Emissions still an issue for oil sands
By Shawn McCarthy, GlobeInvestor.Com, December 30, 2008
Canada's oil industry had a sharp reversal of fortunes in the second half of 2008. But even as oil sands producers struggle to cope with low crude prices, they will have to continue to plan how to adjust to a carbon-constrained world.
Conventional wisdom suggests that, as the economy tanks, corporations face less pressure to improve their environmental performance because governments are reluctant to impose additional costs on struggling employers. And certainly, Prime Minister Stephen Harper's government – never an enthusiastic warrior in the climate change battle – is concerned about proceeding with new emissions regulations in the midst of a deep recession.
Still, pressures are building that should ensure that a reprieve – if indeed there is one – will be temporary, and major emitters from oil companies to electricity producers will have to make significant investments on new technology to improve energy efficiency and reduce emissions.
U.S. president-elect Barack Obama has indicated that he will move aggressively to combat climate change, while the world is looking to fashion a new agreement on emissions-reduction targets at a meeting in Copenhagen next November. The Harper government has said it wants to develop a North American approach to climate change, including a cap-and-trade system that will place real limits on emissions.
Ottawa has already released the broad outline of its regulatory plan, which would reduce emissions by 20 per cent by 2020 from 2006 levels. The Conservative government will impose intensity-based limits, forcing companies to reduce their emissions for every barrel of oil produced. It has said oil sands producers will have to dramatically reduce their emissions-per-barrel, though environmentalists fear there are major loopholes that give credit for research into unproven technologies.
But the government is regulating a much different industry than the one that existed a mere six months ago. After riding high for five years, Canada's oil sands producers saw their fortunes take a violent turn in the second half of 2008, as profit margins shrank dramatically, and expansion and upgrading plans were put on hold.
After posting profits through the first three quarters of the year, the companies' fourth quarter revenues will reflect slumping crude prices. Many analysts now forecast oil prices will bottom out around $25 (U.S.) a barrel early next year before rebounding with a recovering economy.
Project delays would give the companies some breathing room to figure out their future carbon liability, and how they will manage it. Based on forecasts of a tripling of production by 2020, the booming oil sands sector was expected to be largest source of emissions growth in Canada for the next 15 years.
However, the oil sands projects are among the highest cost sources of crude in the world, and a prolonged slump in global oil markets would clearly reduce future oil sands production, at least in the medium term. With cutbacks to planned oil sands projects, the emissions profile could change dramatically.
Ottawa was supposed to release this year its new emissions regulations that will take effect in 2010 and impose added costs on new energy projects, whether coal-fired power plants, oil sands upgraders or oil sands extraction projects. Those regulations were delayed by the fall election and cabinet shuffle, and now aren't expected to be released until the middle of next year at the earliest.
In an interview, Environment Minister Jim Prentice said that, prior to finalizing those rules, he wants to work with the provinces – notably Alberta – on harmonization, to consult further with affected industries, and to get a better sense of how Canada can co-operate with the incoming administration of Mr. Obama.
But with the oil industry slashing capital budgets and once-booming Alberta teetering towards recession, the fragile economy is top of mind.
“In the short term, we can't afford to produce an uncompetitive burden on Canadian jobs,” Mr. Prentice said in an interview.
That reticence does not mean the industry is off the hook, or that the climate change pressures will diminish, he added.
“The transition to a lower-carbon economy is one of the central imperatives of our time,” the minister said, adding that Canada should play a leadership role in the commercialization of the new technologies that will be required to confront the challenge.
The election of Mr. Obama has added tremendous impetus to the environmental agenda, notably on global warming. In the last few weeks, the president-elect has stacked his cabinet – including the energy secretary post, and a newly created role of special assistant on energy and climate change – with global warming experts who have advocated aggressive caps on emissions and major investments in conservation and clean energy.
It remains to be seen, of course, how aggressively Mr. Obama and the Democratic Congress will regulate once they take power and confront the inevitable tradeoff between costly emissions regulations and concerns about competitiveness amid weakened industries.
A central plank in Mr. Obama's presidential campaign – and in his rhetoric since winning the election – has been the need for massive investment in clean technology and renewable fuels to reduce greenhouse gas emissions and cut the U.S.'s dependence on foreign oil.
At the same time, Mr. Obama and Democratic leaders in Congress have promised to establish a national cap-and-trade system that will put real limits on greenhouse gas emissions. It is that cap-and-trade system that Canada is eager to be part of, even as American environmental groups target the oil sands as climate-change enemy No. 1.
Urged on by U.S. environmental groups, the Democrats are considering “low carbon fuel standards” – highlighting fuels with a lower carbon footprint – that could disadvantage oil sands producers if they don't reduce emissions.
Canadian companies are looking to reduce their carbon footprint through carbon-capture-and-storage technology, which diverts emissions from smokestacks and buries it permanently underground. But it remains a hugely expensive and unproven undertaking. In its prebudget submission, the Canadian Association of Petroleum Producers, the industry lobby group, urged Ottawa to provide tax breaks to encourage companies to invest in carbon capture and storage, while the Alberta government wants Ottawa to match its $2-billion (Canadian) spending on the technology.
Mr. Prentice acknowledged that Canada needs to deploy carbon-capture-and-storage technology to meet Ottawa's emission targets. While it will get plenty of help from provincial and federal governments, the oil industry will have to make future investment decisions in the knowledge that the climate-change pressures are unlikely to fade, even in hard times. And that any oil sands expansion will require credible carbon-management plans.
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