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    Capturing the carbon value chain [Gas In Transition]

Summary

Canadian natural gas producers are hopeful that carbon capture and storage can reach commercial status with federal tax credit assistance [Gas in Transition, Volume 2, Issue 5]

by: Shaun Polczer

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Complimentary, Natural Gas & LNG News, Americas, Insights, Premium, Gas In Transition Articles, Vol 2, Issue 5, Security of Supply, Carbon, Political

Capturing the carbon value chain [Gas In Transition]

It’s been called vapourware – literally. Carbon capture and storage (CCS) has alternately been hailed as a silver bullet by its proponents or a glorified science fair project by its critics as Canada moves to a much-vaunted net-zero world by 2050.

Now a combination of government incentives and a rapidly maturing technological platform to capture carbon and store it in the ground are promising to bring CCS firmly into the Canadian mainstream. The problem is, nobody is exactly sure how to do it. Or even if it will matter in the bigger picture of global emissions reductions.

The only certainty, delegates to Natural Gas World’s Canadian Gas Dialogues conference in Calgary on March 30 heard, is that time is short – even shorter than previously assumed. That’s because the day before, on March 29, Canadian prime minister Justin Trudeau decreed a 40% GHG reduction from the oil and gas sector by 2030 as a stepping-stone to net zero by 2050. 

With few other alternatives to make such hefty cuts in such a short period of time, CCS looks to be the primary driver of those efforts. The big question is how to marshal the enormous amounts of money and resources that will surely add up to a Herculean effort to reach that goal.

The buck starts here

To prime the pump, Canada’s Liberal government on April 7 announced a series of investment tax credits (ITCs) of up to 60% in its latest federal budget to spur the effort to slash GHGs. It comes as the first step following Trudeau’s announcement of the 2030 emissions reduction plan. His subsequent budget establishes a refundable investment tax credit for carbon capture, utilisation and storage (CCUS) beginning in 2022, but doesn’t provide specific legislation for implementing the credit in what some already see as another glaring policy omission. 

Nonetheless, to spur quicker adoption of CCS technologies, the CCUS credit is being offered on a sliding scale to offset the cost of purchasing or installing equipment incurred in a taxation year, provided it is used for an “eligible” use. This too, has only been broadly defined. For the 2022-30 the credit is 60% for eligible capture equipment used in a ‘direct air capture project’; 50% for other eligible capture equipment; and 37.5% for eligible transportation and storage. After 2031 those limits will be halved in an effort to spur investment now rather than later.

Further, the budget outlines four new capital cost allowance (CCA) classes in combination with the tax credit, including an 8% CCA rate for capture equipment, transportation (including pipelines and dedicated vehicles for transporting CO2) and storage facilities, including injection and storage equipment. The second will be a 20% CCA rate for equipment required for using CO2 in an "eligible use" – which also has only been broadly defined. 

Although the ITC was long sought after by industry financiers – including Max Van Wielengen, co-founder of Viewpoint Investment Partners – it’s the latter eligibility criteria that is sure to ruffle a few feathers. To wit, limiting emissions from gas-fired power projects are not considered eligible expenses under the programme. Ditto for the use of CO2 in enhanced oil recovery. 

A notable exception is dedicated geological sequestration, which only applies to those jurisdictions determined to have sufficient regulations for ensuring permanent CO2 storage. To date, this is limited to Alberta and Saskatchewan. A subsequent inclusion is storage in concrete – the process must have federal approval and demonstrate that at least 60% of the CO2 is mineralised into cement. It’s not yet clear how that would play out in other regions of the country but Ontario accounts for 50% of Canada’s cement production.

Rocks and Rewards

But for now – and despite the limitations – the two western prairie provinces of Alberta and Saskatchewan stand to be the biggest beneficiaries. Perhaps not coincidentally, they also happen to be home to almost 90% of the country’s oil and gas sector. 

Both have fairly extensive experience with CCS compared to other parts of North America, and indeed, the world. Alberta is home to Shell Canada’s Quest CCS pilot at its Scotford refinery near Edmonton, while Saskatchewan has hosted the Weyburn EOR project in the southern part of the province for well over a decade, which uses CO2 to increase crude production from its ageing oil fields. Saskatchewan is also home to the Boundary Dam in Estevan, the world's first coal-fired power station to use dedicated CCS technology to capture 90% of the CO2 it emits.

Broadly speaking, the geology of both provinces is very well known – depleted oil reservoirs make ideal candidates for CCS. The existing infrastructure to produce oil and gas is also suited for CO2 sequestration, which gives western Canada a huge head start on other regions of the country.

In late 2021, the Alberta government requested expressions of interest (EOI) from companies interested in developing and operating carbon sequestration hubs in the province. The idea is to create hubs that capture CO2 from clusters of industrial emission sources – for instance ‘Refinery Row’ in Edmonton – in tandem with other resource development. This spring it further took steps to licence so-called ‘pore space’ in geologic rock formations under long term leases.

But quantifying the reward is more difficult – as is determining whether it is actually a reward or punishment for missing previous emissions reduction targets in both the Kyoto and Paris Accords. 

This is because the cost of that historical non-compliance is starting to bite. On April 1 the federal government increased its tax on carbon 25% to C$50 (US$39.72)/mt, which is to rise incrementally to $170 by 2030. Apart from the price of gasoline at filling stations – the most visible manifestation of the tax – the impacts on all other sectors of the economy, from agriculture to supply chain logistics have yet to be determined. But they are widely believed in government and economist circles to be at least partly responsible for spiralling inflation and higher consumer prices.

This in turn is putting enormous fiscal and political pressure on oil producing provinces such as Alberta – as well as a strong financial incentive – to do something about it. According to the Canada Energy Regulator (CER), Alberta’s GHG output in 2019 was 275.8mn mt of carbon dioxide equivalent (CO2e), up by 60% since 1990 and 17% since 2005. 

The province’s per capita emissions are the second highest in Canada at 63.24 mt CO2e, or more than three times the national average of 19.4 mt/capita, with upstream oil and gas accounting for 51% of the total. And despite impressive reductions in emissions intensity, those numbers are only expected to climb well past 2030 and even 2050. In its latest report, Environment Canada expects upstream oil and gas emissions in its reference case to increase another 10% by 2030 even as emissions from electricity are halved.

That said, investments in any kind of emissions reduction including CCS are not economically feasible without some kind of a price on carbon. Ironically, higher carbon taxes only increase the business case for doing so, said Adam Chalkley, director of low carbon development at Canadian midstream company Enbridge. Speaking at the conference, Chalkley said the company pulled the plug on a proposed C$750mn carbon capture project at power utility TransAlta’s coal-fired Keephills plant in 2012 because “it just didn’t make sense”. 

So while carbon taxes and indeed, any kind of tax are widely reviled, they are also essential to implementing meaningful carbon emissions reductions in a mixed carrot and stick approach.

From bust to boom and back

By removing that financial hurdle ironically by imposing a bigger one the decks are cleared for what could be a boon for CCS investment and development. But what exactly does that entail? And will it be the dawn of a new Gold Rush, or a massive boom and bust?

According to Mark Demchuk, the national director of strategy and stakeholder relations for the International CCS Knowledge Centre, some 15-25mn mt/year of new CCS projects amounting to a minimum of C$20bn in new capital investment will be required to even come close to meeting a 45% reduction in emissions. 

Then there are “practical considerations” for the provision of materials like cement, steel and demand for labour. Given that virtually all new CCS plants will be built in Alberta and Saskatchewan which are already competing with the traditional upstream energy sector for skilled trades “are there going to be enough welders in ‘27, ‘28 and ‘29”?

The logistics are apart from any further regulatory requirements. New CCS projects will undergo the same scrutiny as any other industrial venture, and any impacts, negative or otherwise, will have to be measured, mitigated and legislated. Given the already short timeline, there will inevitably be a rush of project applications as the deadline nears. “2030 isn’t that far away when you start to think of a billion-dollar project,” Demchuk told the conference.

It’s a conundrum Albertans know all too well. The worries are reminiscent of the Fort McMurray oil sands boom when overly generous incentives created a massive rush that placed enormous financial and social demands on the local infrastructure, resulting in massive cost overruns and at the end of the day, diminished returns.

The purely practical limits are further overshadowed by the more esoteric considerations of what it’s all worth in strictly accounting terms. According to Enbridge’s Chalkley, it’s not enough to put a price on carbon – both federal and provincial governments have to come up with transparent policies to “preserve the value around carbon credits”. 

That implies the creation of market mechanisms to ensure “pricing certainty” in the form of futures and differential contracts that allow for long term investment decisions and planning just like any other commodity exchange. “It’s not enough to flood the market with credits… we need to preserve the value of credits being traded,” he added.

According to Justin Wheler, the executive director of technology and innovation with Emissions Reduction Alberta, there is a need to resolve economics and competitiveness with environmental considerations and emissions reductions “so we’re not just shipping emissions” in a manner that facilitates real and meaningful cuts to GHGs.

Despite all the uncertainties and outright doubts there is still an underlying optimism that Canada’s energy sector can overcome the nagging details that need to be resolved on the path to net zero, said Peter Schriber, vice president of market development for Xpansiv, which is developing precisely such certification programmes and a trading platform for ESG commodities, including emissions offsets and contracts. 

“We’ll probably get there eventually, but it’s going to be a bumpy road…it’s a process.”