09/05/2012 09:35 EDT | Updated 11/05/2012 05:12 EST

Shell Oil Sands Carbon Capture Project The First Of Its Kind In Canada


CALGARY - Royal Dutch Shell and its partners aim to be the first to capture and store carbon dioxide emissions from the oilsands — a project that relies heavily on government funding and that the companies aren't counting on to generate financial returns.

"As an oilsands operator, I firmly believe that the sustainability of our business depends not only on our ability to compete economically, but also to keep raising the standard in environmental management," John Abbott, Shell's executive vice president of heavy oil, said in a speech Wednesday.

The Anglo-Dutch energy giant plans to capture one million tonnes of CO2 annually from its Scotford oilsands upgrader northeast of Edmonton.

The gas will then be injected deep into a porous rock formation about 80 kilometres away, thereby preventing it from entering the atmosphere and contributing to climate change.

The upgrader part of the Athabasca Oil Sands Partnership, of which Shell is a 60 per cent owner. Marathon Oil and Chevron evenly split the remaining stake. The companies also have a vast mining operation north of Fort McMurray, Alta.

Shell estimates the project, called Quest, will cut direct emissions from the upgrader by 35 per cent — the equivalent of taking 175,000 cars off the road.

But the overall CO2 reduction is expected to be about 15 per cent, taking into account the mining of the ore, its transportation to Scotford and its upgrading into a type of crude refineries can handle.

The Alberta and federal governments are kicking in a collective $865 million toward Quest, which is expected to start up in 2015. The cost of constructing the project and operating it for 10 years is expected to be $1.35 billion.

Although the government is defraying a considerable portion of the cost, it's not clear Shell will actually make money from the Quest project — nor is that necessarily its intent.

Down the road, Shell may financially benefit from receiving carbon credits or from selling the carbon dioxide to oilfield operators who use the gas to boost output from mature reservoirs.

But its focus is mainly on improving the long-term environmental performance of the industry, Abbott told reporters.

"I would still say that if oilsands is to continue in the longer term as an important part of the energy mix — which it will be — it's critically important that we continue to do everything we know how to do to reduce the environmental footprint," he said.

"This is one of the of the technologies that we believe can have the biggest impact in the shortest period of time, and that's why we're doing it."

Shell, which has somewhat similar projects in Australia and Norway, sees Quest as its "flagship" carbon capture project. It hopes Quest will demonstrate the technology works on a commercial scale, and that industry as a whole will be able to learn from it.

Earlier this year, Calgary-based power generator TransAlta Corp. (TSX:TA) scrapped a $1.4-billion carbon capture project at its Keephills 3 coal plant in Alberta because the economics didn't work.

The problem, it said, was that there weren't enough customers to buy the CO2 to make it worth the company's time and money. It was to receive some $800 million in funding from Ottawa and from the province.

The Quest project will help Alberta reach its carbon-cutting goals, aid provincial Energy Minister Ken Hughes.

There aren't currently any plans to make it mandatory for other oilsands players to use similar technology at their operations.

"There's no consideration of that at this point, but obviously everybody will learn from this experience," he said.

"This is a big downpayment on our commitment to reducing greenhouse gases across the board."

Alberta is contributing the lion's share to Quest, investing $745 million from its $2-billion carbon capture fund. Ottawa is contributing $120 million through its Clean Energy Fund.

Natural Resources Minister Joe Oliver said Canada can be a "world leader" in carbon capture and sequestration technology.

He said there's a role for government in cases where the private sector is reluctant to invest before the technology is proven.

"We don't think it's the role of government to continue to support a technology which is not otherwise economically sustainable," he said

Ed Whittingham, executive director of environmental think tank the Pembina Institute, said carbon capture can play an important role in tackling climate change and that it's a good thing governments are investing in it in its early stages.

"What's important is that quickly, once we have projects going, that we step back from subsidies and we just give producers or developers the incentive they need through a good robust carbon price," he said.

The technology has worked when applied elsewhere, he said.

"But putting it all together connected to an upgrader — that's what's novel. I do have confidence that it's going to work out as planned."

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