Bad mix

Rachel Pulfer
Canadian Business Online
June 18, 2008

Spectra Energy (NYSE: SE) builds pipeline infrastructure for natural gas. Based in Houston and valued at US$17.5 billion by market cap, the company boasts networks that span North America. These include a series of new developments in Fort Nelson, near the Horn River area of British Columbia.

As Alex Mlynek reported in her Briefcase blog earlier this year on Canadian Business Online, sales of oil and gas rights in the Horn River region have hit record highs in recent months. On June 16, Randy Eresman, the CEO of EnCana (TSX: ECA) announced the company had secured the rights to drill on 220,000 acres of gas shale deposits in the Horn River area. Eresman says Horn River holds the potential to eventually become among the largest resource plays in North America — comparable in size and scope to the Barnett Shale in north central Texas, which produces 3 billion cubic feet of natural gas a day.

So far this fiscal year, the province of British Columbia has derived more than $480 million from these sales of rights. Yet curiously (for a province where the oil and gas sector is so rapidly expanding) British Columbia is also among the first jurisdictions in North America to introduce a tax on carbon. That tax, announced in the February provincial budget, is set to go into effect July 1. It will tax carbon at a low “starter” rate of $10 a tonne. By 2012, that will ramp up to $30 a tonne. (Lest you think British Columbia is alone in this effort, on Thursday June 19, Liberal leader Stéphane Dion proposes his own version.)

Environmentalists applauded B.C.’s decision, and many economists agree that putting a price on carbon is the most immediate way to reduce emissions. People respond to price signals, and a tax is the strongest policy lever a government has to price the environmental cost in to carbon-intensive activity — thus encouraging low-carbon alternatives. Or so the theory goes.

But B.C.’s odd mix of policies — allowing record sales of rights to develop oil and gas, the sectors that generate the most greenhouse gas emissions in Canada, while taxing carbon — presents an interesting conundrum. On the one hand, the government is encouraging a mushrooming oil and gas sector; on the other, it’s proposing to tax emissions (much of which will come from that sector) to the hilt.

This situation may help explain why the B.C. government put $3.4 million towards Spectra Energy’s effort to test whether the Horn River area is ready for the magic of carbon capture and sequestration (CCS). That’s the technological alchemy whereby greenhouse gas emissions are removed from the atmosphere and pumped deep underground for permanent storage.

Like Alberta, B.C. faces the dilemma of how to grow an expanding resource sector while bringing emissions under control. CCS is seen by many as Canada’s best hope for reducing the carbon footprint of a fossil fuel-intensive economy. So on May 26, Spectra Energy announced it is conducting a $12 million feasibility study of CCS at Fort Nelson near Horn River, together with the support of the provincial government and the good wishes of the U.S. Department of Energy. (The DOE will study whether it is possible to sequester natural gas this way — and develop a manual of best practices.)

Spectra Energy’s Western Canadian initiative is headed by Doug Bloom. In a conference call with Gary Weilinger, another Spectra VP, and Canadian Business, he said CCS is a “safe, proven technology.” (Spectra already operates seven other CCS projects elsewhere in Canada.) For Bloom, “Fort Nelson is simply a good opportunity to try it out on a larger scale.” The goal is to pump 1 million tonnes of carbon dioxide and other greenhouse gases underground each year. The feasibility study will test the geology of the region and ensure the cavity in question can store that amount of gas, leak free.

Some, such as Ian Bruce, a climate change expert with the David Suzuki Foundation, have questioned whether public money should be going towards such projects, particularly at a time when commodity prices — and in particular those for natural gas — are through the roof. But Bloom says the public spend is justified by the public benefit. Spectra literature claims that sequestering 1 million tonnes of carbon a year is the equivalent of taking 250,000 cars off the road.

More of a concern is the economic and environmental impact of this provincial government’s decision to implement two policies at direct cross-purposes — at the same time.

By taxing carbon, the Gordon Campbell government earned kudos from an environmentally-aware electorate. Yet by allowing drilling activity to expand, the government is filling its coffers with rights revenues and encouraging the emissions-intensive activities its carbon tax is supposed to discourage.

Attempting to square this circle by putting public money into carbon capture isn’t going to make the problem go away anytime soon. Assuming the geology is leak free, the Fort Nelson CCS project won’t be in operation for several years; drilling on one well for the feasibility study starts later this year, and the other in 2009. Meanwhile, emissions from new drilling activity in Horn River will rise, and the government will collect additional revenue from the carbon tax on those emissions.

A government that allows its oil and gas sector to expand — while simultaneously introducing a carbon tax — undermines, at least in the short term, the point of having the tax in the first place. Meanwhile, Bloom says the company’s strategy for coping with its carbon tax liability will be to pass the costs on to shippers, who will eventually have to pass those costs on to consumers. That means higher energy costs, at a time when consumers are already hurting.

If the B.C. government really wants to encourage green growth, a smarter approach might be to let industry test out and implement a CCS strategy first, before auctioning off rights. As it is, all this mix of policies will achieve for certain is increased revenue for the government. That may be a great for government finances, but it’s a lousy way to promote an economically savvy green policy. Too bad consumers and taxpayers end up paying a disproportionate amount of the price.

Rachel Pulfer is the U.S. correspondent for Canadian Business. A journalist since 1999, and features editor of Canadian Business from 2005 to 2007, she has been nominated for three National Magazine Awards. In Letter from America, her online column, Rachel comments on economic and cultural developments in the U.S. and their significance for Canada.

VICTORIA, BC – Spectra Energy (NYSE: SE) today announced plans to pursue a large-scale integrated carbon capture and storage (CCS) project near its existing Fort Nelson natural gas plant in northeast British Columbia (BC).

The project represents a partnership between Spectra Energy and the provincial government in BC which has provided a $3.4 million grant to help fund an initial feasibility phase, intended to determine whether deep underground saline reservoirs and associated infrastructure in the area are appropriate for CCS.

“Addressing the challenge of climate change requires a commitment of both government and the private sector to innovation and deploying new technologies,” said Doug Bloom, president, Spectra Energy Transmission West. “We believe carbon capture and storage technology holds real promise in providing a safe and effective means of reducing greenhouse gases and addressing climate change.”

“We’re excited to work in partnership with the Province to build on Spectra Energy’s existing experience with CCS and to explore the feasibility of a large-scale project at our Fort Nelson plant,” said Bloom.

"As part of the BC Energy Plan, we said our government will explore new technologies for safe, underground sequestration of carbon dioxide from oil and gas facilities – or CCS – which is exactly what Spectra Energy proposes to do,” said the Honourable Richard Neufeld, Minister of Energy, Mines and Petroleum Resources. “If the exploratory drilling program achieves good results, Spectra Energy’s project has the potential to deliver major CO2 reductions for BC."

During the initial phase of the project – which will evaluate geological, technical and economic feasibility – Spectra Energy will drill two test wells to determine whether surrounding geology is suitable for the permanent storage of carbon dioxide (CO2) and hydrogen sulphide (H2S). These compounds are present in the raw natural gas produced in the area and removed during processing at the company’s Fort Nelson gas plant.

“While there is a significant amount of research and development required, our initial work has identified two potentially suitable saline reservoirs – over two kilometers underground – which may be suitable for large-scale CCS,” said Gary Weilinger, vice president, strategic development and external affairs, Spectra Energy Transmission West. “If proven viable, we believe the project has the potential to capture and store in the range of one million tonnes of CO2 emissions annually — the equivalent of taking 250,000 cars off the road each year.”

Spectra Energy has been recognized by the UN Intergovernmental Panel on Climate Change as a world leader in CCS technology. Currently, four of Spectra Energy’s gas processing facilities in BC, and four in Alberta, are equipped with CCS technology. Together, these facilities remove about 200,000 tonnes of greenhouse gases from the atmosphere each year.

Spectra Energy Corp (NYSE:SE) is one of North America’s premier natural gas infrastructure companies serving three key links in the natural gas value chain: gathering and processing; transmission and storage; and distribution. For close to a century, Spectra Energy and its predecessor companies have developed critically important pipelines and related energy infrastructure connecting natural gas supply sources to premium markets. Based in Houston, Texas, the company operates in the United States and Canada approximately 18,000 miles of transmission pipeline, 265 billion cubic feet of storage, natural gas gathering and processing, natural gas liquids operations and local distribution assets. Spectra Energy Corp also has a 50-percent ownership in DCP Midstream, one of the largest natural gas gatherers and processors in the United States. Visit www.spectraenergy.com for more information.

Forward-Looking Statement

This release includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events. This release includes forward-looking statements concerning future developments at our facilities, including the anticipated timing and amount of planned capital expansions. Such statements are subject to risks, uncertainties and other factors, many of which are outside our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. Those factors include: the timing and success of efforts to develop infrastructure projects; the timing and receipt of required regulatory approvals. These factors, as well as additional factors that could affect our forward-looking statements, are described in our Form 10-K, filed with the Securities and Exchange Commission, and other filings that we make with the SEC, which are available at the SEC’s website at www.sec.gov. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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