Carbon-cost debate finds a ready stage – the oil sands

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There is plenty of movement in the oil sands all of a sudden, and a common theme of the approvals, cancellations and sales of projects is Alberta's carbon policies.

Two players that backed Premier Rachel Notley's sweeping plans last year, Cenovus Energy Inc. and Canadian Natural Resources Ltd., have taken major projects down from the shelf and are poised to pump hundreds of million of dollars into developing them.

Koch Industries Inc. of Wichita, Kan., asked the province's energy regulator to scratch the approval for an $800-million development, blaming economic uncertainty and costs associated with the NDP government's moves to fight climate change.

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Norway's Statoil ASA said it had "bent its cost and emission curves" by striking a deal to sell its Alberta oil sands assets to Athabasca Oil Corp., and booking a loss of at least $500-million (U.S.) on the transaction.

There are twin messages here.

The first is that oil sands by nature are expensive, and not every company will invest over the long haul if it believes it can make quicker money elsewhere. Multinationals can pick and choose.

The second is that not all proposed projects are of high enough quality to warrant the investment needed to get them up and running, especially if crude oil prices languish. Some take more steam, or other processing, to get the bitumen out. No carbon levy, or lack thereof, will change that.

There is no question that carbon taxes, set to take effect next month, are contentious in Alberta, where the economy has sputtered as a result of the collapse in crude prices. Some of the calculus in proceeding with the policy is to show Canadians and others that the province is serious about cleaning up its act as it tries to expand markets for its main product.

Meanwhile, the industry's participants have been winnowed down, first by surging costs and corporate pockets found to be too shallow, then by the collapse in crude prices. Without some moonshot technology to slash costs and emissions, the big incumbent players with expertise and access to capital will increasingly dominate the landscape.

Suncor Energy is a prime example, having spent more than $5-billion (Canadian) bulking up on acquisitions in the oil sands over the past year while at the same time building the $15.1-billion Fort Hills mining project, due to start up in about 12 months.

Koch, owned by the conservative billionaire brothers who famously oppose regulations to limit emissions, said Ms. Notley's carbon tax and oil sands emissions cap persuaded it to scrap the Muskwa oil sands development plan.

But it did not release the project's supply costs – the complete menu of inputs that go into the 10,000-barrel-a-day proposal. Projected margins may have been razor-thin without the carbon levy.

Under the NDP plan, the extra cost of an average steam-assisted project would be 46 cents a barrel, with U.S. crude at about $51 (U.S.) a barrel and other assumptions for natural gas costs and assorted expenses.

Indeed, in the week it buried Muskwa, Koch, in partnership with Pengrowth Energy, applied for a steam-driven project called Selina that would produce 12,500 b/d, even as Alberta proceeds with its carbon policies.

Statoil, 67 per cent owned by the Norwegian government, decided to exit the oil sands after years of taking flak from environmentalists at home. It had already shrunk its ambitions, having mothballed a major expansion of its production south of Fort McMurray, Alta., two years ago.

In 2010, the company had pledged to reduce its emissions from the oil sands 25 per cent by 2020 and 40 per cent by 2025. Now, as it trumpets the reduction in its carbon footprint from selling its holdings, the project continues to operate, only under a different corporate brand.

Meanwhile, money is still flowing into the oil sands, as Canadian Natural and Cenovus have shown by expanding their projects. They have to deal with rising carbon costs along with all the other companies, but seem to hit on a formula of high-quality leases, reduced costs, economies of scale and long-time supplier relationships.