Un­der One Roof

Al­berta’s 100 mega­ton cap on an­nual oil sands emis­sions is de­scribed by en­vi­ron­men­tal groups as an “in­surance pol­icy” against ever-ris­ing pro­duc­tion. Could it hin­der oil sands growth?

Alberta Oil - - CONTENTS - BY JESSE SNY­DER

Con­fused by Al­berta’s car­bon ceil­ing? You’re not alone

WHEN AL­BERTA PRE­MIER RACHEL Not­ley in­tro­duced her gov­ern­ment’s new en­vi­ron­men­tal pol­icy last Novem­ber, it was met with a sur­prising show of sup­port from some high-rank­ing mem­bers of the en­ergy sec­tor. The CEOs of Sun­cor En­ergy, Shell Canada, Cen­ovus En­ergy and the ex­ec­u­tive chair­man of Cana­dian Nat­u­ral Re­sources all roundly sup­ported the new poli­cies, which in­cluded an econ­omy-wide car­bon tax, a plan to phase out coal­fired power gen­er­a­tion and a 100-mil­lion-ton cap on an­nual oil sands emis­sions. (A num­ber of other en­ergy ex­ec­u­tives, who did not pub­licly agree to the poli­cies, were re­port­edly livid with the changes).

There is still some un­cer­tainty around how the new reg­u­la­tions will be im­ple­mented and en­forced. But the big­gest ques­tion mark is per­haps the 100Mt limit on emis­sions from the oil sands, which col­lec­tively gives pro­duc­ers a 30Mt win­dow to in­crease their emis­sions pro­files, up from the cur­rent level of 70Mt per year. The cap—which, it should be pointed out, was not among the rec­om­men­da­tions of the cli­mate change panel headed by An­drew Leach— was placed on the oil sands as an in­cen­tive to de­velop tech­nolo­gies that will lower emis­sions. In com­par­i­son to the other ma­jor tar­gets set un­der the NDP pol­icy, the 100Mt cap re­ceived lit­tle at­ten­tion from the me­dia, pos­si­bly be­cause it is the kind of pol­icy that doesn’t im­me­di­ately mat­ter—un­til it does.

It could even­tu­ally present a ma­jor co­nun­drum for oil sands pro­duc­ers. De­spite progress in re­duc­ing per­bar­rel emis­sions, the cap places an even­tual ceil­ing on the oil sands, a loom­ing dead­line that re­in­forces the ex­is­ten­tial ques­tions fac­ing the in­dus­try to­day. Could such a cap, if viewed on a long enough time­line, even­tu­ally limit oil sands ex­pan­sion? Or is it, as some en­vi­ron­men­tal groups have said, sim­ply an in­surance pol­icy against rapid growth?

MOST AN­A­LYSTS ARE QUICK TO POINT out that a limit on emis­sions doesn’t nec­es­sar­ily mean oil sands ex­pan­sion will like­wise be lim­ited. “It’s cap on emis­sions, not a cap on pro­duc­tion,” says Kevin Birn, a di­rec­tor with IHS En­ergy. “So I think the in­ten­tion is prob­a­bly to pro­vide cer­tainty about what the emis­sions pro­file will be in the fu­ture. That’s some­thing the in­dus­try has long been crit­i­cized for, is the un­end­ing growth pro­file.”

But the in­dus­try could meet that thresh­old sooner than it likes to ad­mit. With­out sig­nif­i­cant car­bon re­duc­tions, it could even reach that limit within the next 10 to 15 years, ac­cord­ing to some an­a­lysts. “If you take your sim­plest cal­cu­la­tion, which is to take the in­ten­sity and mul­ti­ply it by the vol­ume, most fore­casts see us get­ting there in the mid-2020s,” Birn says. RS En­ergy Group, a Cal­gary-based re­search firm, es­ti­mates that pro­duc­ers could reach that limit as early as 2023, based on a sce­nario that would al­low just 1.2 mil­lion b/d of new pro­duc­tion. An­a­lysts have not put a lot of time into de­vel­op­ing sce­nar­ios un­der the 100Mt cap, partly be­cause the pol­icy it­self is so new, and partly be­cause fu­ture emis­sions pro­files are so dif­fi­cult to pre­dict. Un­der a more gen­er­ous sce­nario, and ac­count­ing for the 10Mt carve-out that will be avail­able to co­gen­er­a­tion and up­grad­ing fa­cil­i­ties, the in­dus­try could com­fort­ably meet the Na­tional En­ergy Board’s pro­duc­tion pro­jec­tions to 2030.

How quickly pro­duc­ers reach the cap, if they meet it at all, de­pends upon in­dus­try’s abil­ity to lower emis­sions. Pro­duc­ers have grad­u­ally re­duced the av­er­age steam-to-oil ra­tio (SOR) of ther­mal oil sands pro­jects, low­er­ing the av­er­age SOR to 2.7 in 2015, down from 2.9 the year be­fore. “There was al­ways this dis­cus­sion about how the SOR would have to creep up over time, but what we’ve seen is the SORs are go­ing down,” Birn says.

The lin­ger­ing ques­tion at the cen­ter of the pol­icy is how far pro­duc­ers can bring down their emis­sions, not just in steam gen­er­a­tion but across their oper­a­tions. With­out a step change re­duc­tion, that could have se­ri­ous ram­i­fi­ca­tions on new project ap­pli­ca­tions in the fu­ture, where reg­u­la­tors would be forced to ap­prove new pro­jects or ex­pan­sions based upon emis­sions pro­files, rather than the typ­i­cal com­pli­ance stan­dards. The Al­berta En­ergy Reg­u­la­tor, for its part, de­clined to com­ment on how the 100Mt might af­fect the ap­pli­ca­tion process. “At this time, it’s too early to tell what the reg­u­la­tions will look like or how the pol­icy is go­ing to be im­ple­mented, as we’re still await­ing di­rec­tion from gov­ern­ment,” Ryan Bartlett, a spokesper­son for the AER, said in an email to Al­berta Oil.

AL­THOUGH THE 100MT CAP COULD PO­TEN­TIALLY curb oil sands ex­pan­sion, there is also a pos­si­bil­ity that pro­duc­tion pro­files won’t be the least bit af­fected by it. Amid low in­ter­na­tional oil prices that are un­likely to re­turn to peak lev­els, most com­pa­nies have can­celled or post­poned new oil sands ex­pan­sions, and very lit­tle new ac­tiv­ity is ex­pected in the fu­ture. In an oil mar­ket re­port that looks out over the next five years, the In­ter­na­tional En­ergy Agency es­ti­mated that Canada would see 800,000 b/d of new pro­duc­tion be­tween 2016 and 2021, fol­lowed by a pro­duc­tion plateau there­after (about 625,000 b/d of that new pro­duc­tion will come from the oil sands).

There are signs that com­pa­nies may still be con­sid­er­ing mod­est ex­pan­sions, such as when Im­pe­rial Oil filed an ap­pli­ca­tion in March for a $2-bil­lion ther­mal project that falls within its ex­ist­ing Cold Lake lease. The project would use sol­vent-as­sisted, steam-as­sisted grav­ity drainage (SA-SAGD) to bring bi­tu­men to the sur­face, and the com­pany ex­pects the tech­nol­ogy will lead to a 25 per­cent re­duc­tion in emis­sions in­ten­sity com­pared to ex­ist­ing SAGD meth­ods. As the in­dus­try edges closer to the cap, it is pos­si­ble the im­ple­men­ta­tion of such tech­nolo­gies will play an in­creas­ingly large role in the ap­pli­ca­tion process. Lisa Sch­midt, a spokesper­son for the com­pany, de­clined to spec­ify whether new en­vi­ron­men­tal poli­cies played into Im­pe­rial’s ex­pan­sion plans, say­ing it “takes a long-term ap­proach to re­source devel­op­ment.”

To­day, an­a­lysts agree that the cap will not have an ef­fect on ex­pan­sion plans in the short term. “Right now, we don’t think [the 100Mt cap] is go­ing to make any dif­fer­ence at all,” says Samir Kayande, an an­a­lyst with RS En­ergy Group. How­ever, even if oil mar­kets see a ma­jor shift in the fu­ture—a pos­si­bil­ity that can’t be ruled out en­tirely—he says that ex­ist­ing poli­cies en­joy a lot of wig­gle room to al­low for new pro­duc­tion in­creases. “What the gov­ern­ment has done is left it­self a lot of flex­i­bil­ity in how to ad­dress green­house gas emis­sions. I think that the prece­dent is that the rest of the Al­berta econ­omy will be forced to re­duce its emis­sions in order for the oil sands to con­tinue to have head­room for CO2.” The open ques­tion is how much head­room they’ll need.

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