Alberta's oil production costs will rise to uncompetitive levels under Ottawa's MOU, study says

OTTAWA — Conditions in the federal-Alberta memorandum of understanding to approve a new oil pipeline will raise costs on the province’s oil production that make it uncompetitive with other exporting jurisdictions, a new study by economist Jack Mintz finds.

The higher industrial carbon tax requirement will also add $1 billion per year to the cost of producing electricity in Alberta by 2040.

The study, released this week by the Fraser Institute , finds that the new federal-provincial implementation agreement , which includes a requirement to raise Alberta’s industrial carbon tax and Ottawa-imposed carbon capture requirements, places a multibillion-dollar drag on the province’s ability to compete with major oil and gas producing jurisdictions in the U.S., especially Texas and New Mexico.

Mintz, the study’s author and an economist at the University of Calgary, said that the Trudeau Liberal government’s orthodoxy of taxing carbon had already hamstrung Alberta’s oil and gas industry without appreciably contributing to the global mitigation of climate change.

“The Trudeau government was narrowly focused on calculating the impact of emissions in the country, and didn’t take into account the impact we could be having elsewhere in the world,” with exports displacing higher-carbon sources, said Mintz.

Mintz said that things have improved under Prime Minister Mark Carney, but stressed that the numbers are still uncompetitive under Carney’s new MOU agreement with Alberta Premier Danielle Smith, which reduced the requirement to raise the carbon tax from $170 per tonne by 2035 to $140 per tonne by 2040. The current target industrial tax under Alberta’s Technology Innovation and Emissions Reduction Regulation carbon-credit trading system is $95 per tonne, although credits frequently trade on the market at a much lower price.

Mintz calculates that the revised industrial carbon tax requirement will add $3 per barrel onto the marginal cost of oilsands production in 2040. This adds up to a total of $3.8 billion in additional costs at current production rates. Costs per barrel rise even higher for conventional oil.

The report says investors generally make decisions on expectations of tight margins, and without the policies, Alberta would be relatively competitive with U.S. producers, but the five-to-15 per cent increase in costs will make Alberta an uncompetitive high-cost jurisdiction.

Mintz said that, left unchanged, the carbon tax will have the biggest impact on Alberta’s electric power industry, raising household electricity bills and slowing the development of AI data centres and other new industries.

The study doesn’t directly calculate the impact of the $20-billion Pathways carbon capture project but Mintz says it will almost certainly weaken Alberta’s market position even further.

“There’s no gain at all, from the producers’ point of view,” said Mintz. “Even if producers get (carbon capture) subsidies from the government and breaks on their carbon tax payments … there’ll still be a leftover cost,” said Mintz.

While the Pathways project — an elaborate scheme to finance carbon capture and storage infrastructure using a mixture of government subsidies and carbon credits — was initially proposed in 2021 by a group of oilsands companies, skepticism has steadily mounted about its viability.

Jon McKenzie, the CEO of Pathways partner Cenovus Energy, said at an energy conference this month that, absent a more producer-friendly tax and regulatory environment, the carbon capture project doesn’t “really make any sense.”

Mintz said that political imperative of building a new West Coast pipeline, amid heightened Ottawa-Alberta tensions, could give Carney a possible off-ramp from moving forward with Pathways.

“It’s one thing to build a pipeline and it’s another if you can fill it with oil,” said Mintz. “And I think the big risk, for both Alberta and the federal government, is having a pipeline approved and nobody willing to produce more oil.”

He added that the potential ecological and public health risks of carbon leaks could also dampen enthusiasm for the Pathways project, which aims to trap millions of tonnes of carbon dioxide in underground storage hubs.

Mintz, who was tapped earlier this month to chair an independent panel tabulating the potential costs of Alberta separation, said it’s hard to say how ditching Ottawa-imposed climate policies could cushion the economic blow of the province striking out on its own.

“Can this be one of the issues looked at? Obviously (it can). But it has to be put within a much bigger agenda of how you assess those costs,” said Mintz.

National Postrmohamed@postmedia.com

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