Shannon Phillips lays out case for Alberta climate policies, oil sands expansion

Alberta government, industry goal is to reduce oil sands GHG levels to that of conventional oil

A common view in the Alberta oil patch is that the NDP are anti-oil sands and that eco-activist ideology is driving the Climate Leadership Plan. Environment Minister Shannon Phillips went out of her way to dispel that view Monday during a Markham On Energy Webinar.

She emphasized that Rachel Notley government’s goal is twofold: reduce greenhouse gas emissions from the oil and gas sector, but also help producers lower costs and access new markets (with pipelines to tidewater, for instance).

“The push is towards lower cost of extraction, whether it’s on the labour side or on the exploration and production side, etc.,” she said.

“Carbon [emissions result from fuels that are an] input cost and so what [the government is] trying to do is ensure that we have regulations that will push towards those lower cost areas where carbon is priced.”   

 I asked Phillips about the apparent division within the Alberta industry, where the majors and large independents, represented by the Canadian Assoc. of Petroleum Producers, appear to be mostly supportive of the Alberta government’s approach, but medium-sized and junior producers, some service companies and drilling contractors, are vocally opposed.

She replied that the larger producers have been paying the large emitters carbon pricing of $15/tonne since 2008 and have adjusted their operations to incorporate it. Also, majors like Shell, Chevron, and ExxonMobil have supported carbon pricing for years and built it into their budgeting.

“I think it’s really important to know two things,” Phillips said. “This Climate Leadership Plan was developed in collaboration and in partnership with our oil and gas industry and, second, we are seeing due to price and other fundamentals falling into place a large amount of new investment announcements coming from the oil and gas sector.”

CAPP announced in April that capital spending in the Canadian oil and natural gas industry declined $50 billion, or 62 per cent, since 2014, and was estimated to be $31 billion in 2016, with about $23 billion spent in Alberta. Provincial oil and gas capex spending is expected to remain flat or rise slightly over the next few years.

Phillips and the Alberta government are hoping that some of that investment is in emissions-reducing technology, which is a central feature of the Climate Leadership Plan, particularly in the oil sands, currently emitting about 70 megatonnes of GHG a year. That will be capped at 100 megatonnes.

Phillips says the key to staying within the cap as the oil sands expands by up to 1 million b/d over the next decade is to use more efficient technology to reduce the carbon output per barrel.

“I think the goal for our oil sands producers…has to be [crude oil as] clean as conventional extraction and they share that, too,” she said.

That’s a tall order, but not impossible. A few Alberta oil sands producers are already close. Imperial Oil’s Kearl plant, for instance, uses proprietary Paraffinic Froth Treatment technology to reduce the carbon-intensity of its mined bitumen crude to within two per cent of other crude oils refined in the United States.

Click here to watch the full interview.

The mechanisms to drive the adoption of new technology will be the carbon tax ($30/tonne by 2018, about$2.25/b) and “output-based allocations,” which are designed to cushion the cost impact and help maintain the oil sands’ competitiveness in American (and, hopefully, Asian) markets.

An output-based allocation (OBA) is basically a subsidy to offset the changes to the large emitters emissions regulation with the intent of protecting trade exposed industries. The government is still working through the details of how these allocations will be implemented, but the advisory panel that helped develop the climate plan recommended tying the OBA to the performance of the top 25 per cent of oil sands performers, who will receive credits for beating the allocation which they can shift to other facilities, sell on the market or bank to offset future obligations.

Companies whose production is more carbon-intensive, those in the remaining 75 per cent, will pay the carbon levy. The farther back in the pack the producer resides, the more of the carbon price it will pay.

“When we set an output-based allocation, what we’re setting is basically a performance standard and if [producers] are exceeding that standard then of course they will get credit,” she said.

“[T]here’s then a push to reduce one’s GHGs to that standard, and that standard will change over time.”

How the remaining 30 megatonne allocation will be divided among producers has been a confusing – and sometimes contentious – issue. The short answer is the government hasn’t yet figured it out.

“Right now what is concerning the [Oil Sands Advisory] Committee is the development of the regulations around the 100-megatonne limit in the oil sands,” Phillips said. “I think obviously there is a big role for technology there in terms of existing operations. Then there’s a big role for the Alberta Energy Regulator in terms of allocating which plays [are included] in the approvals process. They’re at the table as well.”

The government will re-invest some of the carbon proceeds in new processes and technologies that help producers lower the carbon-intensity of their crude.

That same approach will be applied to reducing methane emissions from oil and gas production. This is an issue that gets very little public attention, but deserves more scrutiny.

The Alberta government estimates the climate impact of methane at 25 times more than carbon dioxide over a 100-year period, but other sources estimate the effect to be as much as 85 times. Methane accounts for 25 per cent of all GHG emissions from upstream oil and gas, including the oil sands, with almost half (48%) from direct venting or venting from equipment, another 46 per cent from fugitive emissions or leaks, and the remaining 6 per cent from flaring or other sources.

Reducing methane leaks is widely considered one of the easiest ways to reduce GHG emissions. A 2015 study in Texas’ Barnett Shale found that most methane emissions came from faulty equipment, like broken valves or open hatches. More stringent maintenance and repair programs, coupled with adopting new technologies, was seen as the most effective way to fix the problem.

“[I]t’s an opportunity that affirms who invests earlier in that methane reduction in technology and so on, they will get offset credit for that. And those are economic instruments that could be used for other endeavours and other investments,” Phillips said.

“Because we are moving towards a system where by some time in the mid-2020s, that voluntary piece [will] sunset and the regulatory piece will come into play. The earlier the firms make those investments, the longer they get that credit for, and that is an economic opportunity for those who are producing in that space.”

I asked Phillips, why bother with the Climate Leadership Plan after the election of President Donald Trump and his stated objective to leave the Paris climate accord and roll back regulations on American oil and gas producers?

She replied that Canada has always had a different “value system” than the United States and often chosen different strategies and solutions to address issues. Socialized medicine versus private healthcare, is one example she used to illustrate her point. She also pointed out that the Alberta industry would face far more competitive challenges from a Trump “border adjustment tax” than the Climate Leadership Plan.

That seems to me to be a weak argument. A far better one was advanced by Bernadette Johnson, the VP of market intelligence for Drillinginfo, in a recent Markham On Energy webinar about oil and gas infrastructure in Texas’ Permian Basin. I asked Johnson about the impact – positive or negative – of Trump’s energy plan.

“We’ve gotten very efficient, we’ve gotten very good at producing these hydrocarbons very safely and very cleanly, and reducing the carbon footprint. I think those trends are just going to continue, where we are in a world where we have to compete with renewables and other things,” she said.

“So, that, if anything, we don’t think it’s going to be wide-scale change because of the Feds…once we have the technology, once we know we can make it work efficiently, there’s no reason to go backwards and especially considering we don’t know what’s going to happen in four years with the next election.”

Johnson also pointed out that American producers are mostly regulated by state governments (just as Canadian producers are regulated by provinces) that have indicated they plan to stay the course on GHG reduction strategies.

Alberta needs to not get get caught up in the hype and drama coming out of the Trump White House and remember that the basic trend toward greater energy efficiency and emissions reduction has not changed.

Time will tell if the Notley government’s Climate Leadership Plan will be a net positive for the Alberta oil and gas sector, especially the oil sands. Much of its success or failure will be determined by producers’ response to the price and regulatory signals designed into the plan and their willingness to adopt better technology as a consequence.

Construction of Kinder Morgan’s Trans Mountain Expansion pipeline and replacement of Enbridge’s Line 3 – whose approvals were directly linked to the Climate Leadership Plan – would be the cherry on the Alberta’s industry’s sundae.

If the Climate Leadership Plan works as Shannon Phillips hopes it will, Alberta and its controversial energy industry could be well-positioned to expand production while bringing down the carbon-intensity of its crude oil.

Correction: I incorrectly stated that the impact of the carbon tax will be “about$2.25/b.” This is the impact under the SGER, which will be replaced by the carbon tax. The sentence has been edited and corrected.