Thursday’s report that the Alberta government will ramp up the stringency of its provincial climate change policy was almost certainly motivated at least in part by concerns over pipeline approval.
If so, it wouldn’t be the first time that outside events have led Alberta to enact new environmental regulations. The province’s current flagship greenhouse gas policy, the Specified Gas Emitters Regulation, was born in 2007 out of a desire to supersede federal regulations that were expected at the time. The regulations require large facilities, including most oil sands operators, to cut greenhouse gas emissions per barrel of oil by 12 per cent from pre-regulation levels. If that target is not achieved, firms must contribute $15 to a technology fund for each tonne of greenhouse gas by which the target is missed.
The new proposal would apparently build on the existing regulation, requiring per-barrel greenhouse gas reductions of 40 per cent, and increasing the penalty for non-compliance up to $40 per tonne. These are clearly significant increases in stringency. However, it is unlikely that they will have a substantially detrimental impact on the overall profitability of oil sands operators.
Of course, there’s no guarantee that the new regulations would significantly reduce the opposition the industry faces from environmental groups. If the environmental community works through the costs and benefits of the policy to oil sands operators, they may demand an even more stringent policy in return for heightened acceptance of new pipelines and the product they carry. Based on the numbers, the industry can probably afford to go farther.
A “typical” in situ oil sands facility produces around 120 kilograms of carbon dioxide per barrel of oil produced. As a result, in the absence of any effort to reduce emissions, the new regulations would impose an average cost of just under $2 a barrel on existing facilities. However, costs associated with environmental compliance can be deducted from corporate income tax and royalty payments, so the net impact on firms would be closer to $1 a barrel, relative to a current bitumen price of around $80 a barrel.
Even this is probably an overestimate. Innovation in oil sands recovery has been rapid over the past decades and has resulted in significant improvements in greenhouse gas intensity. Natural Resources Canada reports that between 1990 and 2009, a time when greenhouse gases in the industry were mostly not regulated, emissions per barrel dropped by almost 30 per cent. Assuming such innovations continue (as NRCan predicts), the proposed 40 per cent reduction target would be met in part by on-going technological developments.
The costs of the proposed regulatory tightening therefore seem modest. On the other side, the benefits may be large.
Partly as a result of tight pipeline capacity connecting Alberta to U.S. Gulf Coast refineries, bitumen prices in Alberta have been substantially lower than government expected over the past year. Easing pipeline constraints might reduce the price spread between bitumen and conventional crude oil by several dollars per barrel, an amount much greater than costs likely to be imposed by updates to the environmental regulation.
But the building of new pipelines, both through British Columbia to the Pacific Coast and to the U.S. Gulf Coast, has been recently slowed by the environmental community, reacting to weak regulations and high emissions in the oil patch. If new regulations succeed in buying a peace with the environmental community and the eventual approval of a major new pipeline, they will offer a substantial benefit to the industry in the form of higher bitumen prices for Canadian producers.
In addition, new regulations may reduce the targeting of Alberta oil sands by environmental regulators in other jurisdictions, such as California and Europe, which single out Alberta crude for special import penalties.
Cast in this light, the new regulations don’t seem so stringent. In fact, if they make it easier for the province to market its product to international consumers, it is certainly conceivable that they could result in improvements to the bottom line of Alberta producers.
Nicholas Rivers is chairholder, Canada Research Chair in climate and energy policy at the University of OttawaReport Typo/Error