Businesses fear carbon cap could favour those who backed proposal.

INDUSTRY CONCERNED ABOUT ALLOCATIONS

• As the Alberta government prepares to deliver the last big piece of its climate leadership plan — a cap on emissions in the oilsands industry — anxiety is building that it will pit company against company, project against project, and could even be based on political favour, according to industry observers.

With the remaining carbon budget expected to be used up in a decade, and more projects vying for a piece of it than will be available, there is concern that companies that supported Rachel Notley’s NDP plan will get preferential treatment, at the expense of those that didn’t.

“People are very concerned that ( the changes are) not being designed for the industry as a whole, but the interests of a few,” Glen Schmidt, president and CEO of oilsands startup Laricina Energy Ltd., said in an interview.

“If you are in the cartel and part of the group that has a favoured hearing, you are pushing design elements that favour your interests.”

The leaders of four oilsands companies — Canadian Natural Resources Ltd., Cenovus Energy Inc., Suncor Energy Inc., and Royal Dutch Shell PLC — stood behind Notley when she unveiled the climate plan more than a year ago. The companies have representatives on a provincial panel appointed to make recommendations on how to allocate the unused carbon space across the industry and how to treat resources that will become stranded.

Also represented on the panel, known as the Oil Sands Advisory Group, are ConocoPhillips, which has oilsands projects in partnership with Cenovus; MEG Energy Corp. and Statoil ASA. Statoil has since sold out of the oilsands business. Shell has said it is no longer in the business of large oilsands expansions.

But other companies like Imperial Oil Ltd., Husky Energy Inc. and Laricina have been critical of the measure, which is unprecedented among oil producing jurisdictions. How the cap will be allocated could affect investment choices, and in the meantime corporate decisions are on hold, observers said.

“I think this is definitely an issue that it is important to get right,” Rob Peabody, president and CEO of Husky Energy Inc., said in an interview.

“I think Albertans are going to need answers to some basic questions, like, what will be the impact on investment and jobs, what messages does it send to the U. S. particularly in this delicate time, about Canada being a reliable partner in growing and not limiting North American energy production? And if some projects are not allowed to proceed, what is the potential cost to taxpayers in compensation?”

The sector i s awaiting recommendations on two major i nitiatives: a perf ormance- based ranking that would reward high-performing facilities and penalize the rest, and how a cap on emissions of 100 megatonnes a year will be administered. The initiatives are related because a project’s ranking could determine how it’s treated under the cap.

Ongoing work is clouded in secrecy. The ranking, known as outcome-based allocation policy, is being developed with the assistance of the Canadian Association of Petroleum Producers, the industry’s major lobby group.

The advisory group includes the representatives from industry, as well as environmental organizations and communities, including aboriginals. Its chairs are Dave Collyer, a former CAPP president; Tzeporah Ber- man, the former Greenpeace and ForestEthics leader; and Melody Lepine, a member of Alberta’s Mikisew Cree First Nation.

Collyer did not respond to a request for information. Kirk Heuser, communications director, Alberta Climate Change Office, did not respond to requests for information.

Schmidt said companies with existing production, such as those that backed Notley’s carbon plan, that had the opportunity of time and scale to improve their emissions, or projects in existing production areas, could be favoured and gain special credits or classification, while new projects, like those advanced by Laricina that have not had the same opportunity of time, may be treated unfairly.

“Existing production by definition is more efficient … so others pay, not them,” Schmidt said. “It’s not a sustainable structure and it’s built on political favour.”

Companies would only develop their best reserves because they are favoured under the new policy

Another concern is that projects that produce fewer greenhouse- gas emissions because, by an accident of geography/geology, happen to be on top of the best reservoirs, will be favoured over projects that draw from more difficult reservoirs and require more energy to produce.

The perverse outcome is that less- efficient projects will be heavily taxed instead of being incentivized to improve emissions, while favoured projects will have no incentive to improve because they already enjoy top billing, said a spokesman for an oilsands developer who asked not to be named.

“You are basically starving those that you want to incent and rewarding those that have performed through no action on their own,” the spokesman said, noting that if the penalties are too onerous projects could be shut down.

Brett Harris, a spokesman for Cenovus, said his company is focused on applying technology and innovation to reduce CO2 emissions.

“With respect to the Oil Sands Advisory Group, it will provide its recommendations to the government,” Harris said.

“It’s our expectation that the government will consider those recommendations and will also consult with relevant stakeholders, including industry, as it drafts its regulations.”

Another concern is that companies would only develop their best reserves because they are favoured under the new policy, and then go look for other projects elsewhere in the world instead of taking on the most difficult projects in Alberta, said James Brown, a consultant specializing in environment, health and safety compliance at ERM CVS in Calgary.

“If all you do is go after the best oil, then more expensive stuff, because it takes more money to recover the more difficult reserves, could be stranded in the ground,” he said. “Most jurisdictions want to ensure the resource is developed in a responsible and long-term manner.”

The oilsands cap is an important unknown that oilsands players want to see resolved so they can add up the total fiscal take, which includes carbon costs, corporate taxes and royalties, Brown said, and will determine whether Alberta is a competitive regime, or whether capital will be deployed elsewhere where there are better terms.