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Canada’s Oil Crisis Is Far From Over

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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Alberta's Aggressive Renewable Energy Push

Industry

One Canadian province has set its sights on generating almost a third of its electricity from renewable sources by 2030. This will take some US$7.77 billion (C$10 billion) in investments by that year to add 5 GW of renewable capacity, creating more than 7,000 jobs.

The province is Alberta—the center of Canada’s oil industry.

Alberta has been aggressively pursuing renewable energy, switching power plants from coal to gas, and last December, organizing its first renewable power bidding round, which ended with commitments from three energy companies to develop four wind power projects that will add a combined 600 MW to the province’s renewable capacity.

Now, the government is preparing another two bidding rounds, to take place later this year, and it is raising the local carbon tax to fight emissions.

As of January 1 this year, Alberta’s carbon tax has jumped to US$23.30 (C$30) per metric ton. That’s a 50-percent increase although it’s still lower than the carbon tax that will enter into force in neighbor British Columbia from April 1, at US$27 (C$35) per ton.

An urge to go green is not the only reason for the steep tax increase, however. It is expected to help the government’s efforts to balance its books.

In the current fiscal year, Alberta’s Finance Ministry has projected a deficit of US$6.8 billion (C$8.8 billion). This is a decline on last year’s figure and the deficit should continue to decline over the next four years until the province returns to a surplus, albeit moderate, in fiscal 2023-24. The carbon tax will contribute to the deficit shrinkage but it won’t be even close to enough for Alberta to swing into the black. Related: Will Lithium-Air Batteries Ever Become Viable?

For that, it needs two oil pipeline projects.

The expansion of Kinder Morgan’s Trans Mountain pipeline and the replacement of Enbridge’s Line 3 are crucial for Alberta’s budget. Right now, heavy crude producers in oil sands country are losing money because there is not enough pipeline capacity to get the crude to markets.

To add insult to injury, there is now a shortage of oil train capacity, as well.

As a result, Canadian crude’s discount to WTI has deepened significantly and producers are likely to start curbing production. Cenovus already has, and more will probably follow if the situation doesn’t change fast.

This dual focus on crude oil and renewables is certainly fascinating. According to Alberta’s environment minister Shannon Phillips, it is pragmatic.

Speaking to Bloomberg recently, Phillips said the province has sought to strike a balance between the oil industry and addressing climate change after years and years of denial. Carbon tax, according to her, “the most market-friendly and most flexible means of dealing with the issue.”

Yet from a budgetary perspective, the carbon tax has yet to start making substantial contributions to Alberta’s coffers. For now, most of it goes to consumers in the form or rebates and into emission-reduction programs, including the phase-out of coal power plants.

Others view this “pragmatic balance” as little more than an exercise in window-dressing because here’s the thing: the carbon tax does not apply to Alberta’s US$36-billion oil industry. Related: Oil Prices Fall As EIA Confirms Inventory Build

One skeptic, Parkland Institute’s Ian Hussey, told Bloomberg that all the emissions to be saved from the phase-out of the coal plants will in fact be offset by higher emissions from the oil sands. Yet if more producers follow in Cenovus’ footsteps pressured by low oil prices and absent pipelines, it might not come to that.

The problem for Alberta is that the two pipeline projects will lead to a provincial GDP rise of 1.5-2 percent by 2023. It needs its oil industry to grow and not shrink. In fact, PM Rachel Notley says, Alberta would not be able to comply with the federal carbon emission reduction plan without the two pipeline projects.

It looks like Canada’s oil heartland will continue juggling with oil and renewables in the foreseeable future.

By Irina Slav for Oilprice.com

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