Strathcona, Canada Growth Fund partner on $2-billion carbon capture project for oil sands

A Canadian oil sands company is betting big on the economics of carbon capture, entering into a $2-billion partnership with the Canada Growth Fund in a deal that bucks the trend on how the oil sector views decarbonization.

The deal will see the Canada Growth Fund (CGF), an arm’s-length public investment vehicle of the federal government, invest up to $1-billion toward carbon capture and sequestration (CCS) infrastructure at oil sands operations belonging to Strathcona Resources Ltd. SCR-T in Northern Alberta and Saskatchewan.

Strathcona will construct, operate and own the infrastructure, with the initial capital costs split 50/50 between the fund and the oil company.

Most oil sands companies look at CCS investments through the lens of what the carbon tax might cost down the road, Strathcona chief executive Adam Waterous told The Globe and Mail. But he has a very different view.

Canadian producers “have a moral obligation to reduce their emissions,” he said, so Strathcona is making a judgment call on the average long-term value of capturing carbon.

While that value will likely fluctuate, he said Strathcona is prepared to take the risk; after all, he added, the company also has to make decisions on what oil will be worth in the future, despite a host of global economic unknowns.

“Our production is going to last 30 or 40 years, and we’re going to go through multiple governments in those 30 or 40 years. But the sequestration of carbon is an important goal, an important good for the community,” he said in an interview Wednesday.

The arrangement between Strathcona and CGF turns on its head how oil sands companies approach the value of carbon capture, and Mr. Waterous hopes it will make the industry more prepared to bank on CCS being a valuable commodity.

“Others will say, ‘That’s crazy, I’d never take that risk,’ ” he said. “We’ll see if we’re right, but that is our view of what’s going to happen over time.”

For the past few years, industry has been pursuing carbon contracts for difference (CCfDs) with Ottawa. Those contracts are essentially deals between companies and the government that guarantee a minimum value for emissions-reduction credits earned under the industrial pricing system. They would ensure that the credits serve as a reliable revenue stream, insulated from uncertainty about how credit markets will take shape, for investments in carbon capture and other decarbonization technologies.

Instead, Strathcona will repay the fund’s investment over time from cash flows generated by the CCS infrastructure. Those payments won’t be subject to any fixed amounts or minimum volume commitments, driven instead by the performance of each project.

Essentially, Strathcona will guarantee a fixed price of carbon to the partnership, which will shore up the cost to decarbonize its oil production and serve as a hedge to its annual carbon tax obligations.

Patrick Charbonneau, president and CEO of CGF Investment Management, said in an interview that the partnership is a breakthrough in Canada’s journey toward decarbonizing the oil and gas sector, which represents 31 per cent of the country’s emissions.

It’s the sixth deal CGF has made in just over a year of operation. The fund intends for each deal to be scaled up and applied to more emitters, and the partnership with Strathcona is no different, Mr. Charbonneau said Wednesday.

“Every time we do an investment, we’re setting precedents,” he said.

“In this case, it’s a really important precedent, because we’re able to find a solution with a heavy oil producer in order for that producer to lock in the cost of reducing the carbon intensity of their production.”

Strathcona’s oil sands facilities in Lloydminster, Sask., and Cold Lake, Alta., are located near underground storage reservoirs, which means carbon dioxide can be injected directly on site. It already has permission to do that from the Saskatchewan government, and is in talks with Alberta.

Mr. Waterous said the CCS partnership will allow Strathcona to begin its final detailed engineering work, with a final investment decision likely in mid-2025. He expects the projects to start up in 2026.

Based on the engineering work that Strathcona has already done, he said the intensity of two-thirds of the company’s production emissions will be cut by up to 90 per cent. He said Strathcona hopes to eventually cover off the remaining third of production.

Discussions about the CCS investments in the oil sands have been going on for years, particularly through a group of producers called the Pathways Alliance. It aims to reduce greenhouse gas emissions from production to net zero by 2050, in part through a huge CCS project.

But risks associated with the costs of building and operating CCS projects, how efficient they’ll be and the future value of capturing that carbon have all stymied large investments.

“There has been, in the past, a great focus on trying to have the government guarantee the price of what sequestration going to be. The reason we’re doing it is that we believe that this is a long-term investment, and that the sequestration of carbon is a very valuable community good,” Mr. Waterous said.

“Economics and delivering a community good are inevitably joined at the hip.”