Five major Canadian oil producers have reached an agreement with Alberta and the federal government to build a carbon capture project in exchange for approval of a new million-barrel-a-day pipeline to the Pacific Coast.

The Oil Sands Alliance — made up of Canadian Natural Resources Ltd., Cenovus Energy Inc., ConocoPhillips, Suncor Energy Inc., and Imperial Oil Ltd. — will build the Pathways Project to capture and store about 6 million metric tonnes of carbon dioxide underground annually in the Cold Lake area by 2035, according to press releases from the alliance and federal government. The companies have also agreed to achieve an additional 10 million tonnes of emissions reductions by 2045.

The deal is styled as a memorandum of understanding. The parties aim to sign binding agreements with each oil company by November 15.

The agreement is part of a "grand bargain" reached last year between Prime Minister Mark Carney and Alberta Premier Danielle Smith. In that deal, Carney agreed to back the new pipeline and relax some environmental regulations in exchange for carbon capture deployment in the oil sands and a higher industrial carbon tax. As a "reward" for meeting the targets, Alberta will ease stringency requirements for the companies' emissions intensity under its carbon pricing system. Companies that fail to deliver the agreed reductions will face penalties, more stringent benchmarks, and higher compliance costs.

The federal government has agreed to provide financing to support operating costs for carbon capture projects. Alberta has committed to offering "financial supports" to encourage oil production growth needed to fill the new pipeline, according to a backgrounder released by the province.

The new pipeline will run along the route of the existing Trans Mountain oil pipeline from Alberta to the Vancouver area but will terminate at a deep-water port capable of handling the world's largest oil tankers. The government-owned Trans Mountain Corp. will lead the project.

In Layman's Terms

Here's what's happening: Canada's five largest oil sands companies want to expand production and ship more oil to Asia. But the federal government has climate commitments to meet. So both sides made a deal.

The oil companies agreed to capture carbon dioxide — a greenhouse gas produced during oil extraction — and bury it permanently underground instead of releasing it into the air. They'll capture 6 million tonnes per year by 2035, and cut emissions further by 2045. Think of it like a filter on a factory smokestack, except the captured pollution gets stored in the ground rather than released.

In return, the federal and Alberta governments approved a new pipeline to carry oil to the Pacific Coast for export. The federal government is also helping pay for the carbon capture equipment, and Alberta is offering financial incentives to help the companies invest in new oil production.

The companies must hit their targets or face penalties and higher costs. If they succeed, Alberta will make their climate regulations less strict.

Why This Matters

For Alberta and Canada, the pipeline means more oil exports to Asia, which could boost the economy and government revenues. Higher oil exports also help shield Canadian companies from U.S. trade protectionism.

For the oil companies, the deal removes a major barrier to expansion: federal approval for a new pipeline. It also provides government money to help pay for expensive carbon capture technology.

For climate goals, the carbon capture is meant to reduce emissions from oil sands production. However, the total reductions — 16 million tonnes by 2045 — fall far short of a previous federal scenario that envisioned 40 million tonnes captured by 2050.

The deal also highlights a tension: while major investors have pushed oil companies to focus on returning profits to shareholders rather than building new production, Alberta is now offering incentives to do the opposite — expand production.

What We Still Don't Know

The source material does not specify the size or terms of the financial supports Alberta will offer to encourage production. It is unclear whether the carbon capture technology will work at the scale promised, or what happens if companies fail to meet their targets. The documents do not explain how the federal government will fund the carbon capture operating costs, or what the total cost to taxpayers will be. It is also unknown whether the new pipeline will actually be built and, if so, when construction will begin.

Sources: Financial Post, Financial Post