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Canada’s stranded barrels

Without major technology breakthroughs, carbon restrictions will mean a smaller future for the oil sands

After years of being tarred as an environmental laggard Alberta will do something no other major oil-producer has done: cap carbon emissions from its major asset. From 2017, the oil sands will only be allowed to emit 100 megatonnes a year.

The policy is meant to prove that the province is finally getting serious about addressing climate change. Oil sands are the largest and fastest-growing source of green-house gas (GHG) emissions in Canada.

Part of the pitch, to the industry at least, was that the emission restrictions would allow for continued output expansion by softening opposition from oil sands critics and helping to win approvals for new pipelines to both coasts and the US.

The policy gained broad support from the country's largest oil producers. But hard realities are setting in. No one is quite sure how these targets can be achieved while still pumping ever-increasing amounts of crude without either shutting in barrels or magicking up a quantum leap in technology.

This government is banking on the latter, forcing oil production to become more efficient. Oil sands producers have been touting per-barrel emissions-intensity reductions for years, though fast-growing output means absolute volumes of carbon emissions continue to rise.

Oil sands emissions in 2015 were estimated at 62mt, about a third of Canada's overall GHGs. At present rates of expansion, oil sands emissions would hit the 100mt hard cap around 2027, just a little more than a decade away. Oil production would be allowed to nearly double by then.

What happens after that is anybody's guess. There are doubters and not everyone is on board-Husky Energy, Nexen-Cnooc and Shell are conspicuously silent on the issue.

Steeping declines

A study by the Fraser Institute, a Vancouver-based right-wing think tank, reckons that oil sands output would effectively have to flatline at 3.8m barrels a day, up from roughly 2.7m b/d at present, but well short of the 5m b/d most expect.

According to the study's authors, cumulative production losses could potentially leave 2bn barrels stranded in the ground, with a combined value of C$254.75bn ($192bn) at today's prices. They agree that the policy would abate some 250mt of GHGs over 25 years, or 70mt more than Canada emits in a year.

After factoring in economic losses, those emissions reductions would come at a cost of C$1,035 per tonne, Fraser argues. By contrast, the carbon tax that comes into effect on 1 January, 2017 sets a price for carbon at C$30 per tonne, up from C$15 previously.

The Pembina Institute, an Alberta-based environmental group, didn't dispute the numbers. But it countered by suggesting the emissions caps would force producers to high-grade future expansion and proceed with only the most cost-effective projects, effectively ending the free-for-all boom that has characterised oil sands development for 40 years.

Aiming high

Another thing to keep in mind is that Fraser's numbers don't assume any advances in per-barrel emissions intensity, which is unlikely. They're based on production forecasts from the National Energy Board, Canada's regulator, which could vary significantly by 2040. However, Fraser complains the policy will have a "miniscule" impact on overall emissions output at considerable economic cost.

Fraser argues the only way to meet the targets would be to leave oil in the ground. And, in fact, oil producers themselves have proposed stranding barrels as a means of skirting the problem.

Steve Williams, chief executive of Canada's largest oil sands producer, Suncor, suggested doing just that. The company produces about 0.5m b/d of oil sands and sits on another 50bn barrels of undeveloped reserves. It is proposing abandoning its marginal barrels to focus on the most profitable deposits.

But that flies in the face of a decades-old strategy to maximise recovery. Because the government leases the land -and owns it outright-it has sought to wring every drop from every acre. It's part of a conservation ethic that dates back to the 1930s when oil companies engaged in wasteful production practices that damaged conventional oil reservoirs by, for example, flaring gas caps that resulted in billions of barrels being left unrecoverable.

It's also a thorny political dilemma, given that the government gains a third of its revenues from oil production and has subsidised the oil industry for decades. Who wants to pay oil companies to not produce oil? The estimated losses to the public accounts, by Fraser's numbers, are C$150bn.

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