Alberta’s $90 Billion Carbon Capture Storage (CCS) Opportunity
This week we welcome to the podcast Jared Dziuba, Oil & Gas Market Specialist, BMO Nesbitt Burns and Rachel Walsh, Carbon Innovation Analyst, BMO Nesbitt Burns.
Jared and Rachel have authored several reports on the topic of CCS, including, “The Outer Limits: Exploring the Cost (Opportunity) of Canada’s Net Zero Pathways” and following the recent news of the federal tax credit for CCUS in Canada, they published “Durable Carbon Offset Revenue Still Needed to Drive CCUS.”
Here are some of the questions Peter and Jackie asked them: Considering the new federal tax credit, what carbon price is needed to support new investments? How likely is it that the carbon credit market in Alberta will trade at this level? Could the actual costs for building large-scale CCS projects be greater than expected? How is Alberta allocating the subsurface pore space for storing carbon?
If you would like to have access to BMO Nesbitt Burns research on CCS, please contact Jared directly at Jared.Dziuba@bmo.com
Please review BMO Capital Markets disclosure at: https://researchglobal0.bmocapitalmarkets.com/public-disclosure/
Please review our disclaimer at: https://www.arcenergyinstitute.com/disclaimer/
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Episode 151 Transcript
Disclosure:
The information and opinions presented in this ARC Energy Ideas podcast are provided for informational purposes only and are subject to the disclaimer link in the show notes.
Announcer:
This is the ARC Energy Ideas podcast with Peter Tertzakian and Jackie Forrest. Exploring trends that influence the energy business.
Jackie Forrest:
Welcome to the ARC Energy Ideas podcast. I’m Jackie Forrest.
Peter Tertzakian:
And I’m Peter Tertzakian and welcome back. Well, Jackie, we’re recording today. It’s Earth Day. I’m looking out and certainly the earth is talking. It’s snowing here, late April in Calgary. So tell us, what are the principles of Earth Day?
Jackie Forrest:
Well, Earth Day started in 1970, and it’s really to acknowledge the Earth. And it’s really not only about climate, although it’s become more about climate change. It’s about biodiversity, deforestation and other issues. In fact, I don’t know if you checked out Google today-
Peter Tertzakian:
Mm-hmm (affirmative).
Jackie Forrest:
… But they show time lapse images of how the glaciers have been changing by year. But also they include things like the Great Barrier Reef and deforestation. But, I think there are some skeptics and critics. One of the things is people should take action to make changes in their life, and people that are cynical say, “well, those actions don’t really add up to anything, right?” Like ride your bike once a week or pick public transportation. I actually think those things do add up. The IEA-10 Point Plan talked about a bunch of small things that would add up to 3% of…
Peter Tertzakian:
Yeah, it’s very big. Small actions, cascade, aggregate into very large actions. And I always like to say, when you think about these things, the onus of decision making is on say corporate leaders, and leaders of large enterprises, and so on. Okay, sure. Decisions around a boardroom table are huge, but equally decisions around a kitchen table, when you add them all up, are huge. Making the decision to turn the key in your vehicle, that is a big decision because 80 plus percent of emissions come from combustion in a vehicle or other types of downstream appliances and things. So yeah, it’s huge if you add it up. And I guess my perspective is, it’s nice to have a day but why doesn’t the day last when you make some of these things? Because we’ve got big sustainability issues in the earth with eight billion people.
Jackie Forrest:
Yeah, I’m a fan of the day, Earth Day. So we’re celebrating it today. And I also think there used to be this, remember that Earth Hour thing, where you’re supposed to just sit in the dark for an hour?
Peter Tertzakian:
Yeah.
Jackie Forrest:
I think that was too far, but I think the idea of getting people to take small actions and maybe do them throughout the year.
Peter Tertzakian:
Yeah. Well that’s, as I said… The kitchen table is sort of the downstream decision making. Upstream, in the heavy industries and oil fields of the world and especially here in Alberta, there’s a big push to decarbonize, to remove the carbon emissions from the processes that go into those heavy industries. So we have a couple of special guests here today to talk about the economics of carbon capture and sequestration. And we’ll talk a little bit more about the details of what that is, we have on previous podcasts. But it’s always good because it’s actually quite a complicated subject. But, rest assured we have the experts with us. And so, we are delighted to have with us, Jared Dziuba, Oil and Gas Market Specialist with BMO Nesbitt Burns, the bank. And we have Rachel Walsh. She’s the carbon innovation analyst also with BMO Nesbitt Burns, who works alongside Jared. Welcome to both.
Rachel Walsh:
Thank you for having us.
Jared Dziuba:
Thanks for having us.
Jackie Forrest:
Yeah. And it’s great to have you here. Obviously this topic is very topical because of the announcement in the budget that there was going to be a 50% tax credit for CCS projects. And a lot of people saying, well, what does this mean? Is this going to go forward? Are they economic? And so we’re looking for those answers from you today. And you’ve done some great publications on this topic, The Outer Limits: Exploring the Cost and opportunity of Canada’s Net Zero Pathways, you did before the announcement of the tax credit. But it looked at different scenarios of tax credits and how that would impact economics.
Jackie Forrest:
But you did another report this week that explored the tax credit and the economics of it. So if any of our listeners are interested in that, we’re going to actually include Jared’s email in the show notes, so reach out to him if you’d like to get a copy of those reports. But today we’re going to cover a number of things, some context setting in terms of the emissions from Canada, and oil and gas, and how much of that can actually be addressed by carbon capture and storage. The economics, considering the new policy, and then what are some other barriers. But before we get started, we’d like to hear a bit about yourselves and how you came to study the opportunity for carbon capture in Canada.
Jared Dziuba:
Sure. Well, thanks again for having us. I guess I’ll start and say that I’m actually an Earth Day child myself. My birthday is today. So definitely kind of interesting-
Peter Tertzakian:
Happy birthday.
Jared Dziuba:
Yeah, thanks. It’s interesting that a lot of the work that I’m doing these days at BMO is focused on sustainability and environmental things, so kind of ironic in a way. I’ve been with BMO’s energy research group going on about 18 years now, which is kind of crazy to say. I’ve covered a full range of the energy businesses globally with particular focus on the Canadian large cap space and the oil sand space. I actually covered the junior oil sand sector for a number of years, way back when that was actually a thing, we’ve since learned that it’s more of a big kids game. And so, I’ve been around long enough, I guess, to see a number of different market cycles and interesting transitions happen in this business. And certainly seeing that again now, with that evolution, I shifted roles about five or six years ago into more of an industry thematic role.
Jared Dziuba:
So we take a detailed look at sort of interesting themes that are affecting more the longer term outlook for the energy business. And lately, not surprisingly, the focus has been on ESG and energy transition, how Canada sort of fits into that. So I would say one of my special interest is in challenging some of the misconceptions around Canada’s oil sands business in particular. We do have a belief that Canadian producers are actually uniquely well positioned to achieve net zero and lead energy transition for a number of different reasons.
Jared Dziuba:
But it’s becoming very clear as we look at the plans to achieve net zero of these producers, that we need much more impactful abatement tools like CCS in order to make this happen. So our latest work is really asking the next logical question about, what is net zero via CCS and other equivalent technologies going to cost the industry? What’s that going to do? Or how does look relative to the industry’s financial capacity to do it and its impact on investors? That’s kind of what’s led us here today.
Peter Tertzakian:
Yeah. It’s interesting. You’ve been in this game for quite a while, as have we, and it’s an evolution of an industry that just changes. And so when people talk about transition and energy transition, the immediate visual is we’re transitioning off of fossil fuels and into renewables, and that’s true. However, there’s a constant renewal in an evolution going on within industries, including upstream oil and gas.
Jared Dziuba:
Absolutely. Yep.
Peter Tertzakian:
The assumption often made is that it’s sort of the static dinosaur business that doesn’t ever change, but we’re going to challenge that notion today. So Rachel, tell us about yourself.
Rachel Walsh:
Yeah. For myself, I have been in equity research for several years now, formerly with the EMP group, working for at BMO. And we’ve always focused on longer term thematic pieces. I think that drives a lot of value for our clients, naturally that brings us to some energy transition themes. We’ve focused a lot on carbon sequestration through enhanced oil recovery and have also collaborated with Jared on large blue hydrogen reports, looking for opportunities for natural gas producers in Western Canada.
Rachel Walsh:
And my role has recently shifted. I am now the carbon innovation analyst. And that sounds rather vague I know, but I’m going to be looking at different things that could help us decarbonize our economy. Whether it’s from technologies or companies that can help abate emissions through processes like CCS or through negative emissions technologies, as well as different policies and potentially carbon offset markets that could incentivize investment in this space.
Jackie Forrest:
Okay. Well, let’s get on with the context setting and talk a bit about how many emissions come from oil and gas?
Jared Dziuba:
Just to give I guess a few initial statistics, the oil and gas sector in Canada counts for about 25% of Canada’s total greenhouse gas emissions. This is roughly the same as the transportation sector, just for some context. I always like to put this in global perspective as well though. And point out that Canada’s oil and gas industry, on a global basis, makes up just one third of a percent of the world’s total. So when you think about Canada’s commitments to achieve net zero, I think it’s pretty spectacular.
Jared Dziuba:
Now to break down I guess the oil and gas emissions, the majority is from the upstream business. There’s about 15% comes from pipelines and oil refining. And when you think about the upstream piece of it, you have the oil sands, you have conventional and natural gas. They’re actually about equal between the two, 50/50. Oil sands may be a little bit more, if you include the bitumen upgrading side of the business, each about 80 million tons a year.
Peter Tertzakian:
So in the oil sands, the bulk of the emissions to extract, liberate the oil from the oil sands comes from the thermal process. So you have to basically make steam to heat it up and extract the hydrocarbon molecules before you can send them down market. And so the process of making that steam comes from burning natural gas, for example, which is a huge part of that. Is that right?
Jared Dziuba:
Yeah, absolutely. I mean the mining side, I guess you’d have upgrading emissions as well. You have emissions from industrial boilers and water treatment before the mining as well.
Peter Tertzakian:
Right.
Jared Dziuba:
But yeah, a large portion is from in situ heating of natural gas. And that is a good point because, unlike other industries that burns say coal in power our generation. Those emissions are much more difficult to extract and likely more costly versus a clean burning natural gas, produces a cleaner stream of emissions to potentially grab the carbon from.
Peter Tertzakian:
Right. And just to finish this off, on the non oil sand side, which is drilling, a large part of the emissions come from the diesel engines and all the other apparatus that are on well sites that drill very deep wells and go horizontally. And then there’s the whole hydraulic fracturing process and so on and so forth.
Jared Dziuba:
Yep, exactly. And I would say the main difference between the oil sands and the conventional side is that the emission sources from the oil sands are much larger and very concentrated. So you have 80 million tons per year from a very finite geographical area and very large emission sources, these boilers emit quite a bit of emissions. And the conventional side is much more sporadic if you want to call it that, much smaller emission sources. I think of thousands of wells scattered across Alberta, or whether it’s in the Permian in Texas, thousands of different point sources, I think logistically, are much harder to envision how you’re going to handle that.
Peter Tertzakian:
Yeah.
Jackie Forrest:
All right. Let’s wrap up this section. Let’s just talk about those large scale CCS projects that seem more likely for now. As you know the federal government is talking about a 42% reduction of emissions here by 2030. Do you think it’s possible that CCS could contribute to that 2030 goal, considering everything from the capture to building the pipeline to sequestering?
Jared Dziuba:
I think both the government and the industry plans that are out there are very ambitious, so certainly risk, I would say, to some of the timelines. But the interesting thing about both the government and the industry plans is they’re actually fairly closely aligned we find, which is interesting. It’s almost as if the government is kind of listening to the console with industry. A good example of that is if you look at where the government and its emissions reduction plan are expecting most of these reductions to come from, number one is oil sand upgrading, it’s about 56% reduction. Then you have the downstream refining, and you’ve got the natural gas production side, each with a 45% reduction. And these eerily logical to us. When you think about the fact that hydrogen production in upgrading refining, it’s likely going to be the low hanging fruit.
Jared Dziuba:
We have a lot of existing capacity utilizing CCS to extract carbon from these types of projects. So it’s low cost and we know how to do it very well. So those are going to be addressed very early on. And then on the natural gas side, methane emissions are really the focus for natural gas and the government’s expecting about a 75% reduction in methane emissions by 2030. So you look specifically at the oil sands, they’re calling for emissions reduction of about 29 million tons per year by 2030. Pathways is calling for 22 million tons per year. But when you gross that up to include the full oil sand sector, it’s pretty close to 29 million tons a year, so coincidentally. And then CCS within that is about 10 million tons per year of this goal. So yes, I mean, we do think if they stay on this timeline, then it’s going to contribute significantly to that goal.
Peter Tertzakian:
Yeah. I think it’s important to set that context. So thanks, Jared. Let’s talk about the economics, because none of this happens without cost, whether it’s to build the infrastructure, or as you operate it costs money to operate these sorts of processes. So maybe we’ll start, Rachel, by asking, so what kind of carbon price do you need to make this whole thing work?
Rachel Walsh:
In addition to the investment tax credit and just to walk through what that looks like, it appears it’s going to be a refundable tax credit. So regardless of tax status, companies are going to be able to receive the benefit of this. So it’s going to cover 60% of investments on direct air capture, which we think we’re ways away from seeing investments in that space still. It’s going to cover 50% of investments on traditional capture equipment and then 37.5% on transportation and storage infrastructure.
Rachel Walsh:
And so when you consider that tax credit and you also think about the operational cost for these facilities that won’t be included in that credit, we still think that there needs to be a substantial offset price to provide break even economics for these projects. And we see that in excess of $100 per ton here. And that would be in a situation where there’s talk of the tax credit getting reduced by 50% post 2030. If that is the case, you need to see a tax credit in excess of $125 per ton for these projects to be economic. So we need to see more robust offset pricing here for project investors to feel comfortable moving forward.
Peter Tertzakian:
So let’s just back up again for a moment. So when you say 60%, 50%, 60% tax credit, explain that to us.
Rachel Walsh:
So if that company is investing that million dollars in a piece of capture equipment, 50% of that million dollars, they’ll be able to offset their tax liability for that portion.
Jackie Forrest:
So they had to pay tax anyway and now they don’t have to pay tax. So it’s kind of, in a way, the taxpayer paying that part of the capital cost.
Rachel Walsh:
Yeah.
Jackie Forrest:
And if they’re not taxable, they could go sell that to someone else who would be willing to buy it from them, right?
Rachel Walsh:
Yeah. In saying that the companies that look like they’re pursuing this at the moment are very taxable, so I don’t know if a lot of them will look at that, but that certainly is a possibility.
Jackie Forrest:
Okay, let’s come back to that $100 a ton. Now I know that the stated price of carbon by the federal government gets up to that level may be by 2025 or something like that. But there’s an offset market today. If you reduce your emissions more than the industrial emitters program here in Alberta, you have to go sell that to someone else who hasn’t done that to meet their requirements. And sometimes those offset markets trade at a lower price than the stated tax. So what are the chances do you think that the offset market in Alberta would be at a 100% a ton in 2030? And is there any risk that wouldn’t be there?
Rachel Walsh:
With how that offset market is currently structured, I think the answer is no. Fortunately we are going to see changes to the Alberta TIER market as it’s titled, it’s currently in its first full review. And the federal government did announce that they are going to have different requirements post 2022. A lot of those are in regard to maintaining that federal price escalation with the price on carbon going up to $170 per ton by 2030. And one of those requirements is that every compliance method must reflect that price on carbon.
Rachel Walsh:
And so when you consider an offset market as a system, how do you reflect that pricing? We think you need to create a deficit offset market. And there is two levers that those systems can pull in our opinion. You either increase the demand for offsets and by being more stringent on emitters, or you can restrict the supply of offsets. So I think there’s a possibility with these new requirements that we could see that to 2030. But just to put that in context with the Pathways plan alone, on our estimates we have potentially 60 million tons of CO2 being addressed annually by carbon capture. If projects like that can produce offsets, that’s one third of total covered emissions in the province at the moment. So you can see how we approach a very oversupplied market very quickly.
Peter Tertzakian:
Yeah. Well, let’s have a carbon accounting moment here just to really understand this. So the TIER program, what does a T stand for? It’s industrial-
Rachel Walsh:
It’s Technology Innovation Emissions Reduction.
Peter Tertzakian:
Okay. So there’s an obligation, Jackie, for industrial emitters to reduce by 12%?
Jackie Forrest:
On average today.
Peter Tertzakian:
On average today?
Jackie Forrest:
And if you don’t do that, then you have to go buy some offsets or pay the tax.
Peter Tertzakian:
Offsets are like basically carbon credits, basically like a penalty. You have to buy a credit from someone who has actually reduced emissions by one unit, you buy that one unit, right?
Jackie Forrest:
Right.
Peter Tertzakian:
Okay. So what we’re talking about here is giving incentives to companies to reduce more than that 12%, because the 12% is pretty much obligatory, right?
Rachel Walsh:
Yeah. And the math we do for just that 60 million tons alone, you need emissions reduction of 1.25% to 2050 annually to reach that demand for just that. That’s not considering other ways to reduce your emissions, abatement methods or other ways to generate offsets.
Jackie Forrest:
So do you mean that we’d have to go from 12% and every year increase it by 1.5%?
Rachel Walsh:
Yeah.
Jackie Forrest:
So it’d be like 25% in 2030 or something like that. Which, by the way, the federal government has put forward a plan to increase it by 2% per year. That’s just a draft right now. But there is a plan to increase the stringency so that now they have to buy 20% of their emissions in the offset market, they’ll create more buyers.
Peter Tertzakian:
So the Alberta government has this TIER program, has been around for a long time, right?
Jackie Forrest:
Yes.
Peter Tertzakian:
The 12% reduction. So that’s an Alberta provincial requirement. So what are you talking that the Alberta government is going to have to escalate the 12% requirement plus the federal government is going to pancake on another requirement?
Rachel Walsh:
Potentially. So how this will work is, if the provincial program doesn’t meet the federal requirements, the federal backstop will be put in place instead.
Peter Tertzakian:
I see.
Rachel Walsh:
And so the provinces do have some control here and I think they would like to keep it, providing some flexibility for emitters, but they need to meet those federal minimum requirements.
Peter Tertzakian:
Okay. So let’s say, I’m just going to throw a number up, what’s the minimum requirement by 2030, 20?
Rachel Walsh:
There isn’t one in place now.
Peter Tertzakian:
Okay.
Rachel Walsh:
So the one that’s been lobbied is the 2% reduction per year.
Peter Tertzakian:
So by 2030 it would be, say 30%?
Rachel Walsh:
Yeah.
Peter Tertzakian:
Right. Okay. So that means that if companies reduce more than that, they physically capture and put in the ground more than 30%, they’re going to actually generate credits, which they can sell?
Rachel Walsh:
Yes. If allowed to by the system.
Peter Tertzakian:
Right. And if the price by 2030, the federal price on carbon is…
Jackie Forrest:
Well, it’s supposed to be near a $170. However, that doesn’t mean the offset market necessarily trades at that level.
Peter Tertzakian:
Right. But that’s theoretically.
Jackie Forrest:
Yeah.
Peter Tertzakian:
So that becomes quite lucrative. And the incentive is there to actually exceed that 30%?
Rachel Walsh:
Yeah, based on our modeling, $170 would make these projects very economic.
Peter Tertzakian:
But the risk is, if carbon capture, technology innovation, implementation actually exceeds, then these companies are going to be generating a lot of credits, which is really interesting. Oil and gas companies are now generating credits that sort of flood the market with carbon credits and drive the price down?
Rachel Walsh:
Yeah, which should degrade their economics.
Jackie Forrest:
Yeah. And that is a real concern I think when people think about these investments. So yes, the government is paying half of your capital cost. That’s good. But let’s say it was a billion dollar project. Now it’s become 500 million, but you still need a return on the 500 million because the only thing you’re getting paid for is the value of those credits. So I uncertainty about the credits, and minister Wilkinson talked about that on our podcast last week, that’s really the next big barrier. And of course the federal government talked about maybe creating a floor or a minimum price or some sort of certainty around the carbon price as a way to get these projects going.
Jackie Forrest:
I’ve been thinking about it a lot. Alberta, although we admit a lot of carbon, it’s a fairly small market with a limited number of buyer and sellers. And as we drive down emissions more and more, it just to me makes sense that we open this up to maybe a national program or something, because the risks of the carbon price being lower are much smaller if we could then start selling it to people in Ontario or other emitters across the country.
Rachel Walsh:
And we also have a lot of the sequestration capacity here, which allows us to inject the carbon and create the offset, so we would like to sell those to an emitter in Ontario potentially. I do think that is the issue with compliance markets right now, is how fragmented they are. There’s not the efficiency that you need there to really drive large scale reductions across the country and even in North America per se.
Jackie Forrest:
Yeah. I mean, ideally we’d get into a global market, honestly. Then there’d be no fears around things like that because it’d be such a large market. I know that there’s plans at the Glasgow to get there someday, but I think as the world thinks about driving emissions further and further down there is that need for a much larger market.
Peter Tertzakian:
Yeah. So Rachel, let’s talk about this policy uncertainty, because there’s this proverbial chicken and egg thing where companies that are being asked to spend billions of dollars on the equipment and infrastructure to do this will say, “Well, I need to know what TIER threshold is going to be. It’s 12%. I need to know what the federal government’s numbers are going to be and how it escalates. I need to know that when they put that in place it’s going to endure that somebody isn’t going to come along down the road and change it before I spend my billions of dollars today.” So what’s your view on gelling of policies at a provincial federal level?
Rachel Walsh:
I think the most substantial thing that’s been put forward right now, and Jackie mentioned it, is that guaranteed carbon pricing that the federal government had mentioned for projects of this scale, billion dollar projects. I know they mentioned contracts for differences. If they can bring something like that into place, that completely de risks a lot of the project economics here, and then also the risk of potential regime changes in the future as you mentioned. That could go a very long way in forcing project, well, not forcing them, but allowing project investors to move to final investment decisions here and really advance large scale build out of CCS. Yeah.
Peter Tertzakian:
Yeah. And it’s all very complicated. I mean, we all around the table here, live and breathe this stuff, well, of course we live and breathe CO2 don’t we? But anyway, it’s just a very complex behind the scenes and to get it right, because if you don’t structure the policies right, you could have a glut of carbon credits, which then actually spills over into all sorts of other heavy emitting industries and they won’t spend the money. But if you get it wrong the other way, the price of the credits go through the roof and then you start really hindering the competitiveness of our industries relative to other jurisdictions.
Rachel Walsh:
And you can see that in other more mature markets. If you look to Europe, that’s one of the oldest carbon trading markets, you can see they’ve gone through an evolution. We think of the price being very high recently, but it was very low following the financial crisis. And they’ve had to put mechanisms in place that give emitters a sideline that they do intend to keep that marginal price on carbon. And then they’ve also had to put in some mechanisms that allow them to pull allowances at a circulation to stabilize price.
Jackie Forrest:
I have another question about your economic assumptions here. What did you assume for capital cost for building CCS projects in that calculation you did to say a $100 dollars? Because I look at the situation now, the price of everything’s going up. We heard just this week that we’re already having some labor issues on some of these big projects and having to bring people in from as far away as Newfoundland again. Is it possible these project costs could be a little bit higher than what people are thinking?
Jared Dziuba:
I think there’s a few moving parts to that Jackie, and yeah, the costs are high. For our purposes, we kind of went about this with our report, our main purpose was to kind of stress test the industry and its financial capacity to achieve net zero with these technologies. So we went about it fairly conservatively, used conservative assumptions based on legacy precedent costs from Shell’s Quest facility, for example. So actual costs from a legacy project, first generation CCS technology if you want to call it that, it was built in 2015 at roughly a billion dollars per metric ton of capacity. So when you add this all up, 130 billion dollars, we think, to achieve net zero for the Pathways initiative, about 95 billion of that is capital, maybe 10 to 20 billion by 2030 alone. So significant costs.
Jared Dziuba:
I mean, the interesting thing about this, before we kind of get into the question about cost overruns and labour on the other side, is that we actually think that the industry is very capable of funding this if they needed to. We have the group generating 150 billion in surplus free cash flow by 2030 alone. So almost generating enough free cash flow by 2030 to fund the full cost of net zero at those conservative cost levels. The other thing to consider here though is, a lot of indications that next generation CCS or capture technology is going to be significantly lower. So 20% to 30% is kind of the rule of thumb that’s out there. We don’t know for sure if that’s going to happen or not. And you have to consider that further out the abatement curve, harder to abate emissions, with carbon capture, are going to be higher cost, all [inaudible 00:25:24].
Jared Dziuba:
Another thing to consider, I mean, you look at Shell’s Quest project, Canadian Natural has a 70% interest in that. They have suggested that that plant today, maybe without the labor issues that you’re you’re mentioning, could be replicated at 30% lower than what they actually built it for back in 2015 or whenever it started. So there’s some give and takes. I think it’s an interesting question because you’re right, cost overruns in Alberta are a thing we’ve seen before, especially with the huge oil sands rush that happened a number of years ago. Yeah, I do think that there’s a bit of a difference though, in terms of… Especially when we’re thinking more longer term about the build out of CCS, it’s a little bit different. The scale and capital intensity of building out the CCS part, I think is going to be significantly different than what we saw for the oil sands boom.
Jared Dziuba:
So just to put it in perspective, we’re talking about, on the cost side, on average, 2.5 to 3 billion per year of investment in CCS through 2050, it’s going to be less than that for the earlier parts because they’re just kind of ramping up capacity to 2030. And what you’re basically doing here is you’re attaching CCS units mostly to retrofit existing facilities, as opposed to in the oil sands, oil sands spending peaked in 2014 at 34 billion a year. So very significant expenditure on the oil sands side of things. And that’s because they’re building full scale green field plants as opposed to just retrofitting facilities. So I think it’s different in terms of how complicated it is and related cost.
Peter Tertzakian:
Sort of digress just momentarily. The whole idea of carbon capture and sequestration is, let’s just create waste emissions and then bury it, right? So if I’m looking at alternative pathways, why don’t I just build a small modular nuclear reactor that emits nothing and just wire it up to the thermal boilers and generators?
Jared Dziuba:
I think we’re going to see that too. The pathways is, and you’ve probably seen both in the federal governments plans and even the Pathways plan, that small modular nuclear reactors is certainly something that’s coming up. Only that’s going to be further out, I think, the abatement curve, if you want to call it that. So we’re talking it’s still ways away
Peter Tertzakian:
Its more expensive in other words?
Jared Dziuba:
It’s still ways away. But they are starting to pilot and look pretty seriously at that. I know Cenovus talks a lot about it. I think that they’re looking at it seriously as one of those alternatives to CCS down the road.
Jackie Forrest:
Okay, well, let’s wrap up with the other barriers. The way I see it, and I’ve been talking about this for a few weeks now, is that CCS is like a big puzzle. There’s lots of pieces of the puzzle. The tax credit rebate is a big piece that’s been laid down on the table here. The price of carbon is another piece to the puzzle that has to be solved, I think, before you see these final investment decisions going forward. The inflation and labor issues, Jared, you had some good arguments there. But I heard your first number, $90 billion as I’m like, oh my God, that’s a lot of capital investment. But also shows a huge prize for Alberta, in not only the prize for Alberta for all that new capital investment, but I also think that it’s going to create longevity for our oil sands.
Jackie Forrest:
All things the same, they’re going to be producing for more decades if they can pull this off. So there’s a huge prize for Alberta that way too. But the final piece of the puzzle is to me, the pore space rights and the regulation for storing carbon long term in Alberta. Well, maybe explain how Alberta is allocating their pore space now and what the strengths and potential weaknesses are of the current approach?
Peter Tertzakian:
So pore space is the geology. So we talked about that earlier. It’s the ability of the subsurface geology of the rocks that are porous. And because we’re a sedimentary basin, that’s the rocks from which we extracted all the carbon and now a hundred and some years later, we’re going to put it back in.
Rachel Walsh:
And the government did clarify that the provincial crown owns the right to the pore space. So they established that about a decade ago. And so they’re going through a formal bidding process for 10 year management of the pore space. And the main objective is this, is to create a competitive process to create these hub type settings, which will obviously drive economies of scale through shared transport and so storage infrastructure.
Peter Tertzakian:
So talk about a hub. Explain a hub.
Rachel Walsh:
So a hub, a good example is the Industrial Heartland near Edmonton, there’s a lot of refineries, fertilizer plants that are there. Essentially all of those industrial emitters could hook up to the same transportation and storage system, which would really reduce cost for all of them.
Peter Tertzakian:
Right. It’s also sort of a place where, underneath your feet, two kilometers plus down, there’s geology and pore space [inaudible 00:29:51].
Rachel Walsh:
Yeah. In that location especially.
Peter Tertzakian:
In that location. And it’s important to understand that not everywhere is conducive to this process.
Rachel Walsh:
Yeah. Specifically the oil sands which need to ship CO2 400 kilometers. There’s a lack of sedimentary rock in that area, unfortunately. But I think the advantage to this bidding process is that the proponents need to prove that they are technically qualified. They also need to have the ability to fund these things financially and to operate them. I think when you’re talking about projects that are billions of dollars that need to be operated for many years and that need to be monitored and verified, those things are very important.
Peter Tertzakian:
So what are they bidding for?
Rachel Walsh:
They’re bidding for the right to manage the pore space and sequester carbon and [crosstalk 00:30:35]
Peter Tertzakian:
So we have a hundred plus years of regulatory and fiscal frameworks for extra action from the pore space, so we understand that very well. You lease it out to an operator and that operator then has the right to extract the hydrocarbons. Now it’s the reverse process. And so the operators are competing to have the right to build and operate equipment to put the carbon back into the ground?
Rachel Walsh:
Yeah. To transport and sequester it back into the ground. I think it is important that these are reputable operators. They need to fund these giant projects, but there was one negative I could think of. I think this might complicate things for smaller sequestration projects, potentially. I know we discussed it earlier for the conventional side of the business, potentially if you’re strapping CCS on a smaller natural gas processing facility, does that CCS operator need approval from the tenure management group in order to sequester? I have questions around that. I think it’s a layer of complexity, but I don’t think it would prevent a project from going ahead.
Peter Tertzakian:
So Jackie, what about, I think that’s it six hubs that have been recently approved? But-
Jackie Forrest:
Well they’ve changed it, and personally I would like to see a much more entrepreneurial system here, maybe a bit more like how we do our oil and gas rights. There’s some rules that you need to follow, and then you could put an application in at any time and be awarded that, and you may or may not actually develop it. That’s how it works in oil and gas. And I think the current process is a little bit too bureaucratic, it’s more geared to the large players like you say. And today there’s a process… Actually it’s changed a little bit, where now they’re actually opening it up to anywhere in the province if you would like to put in a potential project, you need to do that by May 2nd, just a few weeks away. And then they’re going to award projects throughout the province.
Jackie Forrest:
It took them about 10 months toward the first six. So I hope it’ll be a little faster for the rest. But I have an issue is, what happens if you have an idea on May 3rd? Is this a one and done process that we’re just going to award in 2022, all the projects between now and 2030? So I do think we need to evolve into a more entrepreneurial system that also accommodates smaller projects that need to store locally, because the size of the emissions aren’t going to be big enough to warrant large pipelines. So all those little gas plants in Northern Alberta that could just inject locally into the hydrocarbon reservoir that they’re sitting on top of. And maybe do it very quickly and very economically. I hope we evolve and I think we will.
Peter Tertzakian:
We will. The regulatory framework and the fiscal framework, the royalty structure, these are complicated things and they evolve and they get developed and it’s part of the infrastructure. So I think that the six first hubs and then this competition for the rest of them will basically be a foundation of the framework that’ll evolve into the smaller players.
Jackie Forrest:
Yeah.
Rachel Walsh:
And we did wonder, I mean, the process was a bit of a black box from the outside, we do wonder if there’s a project threshold for tenure management. If projects are under a certain threshold, do they have to go through that process? We had questions about that as well.
Jared Dziuba:
I think the other thing maybe to consider there, and how they’re going about it slowly and starting with the major players that have the expertise and experience, is that a big part of this tenure management thing is about long term monitoring and liability around preventing leakage of the emissions back into the atmosphere. So I think looking at it from a responsibility perspective for these initial projects that may factor in. So I think to your per point of this being the foundation, proving that the regulatory process works and that these larger projects are viable, and taking responsible approach to it, is the first step.
Peter Tertzakian:
Yeah. I think I’d like to end on understanding that… Just basically talk about oil sands and oil and gas, right. But actually this carbon capture is really important to other heavy emitting industries, whether it’s fertilizers, steel, cement, so on and so forth. Of which we have those sorts of heavy emitters especially in and around the Edmonton, the Heartland and so on. So talk about the importance of the oil and gas industry sort of seeding and developing the base infrastructure into which other heavy emitters can come in. How does it like change the economics of everything?
Rachel Walsh:
Well, I think it’s twofold. I think for one it’s that hub setting that we talked about, where you have shared transport and storage infrastructure, and you can see immense cost savings for other emitting facilities through that. The oil and gas industry also has the ability to operate and develop those projects, which could be helpful to other emitters. But also just the information sharing that we think is going to happen and go forward, you look at the few projects that do exist. There’s one on a coal fired power plant, there’s also a fertilizer plant, and then some upgrading and refinery facilities. That’s a broad range of carbon capture already. And there’s an immense amount of open source information. As Jared discussed, there could be cost savings from the Quest project of maybe up to 30% just based on going through that process and the learnings that come with that.
Jackie Forrest:
All right. Well with that, this has been a great conversation. We’ve learned a lot. I have to say, we did that podcast after the ERP as it’s now called, the Emissions Reduction Plan. And we were kind of, especially me, quite pessimistic on the state of policy. I think this news with the tax credit, I think this idea that we may look at a firm price and hopefully get that sorted, makes me more optimistic. I am really excited about the opportunity for Western Canada. I mean this $90 billion of investment, okay, we have to spread it over a number of decades, but this could be amazing major source of employment. And I think position us to be leaders in the world.
Peter Tertzakian:
So thanks for coming in and sort of helping us navigate through this complex web of carbon capture storage and the whole upstream emissions. Which a lot of people around the kitchen table don’t really think about in terms of their personal decision may on Earth Day but behind the scenes. I’m optimistic too. I think there’s going to be a lot of innovation and carbon mitigation over the course of the next decade.
Rachel Walsh:
Yeah. Thanks so much for having us.
Jared Dziuba:
Yeah. Thanks for having us.
Jackie Forrest:
And thanks to our listeners. If you enjoyed this podcast, please rate us on the app that you listen to and tell someone else about us.
Announcer:
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