Ottawa MOU Will Push Alberta Oil Production Costs to Uncompetitive Levels: Study

A rainbow appears to come down on pumpjacks drawing out oil and gas from wells near Calgary on Sept. 18, 2023. The Canadian Press/Jeff McIntosh

The conditions outlined in the federal-Alberta memorandum of understanding (MOU) for a new oil pipeline will increase the province’s oil production costs, rendering it less competitive than U.S. states that produce energy, a new study suggests.

A report by University of Calgary economist Jack Mintz for the Fraser Institute says that while Alberta currently holds an inherent tax advantage, the carbon tax and regulatory frameworks agreed upon in the MOU with Ottawa erode this edge.

These regulatory requirements and the carbon pricing structures will make Alberta less competitive than the two largest oil producers in the United States, he says. Texas and New Mexico do not face the same federal carbon pricing and rigorous mandatory carbon capture requirements, Mintz notes in his report. He contends that their lower production and compliance costs will lure investors away from Alberta.

“By increasing the marginal costs to produce energy in Alberta, federal and provincial policymakers are in effect encouraging investors to look at other energy-producing jurisdictions where costs are lower and returns on investment are higher,” Mintz said in a press release.

The Alberta and federal governments finalized an implementation agreement for their MOU on May 15. Both Alberta Premier Danielle Smith and Prime Minister Mark Carney have heralded the MOU as a benefit to the economy both provincially and nationally.

Smith has described the deal as a strategic triumph for Alberta’s independence and resource industry. Carney frames the Canada-Alberta energy accord as pragmatic “climate action” that unifies the country while securing economic survival and argues it balances environmental goals with industrial competitiveness.

Carney has said the new pipeline and other energy initiatives will increase exports to global markets, noting that the infrastructure will be constructed with sustainability and low emissions as priorities.

Under the agreement, Alberta was to submit a proposal for a new oil pipeline to the major projects office by July 1, but Alberta Premier Danielle Smith’s office pushed the final submission back by one day to July 2 to account for the Canada Day holiday. The federal government must then designate it as a project of national interest by Oct. 1.

Key Findings

The industrial carbon tax is expected to rise to $140 per tonne by 2040. That increase is projected to hike the cost of electricity production in Alberta by $1 billion each year, also by 2040, the study says.

Wholesale electricity costs will also significantly increase, climbing from $39 to $53 per megawatt-hour. This threatens to make Alberta less attractive for developing power-intensive infrastructure, such as AI data centres, Mintz says.

The industrial carbon tax increase also translates to oil sands marginal costs climbing 19.6 percent from $51 to as much as $61 per barrel, and conventional oil costs jumping 25.6 percent from $43 to $54 per barrel.

Natural gas will also be affected, rising 39 percent. The cost to produce a gigajoule (GJ) of natural gas is expected to increase from $1.56 to $2.17, according to the report.

The findings of the report emerge following Mintz’s calculation of the marginal effective tax rate on costs (METC), which involved assessing how carbon policies, including Alberta’s technology innovation and emissions reduction (TIER) system, along with corporate taxes and royalties, increase the expense of producing the next unit of energy.

This forward-looking approach specifically factors in the opportunity cost of lost carbon credits and offsets capital subsidies against the high operational costs of compliance, such as carbon capture, utilization, and storage (CCUS), revealing a higher tax burden for Alberta compared to its U.S. counterparts.

CCUS capital subsidies fail to improve Alberta’s cost competitiveness because they are entirely offset by the high installation and operating costs of the technology itself, the study says. While Canadian subsidies cover roughly 60 percent of capital expenditures, they do not lower the marginal effective tax rate on costs and leave producers with significant out-of-pocket expenses compared to U.S. production-based incentives.

“Critically, by increasing the cost to generate electricity, policymakers will be raising costs on producers across the province, meaning their goods and services will be more expensive,” Mintz says. “As energy becomes more expensive to produce as a result of the increased taxes and regulations, investors will inevitably look to other energy-producing jurisdictions where costs are lower.”