Saturday, March 3, 2007

Green Oil Sands Royalty & ACCA programs

The Alberta provincial government has initiated a formal review of Alberta’s Oil Sands’ Royalty program. This review is expected to solicit the public for their views on the matter, which is expected to occur within April of 2007. As a private citizen of Alberta, I have prepared this paper to generate public discussion during this review process. This paper reflects my personal views alone as a private citizen.

This paper will briefly discuss the existing Royalty and Accelerated Capital Costs Allowance (ACCA) programs, today’s successes and challenges that they brought, and a look at the opportunities and challenges tomorrow. From these challenges, opportunities and successes, this paper will discuss conceptually how a revised “Green” Oil Sands Royalty program and a revised “Green” ACCA program could play a key role in developing Alberta’s Oil Sands to its fullest potential all the while lowering total Greenhouse Gas (GHG) Emissions. I invite members of the public, academia, industry and the government to engage in this discussion.

The existing royalty and ACCA programs were designed to overcome barriers associated with the high initial capital costs required for Oil Sands development and the limited knowledge base available for In-Situ and strip-mining exploitation. Coupled with high oil prices, these programs have lead to exponential growth in the industry. The Royalty program essentially allows Oil Sands companies to pay very low royalty rates (i.e. 1% as opposed to 25% of revenues to Albertans) until these companies have recouped their capital costs in profits. The ACCA program allows 100% of Oil Sands capital costs to be written off as opposed to the normal rate of 25%.

With the price of oil rising and holding consistently above US$50/bbl, the risks associated with Oil Sands development is now considered to be minimal considering that Oil Sands companies can be considered modestly profitable when the price of oil is as low as US$30-US$35/bbl. In addition with the development of several In-Situ and strip‑mining operations, the knowledge base and expertise of Oil Sands development has grown tremendously in the region meriting international recognition. Given these new realities, Albertans have been prompted to ask whether they are getting value for their resource? This paper concludes that the Oil Sands industry no longer requires such a high level of incentives offered by these programs for their development and therefore these incentives should be refocused to address the greater challenge ahead.

This question comes at a time where tremendous growth in Alberta’s conventional oil & gas industry and the Oil Sands industry has brought significant growth to Alberta’s population and tremendous demand on Alberta’s infrastructure. Excess demand for labor has further stressed Alberta’s capability of providing its services and expanding its infrastructure. Despite record provincial surpluses and eliminating the provincial debt, more revenues may be needed for Alberta to deliver its services and expand its infrastructure to meet this growth.

The future will also hold a more significant challenge. With all federal political parties committed to reducing Canada’s GHG emissions, a time will come when Alberta’s oil and gas sector including its Oil Sands industry will be required to limit its GHG emissions. Given Alberta’s Oil & Gas industry’s current limited “green” capabilities, it is unlikely that high oil production growth in the province will continue if GHG emissions are capped, and it is probable that its economy’s growth may suffer as a result of its limited capacity to deal with reducing GHG emissions.

According to recent reports, total Oil Sands production is projected to quintuple over the next 20-30 years. This increase will certainly result in a significant increase in GHG emissions. In 2006, the Oil Sands industry accounted for approximately 35Mt of Canada’s 775 Mt of CO2 equivalent emissions. The Oil Sands also present the fastest growing source of GHG emissions in Canada. As Oil Sands production increases, its GHG emissions will represent a much bigger and noticeable portion of Canada’s total GHG emissions. New technologies such as carbon capture are being introduced into industry; however, an industry-wide knowledge base is still lacking and initial capital investments pose a significant risk given the high cost of labor and materials in Alberta. Since Oil Sands companies are in close geographical proximity to each other, there may be significant cost savings if they can collaborate with each other on implementing GHG emission reducing technologies.

Given today’s civic challenges and tomorrow’s green challenges, we need to develop a plan to address these challenges in the short and long terms. Since the province of Alberta is reviewing its existing Oil Sands Royalty program, we are at a very opportune crossroads. The existing Royalty and ACCA programs have proven successful in generating investment in the Oil Sands that led to the building a rich Oil Sands development knowledge base. This paper proposes to adopt a Green Oil Sands Royalty and Green ACCA programs to entice Oil Sands companies to significantly reduce their total GHG emissions. The Green Oil Sands Royalty program would allow Oil Sands companies to invest in technologies that would significantly reduce their total GHG emissions and allow these companies to pay discounted royalty rates to the province until these “green” investment costs are recouped in profits. In addition, the Green ACCA program would allow Oil Sands companies to write off 100% of their capital costs that are used to fund GHG emissions reduction initiatives. These revised programs would also increase the Oil Sands industry’s knowledge base of GHG emissions reduction technology and help it become a world leader in this domain.

These programs would need to be followed by GHG emission caps set on Oil Sands companies 7 to 12 years after these new programs come into effect and is available to Oil Sands companies. For companies to become eligible for these programs, their GHG emission reduction initiative(s) would need to cut GHG emissions by amounts corresponding to the GHG emission caps that would follow. In order to address the current challenge of infrastructure and government service shortfall, the discounted royalty rate could rise from 1% in order to increase revenues to the province, but the new royalty rate should stay low enough to produce a meaningful incentive for Oil Sands companies.

Timely migration from the existing royalty and ACCA programs to the new Green Oil Sands Royalty and Green ACCA programs will be key to providing incentives to industry early enough for these companies to prepare for upcoming GHG emission caps. Companies deciding to not participate in the Green Oil Sands Royalty program should have their royalty rates raised to slightly lower rates than the royalty rates paid by conventional Oil & Gas companies in order to compensate for the inherent reduced profitability of the Oil Sands industry within the next 2-3 years. Similarly, companies deciding not to participate in the Green ACCA program will only be able to write off 25% of their capital costs beginning 2-3 years from now. When the GHG emissions hard caps come into effect, Oil Sands companies who produce GHG emissions exceeding their cap will need to be fined based on its excess GHG emissions.

In regards to the excess moneys produced by Oil Sands companies being fined for over‑emitting and choosing not to participate in the Green Oil Sands Royalty & ACCA programs, it should be re-invested into Research & Development that will help Alberta further cut its GHG emissions and develop clean renewable sources of energy.

Developing the GHG emissions target for the entire Oil Sands industry will be the key that will drive all other targets in the Green Oil Sands Royalty and Green ACCA programs and the GHG emissions caps that will follow. The Federal and Provincial governments must come to an agreement on how much GHG emissions the Oil Sands industry can produce, as they should for every other industry in the country. This target should then be divided among all Oil Sands companies based on their actual production capacity and quality of the product(s) they produce (e.g. light sweet crude vs. raw bitumen). The qualifying requirements for these Green programs should then be based on ensuring that the Oil Sands companies’ proposal(s) to reduce their GHG emissions can meet these targets.

I produced this paper as a starting point to introduce a new perspective on reforming the Oil Sands Royalty and ACCA programs. This is not a “take it or leave it” proposal but rather an opening statement to a discussion on how we can approach the problem of GHG emissions in the Oil Sands industry differently. I sincerely hope that this paper leads to a lot of serious discussions and contributes to a meaningful resolution to the problem of GHG emissions in the Oil Sands industry.


Ian said...

Brilliant work Derek!

This is one of the best ideas/papers I have seen lately! I lack much knowledge in the area of the actual workings of the subsidies the government gives to oilsands and even the specific technologies used to upgrade the oil so I have always felt badly about not addressing this issue properly.

I also feel that this idea is really Albertan in nature and I hope you get many positive responses from the Alberta Government and the Federal Government.

I hope it's ok but I will be posting this paper to my website and message board...naturally I will post your name and your website/Blog address.

-Ian Hopfe

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