Oil firms eye $11bn Canada fund to match Biden's subsidies

23rd January 2023 By: Bloomberg

Oil-sands companies see a chance to secure a steady stream of government aid as Prime Minister Justin Trudeau pledges to keep Canada competitive with the massive clean-energy subsidies on offer in the US.

Firms including Suncor Energy and Cenovus Energy are seeking a chunk of the C$15-billion Canada Growth Fund, unveiled in the government’s 2022 budget, to help fund large-scale carbon capture plans that would reduce emissions from extracting the country’s heavy oil.

Trudeau has already put forward a tax incentive for building carbon capture projects, but Canada still faces a gap in matching the production tax credits contained in the US Inflation Reduction Act. The legislation signed by President Joe Biden last summer, in effect, provides an annual operating subsidy for carbon-capture systems.

“We’ve got a very tilted playing field in North America at the moment,” said Derek Evans, CEO of MEG Energy, warning that Canada risks losing out on investment and jobs.

In an interview, Evans and executives from Cenovus and the Pathways Alliance, a group of the largest Canadian oil-sands producers, set out their vision for lowering the pollution from Canada’s energy sector and creating “the globally preferred barrel of sustainable oil.”

To get there, they’ve set a target of lowering oil-sands emissions by 22 million metric tons by 2030. The total was 81-million metric tons in 2020 — a figure the government notes more than doubled over the previous decade and a half. Their plan to do so requires C$24-billion in spending, including on carbon capture.

Pathways President Kendall Dilling said comparable de-carbonization plans in Europe and the US get two-thirds of their funding from public sources in order to get the projects “moving ahead in a way that’s sustainable and reasonable from a corporate private investment perspective.”

Under those proportions, the oil-sands producers are seeking C$16-billion in state aid — some of which has already been pledged by Trudeau. Last April’s budget set aside more than C$7-billion for the carbon-capture investment tax credit through 2030.

Other federal programs, such as the C$8 billion Net Zero Accelerator, could be used for equipment costs. And there is also potential support from Alberta’s provincial government.

That means Canada is already close to matching the US on capital cost incentives, said Mark Cameron, head of external relations for Pathways. “Where there’s a real gap is on the operating cost side,” he added, with money from the Canada Growth Fund as the possible solution.

In its November fiscal update, the Trudeau government said the fund could be used in a variety of ways to spur private investment in clean technology. It explicitly flagged carbon capture as a priority.

The program could be used to provide “a more predictable environment for decision making about long-term investments,” according to the budget document. One example is guaranteeing a floor price for carbon credits through what are known as contracts for difference.

In practice, this would mean the government guarantees oil-sands operators get a certain amount of money in exchange for sequestering carbon each year, even if the carbon trading market can’t support the flood of credits generated by new projects.

Evans said that ideally the industrial carbon trading market in Canada matures to the point where federal price guarantees aren’t necessary. But for now “we’re not going to undertake a project when we don’t have some idea of what the revenue is going to be,” he said.

Tapping Canada’s massive oil-sands deposits carries unique challenges that make them among the world’s most carbon-intensive sources of crude.

Extracting the hydrocarbons from the peanut butter-like oil sands requires heavy doses of steam — either injected directly into underground deposits or mixed with loads of the bitumen at processing plants — both of which require significant amounts of natural gas. Even then, the crude that’s produced is a heavy, high-sulfur grade that requires a more energy-intensive refining process than lighter oils.

Climate-change activists, some of whom helped propel Trudeau to power in 2015, are critical of the prime minister’s receptiveness to the industry’s overtures on carbon capture.

“The government is betting big on a speculative technology” but “doesn’t spend much on real climate solutions” such as renewable energy, Julia Levin, a spokeswoman for Environmental Defence, said by phone. “That ultimately doesn’t move us away from oil and gas.”

Companies are also consulting with the government on Trudeau’s proposed emissions cap for the oil and gas sector, a mechanism to ensure a gradual reduction in absolute emissions. Environment Minister Steven Guilbeault published a document last year outlining options for the cap.

But while government models see the sector’s emissions dropping 42% below current levels by 2030, oil-sands firms say they can’t meet that target by then without shutting in production.

A 42% cut would mean a nearly 35-million metric ton reduction in oil-sands emissions, Cameron said.

Still, the oil executives said their talks with the government are productive and should lead to a mutually acceptable plan.

“The point that I make regularly with government is: We’re going to hit your 42%,” said Alex Pourbaix, CEO of Cenovus. “It’s just going to take a few years more.”