Average cost of Carbon Competitiveness Incentives will be $.50/b and 92-95% of production will pay under $1/b – Pembina
The Alberta government released the Carbon Competitiveness Incentives (its replacement for the large emitter program) this week and thus far industry continues to worry about higher costs in a low price environment, while carbon pricing supporters praised the new for being well designed and fair.
The new system, which is comprised of a carbon levy and output-based allocations system coupled with a $1.4 billion Innovation Fund, is a mite complex, so you may want to my description of how it works in yesterday’s column.
The Canadian Association of Petroleum Producers thinks we won’t know the real impacts on oil and gas production until the final regulations are released in the near future. Based upon what he’s seen so far, Patrick McDonald, director, climate and innovation, is worried that some Alberta facilities will suffer a “competitiveness risk.”
“Upon first assessment, and we need to get into the details, we’re really uncertain if it’s going to be sufficient to address the competitiveness pressures of our sector as we very emissions-intensive and trade-exposed. It might result in carbon leakage from Alberta,” he said in an interview.
Carbon leakage occurs when policy designed to reduce greenhouse gas emissions causes the plant or industry to relocate to a jurisdiction with less strict regulations, which could actually lead to an increase in total global emissions, according to Jotham Peters of Navius Research in Vancouver.
“Many of these [Alberta and Canadian] policies will reduce the emissions coming from oil sands, whereas other jurisdictions in the world do not have similar policies. To my knowledge, there’s no [emission reduction] policy in Saudi Arabia, there’s no policy in Nigeria or other key sources of crude oil exports,” he said in an interview.
The government claims the Carbon Competitiveness Incentives was designed to stop carbon leakage, but industry will naturally be skeptical until it sees the fine print.
And companies with different types of production will affected differently.
“While we share the government of Alberta’s objective to lower the carbon intensity of Canada’s oilsands operations, there is no question that any increased cost on industry impacts competitiveness, particularly in the current challenging overall business environment,” Imperial Oil, which is focused on heavy oil production near Cold Lake and mining in the oil sands, said in a statement.
Canadian Natural Resources Limited expressed concerned about the viability of its cyclic steam stimulation (CSS) operations in the Cold Lake and Peace River regions.
“CSS projects paid more than 40% of total oil sands royalties in 2016 and in the last five years (2012-2016) Canadian Natural’s CSS projects paid more than $1.5 billion in royalties. We must ensure the economic sustainability of CSS projects and protect jobs,” the company said in a statement.
CNRL says it is “committed to doing our part to reduce our emissions,” having already lowered GHG emissions 16 per cent over the past five years. Technical solutions, supported by the recently announced $1.4 billion Innovation Fund, will no doubt be a big part of its response to the new regulations.
“As a leader in R&D investment, leveraging technology and innovation is the best way to deliver improved environmental performance, reduced costs, and increased productivity,” CNRL said.
In situ producer Cenovus Energy, which has been aggressively lowering GHG emissions, stands to be a big winner, likely earning credits under the CCI.
“At Cenovus, we have some of the lowest emitting facilities and believe we would be well positioned in a lower-carbon future,” the company said.
“It’s important that the government’s plan supports carbon-reducing technology and incents lower emissions facilities. At the same time, more needs to be done to address the cumulative impact of all government policy on our industry to ensure Alberta remains an attractive region to invest in.”
According to the Pembina Institute’s calculations, 92 to 95 per cent of Alberta oil and gas producers will pay under $1 a barrel. The cost of the current regime costs an in situ oil sands producer an average of 22 cents a barrel.
“In 2020, all things remaining equal, that operations are sort of static in that period, we’d be seeing that rise to around 50 cents on the barrel,” says Andrew Read, a Pembina senior analyst, in an interview. “On average, we’re still going to be seeing pretty small costs to the industry as a whole.”
Read argues that a small financial cost to the producer can still result in significant change in behaviour by industry.
“Even if it is a small incremental cost, people will act to avoid that cost. If you’re thinking about Alberta with the introduction of the carbon levy, we know that people are taking action to reduce their carbon footprint so that they are minimally affected by that carbon levy. Same thing will happen at industrial facilities,” he said.
“Every tonne reduced will be worth $30 to the company. And so they’ll be motivated by that price on carbon, and as that escalates in the future, there’ll be even more incentive to reduce.”