In the end, it may be voters laying awake, staring at the ceiling, wondering how the oil industry’s bills will be paid
Business owners are asked all the time how they intend to repay a loan in a worst case scenario. The lender would be negligent to not ask the question. Why, then, are politicians not asking the same question of oil companies looking for public subsidies (think carbon capture and storage)?
I call this Mother’s Admonition: Hope for the best and plan for the worst, but under no circumstances should you plan for the best and ignore the worst.
Yet, this is precisely what Canada does. Over and over again when it comes to the oil and gas industry.
Let’s look at just one example, the Alberta oil sands.
Oil sands are the big kahunas of the Canadian industry. Alberta total oil production is 4 million barrels per day and 3.3 million barrels per day (83%) comes from the oil sands. That puts Alberta on par with Middle Eastern producers like Iran and Iraq. Hydrocarbons, led by the oil sands, are Canada’s leading export by a mile, usually twice that of automobiles and parts. Nationally, the sector directly employs 208,000 workers.
The oil sands’ Achilles Heel is greenhouse gas emissions. All by itself, it accounts for 12 per cent (84 megatonnes in 2022) of Canada’s total. Some recent projects with a better resource have emissions per barrel of around 40 kilograms of CO2 equivalent (kg per CO2e/b), which is in the ballpark of the US national crude oil average of 31 kgs. But plenty have much higher emissions, some as high as 160 kg per CO2e/b. The industry average is 68 kg per CO2e/b, one of the highest in the world.
Canadian Energy Regulator modeling shows that if oil demand peaks then declines, causing prices to fall, the cost of decarbonizing that emissions-intense bitumen rapidly leads to falling production beginning in the 2030s.
That’s the worst case scenario for the oil sands, but it’s entirely plausible, according to economic modeling from BP and many other organizations (the International Energy Agency, BloombergNEF, Rocky Mountain Institute, Oxford Institute for Energy Studies, to name a few).
If oil sands companies begin to fail, or if their revenue is barely enough to survive, who covers their losses? There are three types of losses taxpayers should worry about because the numbers are really, really big.
#1 – $130 billion of environmental liabilities
Who cleans up old assets after they no longer produce oil? For the oil sands, those liabilities could be well north of $130 billion. You read that correctly: billions. The reason for the huge number is that Alberta has never, ever taken security to pay for reclamation at the beginning of an asset’s life. Instead, it assumes the company will be around to pay for clean up. What happens when those companies can’t pay?
This is a deeply flawed system that Alberta refuses to change. The federal government doesn’t have the constitutional jurisdiction to change it, even if it was inclined to, which it is not.
#2 – $50 billion of decarbonization subsidies
The second type of loss is the subsidies the oil sands are demanding to decarbonize. The Pathways Alliance, the oil sands companies’ lobby group, puts the bill at around $75 billion, of which Cenovus executive Alex Pourbais has said that governments must pay $50 billion. Ottawa has already provided over $7 billion of investment tax incentives just for the oil sands and more is expected. The Alberta government announced its own support program.
The companies are asking for much more. They hint that current carbon capture plans may be delayed or canceled if more regulatory and financial “certainty” is not provided by governments.
#3- Stranded assets (who knows?)
This number is harder to pin down. Environmental liabilities are a stranded asset, so they aren’t included, but carbon capture and storage infrastructure is not.
Will taxpayers provide the subsidies to build capture equipment for oil sands projects, the pipeline feeders, the CO2 pipeline to a storage hub near Cold Lake, Alberta – then have to pay down the road to rip up all that material and reclaim the landscape?
Yes, in the event of a worst case scenario. There is no one else to do it. Unless, of course, governments decide not to clean up anything and Alberta is left with 9,000 square kilometres of heavily disturbed northern ecosystem filled with dozens of huge ponds filled with toxic tailings and several dozen giant industrial complexes, including all the associated infrastructure.
Bottom line: many hundreds of billions on the line
Add up all the potential costs and the worst case scenario for the oil sands is a massive expense. Certainly more than Alberta taxpayers could manage, which means all Canadians would be on the hook.
Are politicians, regulators, and industry considering that worst case scenario?
About six months ago, I emailed the offices of Natural Resources Minister Jonathan Wilkinson and Environment and Canadian Climate Change Minister Steven Guilbeault. I asked if the ministers had considered worst case scenario modeling when considering carbon capture and storage subsidies. A straightforward answer was not forthcoming.
During Alberta Premier Danielle Smith’s press conference at September’s World Petroleum Congress in Calgary, I asked her if she had a Plan B if her rosy view of the oil and gas future didn’t pan out. There is no Plan B.
The reasonable conclusion is that the Alberta and Canadian governments are committing taxpayers to unimaginable amounts of potential financial obligations and liability without properly assessing the risk of a worst case scenario.
And that’s just for the oil sands. There is still Alberta and Saskatchewan conventional oil and gas production, British Columbia gas production, and the East Coast industry to consider.
How do politicians sleep at night? CEOs presumably sleep like babies because they are happily transferring as much of their risk as possible to the Canadian public.
In the end, it may be voters laying awake, staring at the ceiling, wondering how the bills will be paid in the harsh light of day.
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