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Tar Secret #5: CO2 per barrel of bitumen going up quickly

The "Tar Secrets" series delivers you essential climate facts missing from government and tar sands marketing spin.

A new Environment Canada report ("Canada's Emissions Trends 2013") reveals a dramatic shift in Alberta's tar sands industry towards the most climate polluting method of producing bitumen. As a result, the carbon-intensity of each barrel of bitumen has risen 8% over the last six years. By 2020 this is expected to worsen to 16% more CO2 per barrel produced.

Data in the new emissions trends report reveals that the bitumen extraction method known as "steam-assisted gravity drainage" (SAGD) is both a rising star and a rising climate problem. The new data shows:

  • SAGD has grown 22% more climate polluting per barrel in the last decade
  • SAGD is now nearly twice as climate polluting per barrel as mining bitumen
  • SAGD is now the most carbon-intensive method for producing bitumen

My chart below shows the amount of CO2 per barrel to produce bitumen for the two main extraction methods.

 

Highlights:

  • Mining bitumen emits only about half as much CO2 per barrel as SAGD
  • The carbon-intensity of mining bitumen is unchanged over the last decade
  • The carbon-intensity of SAGD production has grown significantly worse

Industry choosing highest-carbon option 

Not only is SAGD the industry's most climate-polluting production method, it is also the one industry is choosing for the vast majority of new projects. Environment Canada says that SAGD has been the fastest growing extraction technique since 2005 with more new barrels produced that way than any other.

This trend is projected to accelerate in the future. The report projects that the tar sands industry will choose SAGD for 70% of new production through 2020. The Canadian Energy Research Institute (CERI) expects industry to choose SAGD for nearly three quarters of all new bitumen production through 2045.

As the industry switches wholesale to a much more carbon-intensive process the climate impacts -- and the carbon risks -- add up.

Eleven million tonnes 

By 2020, the switch from mostly mining bitumen to mostly extracting via SAGD is projected to add an extra 11 million tonnes CO2 per year (MtCO2/year). For comparison, 11 MtCO2 equals the combined emissions from Prince Edward Island and Newfoundland and Labrador. With Canada already struggling to reduce our nation's climate pollution levels, adding another 11 MtCO2/year onto the pile poses problems for all sides.

Climate policies? 

So far, no climate policies exist to try to influence this problem.

The Harper government, despite years of promises, has yet to regulate tar sands climate pollution in any way.

Alberta does have a climate policy. However it doesn't care how climate polluting a new project is. Tar sands corporations are free to pick any bitumen production process they want for a new project no matter how carbon-intensive.

Currently, SAGD is both the most profitable way to extract bitumen and also the most climate polluting. Lacking any climate pollution signal from Alberta or Ottawa around this choice, the industry is obviously choosing SAGD.

Alberta's climate policies don't kick in until three years after a new tar sands facility is built. Whatever the carbon-intensity of the new facility is during the first three years becomes the initial "baseline" for the new facility. At that point, the facility is required to reduce carbon-intensity from this initial baseline by a total of 12% over six years.

For example, a new bitumen mining facility might start with a baseline of 44 kgCO2 per barrel. Let's say it managed to get that down to 40 kgCO2. That is a 10% cut in carbon-intensity instead of the required 12%, so it would have to pay a carbon penalty. But a new SAGD facility built at the exact same time might be emitting twice as much per barrel and yet be in full compliance and paying no penalty. That is because it started with a much higher carbon-intensity and Alberta doesn't care how carbon-intensive you start out.

Build it dirtier than needed 

The obvious incentive for companies is to build a new facility much more carbon-intensive than current technology allows. There is no penalty for doing this, so why not. Building extra-dirty provides the facility with a high baseline carbon-intensity to reduce from. Once that baseline is recorded then the company can install the already-available current technology to reduce their intensity the required 12% or more.

By delaying the implementation of lower-carbon technology until after the facility is built and the baseline is set, a company can effectively avoid Alberta's climate regulation.

An article in the Canadian Tax Journal from the University of Alberta School of Business highlights this loophole in Alberta's climate policy:

"Suppose that the possibility existed to build a facility such that emissions per barrel would be lower by a factor of 10 percent ... if the improvements were delayed until after the benchmark was established … [it would] essentially eliminate compliance costs."

This scenario of "build it extra dirty then get credit for cleaning it up" happens around the world where climate policies create incentives to do it. The multi-billion dollar Chinese HCFC-22 factory scam is an example of just how out of hand this can get.

In fact, under Alberta climate policy rules, a company could potentially make money by building their tar sands facility even dirtier -- say 20% more carbon-intensive -- to start with. Then once the baseline is established the company adds the known improvements to make it 20% cleaner. This satisfies the 12% reduction that Alberta requires and also leaves another 8% more which can be sold as carbon credits in Alberta's carbon market.

Hiding the risk = carbon bubble

The bottom line is that there are no climate policies trying to prevent the very dirtiest bitumen production method from surging to dominance in Alberta's tar sands industry.

But increasing the carbon-intensity of the industry carries serious risks. Shielding the industry from any meaningful carbon signal just inflates the carbon bubble larger. Sub-prime carbon.

At some point the laws of physics are going to require a dramatic shift in the amount of carbon the world pours into the atmosphere. As the IPCC recently quantified, most of the carbon assets of major fossil fuels companies can't ever be extracted and burned if we want a safe and stable climate system. That includes leaving most tar sands bitumen in the ground.

And yet the tar sands industry is busy developing twice as much bitumen capacity by 2035 as the International Energy Agency says the world can use on a safe climate path. When the world acts to preserve a liveable climate the penalty for the most carbon-intensive fuels like SAGD tar sands will -- by definition -- be high enough to shut that activity down.

The question in my mind is which projects get stranded first and what does that mean for Alberta's royalty dreams. My hunch is that the industry might hang onto the projects they still need to recoup their initial investment on and abandon their "post payout" projects. The problem for Alberta is that those "post payout" projects pay most of the royalties.

However the bubble pops, it won't be pretty for the province that helped inflate it with its hide-the-risk climate policies.

Our current path leads to…

The Environment Canada report projects what will happen to each province's climate pollution levels by 2020 under current climate policies:

 

Hmmm.

As Jeffrey Simpson wrote in the Globe and Mail about this:

"Emissions have come down impressively in some sectors and provinces ... Every bit of that reduction, however, will be wiped out by soaring emissions from bitumen oil "

At the end of its report Environment Canada lists the official climate targets for each province. Every province has promised to reduce their total climate pollution levels by 2020 -- well, except for Alberta that is. Alberta, as usual, has some complicated formula that seems to say "big reduction" but ends up meaning a big increase. Just like their climate policies.

If you view the fight to preserve a livable climate as a hockey game then Team Canada's relentless losing streak can be blamed on the fact that Alberta keeps scoring own goals. It is clear that our nation will keep losing badly until somebody requires Alberta's tar sands industry to reign in their surging climate pollution.

If they were smart, Alberta would do it themselves while they still have time, by pricing carbon risk transparently, effectively and across the board.

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