Economist: Carbon price not an oil-sands deal breaker

Oil-sands investment can grow in Alberta despite the Canadian government’s carbon-pricing plan announced last month, according to a TD Bank economist.

Oil-sands investment can grow in Alberta despite the Canadian government’s carbon-pricing plan announced last month, according to a TD Bank economist (OGJ Online, Oct. 5, 2016).

While introducing “another bout of uncertainty,” the plan might impede oil sands investment less than crude prices below full-cycle project costs and limits on market access, writes the economist, Dina Ignjatovic, in a Nov. 22 report.

“We estimate that if oil prices are roughly $60/bbl (US) or higher, the carbon price is unlikely to make or break an investment decision,” Ignjatovic writes. “Below that threshold, the analysis becomes murky as the carbon price wouldn’t be the only factor deterring new investment. Greater advances in productivity and cost reduction would likely be required in order to make new projects economical.”

Regardless of the price, she adds, the ability to move oil out of Alberta remains “a crucial element impacting the future of the industry.”

Provincial, federal plans

An important question is how Alberta adapts the carbon tax it announced a year ago to the new federal program (OGJ Online, Nov. 23, 2015).

The provincial tax starts at $20/tonne of carbon dioxide-equivalent in January, rises to $30/tonne in 2018, and increases by 2%/year plus inflation after that.

Also part of the Alberta plan is a 100-megatonne/year cap on oil sands emissions. The emissions rate now is about 70 megatonnes/year.

Ignjatovic notes that large emitters of greenhouse gases will be subject to performance-based carbon pricing calibrated to a standard set by projects with lowest carbon intensities.

Program details haven’t been disclosed. But the TD Bank economist says recommendations made to provincial officials indicate the effect on oil-sands producers might range from a 50¢/bbl subsidy for the least carbon-intense operators to a 75¢/bbl cost.

The federal program yields to provincial plans that meet its emission-reduction goals but imposes a tough carbon-pricing system for those that do not. Most do not.

The federal carbon price begins at $10/tonne in 2018 and rises to $50/tonne in 2022.

To satisfy the federal standard, Alberta’s carbon tax would have to be increased after about 2020, depending on the inflation rate.

If Alberta raised its carbon tax to $50/tonne, Ignjatovic estimates, the effects on oil-sands producers would range from an 84¢/bbl gain for operators with the lowest carbon intensity to a cost of $1.25/bbl.

Balancing the factors

The economist notes that oil-sands investment—down by more than 50% since 2014—was expected to slow even before oil prices plunged for other reasons, chiefly limited market access.

“While construction of projects that were under way prior to the price collapse will drive growth through 2020,” she writes, “investment is likely to be limited thereafter unless new ways are found to move oil outside the province, regardless of the price.”

She notes that the federal government is to decide by Dec. 29 whether to approve expansion of Kinder Morgan’s Trans Mountain pipeline, which would triple capacity of the system between Alberta and Burnaby, BC.

And US President-elect Donald Trump said during his campaign that he’d approve the border crossing of the Keystone XL pipeline expansion.

Also impeding oil-sands investment is US shale oil, which costs less than oil sands to develop and produce and has shorter lead times.

Meanwhile, Alberta’s emissions limit on oil sands work represents “more of a long-term story and may only be an issue if there is enough market access to demand higher production,” Ignjatovic writes. Operational improvements probably will continue to lower emission rates and would have been implemented even if the cap hadn’t been imposed.

The immediate questions for investors are how Alberta incorporates the federal mandates and oil prices.

“If prices were to rise to the $60-70/bbl range, which is entirely possible by 2020, the carbon price will not likely be a deal breaker on investment in any project,” Ignjatovic says.

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