Pathways Alliance's flagship project looks like a big money loser

A flare stack lights the sky from the Imperial Oil refinery in Edmonton, Dec. 28, 2018. (Jason Franson)

The Pathways Alliance's proposed carbon capture and storage megaproject has not begun construction or even received approval, and yet its business model is already collapsing, according to a global think tank.

In a study published Thursday, the international Institute for Energy Economics and Financial Analysis (IEEFA) found the $16.5-billion project to pipe carbon dioxide captured from 13 oilsands sites in northern Alberta to an underground storage site south of Cold Lake, using 600 kilometres pipelines, is facing spiralling cost challenges with limited revenue.

Together, the factors are conspiring to threaten the project's profitability — and therefore, its ability to go ahead.

"Most businesses, when you have an increase in costs, you can increase your revenue to offset that," said Mark Kalegha, an energy finance analyst with IEEFA, in an interview with Canada's National Observer. "But if your revenue can't move, and you can't control your costs, the picture becomes clear that this is not a good investment."

The business model of a carbon sequestration project is essentially this: companies capture and store carbon dioxide, earn credits for doing so, sell the credits to others, and generate revenue.

The revenue is used to recoup construction costs, pay for the energy used to capture and transport carbon dioxide, monitor the storage site and more. Whatever is left over is profit.

According to IEEFA, the Pathways Alliance, whose members include Suncor Energy, Canadian Natural Resources, Cenovus Energy, Imperial Oil, MEG Energy and ConocoPhillips Canada, which collectively represent 95 per cent of oilsands production, is facing increasing operating costs, the same problem experienced with other carbon capture and storage (CCS) projects.

Since 2016, Shell's Quest project has seen operating costs grow 118 per cent. Similarly, Wolf Midstream's Alberta Carbon Trunk Link has had costs balloon more than 60 per cent since 2020.

"If operating costs rise at currently observed industry rates for the life of the [Pathways] project, then total cost per tonne of CO2 at the proposed facility would balloon to levels that make breakeven or profitability highly improbable," the study found.

A CCS project can only be profitable if it can earn credits for less than the price on carbon, and then pocket the difference. But in Canada, there is effectively a ceiling of $170 per tonne on how much a carbon credit could be sold for. That's because the federal carbon price is scheduled to rise to $170 per tonne in 2030, and paying the carbon price is a company's alternative to reducing emissions.

Think of it this way: with a carbon price in place, a company has two options. It either cuts its emissions to lower its costs or it pays the carbon price.

Buying carbon credits is one way a company could reduce its emissions. So a company would only be interested in purchasing carbon credits if they cost less than the carbon price, because if they cost more it would make better financial sense to just pay the price on carbon.

That means a carbon capture business, like any business, is incentivized to push its costs down as much as possible. If a company could capture a tonne of CO2 for $50, it could sell for $100 on the market and would likely find buyers because that's cheaper than paying the full $170 carbon price.

And there's competition on the way, further undermining the Pathways business case.

Alberta has shortlisted several facilities to capture up to 56 million tonnes of CO2 by decade's end. That means up to 56 million carbon credits could flood the market and push cost per credit down even farther.

If Pierre Poilievre's Conservatives form government and scrap the carbon price as promised, the Pathways Alliance project would be even less likely to be built because the carbon price is the backbone to a carbon market.

Without an incentive to reduce emissions, there's little reason to build a business model around selling carbon credits.

"If there's a penalty for pollution…, you have to purchase these credits in order to compensate for your pollution," said Kalegha. "If you don't have to buy carbon credits in the market, then what then is the value? There's no revenue for these CCS projects."

It's not just Pathways staring at the writing on the wall. Last year, ExxonMobil CEO Darren Woods, whose company boasts of capturing 40 per cent of all anthropogenic CO2 ever captured, told investors on a shareholder call it's a steep challenge to reduce costs, and there is still no workable business model for the industry.

An unprofitable carbon capture project will not provide lasting benefit for communities because they will be unable to create sustainable job opportunities or lasting infrastructure development. Rather, communities could end up saddled with environmental risks with no long-term benefit, IEEFA warns.

The project "is probably going to lose money without subsidies," Kalegha said. "That's the only way this becomes viable is if there are external subsidies to plug in this gap."

The Pathways Alliance claims the project is critical to their ability to cut emissions and has aggressively lobbied for government subsidies to help build it.

The federal government is offering a 50 per cent tax credit the Pathways Alliance members could use to slash approximately $5.7 billion from the project's total cost, while Alberta's carbon capture incentive program offers grants expected to cost Albertans between $3.2 billion and $5.3 billion.

But according to an alliance official, the federal government is still not offering enough.

At a senate committee meeting in May, Mark Cameron, Pathways Alliance vice-president and former senior advisor to Prime Minister Stephen Harper, said the group is looking to recover at least two-thirds of its costs.

Offering to cover 50 per cent of carbon capture costs "doesn't stack up to what the U.S., the U.K., and Norway have," Cameron said. "In those jurisdictions, there are more generous financial incentives for carbon capture."

Kalegha said the fact the Pathways Alliance members, who are already cash rich, are reluctant to invest their own money in the project is evidence they're aware this is not a viable business model. Subsidies would be required to bridge the revenue shortfall, he said.

"Taking a cue from the TMX [Trans Mountain pipeline expansion] debacle, care must be taken that subsidies … do not become open-ended commitments that effectively hook taxpayers into footing the bill for massive cost overruns," the study found. "If anyone, the primary emitters should bear the financial burden and take the risk for pollution prevention and remediation initiatives."

Carbon capture projects come with significant risks to the environment and climate too. According to the IEEFA analysis, industry claims it can capture 95 per cent or more of its carbon dioxide, but projects have failed to achieve those targets in practice.

On top of that, carbon capture can only address some of the emissions from extracting, transporting and refining fossil fuels, but is irrelevant to the majority of emissions from oil and gas that occur when the fuel is burned, like in the engine of a car. That means global emissions can still increase even with a successful carbon capture industry.

As previously reported by Canada's National Observer, the Alberta Energy Regulator will not subject the Pathways project to an environmental assessment, as requested by the Athabasca Chipewyan First Nation and a coalition of environmental organizations.

Denying a full assessment is concerning to environmental advocates, Indigenous leaders, and health experts because when CO2 pipelines fail, they can fail catastrophically.

In recent years, the most alarming example of a CO2 pipeline failure occurred in 2020 when a rupture happened in the small town of Satartia, Miss., causing a mass poisoning that hospitalized about 50 people.

When the pipeline burst, a massive cloud of concentrated carbon dioxide exploded into the air, but because CO2 is heavier than air, it didn't dissipate. Instead, it settled into a thick fog rolling through the community, displacing oxygen and dropping people to the ground as they struggled to breathe.