"Decarbonized" oil

Every time I hear this phrase it immediately makes equally ridiculous lines like “jumbo shrimp” and “working vacation” jump to mind.

SpongeBob SquarePants

As everyone has heard by now, the Prime Minister of Canada, Mark Carney, and the Premier of Alberta, Danielle Smith, have signed what they have described as a “pivotal energy agreement” wherein Alberta has agreed to:

• Increase their base carbon price to $140 per tonne by 2040 (an improvement over the prior requirements of $170 per tonne by 2030). Included within this is tighter TIER (Technology Innovation and Emissions Reduction Regulation - Alberta’s industrial carbon pricing and emissions trading system) benchmark rates and enforcement of a minimum carbon price for credits in 2030.

• In order to have a pipeline to the west coast, the Pathways CCUS (carbon capture, utilization, and storage) pipeline must be built and in operation, with a target date of no later than 2035.

• Any pipeline to the west coast will have significant indigenous co-ownership and economic benefits, and will have financing provided by the AIOC (Alberta Indigenous Opportunities Corporation).

• Alberta will focus on other “nation building” projects that include methane reduction (75% below 2014 levels by 2035), have a plan by January 1, 2027 for competitive nuclear energy in the province by 2050, and the construction of significant electricity transmission interties with British Columbia and Saskatchewan to support clean power markets.

Photo by THE CANADIAN PRESS / Jeff McIntosh.

If anyone doesn’t read this “grand bargain”, as it is being presented to the Canadian public, as somewhat one-sided, then I pray for you that you are not in charge of negotiations for whomever you work for. In my opinion, this has just further codified what has already been a significant overreach from the Federal Government in terms of what was a constitutionally protected right, namely the exploration, development, conservation and management of non-renewable resources. By first imposing a national carbon policy, the government was able to insert itself into the conversations regarding such things as the expansion of oil sands programs. It was no longer just a conversation within the province of how the development was to be handled, but now had to include the component of “how does this factor into the Canadian carbon outlook.” As such, the final say in a program switched from the province and now has a federal partner at the table.

Fast forward to today. For months now we have been hearing how we need to diversify our trade patterns, moving away from the United States and towards more “friendly” jurisdictions. When it comes to energy, and oil specifically, this has been the number one source of our trade imbalance with the United States, and is something I explored in a prior post titled Looking at the Canada - US Trade Flow Picture. Remove oil from the picture and Canada suddenly becomes a small net importer from the United States. However, as we also know from nature, liquids flow in the path of least resistance. Enter Bridger Pipeline, a proposed pipeline from Alberta to Wyoming with an initial capacity of 550,000 barrels per day, and it will lean extensively on the Keystone XL right of way, thus leading to it being referred to as “Keystone Light.” The Alberta portion of this pipeline would be handled by South Bow (spun out of TC Energy) and the United States portion would be handled by Bridger Pipeline. This has already received a Presidential permit for the pipeline, though additional environmental and regulatory approvals are required to proceed, not to mention the completion of an open season with producers to commit potential volumes to the system. So it seems that, far from diversifying our trade, the sole source for the massive trade imbalances that seem to be a burr in the saddle of a particular United States President, we are potentially doubling down on this bet. Now I for one am not against trade with the United States. They have been a good partner and they have adjusted their energy infrastructure (refining) to take the Canadian heavy oil, something that they are now dependent on going forward (although the “democratization” of Venezuela may have some longer term impacts on these trade balances, depending on how that situation “stabilizes”.)

As I review the Grand Bargain as it is posited (or the Grand Ransom as it is also being referred to by some) I wonder where this all goes. First, let’s clarify something when it comes to “decarbonized oil.” Decarbonizing a barrel has to be one of the dumbest phrases I have heard, especially when it doesn’t actually have anything to do with the barrel itself. We are the ONLY nation in the top 10 oil producers who has a self imposed carbon tax. Moreover, producers will pay to “decarbonize” their production stream (really this is just “decarbonizing” the production method, not the barrel itself), and to the extent that they do that versus a benchmark, they generate a “carbon credit”, which has a value that is to be enforced by government. They then will take that CO2 and inject it into a pipeline, on which they will pay tolls, and inject that CO2 into a reservoir underground. And somehow this is meant to cost a de minimis amount to producers? When you deploy tens of billions of capital, the cost isn’t going to be small, but the math behind it may make it appear as such. One way or another people will be paying for this, while the rest of the world rides on unfettered.

British Columbia continues to partake in own goals as a result of the implementation of DRIPA and the obvious implications for oil infrastructure being built in that province, and Canada puts up its own set of hurdles under the guise of increasing transparency, all the while the world starves for affordable oil from stable jurisdictions. There is a generational opportunity in front of us and yet we seem to find a way to get in our own way. Nowhere in the world is anyone clamoring for “decarbonized” oil, rather they are trying to find cheaper, reliable and predictable supply to provide to their citizens. Canada has to have a real conversation about what it wants to be when it grows up and how it wants to pay for it. All we have right now is political cosplay where various pundits advocate on behalf of various aspirational narratives while ignoring the fact that the economic stage is on fire and in desperate need of a plan.