Trad­ing for Tide­wa­ter

How an in­no­va­tive take on cap and trade could fi­nally move the pipe­line de­bate for­ward

Alberta Oil - - LAST WORD - Chris McDer­mott is a for­mer Cana­dian ne­go­tia­tor on the Ky­oto Pro­to­col and pri­vate in­vest­ment man­ager. He lives in Ottawa and New York.

IT’S A BAD TIME TO BE AN OIL SANDS

in­vestor. Your stocks, once again, fin­ished the year down. Not one new pipe­line to tide­wa­ter has been per­mit­ted, let alone built. Due to that con­strained pipe­line ­ca­pac­ity, Western Cana­dian Se­lect oil (WCS) still trades at a dou­ble-digit ­dis­count to West Texas In­ter­me­di­ate and Brent. The Pope thinks your in­vest­ments look like Hell. Your kid’s school is con­sid­er­ing di­vest­ing from those same com­pa­nies and com­modi­ties. The Bank of Eng­land says those in­vest­ments could be­come stranded. En­vi­ron­men­tal­ists just had a big din­ner party in Paris with fos­sil-fuel foie gras as the main course. The loonie fol­lows wher­ever oil prices go and your win­ter va­ca­tion is priced on the stronger U.S. dol­lar. Life stinks.

But what’s done is done. All you can do is hope that the new political ­man­age­ment will undo some of the dam­age by trad­ing good en­vi­ron­men­tal ste­ward­ship for some pipe­line per­mits. What might that look like? Let’s say you ac­cept that oil sands emis­sions must get to par­ity with those of con­ven­tional crude, know­ing that any­thing less will con­tinue to ex­pose the sec­tor to the “dirty oil” ­crit­i­cism. Now you come to the is­sue of how to re­duce those emis­sions. ­Econ­o­mists will tell you car­bon pric­ing is the most cost-ef­fec­tive way to do it, but when it comes to the oil sands, a car­bon tax has two big dis­ad­van­tages. First, since it only reg­u­lates the price of emis­sions, it doesn’t guar­an­tee that the ob­jec­tive of emis­sions par­ity with con­ven­tional crude will be met. And se­cond, to have any hope of meet­ing that ob­jec­tive, the tax would need to be set high enough to pro­mote in­house emis­sions re­duc­tions. Most stud­ies put those costs at more than $100 per tonne through car­bon cap­ture and stor­age (CCS) tech­nol­ogy, or at least $10 per bar­rel. That’s a non-starter for most in­vestors and the com­pa­nies they sup­port.

Cap and trade, on the other hand, both en­sures the emis­sions tar­get will be met and al­lows firms to keep their costs down by al­low­ing im­ports of low-cost ­al­lowances and off­sets from sources out­side its fa­cil­i­ties, in­clud­ing from other provinces and coun­tries. Cap and trade pro­grams have had am­ple emis­sions re­duc­tions avail­able at, or below, $15 per tonne – a pal­try $1.50 per bar­rel. Sud­denly, there’s an op­por­tu­nity to prof­itably ar­bi­trage the WCS: Pay $1.50 a bar­rel for a pipe­line per­mit and re­ceive a much greater in­crease in the WCS price in re­turn.

And while en­vi­ron­men­tal­ists might be skep­ti­cal of cap and trade, you could ap­peal to their sense of ur­gency for emis­sions re­duc­tions and their de­sire to in­cen­tivize projects out­side of the fos­sil fuel sec­tor. Us­ing com­mer­cial­ized ­tech­nolo­gies, the Ky­oto Pro­to­col’s car­bon off­set sys­tem gen­er­ated over one bil­lion car­bon cred­its in just a few years in sec­tors rang­ing from land­fills and farms to re­new­able en­ergy.

Still, Premier Not­ley and Prime Min­is­ter Trudeau have been cold on cap and trade, with the for­mer par­tic­u­larly wor­ried that cap­i­tal will leave ­Al­berta to be spent on car­bon cred­its. But a ­prov­ince that’s de­pen­dent on free trade for its en­ergy prod­ucts can’t re­ally be ­se­lec­tively pro­tec­tion­ist, and there just aren’t ­suf­fi­cient re­duc­tion op­por­tu­ni­ties in Al­berta to meet the scale re­quired – 55Mt per year and grow­ing – to off­set emis­sions from the oil sands. On the other hand, the Premier is very in­ter­ested in ­op­por­tu­ni­ties for in­ter-pro­vin­cial co­op­er­a­tion on pipe­lines, and En­ergy East alone en­tails roughly 100,000 tonnes of daily up­stream car­bon emis­sions. At $15/tonne that’s $550 mil­lion in ex­pen­di­tures that could be made each year in provinces like On­tario and Que­bec to off­set the pro­ject’s car­bon emis­sions.

Those emis­sion re­duc­tion projects lo­cated along the route of En­ergy East – and paid for by En­ergy East – should ap­peal to the pre­miers of On­tario and Que­bec. They should also ap­peal to the Prime Min­is­ter, who’s look­ing for a na­tion­build­ing pro­ject to put his sig­na­ture on. In a per­fect world, the pipe­line per­mits would be granted and Mr. Trudeau would agree to a fed­eral role in im­ple­ment­ing the off­set sys­tem and man­ag­ing link­ages be­tween dif­fer­ent emis­sions trad­ing regimes. If he does, 2016 could turn out to be a very busy year for progress on pipe­lines and cap and trade in Canada. It might even be one where, as you look back at your oil sands in­vest­ment port­fo­lio at the end of the year, the bal­ance is ac­tu­ally up.

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