Alberta faces high hurdles with ambitious carbon reduction plan

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The proposed ratcheting up of Alberta's carbon levy stands to win few plaudits from oil-sands opponents who have targeted TransCanada Corp.'s Keystone XL pipeline, and would set emission reduction targets that many companies may find impossible to meet.

At a recent meeting with industry executives and federal officials, Alberta Environment Minister Diana McQueen suggested the province is considering toughening its existing climate regulations by requiring industry to either cut emissions by 40 per cent per barrel over an unspecified time frame, or pay a $40-per-tonne charge for emissions above the regulated level.

Ms. McQueen said in a statement Thursday that negotiations are continuing, adding that "revised targets have not yet been finalized."

Alberta and the federal government have faced considerable pressure to reduce the energy sector's greenhouse gas emissions, particularly in the face of environmentalist opposition to the Keystone XL pipeline, which would provide the industry with much-needed access to the massive U.S. Gulf Coast refining sector.

The Alberta proposal – if it were to be passed into regulation – "would give the Obama administration comfort to say that it looks like there is going to be serious effort to get the emissions reduction over time, or the expenditure of funds toward things that would reduce greenhouse gases," said David Pumphrey, a fellow at the Center for Strategic and International Studies.

"For the opposition, I don't think it's going to matter. This [Keystone debate] is iconic for them and they will lock in on it."

Environmentalists argue Ottawa and Alberta would have to adopt a carbon levy exceeding $100-a-tonne in order to provide an effective emissions regime for the oil industry, one that would allow Canada to meet its international climate commitments.

"What matters is whether Canada has a credible climate plan to tackle [the] tar sands climate pollution problem," said Danielle Droitsch, Canada director at the Washington-based Natural Resources Defence Council. "And while Alberta might like to sell this plan in the U.S. as a strong step, it will be obvious it falls short by a considerable margin."

And some say it will be virtually impossible for oil sands producers to cut their emissions per barrel by 40 per cent.

The 40-per-cent target "will be a high hurdle to overcome," said Dinara Millington, research director at the Canadian Energy Research Institute in Calgary, adding the timeframe is critical to assessing the practicality of the goal. Ms. Millington said companies would likely opt to pay into the technology fund at $40 per tonne over their emissions targets.

UBS analyst Chad Friess said a 40-per-cent emissions reduction from current levels is "a fantasy," although Alberta could propose to cut from levels 10 or 20 years ago when per-barrel emissions were higher. Either way, he said, a $40-per-tonne tax would hardly drive the oil sands out of business. "It's a manageable cost in the worst-case scenario, and I doubt that worst-case scenario will come to fruition."

Ottawa too has suggested progress is likely to be a long, slow game. Though per-barrel emissions have fallen 26 per cent since 1990, a March, 2012, federal document cites international research to suggest that emissions per barrel will decline by only 10 per cent over the next 20 years.

Recent industry experience, too, shows that even the most promising – and most costly – innovations create only modest change. Take Quest, the $950-million project by Royal Dutch Shell PLC – financed largely by government – to capture and store some emissions from its Scotford refinery complex. Even with such a high price tag, however, it will trim just 15 per cent of the greenhouse gases from an unrefined barrel of oil sands crude.

Cenovus Energy Inc. is developing technology that promises to slash energy use and emissions in non-mining extraction, but it is taking 15 years to deploy on only a limited commercial basis.

Cenovus declined to say specifically whether a 40-per-cent emissions cut is achievable. Spokesman Brett Harris said there is "no question it will be challenging. But that's what the oil sands industry has really been about: taking these huge, seemingly impossible challenges and using technology to address them."

Yet the magnitude of the emissions problem is underscored by the vast new production being built today with existing technology. By 2017, the Canadian Association of Petroleum Producers expects 2.6 million barrels per day of oil sands production, up by nearly a million from 2012. That huge installed base – which represents hundreds of billions of dollars of investments – stands as a major obstacle to industry-wide change.

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ONTARIO PIPELINE

While Alberta fights the air war over the Keystone XL pipeline with a plan to increase the province's carbon tax, the ground war is getting messier with Exxon Mobil's pipeline break in Arkansas. And the impact is spreading.

Environmentalists opposed to Enbridge Inc.'s plan to reverse Line 9 in Ontario are seizing on a statement from the U.S. pipeline regulator that reversing the flow of Exxon's Pegasus pipeline had put added stress on aging infrastructure.

With the National Energy Board set to start hearings on Enbridge's plan, the Arkansas spill is buttressing opposition in Ontario. Enbridge wants to reverse the flow of an underused pipe in order to deliver western oil to Montreal and the Suncor Energy Corp. refinery there.

Provincial NDP energy critic Peter Tabluns has asked the Liberal government to launch its own environmental assessment of the Enbridge plan, noting the pipeline crosses several major rivers in the province. However, a spokeswoman for the energy ministry said the pipeline review falls under federal jurisdiction, and that the provincial government will monitor the process "to ensure the best interests of Ontario are fully represented."

"It seems like the minimum Ontario should be doing in this case is having a full environment assessment so that Ontario's interests are protected," Mr. Tabluns said.

He said news of the Pegasus break and the regulators' comments about reversing the flow is "disturbing."

Exxon reversed the flow of its Pegasus line in 2006 to carry heavy Alberta oil from Illinois to the Gulf Coast. In a corrective order issued this week, the Pipeline and Hazardous Materials Safety Administration said changing the direction of the flow "can affect the hydraulic and stress demands on the pipeline."

Adam Scott, a researcher with Toronto-based Environmental Defence said Canadian regulators need to take the Pegasus accident into account in reviewing the Enbridge plan. He noted that the firm not only plans to reverse the flow, but will increase the capacity by 25 per cent to 300,000 barrels per day, and could ship heavy oil, which would require more hydraulic pressure.

Shawn McCarthy in Ottawa