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The carbon capture conundrum

Globe and Mail: Nathan VanderKlippe & Shawn McCarthy - Saturday, June 13, 2009

http://www.theglobeandmail.com/globe-investor/the-carbon-capture-conundrum/article1180418/

Fort Saskatchewan, Alberta - On a late-spring day beneath a warm prairie sun, some 6,000 construction workers and 30 cranes are at work on a $12-billion expansion to Royal Dutch Shell PLC's upgrader to boost its capacity for processing oil sands bitumen.

A short drive across the massive industrial complex near Fort Saskatchewan, Alta., a gravel lot sits largely empty – an idle crane, some pickup trucks, and a row of portable offices. It is, however, home to a controversial idea: This undeveloped lot is the would-be home for a carbon capture storage (CCS) project.

The technology known as CCS has been touted as the next major advance for an oil sands industry that appears to be on a collision course with governments' determination to battle climate change. In their struggle to soften Canada's reputation as a source of “dirty oil,” federal and provincial governments have placed a big bet on CCS, with plans to pump more than $3-billion into the technology.

Few other technologies hold the same promise, and indeed, few are being tested or funded to the same degree. And the spending is just ramping up. Later this month, the Alberta government is set to announce the winners of $2-billion in funding for carbon capture.

All this promise runs smack into the overarching uncertainty about carbon capture. The technology likely won't work where the oil is actually pulled out of the ground, but rather at the processing end. Even there, the economics simply don't add up. And the technology remains unproven at a commercial scale.

“We shouldn't see this as a silver bullet and be putting our eggs in this basket – particularly with public dollars – and ignore some of the cheaper and more effective options,” said Simon Dyer, the oil sands program director at the Pembina Institute, an environmental think tank.

Even federal Environment Minister Jim Prentice conceded recently that the technology will have limited application in northeastern Alberta, where companies produce bitumen either in open-pit mines or by injecting steam into underground formations.

Critics such as Mr. Dyer, and some within the energy industry, argue that government money is better spent on technologies that reduce the very creation of greenhouse gases – including new oil sands extractions techniques currently under development – and on cleaner forms of electricity generation.

Most of CCS's proponents acknowledge it won't contribute to reducing emissions from the oil sands projects themselves, where diesel-powered trucks and natural-gas-powered steam generators produce greenhouse gases that are difficult to capture. But industry and government remain confident the technology can be widely used on the upgraders and refineries that process the bitumen, as well as for coal-fired power plants.

Upgraders are critical components of the oil sands industry, transforming heavy bitumen into synthetic crude oil for further refining. But it is an energy-intensive process that drives up both costs and the emissions of carbon dioxide for oil sands producers.

Capturing their emissions could dramatically reduce the “carbon footprint” of oil sand projects, though critics doubt it could ever remove the environmental stigma from the controversial projects.

Still, some industry executives have not given up on the idea that CCS can eventually be useful in the mines and in-situ projects around Fort McMurray.

One of those is Murray Edwards, one of Calgary's most successful entrepreneurs and vice-chairman of Canadian Natural Resources Ltd., which is looking into injecting CO{-2} into tailings from its Horizon oil sands mine. And Mr. Edwards supports CCS even though even though he believes it will come at a cost. “In today's world, the process that we're proposing is not economically viable,” he said.

But the public purse needs to be wide open, he argues, to support what he believes will be a game-changing technology with wide application in the industry.

“If there's to be an important commitment on climate change and carbon emissions, there's going to have to be investment in technology, much like if the government hadn't mass-supported the railway it would never have been built,” Mr. Edwards said.

Profiting from emissions

If CCS is going to contribute to the Harper government's goal of reducing greenhouse gas emissions by 20 per cent from 2006 levels by 2020, the oil and power industries need to begin building demonstration plants now, industry executives say.

Companies are vying for huge pots of public money that would help underwrite the first projects, though even taxpayers' support may not be sufficient to spur the development, given the large capital costs involved in the proposed projects.

Alberta is set to announce several winners of a competition for some $2-billion in provincial funding to build demonstration plants. Saskatchewan has offered its own support, and Ottawa has promised $1-billion for clean energy technology, much of which will go to CCS.

The plan: To capture CO{-2} from power plants and upgraders, and then sell it to oil companies that will use it to enhance recovery from aging crude reservoirs, or inject it underground for permanent storage in deep saline aquifers.

At its Fort Saskatchewan upgrading site, Shell and its partners, Chevron Canada Ltd. and Marathon Oil Corp., hope to pioneer the capturing of CO{-2} to prevent its emission into the atmosphere.

On that gravel lot at the Scotford facility, they have sketched plans to build a unit that would process emissions, separating CO{-2} from other gases and diverting it out of the waste stream.

Across the road, the gleaming silver stack on Scotford's hydrogen production unit pours an invisible stream of CO{-2} into the air. Upgraders require hydrogen to break apart the bitumen molecules and create synthetic light oil.

While the entire upgrading facility produces 1.8 million tonnes of the gas every year, 40 per cent of that comes from the hydrogen plant, which burns vast quantities of natural gas.

Rather than rising out of a stack, all of the hydrogen plant's CO{-2} would be compressed into a liquid, piped to a well and injected 2,300 metres below the surface of the earth. There, it would seep into a massive aquifer filled with saline water and, if all goes according to plan, remain sequestered for a very long time.

Shell won't say how much the project will cost. And questions have been raised about the feasibility of building upgraders in Alberta, as U.S. refiners facing waning heavy oil supplies from Venezuela are adding capacity to handle the Canadian bitumen.

But if it goes ahead, Shell's project – known as Quest – will trim 25 per cent from the carbon footprint of its entire oil sands mining and upgrading operation.

That would be a significant step in a world that is quickly moving to put a price on carbon.

Devising a model

It's a key and still unanswered question: What price will Ottawa impose on carbon emission through its planned cap-and-trade system?

The emission limits imposed on the industry, and the design of the cap-and-trade system, will have a major impact on whether it becomes cost effective for companies to invest in pricey technology.

The dollars-and-cents dilemma remains central.

Industry officials expect the cost of capturing CO{-2} to fall dramatically as companies and governments around the world invest heavily in commercializing it. The numbers work best when there's a buyer for the CO{-2}, such as an oil company that can shoot the gas into old, faltering wells to push up more oil.

To feed that potential market, North West Upgrading Inc., a small Calgary-based firm, has its own plans to capture CO{-2} from an upgrader it hopes to build and then feed it through a pipeline network that would deliver the gas to central Alberta oil fields.

The company is modelling its idea on EnCana Corp.'s Weyburn plant in southeastern Saskatchewan, the world's largest CO{-2} sequestration/enhanced oil recovery project. EnCana buys the CO{-2} from a highly subsidized coal gasification plant in North Dakota, and has boosted oil production from its depleting Weyburn field.

North West chairman Ian MacGregor envisages building a $700-million “Alberta carbon trunk line” to carry the gas to where it's needed – similar to the natural gas gathering system that spurred the development of fields throughout the province.

“Alberta has the potential the produce to a lot more oil from existing fields,” Mr. MacGregor said. “We have all these reservoirs that are languishing because they haven't had the CO{-2} and couldn't get the CO{-2} until the world changed.”

The Alberta Research Council (ARC) estimates about 500 million tonnes of CO{-2} a year could be used to push oil out of the ground, though Mr. McGregor insists the potential demand could be four times that amount.

The rest would have to go underground. The ARC has calculated that the province has enough underground saltwater space to store 10 billion tonnes of CO{-2}; another three billion could go into oil and gas reservoirs.

But even once it's underground, questions remain.

Rules do not exist to govern how companies can own storage repositories, which party receives credit for disposing of carbon – is it the company that captures it or the one that stores it? – or who assumes liability for the carbon once it is buried.

Experts say the likelihood of buried carbon escaping is small. Nature kept natural gas and other substances locked underground for million of years, and they say there is little reason to expect any different for CO{-2}.

Still, because carbon is expected to stay underground for millennia, and because it is only valuable while locked up – if it escapes, carbon credits would need to be repaid – the question of who takes responsibility is an important one. And again, industry is looking to government for help, saying CCS doesn't work unless Ottawa shoulders long-term liabilities that companies won't want.

Enbridge Inc. has proposed a model where the Crown would own the storage space, and lease it to the company pumping carbon underground.

“With that long-term ownership, the Crown would also then have the long-term liability,” said Chuck Szmurlo, Enbridge's vice-president of alternative and emerging technologies. “It would be almost untenable for a company to take on thousands of years of liability.”

If you measure greenhouse gas output purely by what's produced in the extraction of Alberta's bitumen, the oil sands produce three times as much CO{-2} per barrel as regular crude. If you measure by the total carbon that flows from a barrel of crude – from the time it is pulled from the ground to the time it powers a city bus – the oil sands are 10 to 15 per cent worse than other oils, according to current industry estimates.

Either way, a stiff price on carbon would amount to a stiff penalty on the oil sands.

Putting a price on carbon

For the most controversial part of the oil sands process – the massive extraction plants near Fort McMurray – carbon capture is likely a red herring.

Among the chief offenders in the greenhouse gas hall of shame is the steam-assisted gravity drainage (SAGD) process. It essentially melts bitumen out of rock by pumping huge quantities of hot, high-pressure steam underground.

To create the steam, these operations must burn enormous quantities of natural gas; by 2025, fully 20 per cent of Canada's natural gas will be burned in the oil sands.

So why not capture the CO{-2} pouring out of their operations? Several companies have given it serious consideration, but abandoned the effort. The reason: While SAGD produces a lot of CO{-2}, it doesn't produce a concentrated stream.

“The amount of CO{-2} in the flue gas coming out of the steam boiler is about the same amount that's coming out of my mouth as I speak, 3.5 per cent or so,” said Robert Skinner, senior vice-president for commercial affairs with StatoilHydro.

The Norwegian company has the world's oldest carbon-sequestration project at its Sleipner natural gas field in the North Sea. But its efforts to tap Alberta's fund to capture oil sands carbon ran into a cost wall.

“Our own project alone, for one million tonnes [of carbon] a year, would have used nearly 75 per cent of the total $2-billion” in the provincial fund, Mr. Skinner said. “As an Alberta taxpayer, I would rather that money is used to get the biggest carbon bang for the buck. And that certainly is not in a SAGD plant up in the middle of nowhere.”

ConocoPhillips, which also examined and rejected a SAGD capture project, was more blunt: when it did the math, it found capturing, transporting and storing CO{-2} would cost $200 per tonne.

“We withdrew our proposal because of this number,” said Kevin Meyers, the departing president of the company's Canadian operations. “There are other technologies, other processes, other projects that are better suited to pursue CCS.”

None of this has, however, kept some in the oil patch from exploring ambitious CCS plans. Canadian Natural Resources is looking at piping carbon captured from an upgrader at its oil sands mine into its tailings. “To me it shows how technology can be applied in practical solutions to deal with carbon emissions, water usage and reduction in size and the speed of reclamation of tailings ponds,” Canadian Natural's Mr. Edwards said in an interview.

Pipeline builder Enbridge shares Mr. Edwards's belief in carbon capture. Enbridge has already secured underground rights to several deep saline aquifers – it believes it is the first to make such an acquisition – and has conducted engineering studies on a network of carbon pipelines that would criss-cross Alberta, transporting compressed CO{-2} from Fort McMurray and several coal-fired power plants to oil fields and aquifers.

It is also leading the Alberta Saline Aquifer Project, which has 38 industry members and is working on a pilot saline sequestration demonstration.

But the success of the project hinges, Enbridge's Mr. Szmurlo said, on how much governments are willing to support carbon capture. It will likely require the imposition of a substantial carbon price – through a tax or a cap on emissions.

“People have asked me, ‘How do you ever make a buck transporting and sequestering CO{-2}?' My answer is, the same way that waste management makes a dollar picking up the garbage in front of your house. It's deemed to be a societal good not to have your garbage lay in the alley. So society collectively contracts for a company to come along with a truck and pick up that garbage.”

“They may decide to employ the same model for their CO{-2}.”

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