Submitted to: Alberta’s Climate Change Advisory Panel

September 30, 2015

[email protected]

COMMENTS ON ALBERTA’S CLIMATE LEADERSHIP DISCUSSION DOCUMENT Suncor Energy is Canada's leading integrated energy company. Suncor’s operations include oil sands development and upgrading, conventional and offshore oil and gas production, petroleum refining, and product marketing under the Petro-Canada brand. In Alberta, Suncor’s operations include an oil sands base plant and oil sands upgrading facilities, in situ operations, midstream logistics infrastructure, a refinery, and Petro-Canada retail stations. Through oil sands cogeneration and renewable energy, Suncor is the 5th largest independent power producer in Alberta. The company’s head offices are also located in the Suncor Energy Centre in Calgary. We welcome the opportunity to provide input to Alberta Environment and Parks and the Climate Change Advisory Panel members to inform the direction and key components of Alberta’s future climate change policy framework.

Principles of policy design for climate leadership. Part of being a sustainable energy company is recognizing that climate change is a real global challenge and that our operations have an environmental impact. We are a strong voice in the call for credible policy to address the Canadian oil and gas industry’s GHG emissions. In our view, this includes a carbon price signal that incents the right behaviour and a practical regulatory architecture that: •

results in real greenhouse gas reductions

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provides clear support for innovation and technology development that enables game-changing solutions in resource production

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positions Canada as a leader in energy innovation

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maintains the competitiveness of Alberta’s economy

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has relative ease and low cost of administration

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sets challenging but achievable reduction goals with a process that allows for an increase in ambition as technology develops

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provides flexible compliance mechanisms.

Recognizing that investment capital is mobile, a responsible policy will not discourage investment in the resource industry. Climate change policies cannot be implemented in isolation, but need to consider a holistic approach taking into account other policy objectives of both the provincial and federal governments. It is in the interests of all Albertans that climate change policy achieves outcomes in the most economically efficient manner. Suncor operates in several jurisdictions that have each implemented climate change policy frameworks that reflect their own unique objectives and opportunities. While being largely agnostic to the specific architecture of a carbon regulation, we believe that the architecture of the Alberta Specified Gas Emitters Regulation (SGER) was carefully designed for Alberta’s unique circumstances. In a province with

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a large resource base and relatively low population, it targets the most significant emission sources. We appreciate the opportunity to share our perspective on key policy elements of a future climate change regulation.

Stringency A carbon price is the single most effective way to change the investment and operating decisions that drive real emission reductions. The time is right for a higher level of ambition in carbon policy stringency in Alberta. The question is how to drive the most reductions with the least impact on Alberta’s competitiveness. A carbon price per tonne can be achieved either through levying a carbon price on all tonnes, or levying a higher price on marginal tonnes - such as those tonnes required to meet an intensity reduction target under the SGER, or the tonnes above allocated allowances under a cap and trade system. New project economic analysis reflects any carbon price, whatever the regulatory structure, at the average cost per tonne over all tonnes. The higher the cost impact, the greater the influence on the economic viability of the project. After the decision has been made to proceed with the project, a higher price on marginal tonnes is more effective in influencing energy efficiency and adoption of technology. On existing assets, a higher marginal price shifts the break-even of the marginal abatement curve, bringing more reduction projects into consideration in the capital allocation process, leading to real reductions at a faster pace. A higher marginal price can also incent broader abatement opportunities such as renewable energy or cogeneration. A price on all tonnes is less efficient in that it will tax tonnes that currently have a very high abatement cost. Further, if the tax is high enough to incent reductions on all tonnes, it will likely require competitiveness to be managed through other measures such as revenue recycling. Climate policy stringency matters but should not be viewed, or articulated, as the single determinant of climate leadership. It is important to effectively communicate how policy levers pull together to achieve triple bottom line outcomes. The cost per tonne in Alberta is often compared to other jurisdictions that have implemented greenhouse gas regulations, without recognizing that those jurisdictions have mechanisms to protect the competiveness of their industries through either revenue recycling, or allocation of allowances, resulting in a similar effective cost. It is not common perception, for instance, that the overall cost of the current cap and trade program to our refinery in Quebec is substantially similar to the carbon cost on our Edmonton refinery - and will be lower as the SGER increases take effect in 2016 and 2017. See Appendix A of this submission for more detail. Recommendation: •

An approach that puts a higher price on marginal tonnes, rather than a lower price on all tonnes

Baselines for reduction targets Setting a baseline for emission reduction is not unique to the SGER; cap and trade programs also use facility emissions as the basis for setting caps and allocating allowances. The SGER sets a facility intensity base line after the first three full years of facility operation, which allows the facility to reach steadystate operations. The process for setting intensity baselines is transparent, as is the process for reporting

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performance against the baseline. There are mechanisms in place that require compliance through specified types of reduction activity and to reset the baseline under specified circumstances. While a difference in intensities between facilities most often reflects reservoir geology characteristics, a criticism of the approach is that it may also reflect poor energy efficiency in the equipment or project design. An enhancement to the historical facility base line approach could be a requirement for the operator to demonstrate, through a transparent process, that best commercially available technology, economically achievable, to maximize energy efficiency has been evaluated and selected in the project design. For industrial processes like the refining industry, an approach to regulating performance is to assess performance against an international performance benchmark such as the Solomon Complexity Weighted Barrel (Emissions Intensity, kg CO2/CWB). This is made possible by a vast global data base of over 300 global refining facilities and provides a credible, transparent and practical tool to measure industry and facility performance on a level playing field. Another approach to setting a base line is to use a “product standard”. A product standard is not a true benchmark in that it does not compare performance of similar processes, but is a targeted intensity for a specific stage of a product life cycle. This approach is often proposed as a simple and less arbitrary way to set a benchmark. It generally works well for industrial processes, particularly in a ‘greenfield’ application, but has added complexity when applied to the resource-extraction sector where subsurface characteristics, and not technology selection, is the primary determinant in the energy intensity of the facility: • • •

Without some adjustment to recognize differences in reservoir characteristics, a product standard will create winners and losers based on factors beyond the developer’s control. Where the boundaries are set for a product standard matters and the apparent simplicity of this approach could be undermined through the need to recognize different processing pathways and facility integration. A Life Cycle Value is, by definition, the carbon intensity of the end product. The specific processing pathway that crude takes from extraction through to a refined product (particularly whether it is upgraded in the field or in a refinery) is a significant determinant of the life cycle value and may occur in several jurisdictions. A product standard basis for regulation of extraction would discourage opportunities to remove more carbon during the extraction and early processing phases that could result in significantly less upgrading and refinery conversion intensity and, as a result, lower well-to-tank life cycle emissions. In this respect, a product standard approach may inhibit the ability to “think globally and act locally”.

Recommendation: • •

A requirement for the operator to demonstrate, through a transparent process, that best commercially available technology, economically achievable, to maximize energy efficiency has been evaluated and selected in the project design. Before determining a baseline methodology, carefully evaluate the trade-offs between different approaches to setting base lines and the implications for adding value within the province.

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Accelerate the pace of technology innovation Up to this point, oil sands development has been about proving that the business is commercially viable and that relatively new technologies work at scale. The challenge from here on is to make it a cost competitive and less resource intensive industry. Technology and innovation that uncovers step-changes in our processes is key to low carbon oil sands development. Over 50 years, mining technology has evolved to meet this challenge through changes in extraction methods and mine processes. In situ is a relatively immature process and represents the next frontier. In parallel with existing or future regulatory approaches, the oil and gas industry and government have funded and resourced a collaborative network of many different organizations to address both oil sands and broader energy innovation. The solutions to make meaningful GHG reductions across the global economy do not exist today, but will come from the work done by individual companies and these focused collaborations. The spin-off of attracting talent and intellectual capital to the Canadian energy industry is critical and will position Canada to compete successfully as an energy provider in the future. Innovation in the oil sands does not happen at the fringes, but typically within the large industry players that have the tangible pathways to deployment. Properly crafted, regulation can enable and fund innovation through compliance payments. The Alberta technology fund (CCEMC), a compliance pathway under the SGER, is quite unique in global terms in applying and leveraging compliance payments across a broad suite of carbon reduction projects and research. The CCEMC is accelerating technological evolution in Alberta. A higher carbon price would increase revenues into the CCEMC and it is critical that its mandate be optimized to support de-risking technologies to deployment at commercial scale. A characteristic of successful innovative cultures is recognizing that research and development is a series of steps, often failures, that leads to overall success. Breakthrough technology programs recognize and incorporate the “freedom to fail”. The existing royalty framework does not recognize the value of the “good try” and there may be opportunities during the Royalty Review to identify where it acts as a disincentive to innovation or value-add. Likewise, new technologies and innovative process changes in the oil and gas sector may be limited in the future by the singular focus that the current regulatory approach places on asset yield and conservation of resources. Recommendations: • • •

Streamline mechanisms and partnerships that ensure that industry is able to accelerate and increase the results of CCEMC funded programs. An appropriate mix of CCEMC funding for early stage research, pilot projects to speed path to deployment and “shovel ready” projects. Review the regulatory approval process through the lens of climate change to ensure that value to the province and carbon reduction objectives are aligned.

Broaden the base of carbon pricing To be most effective, carbon pricing policy should change how we both produce and use energy. An efficient way to quickly target a significant and growing amount of end-use emissions would be the

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application of a natural gas, electricity, gasoline and diesel carbon price at the point of sale. There are various mechanisms for levying a carbon price, which combined with revenue recycling through reduced personal income taxes, could protect lower income Albertans while sending a clear price signal to change choices and energy use habits. Recommendation: • In addition to a focused regulation for large emitters, consider applying a more broad-based carbon price on targeted emissions.

Offsets and flexible compliance mechanisms Suncor has been a long-standing proponent for the use of offsets as a compliance mechanism. The genesis of offsets is to mobilize capital, ingenuity and action towards an emission reduction objective. In doing so, offsets drive least cost reductions and innovation in energy conservation. Recommendation: •

Alberta maintains leadership in driving reductions through offsets.

Power and Emission Reductions Coal retirement and addition of renewable energy to the Alberta grid are among the most attractive GHG reduction opportunities for Alberta. Our objective, as Albertans, should be to replace coal generation in the most economic and efficient manner possible. Specifically, coal replacement can be accomplished through a combination of gas-fired (‘firm capacity’) and additional renewable (‘intermittent’) generation. For gas-fired generation, oil sands cogeneration is an optimal source of new power and steam in a carbon constrained context; for each molecule of carbon, cogeneration optimizes the environmental, economic and social benefits of both low carbon power and oil production. Cogeneration is also the most economical way to replace base load coal generation because it has the benefit of being financed on oil sands operator’s balance sheets without the need for large subsidies or long-term contracts. While the current slowdown in oil sands growth will reduce ‘greenfield’ opportunities to build cogeneration there are still many ‘greenfield’ as well as ‘brownfield’ opportunities to bring on additional cogeneration over the next 10 years. Four principles are important when encouraging additional oil sands cogeneration – both ‘brownfield’ and ‘greenfield’: • Certainty and stability in the regulatory and fiscal regimes. • A well-functioning, open and competitive market. • The need for adequate transmission access to markets. • An incentive for cogeneration operators that takes into account the risk of additional capital investment, as well as increased absolute emissions and energy intensity at the host facility, in order to displace more intensive generation sources

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We believe that there is room for additional renewable power in the Alberta market and would encourage supply diversification through the right mix of wind and solar. Incremental ‘firming capacity’ will allow renewable energy to further increase its proportion of the total grid. Wind or solar credits that accrue for the life of a project will provide much more certainty and access to financing. Suncor is a strong proponent of an open, competitive market that keeps the risk on the developer, not the rate payer, and keeps costs competitive. Minimizing ongoing changes to the market design will be critical to attract participants and investment. Many of the proposed policies for transitioning to a lower carbon power grid are a major intervention into the Alberta ‘energy only’ market design and may introduce risk into a market structure that has worked well to meet the energy needs of Albertans. Experiences in other jurisdictions suggest that the costs can be high and benefits elusive. Potential grid instability and power disruptions are a very real possibility if proposed changes to the market are not carefully managed. We recommend that proper time is taken to get the mix of policy change and market design right for the long term. Alberta has the opportunity to observe lessons learned from other jurisdictions and get this right. Recommendation: • • •

Prior to implementing climate change policies, consider the implications to the Alberta power market design. Consider lessons learned from other jurisdictions and tailor them to the unique attributes of Alberta. Take full advantage of the resource opportunities that Alberta provides – specifically renewable energy and cogeneration.

Suncor appreciates the opportunity to provide input into this discussion and would welcome the opportunity to engage further on any of these comments and recommendations. If you have any questions related to this submission, please contact Suncor’s Vice-President of Sustainability and Communications, Arlene Strom at [email protected], or General Manager Sustainability, Fiona Jones at [email protected].

Suncor Energy Inc.

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Appendix A: A Comparison of effective costs of GHG regulation in Alberta and Quebec at Suncor’s refineries •

There are more similarities than differences between the Quebec and Alberta greenhouse gas (GHG) regulations for petroleum refineries.

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The Alberta regulation (SGER) is an intensity-based regulation while the Quebec regulation (cap & trade) is characterized by absolute emissions reductions. However, the mechanism for compliance true-up in both regulations functions in a comparable manner resulting in similar outcomes.

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The effective cost on each refinery is very similar.

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Both regulations accommodate growth and increased production intensity.

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The main difference between the regulations is that the number of allowances allocated is reduced according to a pre-determined schedule in Quebec whereas stringency in Alberta is constant pending regulatory amendments.

The determination of a baseline intensity factor forms the foundation in both the Alberta & Quebec regulations. •

The determination of GHG emission limits (Alberta) or cap (Quebec) starts with the calculation of a baseline intensity factor based on historical GHG emissions and refinery activity (total feedstock inputs in the case of Quebec and production activity for Alberta).

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The intensity factor is applied to current refinery activity to establish the emissions limit in Alberta and the number of free emissions allowances in Quebec. Note the number of free emissions allowances establishes the emissions cap or limit in Quebec for a given facility.

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Stringency for Alberta refineries calls for a 15% emissions reduction from a 3 year average historical baseline in 2016 and a 20% emissions reduction in 2017.

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Stringency for Quebec refineries initially called for a 12.5% emissions reduction from a four year average historical baseline then gradually increasing by 1.2% per year from a four year average historical baseline.

The Quebec Cap and Trade and Alberta SGER emissions difference is similar between the two methods. The difference between the two methods is ~ 3% of the total GHG emissions at the facility.

Facility Basis: •

100,000 bpd charge rate

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1,000,000 tCO2eq /yr emissions

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12% GHG emission reduction

Quebec Cap & Trade: (based on a seven year scenario) Years

Refinery feed (bpd)

Years 1 - 4 Average

100,000

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TOTAL GHG Combustion T CO2eq tCO2/kl 730,000 0.1258

GHG process (FCCU + H2 unit) T CO2eq tCO2/kl 260,000 0.0448

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GHG others (Flare, storage, WWT) T CO2eq tCO2/kl 10,000 0.0017

Combustion 0.1107 0.0996

Year 1 Year 7

Intensity GHG Target Process 0.0448 0.0448

Total Target Intensity 0.1572 0.1460

Other 0.0017 0.0016

Year

GHG Emissions (tCO2 eq)

Refinery Intensity (tCO2 eq/kLitre)

Refinery Feed (bpd)

Target Intensity (tCO2 eq/kLitre)

Free Allocations (tCO2 eq)

Emissions Difference (tCO2 eq)

Year 1

1,000,000

0.1723

0.1572

912,400

87,600

Year 2

1,000,000

0.1723

100,000 100,000 100,000 100,000 100,000 100,000 100,000

0.1554

901,527

98,473

0.1535

890,653

109,347

0.1516

879,780

120,220

0.1497

868,907

131,093

0.1479

858,033

141,967

0.1460

847,160

152,840

Year 3

1,000,000

Year 4

1,000,000

0.1723 0.1723

Year 5

1,000,000

0.1723

Year 6

1,000,000

0.1723

Year 7

1,000,000

0.1723

Alberta SGER: Percent Emission Reduction 12.0%

Feed (bbl/d)

Production (RAI bbl/yr)

100,000

340,000,000

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Baseline Intensity Target Intensity (tCO2 eq/RAI bbl) (tCO2 eq/RAI bbl) 0.0029

0.0026

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Actual Emissions (tCO2 eq) 1,000,000

Target Emissions (tCO2 eq) 880,000

Emissions Difference (tCO2 eq) 120,000

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