliminary calculations of the impact per barrel.
Why didn’t CAPP do the same? Without those calculations, McMillan’s op-ed rings hollow.
That is especially true when we consider that the four biggest oil sands producers sat at the table with the Alberta government and helped design the Carbon Competitiveness Incentives policy.
Those same companies also sit at the CAPP board table, which makes one wonder who McMillan is speaking for in the op-ed.
When I interviewed him about CAPP’s competitiveness study this past summer, I raised the issue of the companies consulting extensively with the government about this very policy and the former Saskatchewan cabinet minister under Brad Wall pointedly told me that the producers took the initiative on their own and CAPP was not part of that process.
For this column, I confirmed with two government sources that the companies, not CAPP, engaged policy makers extensively and made substantive contributions to design of the CCI.
To summarize, CAPP wasn’t involved in helping government create the policy, nor has it completed its analysis of the announcement, yet Albertans are expected to believe McMillan’s claim that the Carbon Competitiveness Incentive will be “harmful” to the shared goal of reducing emissions while creating jobs and strengthening industry competitiveness.
As it stands, that argument is simply not credible.