Varcoe: Buyers attempt to decode message despatched by Ottawa's emissions cap on oil and gasoline

As Canada’s oilpatch tries to determine how a federal emission cap will work, a extra instant concern is its influence on funding.

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Because the oilpatch tries to determine how a brand new federal emissions cap on the business will work within the years forward, their eyes are turning to a extra instant matter: its impact on funding.

On Thursday, Ottawa unveiled the framework of its incoming restrict on greenhouse gasoline emissions from the business, adopting a cap-and-trade system to decrease emissions by a goal of 35 to 38 per cent (from 2019 ranges) by the tip of this decade.

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With flexibility measures being put in place, akin to permitting corporations to purchase offsets credit, the precise emissions discount might find yourself being 20 to 23 per cent. Business executives say they might want to see the ultimate laws to know the impact on future manufacturing and compliance prices.

Nonetheless, they’re clear-eyed on the message it sends to buyers within the Canadian oil and gasoline business.

“It can make it more durable to draw international funding to return into Canada and it’ll additionally serve to cap, or make it a hindrance, to attempt to develop manufacturing. And I’m asking, why would you try this? You’ll be able to nonetheless be a world chief in local weather change,” Surge Power CEO Paul Colborne mentioned Friday.

“You bought your palms round my throat and now you’re squeezing even more durable.”

The emissions cap is a part of the federal local weather technique to decrease total emissions by as much as 45 per cent by the tip of this decade as Canada seeks to realize net-zero emissions by 2050.

Draft laws on the cap will probably be unveiled subsequent yr, with remaining laws accomplished in 2025.

“We’re doing one thing that has by no means been completed on this nation, and that nobody else on the planet has completed,” federal Atmosphere Minister Steven Guilbeault informed reporters Thursday. “So, we felt we would have liked to take the time to do it proper.”

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A cap-and-trade system will set up a complete quota of allowable emissions within the upstream business, which might fall over time. Corporations can purchase offsets or put cash into a brand new decarbonization fund in the event that they exceed their allowances.

View of the Syncrude oilsands extraction facility close to Fort McMurray on October 25, 2009. MARK RALSTON/AFP/Getty Photographs

Apart from the brand new coverage, Canada has a nationwide worth on carbon and clear gasoline laws that have an effect on downstream corporations.

The province has an current program for heavy emitters — the Alberta Innovation and Emissions Discount (TIER) system — and a notice from BMO Capital Markets on Friday mentioned the cap provides “one other layer within the Canadian coverage pancake.”

A report by CIBC Capital Markets analysts on Friday famous the majority of anticipated business reductions will come from chopping methane emissions and from the oilsands, the place a big carbon seize and storage community is being deliberate.

“We view the imposed reductions as largely possible from a technological standpoint, however to us the timing of the cap stays unrealistically bold and therefore would make it onerous if carried out,” the CIBC report states.

“On the finish of the day, we doubt both buyers or corporates will take a lot of this long-awaited coverage to coronary heart. Particulars stay scant, a federal election looms and a constitutional problem from the provinces is nearly sure.”

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Certainly, some business buyers in Canada say they’re not fussed but, given the ignorance accessible.

“I simply don’t suppose we now have sufficient particulars to kind an informed opinion,” mentioned Eric Nuttall, a senior portfolio supervisor with Ninepoint Companions.

“That is being put forth by a authorities that in all probability received’t exist in two years . . . I’m not shedding sleep over this in any respect.”

But, there’s concern the coverage will successfully cap future manufacturing development and make it more durable to draw capital, because the business must make important investments in carbon seize, utilization and storage tasks, and different decarbonization initiatives.

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Corporations that function on each side of the Canada-United States border level out that whereas the Biden administration is placing methane guidelines in place, the U.S. doesn’t have the identical array of local weather insurance policies directed squarely on the oil and gasoline sector.

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“They don’t have a carbon worth and so they don’t have these emissions caps in place. So, the query is: Does Canada actually wish to give the US that huge of a bonus?” mentioned Cole Smead, president and portfolio supervisor with Phoenix-based Smead Capital Administration.

“Canada has nice property. (Do) you wish to give your largest neighbour to the south — the place you promote extra oil than anyplace else — a structural benefit within the regulatory framework? I don’t suppose I’d.”

Smead, whose agency has investments in Canadian-based companies together with MEG Power and Cenovus Power, mentioned the emissions cap in Canada “simply proves that there’s a vast quantity of human foolishness potential.”

He’s undecided if the brand new cap will ship buyers in Canadian power to the exits, however it can add one other exterior value and make it a lot more durable for brand new producers to begin up or develop.

Knowledge by Raymond James reveals 49 per cent of publicly traded Canadian petroleum producers are held by U.S. buyers, 46 per cent by home shareholders and the remaining by worldwide buyers. Whereas the U.S. presence has been rising in recent times, the emissions cap is a headwind for the sector, mentioned Raymond James analyst Jeremy McCrea.

“It’s one factor to have a carbon tax the place everyone’s impacted, but it surely’s one other factor to focus on a selected business,” he mentioned.

“It feels very (a lot) within the crosshairs of the federal government. And that’s why a number of the buyers I’ve talked to have been cautious right here of how a lot capital they wish to sustain in Canada.”

Chris Varcoe is a Calgary Herald columnist.

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