Alberta's Emission Regulations: A Welcome Step With Unclear Results

Aerial view of the Suncor oil sands extraction facility on the banks of the Athabasca River and near the town of Fort McMurra
Aerial view of the Suncor oil sands extraction facility on the banks of the Athabasca River and near the town of Fort McMurray in Alberta Province, Canada on October 23, 2009. Greenpeace is calling for an end to oil sands mining in the region due to their greenhouse gas emissions and have recently staged sit-ins which briefly halted production at several mines. At an estimated 175 billion barrels, Alberta's oil sands are the second largest oil reserve in the world behind Saudi Arabia, but they were neglected for years, except by local companies, because of high extraction costs. Since 2000, skyrocketing crude oil prices and improved extraction methods have made exploitation more economical, and have lured several multinational oil companies to mine the sands. AFP PHOTO/Mark RALSTON (Photo credit should read MARK RALSTON/AFP/Getty Images)

Alberta's new emissions regulations, just unveiled by the province's fresh NDP government, are a welcome step towards tailoring environmental policy for the needs of an expanding oil sands sector. Whether those regulations will do anything to help the environment once the industry starts to contract remains a question that still needs to be asked.

The new rules, which will see carbon levees raised from $15 a ton to $30, are designed to encourage the adoption of technology or operating practices that will reduce emissions. Oil sands players will also be compelled by the tougher regulations to cut the emissions intensity of each barrel of oil produced by 20 percent by 2017.

Alberta is hoping its new, greener standards will bring it more in line with jurisdictions such as California and the European Union, which have been critical of the province's environmental record in the past. Premier Rachel Notley will no doubt emphasize that point when she attends the upcoming climate change conference in Paris later this year.

Despite the bad press that continues to dog the oil sands, it's not a potential foreign boycott of "dirty" Canadian oil that's the biggest problem for the domestic energy industry. No, the larger challenge is simple economics. The global economy isn't growing at the same pace as prior to the Great Recession and neither is oil demand. What's more, slowing demand growth is only poised to shrink further as the international community continues to raise the costs of emitting carbon into the atmosphere.

That said, the emissions profile of the oilsands is less of an issue for the industry than the high cost of extracting oil from the gooey, tar-like sludge found in northern Alberta. As environmental costs go up in an emissions-constrained world, low cost barrels will continue to be produced while high cost, unconventional production will turn into a money-losing proposition. Even today, market forces are telling the oil sands to produce less. The price of Western Canadian Select, the benchmark for bitumen players, trades below the operating costs for many producers, let alone the price that will be needed to make new projects profitable. To make matters worse, the sector continues to add production through mines such as Exxon's massive Kearl project or Suncor's Fort Hills mine.

Although these companies can see the flashing red lights as well as anyone, shutting in production in the oil sands isn't that easy. In shale plays, an operator can decide to keep some cash in the bank by cutting back on drilling. Long lead times and billions in sunk costs make oil sand projects a much different animal.

Producers will weather lower prices today, in hopes of making money when prices turnaround tomorrow. But what happens if the current price environment isn't just a cyclical blip, but actually the beginning of a secular decline in demand? At some point in the not-too-distant future, the market will dictate that some mines be decommissioned well before their time. And therein lies a huge environmental liability.

The tailings ponds full of toxic sludge that dot the landscape around Fort McMurray won't just disappear on their own. Nor will the towering stacks of sulphur. Anyone who's visited an oil sands mine has seen the industrial wasteland that's replaced what was once a pristine boreal forest. When the oil sands shut down, all of the land must be reclaimed and the contamination cleaned up. That ain't cheap.

Who will be on the hook for those costs? In theory, oil sands operators are required to pledge financial security to pay for future reclamation costs as they build new mines. In practice, the money, which accrues in Alberta's Environmental Protection Security Fund, is a fraction of what will eventually be needed. A Pembina Institute study from 2009 estimated the costs to reclaim what was then 686 square miles of oil sands developments and 170 square miles of tailings ponds would run as high as $15 billion. At the time, the fund held $820 million. Since then, the size of the fund has doubled to $1.6 billion. The amount of land affected, of course, has also grown considerably. If Albertans aren't already asking who will pick up the tab when the party's over, then they certainly should be.

The province that Premier Notley just inherited has a badly tarnished international image. As much as she may want to recuperate its reputation she may soon have much more pressing worries right at home. The economic signposts suggest that time is running out on the oil sands as a viable business model. Once mines start being decommissioned, Alberta will find itself in the nasty double bind of watching oil royalties shrink at the same time as it will need to scrounge up billions to pay for the mess the industry has left behind.