For a decade Canada's expanding oil sands production has been on a collision course with the country's commitment to reduce greenhouse gas emissions under the Kyoto Protocol. The Canadian government is now addressing this issue with tough new regulations that would require oil sands projects starting up after 2011 to capture and sequester their emissions. The rule would also apply to other new industrial sources of emissions, including coal-fired power plants. In combination with the new royalty rates that went into effect last year, this restriction alters the economics of future oil sands extraction and has implications for all other carbon-intensive industry in North America.
Because of the extra energy used in oil sands production, including the heat required to liberate the hydrocarbons from the sands in which they are bound and intensive processing of the resulting heavy bitumen into synthetic crude oil, these projects emit much higher levels of greenhouse gases than conventional oil projects with comparable output--at least three times more, according to some studies. Under the Kyoto Protocol, Canada committed to reducing its emissions to 6% below 1990 levels by 2012. Instead, and partly due to the dramatic growth of the oil sands industry in Alberta, Canadian emissions had increased by 25% over 1990's by the end of 2005. Absent tough new measures, the country would likely also miss its new target of a 20% reduction by 2020 imposed last year.
At an estimated average CO2 intensity of 250 lb. per barrel of oil sands production, carbon sequestration and storage (CCS) could add up to $4.50/bbl to syncrude costs, assuming a cost for CCS of $40/metric ton CO2. Although $4.50/bbl might not seem extraordinary in a world of $100+ oil, it's a significant increment on top of production costs that were already near the top of the range for the oil supplied to market. Depending on how one views the role of oil sands in the global market, the long-term consequence could be constrained oil sands production, higher oil prices, or both.
I don't think the consequences end there. A new US administration takes office next January, and it seems likely to bring a more aggressive approach to reducing our emissions. It wouldn't be surprising for a new EPA Administrator to see this Canadian rule as something that could be implemented quickly here, while Congress wrestled with the much more complex challenge of cap & trade legislation. Industry might even welcome clear guidelines about carbon sequestration as a way to reduce their uncertainty, and to enable a new generation of coal plants--incorporating CCS from day one--to compete with natural gas and other generation alternatives. In this context, Canada's regulation of emissions from oil sands isn't just a signpost for the oil market, but for the entire North American energy and industrial sector.