A detailed memorandum of understanding (MOU) between the federal and Alberta governments, released late November, looks like a political game-changer but is most likely an economic loser. The short-term beneficiary is the oil and gas industry, who got everything on their wish list to roll back federal climate and environmental policies.
Wrapped in the political boosterism of Canada becoming an “energy superpower,” at the highest level, the MOU is for mutual support of a new bitumen pipeline from Alberta (over the BC government’s objections) to the West Coast, paired with the oil industry’s Pathways Alliance CO2 Transportation Network and Storage Hub Project.
Up close, this plan is more than an environmental or climate disaster. It simply does not make economic sense and would require massive capital costs that the industry itself does not want to pay.
Pipe dreams
Currently, there is no private sector proponent proposing to spend $30-50 billion on a new pipeline. The Alberta government itself is identified as a proponent and may commit provincial funds. The MOU also fancies First Nations stepping up to take equity stakes (likely through federal loans).
We can only hope that the federal government does not repeat the blank cheque exercise of the TMX pipeline at a staggering cost over-run of $34 billion. That pipeline was the result of the last time the feds tried to woo Alberta in exchange for signing on to climate action plans.
Indeed, a new bitumen pipeline to the coast would be a massive step in the wrong direction. In addition to incremental emissions from oil and gas production in Canada, the combustion of exported fuels in importing jurisdictions would represent hundreds of millions of tonnes of carbon emissions.
The costs of a new bitumen pipeline are more than the capital costs of its construction. Building it over several mountain ranges to the coast will inevitably cause environmental disturbances to local ecosystems. And once built the threat of spills on land or off the BC coast will loom over every shipment of diluted bitumen.
Burying the evidence?
Pathways is billed as a $16.5 billion investment in a pipeline network and underground storage. Based on an investment tax credit of 37.5 per cent, the feds have already committed billions should it go forward. Additional 12 per cent tax credits from the Alberta government would push public subsidies to about half of the total capital cost.
However, Pathways does not include the actual carbon capture that would need to happen at member companies’ own production sites. This would run to many billions more in capital expenditure, with federal subsidies of 50 per cent available as an investment tax credit. Federal subsidies for carbon capture, utilization and storage (CCUS) in recent years have also come through the Canada Growth Fund and Canada Infrastructure Bank.
For all of that cost, Pathways would capture only a modest 10-12 million tonnes (Mt) of CO2 per year as a first phase. By comparison, the Alberta oil sands pumped 86 Mt into the atmosphere in 2023 and the oil and gas industry as a whole 154 Mt.
Even worse, the MOU commits the federal government to extending CCUS tax credits to “enhanced oil recovery”, which uses the CO2 not for long-term storage but to boost well pressure to extract more from older wells.
On the demand side, the world is changing fast. The economics of renewables are much more favourable for Asian countries, which also makes them less dependent on imported fossil fuels. Many are projecting global demand for oil to drop, or at least peak, around 2035. And Alberta remains a high cost producer of heavy oil in that competition.
Killing climate and energy regulations
The real action of the MOU is to immediately clear the slate of climate and energy regulations facing the industry that were introduced in the Justin Trudeau era. These include not moving forward with a proposed oil and gas emissions cap and a five-year delay (to 2035) of regulations on methane emissions.
While the MOU makes reference to the federal and Alberta governments continuing to support net zero emissions by 2050, this is clearly disingenuous. There is no plan that Canada will get even close to that even after the slippery “net zero” language which is code for loopholes that enable business as usual.
If anything, the MOU muddies the waters of the public conversation by eliminating the recent anti-greenwashing legislation that required companies to demonstrate that their claims are factually correct. Expect more deceptive advertising in favour of fossil fuel expansion as a result.
Some have argued that the MOU commits Alberta to the federal industrial carbon pricing schedule of increases to 2030, but this battle was already won at the Supreme Court. The federal government already has an enforceable “backstop” or minimum carbon price, so Alberta is just agreeing to obey the law of the land. Commitments to discussions of an industrial carbon price pathway after 2030 are not worth much. If anything, the industrial carbon pricing system is way too lenient in the name of “competitiveness” with oil and gas companies paying only a teeny $6 per tonne of emissions.
Electricity features in the MOU in some problematic ways. The MOU exempts Alberta from federal Clean Electricity Regulations (CER) that were finalized a year ago. The regulations are imperfect but have a core objective of achieving a net zero grid by 2050. They don’t even take effect until 2035 but were to be an organizing framework to guide provincial electricity investments.
Alberta has the most polluting electricity system in Canada, and the province was to be the source of about 60 per cent of the emissions reductions from the CER. Now, we can expect other provinces like Saskatchewan to follow Alberta and withdraw from the regulations.
Nuclear power also figures into the long-term vision of the MOU, providing power for industry and carbon capture, but also data centres for artificial intelligence. Again, there’s not much of a real plan here, nor any sense of what public subsidies might be required to pay for new nuclear generation. The MOU speaks to new transmission lines connecting electricity grids from Alberta to BC and Saskatchewan, which could be a positive development but needs to be part of a more coherent vision for energy and resources in Western Canada.
Assessing the “grand bargain”
The industry has been on a winning streak all year, starting with the One Canadian Economy Act, passed in the summer. The key feature of the legislation was the creation of the federal Major Projects Office, with a mandate to accelerate projects deemed in “the national interest” by bypassing regulatory reviews. So far, it’s mostly a list of mining and oil and gas projects.
While the MOU speaks about consulting First Nations, it falls well short of the language of free, prior and informed consent. Instead, the MOU seeks to bring in First Nations as equity partners to cleanse these projects–likely through federal loans that could put indigenous people on the hook if these projects fail to unfold as planned due to cost over-runs or changes in energy markets.
On the surface, the MOU is a grand bargain that ends a political battle between the feds and Alberta. But with opposition in BC and terrible economics, there’s a strong likelihood those pipelines never get built. Nonetheless, by killing climate and energy regulations, the MOU must have the oil and gas industry feeling like a kid on Christmas Day.
Marc Lee is a Senior Economist with the Canadian Centre for Policy Alternatives
