ROB Insight is a premium commentary product offering rapid analysis of business and economic news, corporate strategy and policy, published throughout the business day. Visit the ROB Insight homepage for analysis available only to subscribers.
As much as oil sands producers may dread the prospect of tougher greenhouse gas (GHG) emissions regulations, it may be a small price to pay to secure the access to markets that they so desperately need.
There's no doubt the report Thursday by The Globe and Mail's Shawn McCarthy and Nathan VanderKlippe , revealing an Alberta government proposal to require large producers to reduce their emissions per barrel of oil by as much as 40 per cent, has sent a shiver through an industry that has already been coping with low prices.
Premier Alison Redford's government is treading a delicate line here; one of its biggest fears is imposing rules that would significantly increase the already substantial costs and risks of large-scale oil sands exploitation, triggering an exodus of producers and investors that would kill the province's black-golden goose.
But the proposal reportedly on the table to slash emissions and levy a $40-a-tonne penalty for exceeding the new targets – needn't be onerous.
A report last fall from the Pembina Institute , a Canadian environmental research and advocacy group, noted that the oil sands industry already reduced its GHG intensity by 29 per cent between 1990 and 2009. Most of those reductions stemmed not from tougher regulations, but from producers making voluntary changes in order to improve efficiency and rein in rising production costs. Tighter emissions restrictions might just dovetail with improvements that would lower energy use, improve operating efficiencies and ultimately bring down costs. (Consider that Suncor Energy Inc., in its quest to address the thorny issue of contaminated tailings ponds, developed a clean-up technology that will drastically reduce the need for the ponds and will save Suncor an estimated $1-billion over 20 years.)
Pembina has argued that future emissions-intensity reductions may be harder and more costly for the industry, as the gains of the past two decades represented the "low-hanging fruit." Still, the reported Alberta proposal should impose a fairly modest cost on producers. Pembina policy director Simon Dyer said that based on his group's recent calculations on emissions penalties, the cost for non-compliance at $40-a-tonne would average about 75 cents a barrel. (Basic economics suggests this is, essentially, the maximum cost of such a regulation; any reductions that could be done for a lower cost are ones producers would logically implement.)
The Alberta government is surely weighing this relatively modest cost for the industry against a potentially huge political benefit of tougher emission standards.
As the U.S. government nears a decision on the Keystone XL pipeline (likely later this year), the move could go a long way to neutralizing the pervasive environmental objection that the oil sands are a "dirty" energy option. The pipeline would give producers the kind of large-scale market access they need to ensure strong product prices and justify further growth in the oil sands.
Not to mention that reducing emissions is, simply, the responsible thing to do. When you can do the right thing and improve the odds of securing the future for your industry, isn't that worth 75 cents a barrel to you?
David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights , and follow David on Twitter at @ParkinsonGlobe .
David Parkinson