KAPLAN: The Pathways CCS Project illusion — is net zero policy quietly killing Alberta’s oil sands future?

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.The April 1 deadline for a tri-lateral agreement between the Carney Liberal government, the Smith government, and the Pathways Carbon Capture and Storage (CCS) project partners has come and gone, and it does not appear there has been any meaningful progress made on advancing this project to final investment decision (FID).Based on some new research findings, I believe that the spectre of the Carney-Smith net zero agenda could be the major factor in keeping the Pathways CCS project in relative limbo.New analysis drawn from the Rystad Energy UCube comprehensive data set reveals that the net present value (NPV) of oil sands projects owned by the Pathways partner companies (i.e. Canadian Natural Resources Limited, Cenovus Energy, ConocoPhillips, Imperial Oil, and Suncor Energy) (estimated currently at nearly USD $415 billion) could be effectively wiped out under a net zero emissions (NZE) agenda.Under current oil demand levels, which represent Alberta government and energy industry expectations, the NPV of oil sands projects owned by the Pathways partner companies is estimated at USD $414.8 billion. However, at NZE Scenario oil demand levels, the NPV of oil sands projects owned by the Pathways partner companies becomes negative, at an estimated shortfall of $42.5 USD billion..Our risk assessment of the oil sands sector NPV 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 NPV 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.NPV analysis is a critical tool used for investment planning purposes by oil sands companies 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 Carney-Smith NZE..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). If the NPV of an oil sands project is negative, it means that the discounted present value of all future cash flows related to that project will be negative, and therefore unattractive.The NPV analysis here 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.”While the Carney federal Liberals and Alberta Premier Danielle Smith are enthusiastic and unabashed supporters of NZE, the Pathways partner companies are actually doing their extensive NZE due diligence before making any long-term decisions, such as agreeing to major increases in Alberta carbon taxes and investing in the Pathways CCS project. The Pathways partner companies are focusing on the “long game,” not short-term political optics like the federal and Alberta governments. Why would the Pathway partner companies accept a deal which could leave them with a risk of impaired or stranded assets down the road?In light of the negative impact of Carney-Smith NZE on NPV in the oil sands sector, I surmise that the federal Liberal government and the Smith government are going to have to put a lot more public money on the table before the Pathways CCS project proceeds. But, in my opinion, scrapping the Alberta NZE mandate, before it is too late, seems to be a much better policy solution for Albertans.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.

KAPLAN: The Pathways CCS Project illusion — is net zero policy quietly killing Alberta’s oil sands future?

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