Canada's Oil Sands Industry Weighs New Technology

OTTAWA (Dow Jones), Jan. 8, 2010

Greenhouse-gas emissions from Canada's oil sands industry are growing even faster than the flow of crude to the U.S., but experts say the only technology able to cut emissions directly is too costly.

Canada's government wants to keep a step ahead of regulations that could penalize high emission rates by promoting and funding carbon capture and storage technology as a way to expand the oil sands while also cutting emissions. But experts say oil sands CCS projects are far too expensive, and money would be better spent cutting emissions from other sectors of Canada's economy, such as from coal-fired electric generation and through more efficient transportation.

CCS technology traps carbon emissions, which are believed to cause global warming, before they enter the atmosphere, and pumps them underground for long-term storage. It's seen as the only significant technology able to cut emissions from oil sands production, which is growing rapidly. Oil sands production is expected to grow by two-thirds to 2 million barrels per day by 2020 while its emissions are expected to more than double over the same period.

However, estimates by the energy industry and independent researchers have concluded that carbon capture in oil sands operations is, at least for the time being, too expensive for the industry to adopt without government funding. Capturing CO2 from the natural-gas-fired boilers used in underground oil sands production costs between C$225 and C$250 (US $216-US $240) per metric ton, according to an independent report commissioned by the provincial government of Alberta. Capturing emissions from technology used to upgrade oil sands into lighter products costs between C$125 and C$225 per metric ton, according to the report.

Simon Dyer, an engineer and oil sands expert for the Pembina Institute, a nonprofit Canadian energy think tank, estimated that roughly one-tenth of a metric ton of carbon dioxide is emitted per barrel of oil produced from the oil sands, meaning the cost of oil sands CCS could add more than $20 to the cost of a barrel of oil, depending upon the project.

Those high costs are the main reason why there are only a few carbon capture projects under construction so far.

"At the same time that CCS is being oversold as a solution for oil sands, we haven't seen any significant projects completed yet," Dyer said. "The rhetoric isn't actually living up to what's happening on the ground."

The few carbon capture and storage projects under construction in Canada now depend heavily on government funding. The Alberta and federal governments awarded more than C$2 billion in funds for several carbon capture projects in the province, including for a coal-fired power plant, an enhanced oil recovery pipeline that would partly reduce the cost of CCS by using CO2 to repressurize declining oil fields and an oil sands upgrader owned by Royal Dutch Shell PLC.

The Canadian government says these initial projects are important first steps to encourage the adoption of the new technology. It reasons that the cost of carbon capture technology will come down over time and public money spent on CCS will be at least partially recouped by ensuring the continued growth of the oil sands industry and extra revenue from enhanced oil recovery.

The Pembina Institute and other critics of the government's plans think the government should instead tax emissions from the oil sands. Pembina says a carbon tax near $100 a metric ton is needed to coax producers to find ways to cut back their emissions, including paying for new technology like CCS.

Satya Das, founder of the Edmonton energy consultancy Cambridge Strategies Inc., also favors a form of carbon tax, which he says would help guide government and industry toward a combination of cheaper, more innovative approaches than funding expensive carbon capture projects for the oil sands. While oil sands is in the spotlight, it currently makes up only a small amount of Canada's emissions, Das said, compared with emissions from power plants and motor vehicles. Environment Canada reported that transportation and electricity and heat generation made up 44% of Canada's emissions in 2007, while industry sources estimate oil sands emissions make up around 5% of Canada's total.

Focusing on cutting back on transportation and utilities emissions would be cheaper and more than offset more emissions from oil sands, Das said. Using CCS on the smokestack of a power plant is generally less expensive than CCS in oil sands -- Alberta's CCS report estimates its costs between C$60 and C$150 per metric ton -- and then the low-emission electricity generated could be used to power hybrid vehicles, Das said.

"What I really despair at is hearing someone fixated on just one pet solution," Das said. "It's a complex problem; there is not just one solution."

Copyright (c) 2010 Dow Jones & Company, Inc.