Alberta sits on some of the largest oil reserves in the world. Alberta’s geology also gives the province an advantage in carbon capture and storage. CCS technology is now key to Alberta’s hopes of aligning oil sands operations with Canada’s current emissions reduction targets. But Alberta needs better Federal tax measures or the U.S will attract CCS capital away.
The U.S. Inflation Reduction Act of 2022 (IRA) provides critical updates to the 45Q tax credit, which incentivizes the use of carbon capture and storage – a climate solution that the Intergovernmental Panel on Climate Change (IPCC) and International Energy Agency (IEA) have found is likely to play a vital role in efforts to address climate change. Some say it has made the U.S. the most attractive global jurisdiction for CCS/CCUS investment.
The Canadian Federal government has a carbon tax credit for CCS equipment like the U.S. but the U.S. 45Q tax credit allows for carbon to be pumped into oil and gas reservoirs, not just saline reserves. The Trudeau government, not wanting to bolster the oil and gas industry, excluded projects pumping carbon into oil and gas reservoirs for EOR from its CCS tax credit.
Craig Golinowski, President and Managing Partner, of Carbon Infrastructure Partners Corp. recently testified before the House of Commons environment committee and summarized the key challenges of this approach. Golinowski made the point that the combined Canadian investment tax credit and carbon price framework need to be competitive with the U.S. 45Q tax credit.
He argued that capital can choose where it will go and it will go to the United States as the recently passed Inflation Reduction Act upgrades the 45Q with a significant increase in value. For geologic storage, the 45Q tax credit will be $85 U.S. per tonne and $60 per tonne for enhanced oil recovery, which the Canadian investment tax credit specifically excludes.
The IRA also removes the complex tax structure of tax equity finance that was required to monetize the tax credit. It is replaced with a direct pay mechanism. For the first five years, it’s a refundable tax credit – paid in cash. For the balance of 12 years, the transferability of those tax credits will be enhanced.
“With the federal government establishing 2030 emissions reductions targets of 42% for Canadian oil and gas and 35% for oil sands, we need to start to take action to reduce our Scope 1 emissions now,” says Caralyn Bennett, Executive Vice President, Chief Strategy Officer at GLJ Energy Advisors.
“CCUS is an absolutely critical near-to-medium term technology for emissions reduction, especially for oil sands and the power generation sector. There is a mountain of work to be done in order to appropriately appraise and de-risk storage opportunities both technically and commercially. The timelines are challenging when it comes to the sheer amount of technical work to be completed, approval processes and our ability to resource execution dollars and people.”
However, Craig Golinowski warns that CCS projects in Canada can’t be exposed to uncertainty of carbon price. Since CCS projects can be billion-dollar projects requiring large-scale investment, they will suffer from the market being unable to underwrite political risk because that carbon price can be changed or there could be a change in government impacting carbon pricing.
He suggested creating Canadian government contracts where a developer enters into a contract with the government of Canada. If the carbon price is changed by a subsequent government, the contract would state that any differences would be made up for, if the carbon price ended up being changed to a lower number. The benefit would be the certainty on a floor price would be visible and contractual. He advised that without certainty in the form of a contract, the exposure to political risk would be prohibitive.
Mark Taylor of Taylor Energy Advisors, has a slightly different take on the level of government support needed and whether it needs to be equal between Canada and the US in order to see Canadian CCS projects flourish. With 30 years of experience in the oil and gas industry and previous VP experience at the Alberta Energy Regulator (AER), he has strong insights into the timelines for government support and regulatory processes.
His list of fundamentals for a CCS FID decision includes the answers to questions of who the producers of CO2 are, what volumes of CO2 will they want to sequester, what price are they willing to pay for parties to sequester their CO2, and what are the timelines and possible risks associated with achieving regulatory approval for those projects?
“Alberta has put a structure in place to start to address the last question about regulatory risk but a new CCS project will still have to deal with the AER and two Government departments. So certainty of schedule and outcome of the regulatory process is a risk,” according to Taylor.
“Most large producers of CO2 in Alberta have extensive knowledge of the reservoirs that make Alberta’s CCS potential world-class. This may mean that the large producers of CO2 will choose to build their own CCS projects rather than paying a third party to sequester their CO2. Combining the source of CO2 with the right reservoir/CCS operator and the right stakeholder buy-in is a jigsaw puzzle on its own. Maximizing government financial support to ensure economic feasibility is just another piece of this puzzle.”
In the meantime, as discussions continue, Alberta has selected nineteen more proposals, increasing the number of new CCS proposals to twenty-five last month, inviting companies to work with Alberta Energy for evaluation of the suitability of their pore space and eventually apply for sequestration agreements.
Maureen McCall is an energy professional who writes on issues affecting the energy industry.