LONDON: Royal Dutch Shell’s investment in a carbon capture plant at its tar sands facility in Alberta shows the company recognizes the threat of climate policies targeting unconventional oil.
The project will help shield Shell against future penalties on tar sands, as planned by California and the European Union, while its commercial success will also depend on demand for the CCS technology which it develops.
In other words, the investment shifts Shell toward the environmental groups which have opposed tar sands development and coal-fired power, on the basis of their CO2 emissions, and could encourage policymakers on CO2 limits.
CCS traps CO2 from processing and burning fossil fuels but has been slow to progress because of vast costs and a failure by governments to charge for emissions whether through carbon taxes or emissions trading schemes.
The first commercial scale power plant application is under construction at the Boundary Dam coal-fired power plant in Saskatchewan, Canada, while Shell’s Quest project will be the first to apply to unconventional oil.
The Quest plant will trap carbon dioxide from Shell’s tar sands upgrader at its Scotford facility in Alberta and inject the greenhouse gas into porous rock 2 km below ground.
Regional and federal Canadian governments will supply C$ 865 million ($ 881 million) toward an estimated cost of C$ 1.35 billion. Shell’s investment, confirmed last week, is undisclosed.
The project will also get two tradable carbon offsets for every ton of avoided CO2 emissions, currently worth up to C$ 15 each, implying up to C$30 million annually if the project meets its minimum target of 1.08 million tons sequestered per year by December 2015.
Production of liquid fuels from tar sands is generally more carbon-intensive than conventional petroleum because of the higher energy intensity of extraction and upgrading.
Tar sands are made of a mixture, in varying proportions, of sand and other mineral matter (80-85 percent) water (5-10 percent) and bitumen (10-18 percent).
The bitumen is either extracted after mining from the surface, as in Shell’s case, or else extracted in situ underground.
In the case of surface mining, the bitumen and sand is removed using massive hydraulic shovels and transported to processing facilities where it is mixed with hot water, screened and the bitumen separated out.
Raw bitumen will not flow through a pipeline at ambient temperatures and so it is either upgraded to synthetic crude oil (SCO) or diluted with a light hydrocarbon.
Shell upgrades the bitumen at its Scotford facility in a process which removes contaminants and adds hydrogen produced from natural gas.
Such hydrogen production reacts steam with natural gas at high temperatures, separating methane into hydrogen and CO2 which Shell will capture using an amine solvent to absorb the greenhouse gas, under its Quest CCS project.
Shell estimates the project will capture up to 35 percent of the total CO2 emissions from the upgrader.
Shell’s investment makes sense in the context of greater expected curbs on CO2 in Canada.
Canada has a national target to cut its emissions by 17 percent by 2020 compared with 2005 levels.
BP energy data show the country’s CO2 emissions from burning fossil fuels presently are just 3.4 percent below 2005 levels and grew annually for the past two years, implying that the target will require additional action to curb CO2 from its expanding tar sands industry.
Canadian provinces have imposed additional targets.
Under 2007 regulation energy companies in Alberta have to report their CO2 emissions per barrel of oil (carbon intensity) and cut these by 12 percent annually, with a phase-in of several years for emitters established after 2000.
That carbon intensity approach puts no upper limit on absolute emissions, and is made more flexible by allowing companies instead to pay into a climate fund at the rate of C$ 15 per ton of exceeded CO2, or else buy carbon offsets from Alberta-based projects which reduce their emissions below a business as usual baseline.
But Alberta is reportedly planning to tighten that target, as it expects CCS to account for 70 percent of the province’s carbon savings through 2050.
The Shell investment also makes sense in the context of expected rising demand for CCS technology, to curb emissions from coal-fired power plants.
Ottawa confirmed on Wednesday a limit on CO2 emissions from new coal plants, following similar caps in Britain and the United States, and which will force the use of CCS in new coal-fired power generation.
Perhaps the most significant prospective policy threat to unabated tar sand emissions will come from plans in California and the European Union to take account of their higher CO2 under existing low carbon fuel standards, and which could provide wider templates.
The EU’s executive Commission in February delayed until next year a decision on whether to attribute higher CO2 emissions to tar sands under its Fuel Quality Directive (FQD).
The law already requires fuel suppliers to cut the life-cycle CO2 emissions of their fuels by 6 percent per barrel by 2020 compared with 2010 levels.
The commission has proposed to label tar sands CO2 emissions as 22 percent above the average crude baseline, in a move which would discourage refiners from using it under the FQD target.
The proposal ascribes to tar sands a value of 107 grams CO2 per megajoule of fuel, compared with average crude oil at 87.5 grams.
It remains to be seen whether Shell’s Quest investment will now see the company support such deliberate targeting of tar sand CO2, policies it has previously been coy about.
The author is a Reuters market analyst. The views expressed are his own.

— The author is a Reuters market analyst. The views expressed are his own.