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?
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.