The $1.35-billion Shell Canada Quest carbon capture project calls for the permanent storage of up to 1.2 million tonnes of carbon dioxide a year from its Scotford upgrader.
Alberta's Energy Resources Conservation Board says it is in the public interest for the project, northeast of Edmonton, to go ahead.
"Shell is delighted with the ERCB's decision to recommend approval," John Abbott, Shell's vice-president of heavy oil, said in a release Wednesday.
"This is a really important milestone for the project and takes us one step closer to implementing the first carbon capture project for an oilsands operation."
But Abbott also said Shell must review the economics of the project with its partners, Chevron Canada and Marathon Oil, before deciding later this year if it will proceed.
Quest includes $745 million from the Alberta government over 15 years and $120 million from Ottawa's Clean Energy fund.
The plan is to pipe liquefied carbon dioxide to injection wells north of the upgrader and store it more than two kilometres underground starting in 2015.
Shell says the liquefied gas would be permanently and safely secured under multiple layers of rock and mineral formations.
The idea is to hive off the CO2 so it doesn't enter the atmosphere and contribute to global warming.
The Alberta government announced in 2008 that it would establish a $2-billion fund to promote carbon capture and storage technology and show the world that the province is serious about reducing greenhouse gases from the oilsands and its coal-fired power plants.
The province said its goal is to reduce CO2 emissions by five million tonnes per year by 2015.
The energy board has imposed 23 conditions on Shell's Quest plan before work can begin and the project must still be reviewed by Alberta's Environment Department.
The board says the underground reservoir Shell wants to use is a suitable location for the long-term storage of carbon dioxide "and the combination of geological conditions, engineering design, operational practices and extensive monitoring program mitigate any potential risks the project might pose."
The federal government, including Natural Resources Canada and the Canadian Transportation Agency, said the Quest project "is not likely to cause significant adverse environmental effects."
Shell's caveat about reviewing the economics of Quest follow an announcement in April by TransAlta Corp. (TSX:TA) that it was pulling out of the separate $1.4 billion Project Pioneer carbon capture project because of financial concerns.
At the time, TransAlta CEO Dawn Farrell said initial studies showed the technology works and that the capital costs were acceptable, but there were not enough customers to buy the CO2 generated from coal fired power plants and the price was not good enough.
The company wanted to sell some of the captured carbon dioxide to nearby energy producers, who would inject the gas into their fields as a means to get more oil out of the ground. The emissions would have been prevented from entering the atmosphere.
Project Pioneer, which would have been connected to the Keephills 3 coal plant west of Edmonton, was to receive $779 million in backing from Ottawa and Edmonton.
Enbridge Inc. (TSX:ENB) and Capital Power Corp. (TSX:CPX) were the other companies involved in the initiative.
Also on HuffPost