Lennie Kaplan was a senior manager in the fiscal and economic policy division of the Ministry of Treasury Board and Finance, where he worked on cross-ministry initiatives evaluating the fiscal and economic impacts of federal and provincial energy and climate change policies.New analysis drawn from the Rystad Energy UCube comprehensive data set reveals that Alberta’s oil sands sector net present value (NPV) (estimated currently at nearly USD $470 billion) could be wiped out under a net zero emissions (NZE) agenda. Under current oil demand levels, which represents Alberta government and energy industry expectations, the Alberta oil sands sector NPV is estimated at USD $468.3 billion. However, at the NZE Scenario oil demand levels, the Alberta oil sands sector NPV becomes negative, at an estimated USD $46.3 billion. This is consistent with previous analysis on the impacts of NZE on the oil sands sector.NPV analysis is a critical tool used for investment planning purposes by the Alberta energy industry to assess the long-term profitability of oil sands projects. Quantifying the impact of NZE on Alberta’s oil sands sector is crucial for business planning. Oil sands companies must be able to identify, assess, and manage the long-term risks presented by public policies, such as NZE.Alberta Premier Danielle Smith has been pitching her NZE agenda since July 2022, reaffirmed it in Alberta’s net zero climate change plan, and enthusiastically signed on to it, along with the Mark Carney federal Liberals, as one of the headline items of the Canada-Alberta MOU. Yet, the Alberta government refuses to prepare and release to Albertans a comprehensive economic and financial risk assessment of the impact of NZE. However, we can be certain that the oil sands industry is doing its own NZE due diligence before making any long-term decisions, such as agreeing to major increases in Alberta carbon taxes, investing in the Pathways CCS project, and the West Coast BC pipeline project. So, what is the Alberta government hiding from Albertans?.Net present value (NPV) is defined as “the cumulative value of all future cash flows (incomes, capital expenditures, operating expenditures, and tax payments) discounted to the present. It represents the value of the oil sands sector and is defined in relation to a particular discount rate. The discount rate is the rate at which the present value of future cash flows decreases for each year into the future at which they will occur. It reflects the fact that a dollar today is worth more than a dollar in the future, because it can be invested in the meantime and generate a return. The discount rate can thus be thought of as reflecting the cost of capital or the opportunity cost of not investing elsewhere.” In this analysis, we use an NPV with a 10% discount rate (i.e. NPV10).Our risk assessment of the Alberta oil sands sector is based on a comparison of two scenarios, a Current Policies Scenario (CPS) and a Net Zero Emissions (NZE) Scenario. For the oil sands sector, the difference between the scenarios leads to an estimate of value at risk.The Current Policies Scenario (CPS) considers a snapshot of current policies and regulations and offers a cautious perspective on the speed at which new energy technologies can be deployed and integrated into the energy system. Oil demand rises to 113 million barrels per day (mbpd) by 2050. The NZE Scenario (NZE) sees efforts to meet the Paris Agreement goal of limiting global warming to below 2 degrees and then pursuing efforts to limit global warming to 1.5 degrees by 2050 through net zero greenhouse gas (GHG) emissions. Oil demand peaks at 101.6 mbpd in 2025 and then falls to 21.7 mbpd by 2050. .Under the CPS oil demand levels, which appears to represent Alberta government and energy industry expectations, Alberta oil sands sector NPV10 is estimated at USD $468.3 billion. However, at NZE Scenario oil demand levels, Alberta oil sands sector NPV10 is negative USD $46.3 billion. The NPV analysis illustrates that there is a risk of stranded assets in the oil sands sector under NZE. Stranded assets are defined as “capital investments that fail to achieve a commercial return on investment due to changes in government policies or market demand compared to what was expected when the investment was made. Once capital has been sunk, it is in the operator’s economic interest to keep producing, as long as each additional barrel can be extracted at a lower marginal operating cost than the price it can be sold for. Therefore, in most cases of stranded assets, production continues while failing to make a commercial return on the capital invested.”The significant loss of Alberta oil sands NPV under NZE will have ripple effects on oil sands projects, oil sands companies, shareholders, and the entire Alberta economy. This is what happens when governments, such as the Alberta government, make poor public policy decisions based on political talking points, rather than relying on robust risk assessment. The Alberta government has been examining the economic and fiscal impacts of NZE for quite some time. In fact, a recent request for information revealed nearly 30,000 pages in responsive records. So, the Alberta government must know the negative consequences but continues to proceed with its NZE agenda, in cooperation with the federal Liberals. Why?Faced with even more evidence of the negative impacts of NZE on the oil sands and the Alberta economy, I believe the Alberta government should consult with Albertans and finally scrap its MOU commitment to NZE.Lennie Kaplan was a senior manager in the fiscal and economic policy division of the Ministry of Treasury Board and Finance, where he worked on cross-ministry initiatives evaluating the fiscal and economic impacts of federal and provincial energy and climate change policies.
