Can Oilsands Be Carbon-Taxed Into Long-Term Prosperity?
By: David Yager, National Leader Oilfield Services
Originally published in MNP's Oilfield Service News - July 21st, 2015.
Alberta’s oilsands were front-page news again the week of July 13-17 as Alberta Premier Rachel Notley stopped in Quebec en route to the annual premiers’ conference in St. John’s, NL to negotiate the socalled Canadian Energy Strategy (CES). The proposed Energy East pipeline to Atlantic tidewater was discussed with Quebec Premier Phillipe Couillard and the outcome remained unclear. What was apparently agreed on was if Alberta could demonstrate leadership on the carbon emissions and climate change file for the oilsands, then strong public resistance to Energy East in Quebec may decline. If so, this critical transportation link for Alberta’s oilsands to new markets might one day proceed.
At the premiers’ conference, the most exciting part was Notley and Saskatchewan Premier Brad Wall trading provocative and entertaining comments in the media. When released, the CES was hailed as a major advancement in interprovincial relations. But to those in the ‘patch trying to keep their jobs and companies alive through 2015 and 2016, the CES is of no tangible value.
Getting everyone in the rest of Canada and the world to accept oilsands development has been spectacularly unsuccessful. Attempts include government-subsidized carbon capture and storage projects (CCS), carbon emission levies, national cooperation strategies, increased regulation, public relations, economic benefit studies, lobbying with domestic and international governments and friendly television ads.
While there has been limited success (the EU dropped a negative classification for bitumen), opposition to pipelines and oilsands development remains fierce. It is difficult to be optimistic. Current declining investment in new projects confirms this view.
The Notley administration recently doubled Alberta’s large emitter carbon levy, a move publicly supported by the Canadian Association of Petroleum Producers (CAPP). At the full rate of $30 per ton, in 2017 it could cost about $0.50 a barrel. The concept behind discussions in Quebec was if oilsands were subjected to more stringent environmental levies, policies and scrutiny, improved market access could follow.
Some think it can. Smart people like Adam Waterous, who founded his own oil and gas property and asset valuation and sale company in 1991 before selling it to Scotiabank in 2005, a business unit he still manages. Writing in the Globe and Mail on July 15, Waterous argued the depressed value of Alberta oil because of pipeline issues was of far greater concern than the election of an NDP government. “The exciting opportunity for Alberta’s new NDP government is the chance to add a huge horsepower boost to Canada’s economic engine by solving the problem of a single export market for Canadian oil and gas – the United States. This lack of market access has led Alberta energy companies, over the past two years, to sell oil at a discount to U.S. benchmark prices by an average $21 (U.S.) a barrel for heavy oil and $8 a barrel for light oil, as well as gas for less than would be possible if it were sold into Asian markets.”
Waterous figures pipelines to tidewater, which would eliminate the local pricing discount, would add more than C$10 billion a year to the top line of Alberta’s oil producers. Liquefied natural gas (LNG) exports would give more of a boost to B.C. but still help Alberta. Waterous calculates closing the pricing differential would more than compensate for all the other economic challenges the NDP is creating by raising carbon taxes 100%, corporate taxes 20% and whatever comes out of the as yet-uncompleted royalty review.
Waterous concluded, “Clearly, this policy choice (carbon taxes, corporate taxes and a royalty increase) would be a near rounding error compared to what lack of market access is costing the industry. Rather than worry about the Alberta New Democrats, the country’s business and political leaders should be worrying about the lack of market access. In fact, the NDP may be more successful in solving the issue of market access than the previous Progressive Conservatives governments for two reasons. First, the NDP may be able to cultivate better relationships with the Premiers of Ontario and Quebec – two key provinces in getting approvals for the Energy East pipeline… Second, the NDP may already have more credibility with environmental groups, which will be important in garnering support from other provincial governments.”
Exactly what must oilsands developers do to regain the so-called “social license to operate?” How does the most vilified hydrocarbon fuel source in the world overcome its army of critics?
Notley appears to be saying the right things. Early in July in Calgary, the Premier gave a pro-oilsands speech to a business audience, the tone of which surprised many. She visited Quebec, where the majority of population is opposed to Energy East, and discussed breaking the logjam with Premier Couillard. Then it was off to St. John’s, where all the premiers signed the Canadian Energy Strategy, a motherhood discussion paper that unfortunately doesn’t actually include the word oilsands and only references pipelines four times in its entire 40 pages.
However, at the same time Notley was crusading for Energy East in central and eastern Canada, determined oilsands opponents were digging in their heels. On July 16, Canadian Press carried a story which opened, “A dozen environmental groups across Canada say there should be no role for oilsands growth in a Canadian energy strategy.” They wanted the premiers to agree to a platform that would halt oilsands development and all market access infrastructure such as pipe, rail and tankers. Environmental Defense, one of the 12 groups, wrote, “Approving tarsands pipelines like Energy East and Kinder Morgan, which is what this strategy appears to do, would lock in high carbon emissions and make it practically impossible for Canada to reach its climate change reduction targets.”
These are the two pipelines Notley supports publicly. These are some of the groups a new NDP government with a new approach is supposed to be able to get on side. So, what do you do with the oilsands to make them sufficiently environmentally benign to get some pipe built?
It is not that Adam Waterous is wrong. Let’s call his analysis “aspirational.” The reality is any and all initiatives to reduce the carbon footprint and environmental impact of the oilsands will raise costs. Money is tight, the economics squeezed. Whether it is CCS, accelerated tailings pond reclamation, higher carbon emission taxes, or whatever the NDP’s new environmental strategy to be announced later this year will yield, they will all cost more.
Once world prices are attained, there will indeed be more money to pay for cleaner and greener recovery techniques. But the cart is well before the horse.
On July 19 Bloomberg carried a story quoting Alberta environment minister Shannon Phillips who said, “If Alberta wants better access to world markets, then we’re going to need to do our part to address one of the world’s biggest problems, which is climate change.” Phillips added the need to “address emissions from all sectors, not just the petroleum industry. If we get it right, our environmental policy will make us world leaders on this issue instead of giving us a black eye around the world.”
Meanwhile, the Pembina Institute figures carbon taxes will have to rise to at least $100 a ton by 2030 to achieve meaningful carbon emission reductions. Alternatively, oil producers are proposing an economywide carbon tax to make all emissions more expensive, not just bitumen extraction. Higher carbon levies on everything would then allow governments to cut other taxes.
Can the oilsands be carbon-taxed into long-term prosperity? Broad consumer carbon taxes designed to decrease demand won’t be a catalyst for increased supply, certainly not in Canada or any other jurisdiction that introduces such taxes. Everything else raises costs on oil production that is currently marginal if not uneconomic. Based on the foregoing, the conclusion is no.
Originally published in MNP's Oilfield Service News - July 21st, 2015.
Alberta’s oilsands were front-page news again the week of July 13-17 as Alberta Premier Rachel Notley stopped in Quebec en route to the annual premiers’ conference in St. John’s, NL to negotiate the socalled Canadian Energy Strategy (CES). The proposed Energy East pipeline to Atlantic tidewater was discussed with Quebec Premier Phillipe Couillard and the outcome remained unclear. What was apparently agreed on was if Alberta could demonstrate leadership on the carbon emissions and climate change file for the oilsands, then strong public resistance to Energy East in Quebec may decline. If so, this critical transportation link for Alberta’s oilsands to new markets might one day proceed.
At the premiers’ conference, the most exciting part was Notley and Saskatchewan Premier Brad Wall trading provocative and entertaining comments in the media. When released, the CES was hailed as a major advancement in interprovincial relations. But to those in the ‘patch trying to keep their jobs and companies alive through 2015 and 2016, the CES is of no tangible value.
Getting everyone in the rest of Canada and the world to accept oilsands development has been spectacularly unsuccessful. Attempts include government-subsidized carbon capture and storage projects (CCS), carbon emission levies, national cooperation strategies, increased regulation, public relations, economic benefit studies, lobbying with domestic and international governments and friendly television ads.
While there has been limited success (the EU dropped a negative classification for bitumen), opposition to pipelines and oilsands development remains fierce. It is difficult to be optimistic. Current declining investment in new projects confirms this view.
The Notley administration recently doubled Alberta’s large emitter carbon levy, a move publicly supported by the Canadian Association of Petroleum Producers (CAPP). At the full rate of $30 per ton, in 2017 it could cost about $0.50 a barrel. The concept behind discussions in Quebec was if oilsands were subjected to more stringent environmental levies, policies and scrutiny, improved market access could follow.
Some think it can. Smart people like Adam Waterous, who founded his own oil and gas property and asset valuation and sale company in 1991 before selling it to Scotiabank in 2005, a business unit he still manages. Writing in the Globe and Mail on July 15, Waterous argued the depressed value of Alberta oil because of pipeline issues was of far greater concern than the election of an NDP government. “The exciting opportunity for Alberta’s new NDP government is the chance to add a huge horsepower boost to Canada’s economic engine by solving the problem of a single export market for Canadian oil and gas – the United States. This lack of market access has led Alberta energy companies, over the past two years, to sell oil at a discount to U.S. benchmark prices by an average $21 (U.S.) a barrel for heavy oil and $8 a barrel for light oil, as well as gas for less than would be possible if it were sold into Asian markets.”
Waterous figures pipelines to tidewater, which would eliminate the local pricing discount, would add more than C$10 billion a year to the top line of Alberta’s oil producers. Liquefied natural gas (LNG) exports would give more of a boost to B.C. but still help Alberta. Waterous calculates closing the pricing differential would more than compensate for all the other economic challenges the NDP is creating by raising carbon taxes 100%, corporate taxes 20% and whatever comes out of the as yet-uncompleted royalty review.
Waterous concluded, “Clearly, this policy choice (carbon taxes, corporate taxes and a royalty increase) would be a near rounding error compared to what lack of market access is costing the industry. Rather than worry about the Alberta New Democrats, the country’s business and political leaders should be worrying about the lack of market access. In fact, the NDP may be more successful in solving the issue of market access than the previous Progressive Conservatives governments for two reasons. First, the NDP may be able to cultivate better relationships with the Premiers of Ontario and Quebec – two key provinces in getting approvals for the Energy East pipeline… Second, the NDP may already have more credibility with environmental groups, which will be important in garnering support from other provincial governments.”
Exactly what must oilsands developers do to regain the so-called “social license to operate?” How does the most vilified hydrocarbon fuel source in the world overcome its army of critics?
Notley appears to be saying the right things. Early in July in Calgary, the Premier gave a pro-oilsands speech to a business audience, the tone of which surprised many. She visited Quebec, where the majority of population is opposed to Energy East, and discussed breaking the logjam with Premier Couillard. Then it was off to St. John’s, where all the premiers signed the Canadian Energy Strategy, a motherhood discussion paper that unfortunately doesn’t actually include the word oilsands and only references pipelines four times in its entire 40 pages.
However, at the same time Notley was crusading for Energy East in central and eastern Canada, determined oilsands opponents were digging in their heels. On July 16, Canadian Press carried a story which opened, “A dozen environmental groups across Canada say there should be no role for oilsands growth in a Canadian energy strategy.” They wanted the premiers to agree to a platform that would halt oilsands development and all market access infrastructure such as pipe, rail and tankers. Environmental Defense, one of the 12 groups, wrote, “Approving tarsands pipelines like Energy East and Kinder Morgan, which is what this strategy appears to do, would lock in high carbon emissions and make it practically impossible for Canada to reach its climate change reduction targets.”
These are the two pipelines Notley supports publicly. These are some of the groups a new NDP government with a new approach is supposed to be able to get on side. So, what do you do with the oilsands to make them sufficiently environmentally benign to get some pipe built?
It is not that Adam Waterous is wrong. Let’s call his analysis “aspirational.” The reality is any and all initiatives to reduce the carbon footprint and environmental impact of the oilsands will raise costs. Money is tight, the economics squeezed. Whether it is CCS, accelerated tailings pond reclamation, higher carbon emission taxes, or whatever the NDP’s new environmental strategy to be announced later this year will yield, they will all cost more.
Once world prices are attained, there will indeed be more money to pay for cleaner and greener recovery techniques. But the cart is well before the horse.
On July 19 Bloomberg carried a story quoting Alberta environment minister Shannon Phillips who said, “If Alberta wants better access to world markets, then we’re going to need to do our part to address one of the world’s biggest problems, which is climate change.” Phillips added the need to “address emissions from all sectors, not just the petroleum industry. If we get it right, our environmental policy will make us world leaders on this issue instead of giving us a black eye around the world.”
Meanwhile, the Pembina Institute figures carbon taxes will have to rise to at least $100 a ton by 2030 to achieve meaningful carbon emission reductions. Alternatively, oil producers are proposing an economywide carbon tax to make all emissions more expensive, not just bitumen extraction. Higher carbon levies on everything would then allow governments to cut other taxes.
Can the oilsands be carbon-taxed into long-term prosperity? Broad consumer carbon taxes designed to decrease demand won’t be a catalyst for increased supply, certainly not in Canada or any other jurisdiction that introduces such taxes. Everything else raises costs on oil production that is currently marginal if not uneconomic. Based on the foregoing, the conclusion is no.
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