"It has the potential to change the way we use our vast coal resources," said Alberta Energy Mininster Ron Liepert.
Under the $285-million deal, Swan Hills Synfuels will drill into a coal seam about 1.4 kilometres underground — so deep it was previously considered unmineable.
The company will use heat and steam to convert the coal into gas, then pipe that gas to the surface. Once there, carbon dioxide will be stripped out of the gas and shipped to nearby aging oil wells to improve their productivity. The gas will then be used to generate about 300 megawatts of electricity, enough to power about 300,000 homes.
Synfuels expects to ship about 1.3 million tonnes of carbon dioxide every year for injection into and permanent storage in area oil wells, which is expected to generate between 80 and 100 million barrels of oil that wouldn't have otherwise been recovered.
CEO Martin Lambert said that carbon dioxide — the most important greenhouse gas driving climate change — would otherwise have been released into the atmosphere from new coal-fired generating plants as Alberta expands its generating capacity.
He said while coal-fired electricity is cheap, it comes with high environmental costs. Natural gas plants are cleaner, but the fuel is more expensive.
"If you're building a coal plant, you'll spend almost all your money up front and have very, very low costs for years in to the future," said Lambert.
"If you build a natural gas plant, you spend some of your money up front and then for years into the future you're buying natural gas every minute, based on whatever that's costing you."
Lambert said the electricity from the Synfuels plants will be cheaper than natural gas-fired plants, as long as gas is priced above $5. He added the syngas-generated electricity will produce lower greenhouse gas emissions than natural gas, about two-thirds the amount a coal-fired plant would produce.
Construction of the $1.5-billion facility near Swan Hills in northwestern Alberta will begin later this year. Carbon storage is expected to begin in 2015.
Chris Severson-Baker of the environmental think-tank the Pembina Institute said Wednesday's announcement was short on details on how the carbon will actually be stored — the original intent of the province's money. There's no guarantee that carbon dioxide used to extract more oil will stay underground, he said.
"Some oil formations might be really good for (carbon capture and storage), some might be really crappy. There needs to be a deliberate effort done to assess the geologic formation that companies are putting this stuff into."
Danielle Smith, leader of Alberta's opposition Wildrose Party, said outgoing Premier Ed Stelmach shouldn't be committing the province to such deals in the declining weeks of his tenure.
She said her party believes such projects should be encouraged through tax incentives, not grants doled out to chosen corporations.
"If there is a market for (these projects) the companies will invest in them themselves," she said.
Wednesday's announcement is the third such deal the province has finalized, financed out of a $2-billion pot for carbon sequestration and storage projects it created in 2008.
One agreement is with Shell Canada to store carbon from its Scotford upgrader near Edmonton. The other will help finance Enhance Energy's pipeline to move carbon dioxide from where it's created to where it can be injected underground.
Liepert said negotiations on a fourth project with TransAlta are stalled while the federal government considers its own climate change policy.
Alberta wants to reduce carbon emissions by five million tonnes beginning in 2015 and decrease greenhouse gas emissions generally by 200 megatonnes by 2050.
Carbon capture and storage is a relatively new technology untried on a large industrial scale. The process traps waste gases, such as carbon dioxide, rather than allowing them to enter the atmosphere where they contribute to climate change. It liquefies the gas and stores it underground.
Opponents call the technology uncertain and expensive and say it will take too long to implement to make a difference. They say it's a political fig leaf to allow oil companies — and governments — to say they're environmentally friendly without reducing how much greenhouse gas they create.