Canada's oil industry wants 'even footing' with Americans on carbon capture

Canada's oil industry says government incentives to build carbon capture projects are "much more generous" in the United States, a gap the largest companies hope Ottawa will narrow in its promised response to the U.S. Inflation Reduction Act (IRA) passed in August.

Finance Minister Chrystia Freeland has said Canada needs to "respond to" certain "elements" of the climate spending-heavy IRA, suggesting the first actions on this front will be revealed in the fall economic statement set for Nov. 3. Natural Resources Minister Jonathan Wilkinson said last Tuesday that the US$369 billion in public money earmarked by U.S. lawmakers for energy security and climate change has "created a playing field that is not level" between the two nations.

At the same time, Ottawa is calling on the oil industry to channel soaring profits into climate change action, rather than payouts for shareholders. In a video posted to Twitter, Environment Minister Steven Guilbeault predicted record-breaking profits for the sector as it reports third-quarter financial results through this week.

His message came a day ahead of Imperial Oil (IMO.TO)(IMO) announcing the largest increase to its dividend in the company's history.

Mark Cameron is vice-president of external relations for the Pathways Alliance, a net zero-focused partnership between six of Canada's largest oil sands producers: Suncor Energy (SU.TO)(SU), Cenovus Energy (CVE.TO)(CVE), Canadian Natural Resources (CNQ.TO)(CNQ), Imperial, MEG Energy (MEG.TO), and ConocoPhillips Canada (COP). The group claims to collectively represent about 95 per cent of Canada's oil sands production.

"We're encouraged to hear Ottawa acknowledge the need to ensure Canada is on even footing with the United States and other countries to incentivize major emissions reduction investments," Cameron told Yahoo Finance Canada in a statement.

Earlier this month, the Pathways Alliance announced the centrepiece of its net-zero-by-2050 pledge, a conditional $24.1 billion investment on a carbon capture and storage facility and pipeline in northern Alberta, along with other emissions reduction projects. The first phase calls for an investment of $16.5 billion by 2030.

However, the Pathways Alliance has not made a final investment decision on the project. When it was announced, president Kendall Dilling said the group is looking for more financial support before it pulls the trigger.

He told The Canadian Press the federal investment tax credit for carbon capture and storage projects, rolled out earlier this year, targets only a fraction of lifetime costs for facilities.

"Over the life of the project, probably two-thirds of your costs are operating costs," he said in an interview. "The [tax credit] helps enormously on the construction side, on the capital side, but we're still working with governments on ways to shore up some support on that operating cost side."

At the same time, Cameron says financial backing from foreign investors will be increasingly hard to come by, with Norway and the Netherlands emerging alongside the U.S. as popular destinations for carbon capture investors.

Kevin Krausert is a Calgary-based former oil field services executive who now runs a clean energy venture capital firm and startup accelerator called Avatar Innovations. He's critical of Canada's lack of carrots and many sticks when it comes to climate policy for the industry. As a starting point, he wants the federal tax credit for carbon capture expanded to cover operating and other costs.

"When the IRA was announced, dozens of multi-million, multi-billion dollar projects were approved overnight. We need to recognize that in Canada, the absolute prevalence of sticks and punitive measures that we have are actually holding back investment," he said in a phone interview.

"A positive incentive structure such as they have in the United States is the big dream, and why the Americans have taken the lead on the energy transition from Canada in one fell swoop."

Cameron points to the IRA's enhancement of Section 45Q of the Internal Revenue Code, which incentivizes the use of carbon capture and storage. The legislation increases the value of the credits across the board, while broadening access to more investors and developers.

"We have an investment tax credit that's not as favourable as the one in the U.S., and then we have a whole suite of other punitive measures that are basically making a choice to invest in Canada sub-economic compared to the United States," Krausert said, referring to measures like carbon pricing and the clean fuel standard. "Where would you take your investment dollars?"

Canada's climate strategy will be on full display at the 2022 United Nations Climate Change Conference set to be held in Sharm el-Sheikh, Egypt. The event, commonly known as COP27, is set to begin on Nov. 6, three days after the release of Ottawa's fall economic statement.

Rachel Doran is director of policy and strategy at Clean Energy Canada. She hopes Ottawa's response to the U.S. IRA will build upon Canadian home field advantages, like a greener electricity grid compared to the U.S., and an abundance of fresh water. Both, she says, are important for producing green hydrogen.

"It's important to consider a combination of safe bets and wildcards," Doran said, placing carbon capture in the later category. "I would be wary of Canada trying to automatically meet U.S. numbers in that particular space without thinking about whether that's the most strategic way we could be spending."

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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