ALBERTA’S REMAINING CCS PROJECTS MOVE ON IN WAKE OF PROJECT PIONEER’S FALL

Tamar Hallerman
GHG Monitor
05/25/12

Developers of the three remaining publicly-funded carbon capture and storage projects in Alberta say they are confident that their business cases are favorable enough to bring their projects online in the coming years. In interviews with GHG Monitor, officials from Shell Canada’s Quest, Enhance Energy’s Alberta Carbon Trunk Line and Swan Hills Synfuels’ self-titled CCS project all said they are certain that their respective projects will be able to overcome the economic problems TransAlta Corp. said ultimately killed its Project Pioneer late last month, despite facing similar external factors such as the lack of a federal price on carbon and a small regional market for high-purity CO2 for enhanced oil recovery operations. “We’re not at all worried about the same issues [that befell Pioneer],” Swan Hills Synfuels CEO Martin Lambert said in an interview. Likewise, Enhance Energy President Susan Cole said she is certain that the business case for her company’s pipeline infrastructure project is strong. “We have supportive economics to get this project off the ground,” she said. Shell Canada spokeswoman Adrienne Lamb said that even without an EOR component, Quest is “progressing well.”

All four large-scale projects received hundreds of millions of dollars worth of grants from Alberta’s $2 billion CCS fund, one of the world’s most robust commitments to the technology. The western Canadian province relies heavily on coal-fired generation and is home to some of the country’s largest point sources of CO2 and could stand to benefit greatly from CCS if it is commercialized. The province is also unique in that it is home to the lion’s share of Canada’s oil reserves, a large portion of which is considered mature and ideal for EOR operations.

So when TransAlta and project partners Capital Power and Enbridge announced last month that they were stopping plans for their $1.4 billion Project Pioneer—which was set to receive $436 million from the provincial government—it came as a surprise to many in the CCS industry. The announcement also raised questions from CCS experts about whether the other large-scale projects in the area could face similar fates, particularly given the lack of a CO2 transport infrastructure and the underdeveloped EOR market in the region. Project operators, however, argued that their business formulas are more salient than TransAlta’s because they are not reliant on a federal price on carbon or other legislative fixes and have instead hedged their bets on other factors such as proximity to oil fields and cheaper capture technologies. 

TransAlta Calls it Quits

TransAlta folded its plans for Project Pioneer largely due to two unfavorable economic factors, the company said. Primarily, Vice President for Policy and Sustainability Don Wharton said that the company was unable to secure suitable contracts for the 1 million tons of CO2 its post-combustion retrofit facility was going to capture annually. TransAlta had hoped to sell the high-purity CO2 via 10-year contracts to multiple EOR project operators at the Pembina oil field roughly 30 miles away. “We talked to a number of EOR operators, and within that context were unable to get a long-term contract signed by any of them,” Wharton said in an interview with GHG Monitor, adding that TransAlta was aiming for a $20 to $30 sale price per ton of CO2. “The price itself wasn’t the really the issue. The challenge we had was that we were unable to attain a firm off-take contract for that CO2 in terms of the volume. There simply wasn’t demand for that volume of CO2, and on that front we were without a revenue stream that we had counted on to make the economics of the project work,” he said.

Wharton said that project partners also chose to fold due to an “insufficient” price for emissions reductions, traditionally achieved via a high federal price on carbon. The consortium had incorporated the creation of a federal cap-and-trade scheme—and the subsequent financial value from emissions avoided due to CCS—into its project plans, a policy signal that was all but inevitable when Project Pioneer was created in 2009, according to Wharton. “When we were initially working on this, our business model was founded on the idea that the government of Canada would be putting in place exactly what they said they were going to do, which was a cap-and-trade system,” Wharton said, adding that the company factored in a $250 million revenue stream from the cap-and-trade scheme.

Other Projects Move Ahead

Despite TransAlta’s reasons for abandoning Project Pioneer, officials from the other three Albertan CCS projects told GHG Monitor that they are moving ahead with their respective projects as planned. They said that concerns over the EOR market in Canada, as well as the lack of a federal price on carbon, were not game-changers moving forward.

Lambert said his company’s $1.5 billion Swan Hills project is economically viable by design. He said his company’s selection of an in-situ coal gasification technology with CCS on a greenfield site is cheaper to install compared to TransAlta’s post-combustion capture system and that transportation costs will be significantly lower because of the project’s close proximity to a number of mature oil fields that are prime candidates for EOR. “We picked our address so that we could be right next to the customers,” he said. The project, which is set to receive $290 million from the provincial government, also does not bet on a federal price on carbon when mapping out its business case, according to Lambert. “We’ve never built any increase in the price of carbon into our economic models. We’ve always thought that if that came it would be a windfall, but we’ve assumed that it would not change from existing situations. Our economics were all built around existing legislation,” he said. Lambert added that while setting the terms of EOR contracts with oil field operators is a “long ways down,” his company is finding “significant” interest in the area.

Meanwhile, Shell Canada’s Quest project is relying heavily on government incentives to make its overall economics work. It is the only project in Alberta’s portfolio that is not currently pursuing EOR as an initial revenue stream. Instead, the project is leaning heavily on federal and provincial grants—$865 million in total—to pursue the geologic storage of CO2 in a saline aquifer. The $1.35 billion post-combustion capture retrofit project is also relying on a deal with the provincial government that awards the project twice the carbon offset credits via its province-wide cap-and-trade scheme. The rest of the project costs will likely be picked up by the project partners, which include the oil giants Chevron and Marathon, according to Shell spokeswoman Adrienne Lamb. However, project partners have yet to make a final economic decision on the project, which could happen later this year if the project receives provincial regulatory approval.

EOR Industry Remains Underdeveloped

While project developers appear to be walking tall in public, the EOR market in Alberta—the best bet for early-mover CCS projects looking to make some sort of revenue stream in the region—remains stubbornly underdeveloped, according to CCS experts. Malcolm Wilson, chief executive officer at the Regina-based Petroleum Technology Research Center, said that the market for captured CO2 in Alberta has been in a “state of transition” for several years and, until further developed, could ultimately hurt projects banking on EOR for revenue. “What we’re perhaps seeing is the combination of effects of an undeveloped market and changes in the structure of the oil business in Alberta, which has undoubtedly created some uncertainties,” Wilson said in an interview. The oil market in the region has been in a state of flux for the last several years ever since the provincial government changed the tax structure governing the industry in the late 1990s, he said.

Also at play is the fact that the market for captured CO2 is still relatively small in Alberta due to the lack of available infrastructure, according to Eric Beynon, director of the Calgary-based Integrated CO2 Network (ICO2N), a consortium of coal and oil companies that advocates for CCS development in the region and counts Shell and TransAlta as members. “EOR in Canada is still a relatively new industry,” Beynon said in an interview. “It’s not brand new, but you don’t have as many players with as much experience as you do in the U.S.” Wilson said that much of the existing market in Alberta is relatively saturated by CO2 from fertilizer plants, seemingly boxing out CO2 produced from more expensive CCS projects. “If the demand were there and the supply were there, the pipelines would be built,” he said. “But part of the lag we see is because of the price of CO2, part of it is the oil industry’s expectations for internal rates of return on these kinds of projects, as well as whether they have the technical capacity to initiate these projects.”

Building a CO2 Pipeline Infrastructure

Despite the infrastructure holes, several CCS stakeholders in the region said they see a notable bright spot in the fourth project being funded by the Alberta government, Enhance Energy’s Alberta Carbon Trunk Line, which aims to develop a CO2 pipeline infrastructure in the province. Earmarked $495 million in funding from the Alberta government, the project seeks to build a pipeline connecting several CO2 capture operations in Alberta’s ‘Industrial Heartland’ to mature oil fields 150 miles south. At full capacity, the Trunk Line could carry up to 14.6 million tons of CO2 annually, according to Enhance President Susan Cole. “We’re hungry for CO2 supply and are talking and negotiating with all the players in Alberta,” she said, adding that the first EOR contracts are already in place and that the company recently started the procurement process.

Wilson said Enhance’s project could help kick-start the EOR industry, and subsequently CCS operations, in Alberta. “If Enhance is successful, then I think we’re going to start to see the building of confidence in Alberta and that in itself will generate more demand for CO2 and willingness to look at prices that are acceptable to both the buyer and the seller,” he said. Cole agreed. “Having the infrastructure in place will allow [developers] to look more favorably in terms of proceeding with CO2 EOR projects in the future,” she said. She added: “Once we have this initial structure in place, it will just grow by leaps and bounds. It will be very economic to add on to the pipeline and grow the pipeline into more systems than just one line. I think you’ll see a completely different picture in Alberta 10 years from now than today. We want to revitalize central Alberta in terms of light oil production.”

Need For Government Investment

Many spoke of the necessity of government investment to get early-mover projects off the ground the region. “Obviously the TransAlta decision demonstrated the challenge that the initial early CCS projects do have around the economics, which is why the government funding and support is so important to get these early projects implemented,” Lamb said. Beynon underscored the need for government investment early on, as well as a strong regulatory framework to commercialize CCS. “I think it’s a role for government to work with industry, especially on the first projects, to help get them off the ground,” he said. “There also need to be companies that feel that the timing is right to make the strategic investments in building CCS, and that combines with support from government.”

Overall, several CCS stakeholders in the region said TransAlta’s experience in the region will likely not affect the other demonstration projects at the end of the day. “We have our experience at TransAlta and it may well be possible for other projects to move forward,” Wharton said. Beynon agreed. “Each project is individual and TransAlta’s decision is their decision. Apart from the public relations side of things, it doesn’t affect the overall economics or viability of any of the other projects.”