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Shell project captures carbon, subsidies

00:00 EDT Thursday, September 06, 2012

CALGARY -- A consortium led by Royal Dutch Shell PLC has launched the first project to bury greenhouse gases from the oil sands, part of a $950-million government-sponsored defence against global criticism of Alberta's "dirty oil."

Called Quest, the project will gather carbon dioxide emissions from the Scotford upgrader, a huge oil sands establishment northeast of Edmonton, and pipe them to a site 80 kilometres north, where they will be injected 2.3 kilometres below the surface.

Once buried, the 1.1 million tonnes a year of carbon dioxide will slowly attach to deep rocks, far from the atmosphere, executives with Shell, the lead partner in Scotford, said Wednesday as they announced the project.

Quest is a "flagship" for the Dutch energy company, and an important step toward securing a future for the oil sands, said John Abbott, the outgoing executive vice-president of heavy oil for Shell. "If oil sands is to continue in the longer term as an important part of the energy mix ... it's critically important that we [do everything we can] to reduce the environmental footprint."

"And this is one of the technologies that we believe can have the biggest impact in the shortest period of time, and that's why we're doing it."

But there is another reason why Shell, along with partners Chevron Corp. and Marathon Oil Corp. are doing it: A generous government investment has taken away much of the financial burden, and may even secure those companies' profits from a project largely built on public funds.

The Alberta government contributed $745-million to the project, and Ottawa added another $120-million. The heavy spending is a clear indication of the tremendous distance between carbon capture as an environmental and public relations benefit, and use of the technology as a viable business strategy.

Quest is expected to cost $1.35-billion to build and run for 10 years, leaving the industry with a $485-million construction price tag, after subtracting the government grants. But the actual number is far lower, because Alberta's carbon legislation currently assigns a $15 cost per tonne of carbon, and Quest has been allowed a two-for-one credit for the tonnes it buries. Those credits are worth enough to trim the industry's Quest price tag to as little as $155-million over the first decade.

And it could be less. Alberta is contemplating a large increase in its cost of carbon. At $30, a level that is being considered but not enacted, the Quest partners could actually see a profit in the first 10 years. (Quest's contract with the government stipulates it is entitled to a reasonable, but not "undue" profit with its carbon credits).

But without major government assistance, the magnitude of the Quest costs point to the difficulty of building carbon capture and storage commercially. Over a 25-year period, Quest will cost $72 per tonne of carbon it stores. That's far above the current Alberta's $15 - and even further from the price on open carbon markets, like the European exchange, where it currently trades at just over $10 a tonne.

The magnitude of difficulty in making the technology work in Canada was dramatically illustrated this April, when TransAlta Corp., along with partners Enbridge Inc. and Capital Power Corp., cancelled their Pioneer project to take carbon from a coal-fired power plant and sell it. That project had $778.8-million federal and provincial funding, but the partners could not make the economics work.

Royal Dutch Shell (RDS.B)

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