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Canada’s Fossil Energy Future: The Way Forward on Carbon Capture and Storage

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Canada's Fossil Energy Future - Executive Summary

The Challenge

Canada is experiencing a significant economic surge driven in large part by the natural resources sectors, in particular by the fossil fuel industries in Western Canada. Combined under the banner of fossil energy, Canada’s oil, natural gas, and coal resources make the country one of the world’s most attractive energy centres for continuing investment and development.

This economic opportunity comes with challenges, such as requirements to mitigate greenhouse gas (GHG) emissions and managing the impacts of climate change. Canadian GHG emissions are up more than 25 percent since 1990. There is growing public concern supported by consensus among the scientific community (the Intergovernmental Panel on Climate Change) that global emissions growth will soon drive atmospheric carbon dioxide (CO2) concentrations to levels not seen in 10 million years, bringing a growing risk of rapid climate change.

Canadian governments are responding to this concern. The federal government has announced a national objective to reduce emissions by 20 percent from current levels by 2020, and 60 to 70 percent by 2050. Nine out of 10 Canadian provinces have indicated the intent to regulate; Alberta already has regulations for large industry. Some of the targets being proposed present a great challenge to a country that derives 77 percent of its total primary energy from fossil fuels, and much of its wealth from the production and export of these prized resources.

Canada is not alone in facing this issue. Global energy supply is 80 percent fossil-based, and due to growing energy demands in rapidly emerging countries like China it is forecast to be 82 percent by 2030. Meanwhile, many countries and the United Nations are calling for deep global GHG reductions.

The challenge is to strike a balance between reducing GHG emissions and maintaining economic growth

The challenge facing every nation is how to make deep GHG emission reductions while continuing economic progress – a complex task given the direct linkages between economic growth, fossil energy use, and GHG emissions. The magnitude of this challenge was recently noted in the Energy Pathways work of the Canadian Academy of Engineering. They note the need for “transformational change”, and that the level of effort required “will not be made through the efforts of individual companies, nor governments acting alone; it will require a coordinated national effort.”

A Solution

Carbon dioxide capture and storage (CCS) is essential if Canada and the world are to address the carbon challenge. CCS is an innovative process whereby CO2 emissions from large industrial facilities are separated from the plant’s process or exhaust stream and compressed and injected deep underground into secure geological formations.

Along with large-scale renewables and nuclear energy, CCS is one of a limited set of large-scale options to enable an energy-rich, low-carbon future. CCS is unique in that it can be built on the technical and institutional base of the existing fossil energy infrastructure. It can be implemented quickly (within a decade) using existing technology as the world develops next-generation, longer-term energy solutions.

CCS is a viable way to achieve significant domestic GHG reductions

CCS has a role to play in broader GHG regulatory frameworks (both federally and provincially) because of the opportunity it presents. But this requires undertaking an urgent set of actions today to support CCS during its early developmental stages.

The Reward

The magnitude of the reward is clear. Canada-wide potential for CO2 capture and storage may be as high as 600 megatonnes (Mt)/year, or roughly 40 percent of Canada’s projected GHG emissions in 2050.

To get Canada moving towards realizing this potential, the Task Force recommendations challenge the country to achieve the following milestones by 2015:

  • Five Mt of annual GHG emission reductions from new large industrial CCS installations
  • A first wave of industrial facilities capturing and storing CO2 (three to five operating projects)
  • Global leadership in CCS technical capabilities and expertise
  • First-mover advantage in CO2 crediting protocols, disposal rights and disposition legislation, and long-term liability solutions
  • World-class institutions working on the commercial, legal, and regulatory aspects of CCS
  • A framework for planning what’s next for CCS in Canada

A significant prospect awaits Canada. Success depends on creating the conditions that support the first and subsequent waves of CCS investment while gaining the public’s support for CCS as an acceptable way to meet the carbon challenge.

CCS is an opportunity for the country and its industrial sectors to become world leaders in demonstrating that emission reductions, fossil energy use, and economic growth can be achieved together. Achieving the five Mt/year by 2015 goal would virtually guarantee Canada a leading global position in this emerging capability.

Why CCS

CCS is a natural fit for Canada for many reasons.

CCS technology can enable Canada to build on its existing energy infrastructure and its fossil energy endowment while managing the associated GHG emissions. CCS is the only reduction option with the flexibility to either be retrofitted into the existing industrial fleet or be built into new and future facilities.

The technology exists. What’s needed is the integration of the components in commercial-scale industrial facilities

The CCS component technologies (capture, transport, and storage) all exist today at industrial scale. What is missing is the full integration and application of these components in commercial facilities at a large-scale. Canada can be among the world’s first to build a commercial power plant, bitumen upgrader, or some other fossil energy facility with the capacity for capturing and storing the associated CO2 emissions.

Canada’s biggest advantage lies just underground. Stable sedimentary rock formations like the Western Canadian Sedimentary Basin (WCSB) are ideal for CO2 storage. The reservoirs that securely held Canada’s vast oil and gas reserves for hundreds of millions of years can be used to store CO2, and the deep saline aquifers underlying these rock units hold several magnitudes more storage potential. The co-location of large industrial GHG sources with this storage opportunity makes the WCSB a world-class location for CCS. Other storage potential also exists in Atlantic Canada, southern Ontario and just south of the Canadian border.

The co-location of CO2 sources and sinks in the WCSB makes western Canada ideal for CCS

Another opportunity in the WCSB is the potential for enhanced oil recovery (EOR), whereby CO2 is injected into existing oil reservoirs to extract more resource. EOR using CO2 injection is already a growing commercial activity and a number of opportunities exist for further EOR development, which helps unlock some commercial value for capturing and injecting CO2.

CCS has broad application wherever fossil energy is used. It is one of the only ways to manage GHG emissions growth in coal-fired power generation and in the rapidly expanding oil sands sector. CCS is a potential solution for these and other sectors across the nation, as the whole country uses oil, gas, or coal in refining, petrochemicals, manufacturing, cement, and steel.

CCS is a solution for Canada and the world and public investment is required today

If provinces such as Alberta and Saskatchewan lead by building and operating the first commercial-scale fossil energy facilities that incorporate CCS, they will pioneer Canada’s efforts as a leading international player in CCS. It is important to remain internationally competitive as the technology evolves and as the market for CCS grows outside of Canada – China, India and other emerging economies require a pathway to continue economic development while reducing emissions.

Why Public Support?

Collaborative investments between government and industry have a long history in Canada, with many examples of arrangements that opened up new and important domestic markets:

  • Syncrude played a pivotal role in furthering oil sands development
  • Hibernia was critical to starting Atlantic oil and gas activities
  • The national railways, pipelines, transmission grids, and other infrastructure have each connected Canadian markets at critical junctures in the country’s history

Each of these “nation-building” initiatives was and continues to be in the interest of Canadians. Each began with public and private support in order to spread the risks associated with the first few projects and to enable action on activities that entailed an upfront capital cost but that were clearly in the public’s best interest.

Canada possesses the technology, geology, and expertise to be a world leader in the development and implementation of CCS technology. But as with any new environmental technology a financial gap exists between the cost of a plant with CCS and what would otherwise be built to produce the same industrial outputs.

In the absence of proven integration of CCS technologies at scale, regulatory clarity, and market prices for carbon, among other uncertainties, it is a very difficult proposition for individual private sector players to commit additional hundreds of millions of dollars of investors’ money to achieve a public good (such as GHG emissions reductions) for which it may not be compensated with an adequate (or any) return on investment.

This financial gap is what prevents the commercial application of CCS projects today.
Closing this gap and establishing CCS as a major component of Canada’s GHG reduction strategy requires a strong collaborative effort by industry and government.

Why Now?

Taking the lead in developing CCS solutions for Canadian industry requires urgent action. Government must commit public financial support for CCS and industry must commit to building and operating CCS projects immediately.

All large industrial facilities entail long construction lead times, and they require highly specific skill sets. Many of the skills required for CCS exist in the oil and gas and power generation sectors, but CCS-specific capabilities will only come through actual experience. Canada will lose the opportunity to deploy CCS rapidly in response to future GHG emission reduction policies if the country delays the construction of an initial set of commercial-scale CCS projects.

In the meantime, capital investments in the fossil energy sectors continue to be made. Electricity markets across the county, including coal-dependent Alberta, Saskatchewan, Ontario, Nova Scotia, and New Brunswick require new capacity to satisfy increasing demand and to replace plants that are reaching retirement. Over $150 billion in capital spending has been announced for the oil sands alone. If government fails to demonstrate its seriousness regarding CCS, these facilities will be built with conventional technology, thus making them costly to retrofit with CCS technologies in the future. If on the other hand government provides support and funding for CCS, new facilities can be designed to accommodate CCS and thus avoid the potential for technology lock-in and stranded assets.

Starting on CCS today will initiate a learning-by-doing phase, which will result in cost reductions due to improved materials and technology design, standardization of applications, system integration and optimization, and economies of scale. Only through implementing a first set of commercial-scale projects will the country start its way along the learning curve to success.

Canada is among the leading countries working on CCS, but it is not the only one. Australia, Norway, the United Kingdom (U.K.) and the United States (U.S.) are all forging ahead with public investment and commercial frameworks for the first few projects and are developing the regulatory environments to nurture CCS. Only by remaining part of this leading group will Canada stay relevant and up-to-date on international developments.

Success with CCS depends on a balanced approach to GHG policy. Domestic action on climate change must proceed at the same pace as the actions being taken by Canada’s major trading partners. If Canada acts too aggressively to reduce GHG emissions in the near term it risks putting its industrial base at a competitive disadvantage. By the same token, however, if Canada moves too slowly it may also hurt its competitiveness as the rest of the world turns to standards that make GHG-intensive energy sources less viable. The competitiveness of the domestic fossil energy sector hinges on using CCS to satisfy growing GHG reduction obligations while continuing to develop these fossil energy resources.

This is why Canada needs to urgently develop the skills and expertise required for CCS. Inaction may result in a declining role for Canada’s fossil energy industry in the future.

Alternatively, by investing today Canada will gain from a leading position in CCS development. More importantly, it enables the option to implement CCS more broadly in the future if increasingly stringent carbon constraints become a reality through international and domestic policy. An investment in CCS is critical to managing the risk that future carbon constraints may place on industry.

The Recommendations

Industry will build and operate the CCS projects, which entails a significant amount of upfront investment risk, for which the main benefit is the potential for reducing the cost of current and future GHG regulations. Any industrial facility with a large capture opportunity (projects that capture on the order of one megatonne of CO2 per year) requires a total project investment in the hundreds of millions to billions of dollars. Before any decisions are even made on these projects, industry invests tens of millions of dollars on front-end studies. Industry should continue to play this role in CCS deployment but this effort should be complemented by public support.

Industry and governments should work collaboratively to develop the financial and regulatory conditions needed to move CCS forward. Governments already provide support in many ways, including funding for some of the front-end studies; they also need to share in the financing of actual CCS projects. Therefore the following are recommendations to Federal and Provincial governments for their roles in these collaborative efforts.

Three immediate actions are recommended to get Canada on the pathway to successful CCS implementation, and three subsequent actions should be undertaken as next steps. The first three require urgent attention as they are intended to address the two main barriers facing CCS today: the financial gap associated with CCS projects today, and current gaps in regulatory frameworks. Canada must overcome these hurdles, and in short order, to succeed with CCS.

Three Immediate Actions

Immediate Action #1 – Federal and Provincial governments should allocate $2 billion in new public funding to leverage the billions of dollars of industry investment in the first CCS projects; this funding should be distributed expeditiously through a competitive request for proposals process so that these phase-one projects are operational by 2015.

Funding the first set of three to five CCS projects will result in five Mt of annual CO2 reductions from CCS, and will initiate the process for getting the country on the pathway towards a made-in-Canada solution for reducing emissions and towards global leadership in CCS.

Immediate Action #2 – Authorities responsible for oil and gas regulation should provide regulatory clarity to move the first CCS projects forward by: quickly confirming legislation and regulation related to pore-space ownership and disposition rights; clearly articulating the terms for the transfer of long-term liability from industry to government; and increasing the transparency of regulatory processes.

Confirming provincial jurisdiction over the ownership and disposition of pore space, and clearly articulating that industry will not face long-term liability obligations associated with CCS will help create a regulatory environment that is conducive for CCS. The time required to make the regulatory changes should not delay decisions or approvals on the phase-one CCS projects.

Immediate Action #3 – Federal and Provincial governments should ensure as much opportunity for CCS projects under the GHG regulatory frameworks as for any other qualifying emission reduction option. This will require the creation of CCS-specific measurement and crediting protocols.

Ensuring a role for CCS in meeting emission reductions obligations, and ensuring that any CO2 credits from CCS are no less tradable or valuable than other credits, will help create some potential commercial value for CCS activities.

Three Next Steps

Next Step #1 - Industry and both government levels should form a collaborative framework including an advisory group over the next two years to coordinate discussion, to institutionalize learning, and to potentially carry out specific aspects of immediate actions 1, 2, and 3. This may evolve into a more formal organization as future needs are assessed.

A collaborative effort based on coordinating and institutionalizing the learning gained will foster CCS capabilities in Canadian industry, government, and non-government organizations.

Next Step #2 – Federal and Provincial governments should provide stable financial incentives to help drive CCS activities beyond the phase-one projects. These may include the continuation of RFPs for phase-two projects, CO2 storage incentives, and/or the use of tax and royalty incentives.

Broad-based, phase-two support for CCS is required to drive the country towards deep future GHG reductions, potentially one-third to one-half of Canada’s projected GHG emissions by 2050.

Next Step #3 – Canadian-based research organizations and technology developers should focus research and demonstration efforts on CCS to achieve two goals: to drive down the cost of existing CCS technologies; and to enable the deployment of next generation CCS technology and processes – the Federal and Provincial governments should provide financial support for these activities.

Canadian-based research on cost-effective and next generation technology will support broader application of CCS in other sectors and locations, both domestic and international.
These recommendations are based on the premise that governments, while remaining cognizant of the requirement for international competitiveness, will continue working towards clearer and more certain GHG emission reductions policy, which is the ultimate driver behind CCS. Only through balanced GHG policy will the country achieve the fundamental objective of all its early-stage investments in CCS, wind energy, and other emission reductions options – a lasting solution to the carbon challenge.

The Way Forward

The technological components for CCS already exist and can be built into industrial facilities today. What is required is financial and regulatory support. A few fully integrated CCS projects will demonstrate to industry and the public the feasibility and safety of integration at scale. These projects will initiate the learning-by-doing curve that leads to cost reductions. The first projects will test the regulatory processes and help pave the way for future projects seeking approvals. Each of these outcomes is essential if CCS is to play its role in reducing emissions.

Canada has an opportunity to be the world’s first country to build a commercial-scale power plant, bitumen upgrader, or some other fossil energy facility with the capability of capturing and storing the associated CO2. Industry and governments should work collaboratively to develop the financial and regulatory conditions needed to move CCS forward.

For its part, industry will undertake a significant amount of investment risk by building and operating the first CCS projects. Industry should play this role, but its efforts should be complemented by a public investment in this critical technology and infrastructure.

Governments already provide support in many ways, including funding for some of the front-end studies; they also need to share in the financial investments to accelerate CCS development and deployment.

The Task Force estimates a public investment on the order $2 billion is needed to close the funding gap on an initial set of projects, which will result in five Mt of annual CO2 reductions from CCS by 2015. This is the equivalent of eliminating the GHG emissions from 1.4 million vehicles per year in Canada. Beyond the first projects (which should be operational by 2015), the Task Force envisions the need for further public support to help sustain CCS activities through an interim stage until the carbon market has matured or other regulatory requirements are at the point where the financial gap facing CCS is sufficiently closed.

This is a significant initial public investment, but it is an important one because it will more quickly enable Canada to make industrial-scale GHG reductions (using CCS) while remaining internationally competitive in a carbon-constrained world.

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