Alberta climate plan makes for winners and losers in the oilsands

It should come as no surprisethere is some dissensionin the ranks of theenergy sectorwhen it comes to Alberta's new plan to fight climate change.

On the afternoon the plan was introduced, the industry seemed unified in its reaction. Four of the largest oilsands producers were represented on that stage, includingoilpatch paragon Murray Edwards, founder of Canadian Natural Resources.

Those four companies were involved in consultations with environmental groups and politicians for around a year, even before the NDP election in May.

A rift in the patch

Butas the rest of the sectorabsorbed the details of the report, a few cracks appeared.

Cenovusis going to make money from this,Nexenis not.Trevor Tombe, University of Calgary

Imperial Oil, the biggest oilsands player not represented on the stage, said that it was reserving judgment on theplan until it had more details. The Canadian Association of Petroleum Producers, which typically talks for industry,is also uncertain.

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"Before we support something, we want to see the details," said Tim McMillan, the chief executive of CAPP, in an interview with CBC News.

"The details on something like this matter a lot.It was largely an aspirational statement that was put out and I think that's good, but before CAPP will fully support anything, we want to know exactly how it will work for Alberta."

That is notable. Four energy companies that representmore than half of Alberta's oilsands production stand behind the policy, but the group that represents them isn't sure.

Let's look at why.

Although the energy industrymay sometimes seem topossess ahive mind, it is made up of hundreds of companies with different technologies, different oil reservoirs, different financesand different agendas.

By design, Alberta's climate change policy does notcreate a level playing field. Itrewards companies that are the most efficient when it comes to greenhouse-gas emissions per barrel of oil and penalizesthose that are less efficient. As a result, there will be clear winners and losers, in the oilsands and outsideof them as well.

Tipping the scales with subsidies

Rob Mark, an energy analyst at 3Macs,sees it as Alberta trying to tip the scales.

"What I see from this policy, as we've read it, is that Alberta isgoing push capitaltowards efficiency," said Mark. "Whether it'sa company, a reservoir or a technology. Weare going to tip the scales so that capital flows awayfrom the least efficient reservoirs, companies, technologies."

Within the oilsands there's a big range in terms of the greenhouse gases emittedper barrel of oil, depending on the project.

Within the climate change report released last month, Alberta promised to protect the competitiveness of the oilsands for a period of time The report made the argument that if energy investment moves elsewhere, the greenhouse-gas emissions still happen, but at the expense of Alberta's prosperity.

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To that end, there will be a subsidy paid back to oilsands producers to soften the blow for the first number of years. In the report, it's called an output allocation, but Trevor Tombe, the economist at the University of Calgarywho first pointedit out, says that you should call a spade a spade and describe it as a subsidy.

Tombe estimates (there are no details yet for the subsidy)that the average return to oilsands operators will be $1.50 per barrel, which will mean the most efficient operators, such as Cenovus and Devon, will pay little to nocarbon tax inthe early years and may even earn credits that they can sell.

At the other end of the scale, Shell in Peace River and Nexen at Long Lake will pay quite a bit more, as much as $5a barrel inthe case of Nexen.

"Cenovusis going to make money from this," saidTombe. "Nexenis not."

To be fair, this is not a matter of intentional inefficiency. Each oil reservoir is different, some bitumen is simply harder to get at. But this policy will direct investment away from carbon-intensive oilsands plays, which is for the best, from a climate change perspective, but a bitter pill for a company that has already committed to a project.

"If you're Nexen, it's an existential issue," said Mark. "You've made your choice and committed your capital based on an old set of rules."

How much can the oilsands grow?

A key part of the climate change plan is a hard cap of 100 megatonnesa year in total emissions from the oilsands. Right now, the oilsands emits 70 megatonnesa year, while producing 2.3 million barrels a day.That gives room for around 40 per cent growth, a number that seems hefty to environmentalists, but tight to producers.

A rough calculation indicates there's only room for another million barrels a day of growth, which even under the current cash-poor position of the oil patch will leave assets undeveloped, or stranded.

But again, the devil is in the details. Upgrading, the process in which bitumen is converted to oil, seems exempt, according to Tombe, which allows another 20 megatonnesa year of growth, effectively allowing production to double from here, which puts it in line with CAPP's growth forecast until 2030.

Even that assumes that there won't be innovation in the oilsands over the period, but there's no question that there will be, after all cash is a pretty big motivator in the corporate world, and this tax, which will grow over the years, is designed to push companies to produce as much as they want as long as they can keep a handle on their emissions.