Petro-Canada is in the business of providing a secure and economic supply of oil and gas products to meet the growing global demand for energy. We also know, by listening to stakeholders’ concerns, that the demand to address climate change is stronger than ever. While oil sands contribute 5% of Canada’s total greenhouse gas (GHG) emissions, we see an opportunity for Petro-Canada to leverage leading edge technology in order to mitigate our industry’s environmental footprint even further.
While climate change is an issue that affects all of our operations, it is most material to our Oil Sands and our Downstream refining businesses. Our Downstream refining operations currently account for just over half of our total GHG emissions. Refining is an energy-intensive process. Technology improvements that were implemented in our Downstream facilities two years ago to reduce sulphur in our refined products had the effect of increasing GHG emissions, because the improvements required an increase in energy use. However, we know that we need to focus on reducing our energy consumption, thereby improving our energy efficiency and improving the economics of a highly competitive business.
While our Oil Sands business unit currently accounts for around 10% of our total GHG emissions, its contribution is expected to rise once future projects are developed. The cost of GHG emissions associated with our projects is a risk to our business strategy and addressing the public’s concerns will also be a key part of moving these projects forward.
There is light at the end of the tunnel. While everyone has a vested interest in how energy development and environmental protection resolves itself in the coming years, we recognize that oversimplified solutions and polarized debate is not helpful. At Petro-Canada, we see the opportunity to leverage financial investment, technological expertise and time into this effort. We feel that both energy development and environmental protection matter, which is why we feel it’s so important for us to drive this issue forward.
Regulations and Economics
Petro-Canada operates throughout Canada and internationally, and is impacted by a variety of climate change regulations, which are at different stages of development and may not be aligned. A key risk for Petro-Canada is the lack of certainty and harmonization around regulations, legislation, targets and post-2012 rules, particularly in Canada and the United States.
In 2008, the current Canadian federal government announced its intention to regulate greenhouse gas emissions by imposing carbon intensity targets, beginning in 2010. We encourage a nationally harmonized set of regulations and compliance obligations where the emissions are taking place.
In the United States, Petro-Canada is monitoring developments within Congress, most notable being The American Clean Energy and Security Act of 2009 introduced by Congressmen Waxman and Markey, Section 526 of the Energy Security and Independence Act (ESIA), state level initiatives including the Western Climate Initiatives, Bill AB32 in California, and various other initiatives. Directly and through our industry associations (Canadian Petroleum Products Institute (CPPI), Canadian Association of Petroleum Producers (CAPP) and the American Petroleum Institute (API)), we have taken an active role in engaging in discussions with the American regulators to understand the implications of these initiatives. Some proponents are labelling the ESIA Section 526 as a restriction on fuels based on hydrocarbons derived from the Canadian oil sands, which could create a dislocation in the current global refined product flows.
Putting a cost on our compliance with climate change regulations and assessing the economic effect on specific projects is evolving within the Company. As a fiscally prudent company, we need to understand and manage the financial impact of greenhouse gas regulations on investment decisions. To this end, we’ve developed a consistent internal carbon cost estimate for the purposes of economic modeling for investment decisions. Carbon cost estimates are now factored into the approval process for all new projects as well as part of our five-year business planning process. We incorporate a price sensitivity analysis into our modelling to account for a high degree of uncertainty in the forecast cost of compliance. As regulations evolve, we expect that estimates of the cost of compliance will become more accurate.
In order to remain in a position to provide an appropriate return on shareholder investment, we need to carefully consider this added dimension of risk in the approval of all projects that fall under these regulations.