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Alberta Minister of Environment Shannon Phillips says the energy industry royalty review will follow in lockstep with the government’s increased carbon levies.

JASON FRANSON/THE CANADIAN PRESS

Alberta's plan to increase carbon fees and toughen its climate strategy adds costs and more uncertainty to an industry already struggling to cope with the sharp plunge in oil prices.

The province's new NDP government on Thursday said carbon levies on major polluters would increase to $30 a tonne over two years, up from $15 a tonne under current regulations. The fee would rise to $20 a tonne starting Jan. 1 next year, and to $30 in 2017. Companies will also be required to reduce emissions by 20 per cent over time, compared with a 12-per-cent target today.

Alberta Environment Minister Shannon Phillips said the government would announce a review of the province's complex royalty regime "shortly," and that it would proceed in "lockstep" with the tougher environmental controls under development.

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The prospect of more stringent rules and higher costs deepens a rift between a government that insists change is needed to smooth the way for stalled pipelines, and companies already reeling from the collapse in oil prices. The downturn has led to thousands of layoffs and dramatically shaved the industry's long-term production outlook.

"Is the fiscal regime more punitive today? Yes. But the assumption of business has been that an increase such as what was announced was coming," said Michael Dunn, analyst at Calgary's FirstEnergy Capital Corp.

"I think if what they announced was the end of it, then I think the industry would be quite comfortable in dealing with it. But there's going to remain some uncertainty until they finalize all the details and any potential other changes later this year."

The NDP government has moved swiftly on several fronts since taking office this spring, eliminating Alberta's flat income taxes and raising the corporate rate by 20 per cent.

Such moves have prompted warnings from some oil and gas producers already struggling to claw back expenses amid the sharp downturn in energy markets.

On Thursday, the Canadian Association of Petroleum Producers, which represents large oil sands players, warned that its members were facing $800-million in added costs over two years because of higher carbon levies and corporate taxes.

The increase in carbon fees comes at a time when the industry is facing "significant competitiveness challenges," a spokeswoman for Canadian Natural Resources Ltd. said.

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"We are especially attentive to changes that increase cumulative costs, including changed corporate taxes, costs for carbon, and royalties," Julie Woo said in an e-mail.

The NDP estimates the increased carbon levy would add 30 to 45 cents a barrel to the cost of oil sands production by 2017. But private forecasts have pegged the cost much higher. Under a so-called "double-double" scenario considered by the provincial Tories, fees paid by Canadian Oil Sands Ltd., the majority owner of the Syncrude Canada Ltd. consortium, would "likely quadruple" from current levels to about $1.07 a barrel on an annual basis, according to numbers crunched by Greg Pardy, co-head of global energy research at Royal Bank of Canada.

Still, such an increase is unlikely to "break the bank" for oil sands producers and other companies, he said Thursday in a note to clients, even if it does raise costs.

Energy economist Dave Sawyer said his model shows the new regulations would cost an average of 21 cents a barrel, with a wide variation.

Mr. Sawyer said the industry needs to show investors that it can survive in a low-carbon environment. The market will shrug off the current increase as having little impact on the bottom line, particularly since the higher levy is deductible against royalties and corporate income taxes. He noted that the previous Progressive Conservative governments had been preparing to impose a similar increase in the carbon levy.

Some oil sands companies factor higher carbon fees into project economics. Royal Dutch Shell PLC, for example, tests new projects globally against a carbon price of $40 (U.S.) a tonne, a spokesman said. Others such as Suncor Energy Inc. have pushed for a carbon pricing mechanism that applies to a broader segment of society.

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The industry faces increased stringency after 2017, and will be squeezed between the need to cut emissions and the imperative of cost reductions in a low-oil-price environment. "There's a greater investment risk now," Mr. Sawyer said.

With report from Shawn McCarthy

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