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SUMMARY

Investment tax credit of 50% offered for CCUS, 60% for direct air capture. [UPDATES with comments from Advantage Energy CEO; Image: Carbon Engineering]

By Dale Lunan

The Canadian oil and gas industry got its federal investment tax credit (ITC) for carbon capture, utilisation and storage (CCUS) projects in the 2022 federal budget, released April 7, and while levels fell short of what the industry was looking for, it was generally well-received.

The budget proposes a refundable ITC for eligible CCUS expenses starting in 2022, to the extent that the projects permanently store captured CO2 through an eligible use. Eligible uses include dedicated geological sequestration and storage of CO2 in concrete, but does not include projects which use CO2 in enhanced oil recovery (EOR) operations.

From 2022 through 2030, the ITC will be set at 60% for direct air capture (DAC) projects, 50% for post-combustion CCUS or CCS projects and 37.5% for investments in equipment to transport, store or use CO2. The oil and gas industry had been looking for a tax credit of 75%, and for EOR projects to also be eligible.

Tax credit encourages investments now, not later

In an effort to attract CCUS investments sooner rather than later, the available rates will be reduced by 50% from 2031 through 2040.

The tax credit is expected to cost the Canadian treasury about C$2.6bn (US$2.1bn) over five years starting in 2022-2023 and about C$1.5bn annually from 2026 through 2030.

On the sidelines of the annual Scotiabank CAPP Energy Symposium earlier this week, Tim McMillan, CEO of the Canadian Association of Petroleum Producers (CAPP), told reporters the lobby group had recommended a 75% investment tax credit available to all industries.

“There’s no other oil and gas nation that that is pursuing (CCUS) in a meaningful way,” he said. “We think it is a key technology for Canada and not just for oil and gas – for cement manufacturing and petrochemical as well.”

The ITC as laid out in the budget – along with a plan to extend the Canadian Infrastructure Bank’s mandate to support investment into hydrogen, nuclear and carbon capture – are both important steps for Canada to achieve its emissions reduction goals, McMillan said in a statement after the budget’s release.

“The energy sector is keen to lead by making investments in CCUS and other emissions-reducing technologies,” he said. “We will be reviewing the details of the budget in this regard to ensure these federal initiatives will work for the natural gas and oil industry.”

Canada could be global CCS leader

In Saskatchewan, which also has substantial capacity along with Alberta to store captured CO2, the International CCS Knowledge Centre said the introduction of an ITC for CCS enhances the Canadian fiscal policy framework necessary to accelerate the development of large-scale CCS projects, while still supporting industrial competitiveness.

Canadian industry, it said, has taken a leading role in developing CCS as a key mitigating strategy for reducing CO2 emissions in hard-to-abate sectors like fertiliser manufacturing, cement and steel production, power generation and oil and gas production. With federal support, Canada can become a global leader in CCS.

“Along with our partners in industry across Canada, the International CCS Knowledge Centre has long advocated for mobilising private capital to help meet our climate goals,” Mark Demchuk, national director of strategy and stakeholder relations at the Knowledge Centre, said in a statement. “Canada is a leader in CCS technology, and the investment support mechanisms introduced in the 2022 Emissions Reduction Plan and federal budget strengthen the business case to build on that leadership. We know that in many critical industries, CCS is one of the only solutions to reducing emissions within Canada’s and the world’s ambitious time frames, and this budget allows for the evolution of market certainty needed for industry to invest.”

Michael Belenkie, CEO of Canadian gas producer Advantage Energy and its modular CCS subsidiary Entropy, says the ITC is a good first step to improving the economics of the projects it has in its pipeline now, but what carbon capture infrastructure developers really need is a commercial pathway to de-risk the price of carbon and future CCS and CCUS investments.

“Even the federal carbon price of C$50/mt today rising to C$170/mt by 2030 doesn’t give many the certainty they need to scale up CCS investment – it can be changed or eliminated with a change in government, if that ever happens,” he told Gas Pathways on April 11. “What we are discussing with the federal government now is a policy that incorporates a ‘contract for differences’ – sort of a hedge against future carbon prices – that would provide the stability needed.”

Canadian energy infrastructure company Enbridge, which is among several companies advancing six carbon capture and storage (CCS) hubs in Alberta, said it was still reviewing the tax credit along with other budget measures impacting the oil and gas industry, but welcomed the ITC as a critical “next step” in building investment confidence in Canada’s CCS sector.

“Both the International Energy Agency and the Intergovernmental Panel on Climate Change have noted that carbon capture and storage is essential for the world to reduce its greenhouse gas emissions,” Enbridge said in a statement emailed to NGW. “This is particularly important in hard-to-abate sectors such as power generation and concrete manufacturing in which no viable alternatives exist at a scale required to meaningfully reduce greenhouse gas emissions.”

Oil sands sector has its own pathway to net zero

And the Canadian oil sands industry – one of the country’s largest CO2 emitters – also welcomed the tax credit as a significant element for Canada to reach its net zero by 2050 ambitions.

“Based on our initial assessment, this is a positive step in our efforts to work collaboratively with governments to help Canada achieve its climate goals and ensure our country can be the world’s preferred supplier of responsibly-produced oil,” said Kendall Dilling, interim director of Oil Sands Pathway to Net Zero, an alliance of six companies who collectively account for 95% of Canada’s oil sands production. “With this announcement, the federal government has recognised the importance of developing new technologies to help Canada fight climate change, as well as the importance of the oil sands to our country’s energy security.”

Oil Sands Pathway has proposed its own CCS project, designed to capture up to 10mn mt/yr of CO2 from oil sands-related operations by 2030, and is seeking sequestration rights from the province of Alberta to advance that project.

“The tax credit is an essential part of a supportive and nimble fiscal and policy framework that is required for our industry to proceed with our foundational carbon capture, transportation and storage network,” Dilling said. “If we want Canada to be a world leader in reducing emissions through carbon capture, we need to ensure our industry can remain competitive with other oil and gas producing jurisdictions around the world.”

Vancouver-based Carbon Engineering (CE), which is developing gigatonne-scale direct air capture (DAC) technology to remove up to 1mn mt/yr of CO2 from the atmosphere from a single plant, welcomed the investment tax credit in a social media post.

“CE is pleased to see that by offering an incentive – for a limited time as industry starts-up – to large-scale carbon capture facility developers, the government of Canada is sending a strong signal that the time to invest is now,” it said in a Twitter post.

“Foolish” to support DAC

Brad Hayes, president of Calgary energy consultancy Petrel Robertson, was disappointed – but not surprised – that EOR was excluded from the ITC, and also questioned the efficacy of offering a 60% tax credit to encourage DAC developments.

“I’ve not seen anybody explain how you could possibly move enough air to capture significant CO2 volumes at 410 ppm, unless you employ a massive passive mechanism – like a forest,” he said in an email to NGW. “Using active mechanisms like fans to move the air, you’re incredibly challenged even to recover the volume of CO2 generated by just powering the fans.”

Canada’s focus, he said, should be on CCUS, particularly on high-concentration streams to capture as much CO2 as possible as efficiently as possible.

“We’ve got plenty of those streams – it would be foolish to spend money on DAC until every high-intensity CO2 stream in the world has been captured,” he said. “But all said and done, [the tax credit is] certainly far more efficient than throwing money at EV rebates.”