Edited by Paul H. Harricks ,

Let's Get Moving in the oil sands: Infrastucture in Northern Alberta

1. Overview

Billions of dollars in oil sands investment will result in hydrocarbon production in northern Alberta rising by an estimated 2.5 million bpd by 20201, and by as much as 6.0 million bpd in the Athabasca Oil Sands Area (AOSA) by 2045.2  Approximately 8,000 over-sized modules - many being built in Edmonton - are scheduled for delivery to Fort McMurray and northward to the various oil sands projects over the next four years. Given the current regional transportation infrastructure deficit, there is conjecture that these modules will have to be transported bumper to bumper to achieve successful on-schedule delivery of all 8,000 over-sized modules by 2016! Oil Sands industry leaders believe delivery schedules will be substantially delayed because of this transportation infrastructure deficit. The oil sands services industry has expressed concern that such lack of infrastructure will ultimately hinder development of Alberta's oil sands.3

2. How government - at various levels - is planning for a robust future

In February 2009, Energy @ Gowlings published an article summarizing the Government of Alberta's 20-year plan for oil sands development, titled Responsible Actions - A Plan for Alberta's Oil Sands (the Strategic Plan). The Strategic Plan encourages the responsible development of the oil sands, in a manner that sustains industrial and provincial growth over the long term, and simultaneously enhances the quality of life of Albertans. The government highlights four priority actions in the Strategic Plan: environmental stewardship, strengthening communities, economic prosperity and building relations.4 Through regional planning, as well as other initiatives, Alberta intends to shift to what is anticipated to be a more effective and efficient management system that considers the cumulative effects of all activities and improves integration across economic, environmental and social pillars.5 Alberta's strategic plan for the oil sands, Responsible Actions, sets objectives for planning and developing healthy communities in Alberta's oil sands areas. It considers the regional impacts of growth from oil sands development, including: social and public infrastructure needs, the size of shadow populations, and the creation of affordable housing.

On a more specific basis, Comprehensive Regional Infrastructure Sustainability Plans (CRISPs) are the long-term and collaborative means of planning infrastructure in Alberta's three oil sands areas: the AOSA, the Cold Lake Oil Sands Area  and the Peace River Oil Sands Area. Each CRISP will create a plan for infrastructure development based on possible future oil sands production rates and concomitant population growth, and will guide provincial and municipal governments in planning and working together.6 The preparation of each CRISP will assist the achievement of Alberta's vision for oil sands development outlined in Responsible Actions. It is a key implementation strategy promoting healthy communities and a quality of life that attracts and retains individuals, families and businesses.7

The CRISP for AOSA has been prepared, and the CRISP for the Cold Lake Oil Sands Area is in development. A CRISP for the Peace River Oil Sands Area will be completed over the next two years. CRISP for AOSA is a guideline for long-term infrastructure development in the region and supports Responsible Actions. It focuses on community development and identifies infrastructure needs relative to transportation, water and wastewater servicing, education and health care8. CRISP proposes extensive coordination among all stakeholders including municipal, provincial and federal levels of government and industry participants. Industry is required to align its project planning  with CRISP; for example, roads and air facilities essential for industrial development would be planned and developed to integrate with the broader CRISP transportation network, while worker accommodations would be coordinated with other growth solutions identified in CRISP. The implementation and funding of CRISP proposals will rely heavily on coordination and integration with the more industrial-environmental regional planning coincidentally taking place under the regionally specific Land-use Frameworks (described below), as well as utilization of alternative financing mechanisms, partnerships and innovative project delivery.9

Regional plans developed under the Land-use Framework, such as the Lower Athabasca Regional Plan (LARP) and the Lower Peace Regional Plan, set a broad vision and objectives for environmental, social and economic development of the region. The focus of this regional planning is much broader in scope and is at a much less detailed level than the CRISPs, which are specific to infrastructure. There will, of necessity, have to be alignment between these various levels of planning, particularly in relation to multi-use corridors and areas set aside for future urban expansion. Planning assumptions regarding oil sand production levels for the AOSA and the Cold Lake Oil Sands Area CRISPs are now aligned with those in the LARP.10

3. Transportation

Probably the greatest infrastructure deficit in Northern Alberta is acknowledged to be in the transportation sector. The existing transportation infrastructure in the area consists of:11

  • Ground transportation:

Road infrastructure is dominated by two major highway corridors: Highway 63 from Edmonton, through Fort McMurray to north of Fort MacKay; and Highway 881 north from Edmonton to Fort McMurray. There is no paved, all-season east-west transportation infrastructure in the AOSA, and no connections of this type to communities to the north or east of the AOSA.

  • Air transportation:

The primary public airport in the region is in Fort McMurray, with smaller public airports in Conklin, Lac La Biche and Wabasca. Numerous private airfields exist across the region at various oil sands project sites, privately owned and operated by the respective oil sands companies.

  • Rail transportation:

Freight rail service terminates just south of Fort McMurray. The movement of over-sized loads is constrained in many areas, particularly through the Fort McMurray community and in the area south of Conklin.

The AOSA CRISP proposes a phased transportation development plan intended to be flexible and responsive to changes in population and hydrocarbon production rates. CRISP AOSA anticipates that a staged approach would incorporate more immediate, shorter term, and longer term transportation improvements to be implemented over a 35 year horizon:

  • More immediate activity would include12:
    • additional lane capacity on Highway 63 north of Fort McMurray and south of Mariana Lake;
    • upgrades to Highway 881 south of Conklin to improve movement of over-sized loads;
    • directing population growth away from traditional work camps and towards existing communities, a possible new community north of Fort McMurray and planned work camp communities in the Conklin and Wabasca areas;
    • development of an eastern bypass route around Fort McMurray to access project sites east of the Athabasca River;
    • implementation of bus based rapid transit north of Fort McMurray and between Lac La Biche and project sites near Conklin; and
    • upgrades to the Lac La Biche and Fort McMurray airports to accommodate increased demand.
  • Short terms plans include13:
    • extension of the eastern bypass route to ultimately become a highway to access projects east of the Athabasca river;
    • completion of a Fort McMurray ring road;
    • a road connecting Fort McMurray to Wabasca and extension of Highway 813 north from Wabasca;
    • specific consideration of commuter rail systems to provide efficient access between communities and project sites, and to locations outside of the AOSA; and
    • extensions and improvements in rail, bus and airport services.
  • Proposed longer term plans include:14
    • extension of  Highway 63 north to Fort Chipewyan;
    • upgrades to the Wabasca airport as oil sands activity increases in that region; and
    • development of a northwestern highway route to connect the new urban growth node and planned work camp community to project sites related to carbonate development in the northwest of the AOSA.

4. The Highway 63 Bottleneck

Improvements to Highway 63 are among the infrastructure projects generating the most attention from media, government and the oil sands industry. It is the main corridor from Edmonton to AOSA. It is the only all-weather road extending out of Fort McMurray, which ensures its criticality to the oil sands industry and in the Regional Municipality of Wood Buffalo. Most of the roadway is a two-lane undivided highway. Between 2001 and 2005, over 1,000 motor vehicle accidents occurred on Highway 63 in which 25 people were killed and 257 others were injured.15 As recent as Spring 2012, two major accidents occurred claiming an additional nine lives and involving eight vehicles. It has been reported that there has been at least 149 fatalities on the so-called Highway of Death since 1990.16

Industry is concerned that deficient ground transportation in the region will delay project investment and consequent development. Since 2006, only 16 km of twinning has been completed south and 17 km north of Fort McMurray. Construction resumed May 13, 2012 on the twinning of 36 km of Highway 63 north of Wandering River, which is anticipated to be completed and open to traffic by Fall 2013. Under current plans, approximately 50 per cent of the Highway 63 twinning will be completed by 2015. The cost of twinning the remaining 240-kilometers of Highway 63 is estimated at $1 billion. The federal government has committed to contribute up to $150 million toward the project under the Canada Strategic Infrastructure Fund.17

The development and widening of transportation corridors has been well understood for centuries. The greatest impediment is not technological, but rather financial – how should the project be funded?

5. Possible Funding Strategies

a) Government Funding

Government has traditionally funded most infrastructure projects. However, government does not necessarily have one or more of the time, expertise, or capital for Highway 63 twinning and extension.

b) Industry Funding

Private funding of infrastructure is currently more philanthropic than commercial and industry is hesitant to finance the twinning of Highway 63. Ken Chapman, executive director of the Oil Sands Developers Group (OSDG) has argued that industry already pays very substantial royalties and taxes to the provincial government and that road improvement is a provincial (government) responsibility. The OSDG suggested that "the sector is already doing its part in making the artery safer by trying to take as many people off the road by using the aerodromes for workers and using buses".18 A potential solution to encourage the timely completion of the Highway 63 twinning project may be that industry funds same with the opportunity to sell the widened highway back to the Province at a set percentage of profit at a future date certain.

c) Public Private Partnership (P3)

Collaboration between government and industry (both oil sands and road building and maintenance industries) and a mix of funding options may be a more feasible approach for the timely twinning of Highway 63. This is often cited as a preferred approach as government can borrow money at lower rates than other entities and private industry can develop the roadway on a cost-efficient basis.

Features of a P3 model could include:

  • the roadway design, build, finance, operate and maintain (DBOFOM) by private entity/consortium;
  • repayment of development and maintenance costs on a monthly ("tariff") basis over a  long term (e.g. 40 years); and
  • a more balanced allocation of cost/risk.

Ownership of the infrastructure (in this case, the roadway) could fall within one of numerous ownership models including:

  • Design Build Transfer ("DBT") with License to Operate;
  • Build, Own, Operate, Transfer (at End of Term) ("BOOT"); or
  • Government Own with Government Permission (license) to Operate.

If government is reluctant to pay the full cost of the Highway 63 twinning, additional revenue could be generated through a mix of use-base (a toll model) and/or development fee (charging only those making extraordinary or heavy-duty use of the road) models.

By utilizing any of the aforementioned models, the completion of the Highway 63 twinning project, for the purpose of saving lives and promoting the further development of the AOSA, consistent with both LARP and CRISP, could well be accomplished on a more timely and cost efficient basis.

6. Conclusion

The Province of Alberta should be applauded for the consultation and analysis that have resulted in the very thoughtful development of LARP and AOSA CRISP. It will be in the implementation of these plans, with the involvement of the relevant levels of government, regulators and private industry, that infrastructure improvement and upgrade must take place, permitting the proverbial "rubber to hit the road".


Electricity Market Reform in the United Kingdom

A draft Energy Bill was announced by the UK's Secretary of State for Energy and Climate Change at the end of May but has been heavily criticised by the House of Commons Energy and Climate Change Committee in a report published on 23 July. 

The draft Bill is the latest stage in the UK Government's planned electricity market reform (EMR) which will radically reform Britain's electricity market which has been largely de-regulated and open to competition since privatisation of the electricity industry over 20 years ago.

The stated purpose of EMR is to deliver secure, affordable and low carbon energy by establishing price mechanisms designed to support investment in new generating capacity and an improved transmission network.

There has been relatively little investment in generation in the UK since the so called "dash for gas" (construction of a large number of combined cycle gas turbine plants) in the 1990s.  As a result, there is a great deal of old plant which needs to be replaced – perhaps a third in the next decade – and additional capacity is required to meet projected increases in electricity demand.  At the same time, the UK Government is committed to reducing greenhouse gas emissions by decarbonising generation and to having 15% of the country's energy needs (around 30% of its electricity) met from renewable sources by 2020.    

The International Energy Agency puts the investment needed at £110 billion by 2020 (£75 billion in new generating capacity and £35 billion in improvements to the transmission network).  This compares with current investment of around £4 billion a year.

Against this background, the UK Government decided that radical reforms were necessary and, following a consultation process, a White Paper on EMR was published by the Department of Energy and Climate Change in July 2011.    

The Energy Bill will set out the proposed primary legislation which the UK Government plans to have in place by the end of 2013 but this will only provide the broad legislative framework for EMR with many details needing to be implemented through secondary legislation and changes to codes and licences.

EMR will consist of a number of key measures, including:

  • Low carbon generation support through "Feed-in-Tariffs with Contracts for Difference" (CfDs) to provide stable and predictable prices for companies investing in low-carbon generation;
  • Introduction of a capacity market providing incentives to ensure the availability of sufficient generating capacity to provide security of electricity supply;
  • Introduction of an Emissions Performance Standard (EPS) limiting carbon dioxide emissions from new fossil fuel power stations.  The effect of this will be to prevent construction of new coal-fired plants unless capable of carbon capture and storage (CCS).
  • Transitional arrangements.
  • Appointment of the System Operator, National Grid plc, as the EMR delivery body (to administer CfDs and the capacity market) and arrangements regarding possible conflicts of interest on the part of the System Operator.

The UK Government's original EMR proposals contained another key measure – introduction of a carbon price floor, but this has already been covered in the Finance Act 2011. 

Contracts for Differences (CfDs)

The CfDs are intended to provide generators of low carbon electricity with stable prices for the electricity they generate by setting a "strike price", with the generator receiving (or paying back) the difference between the strike price and the market reference price. 

The draft Energy Bill proposes a "multiparty payment model" whereby the liability to make payments to a generator under a CfD would be borne collectively by all electricity suppliers. 

It is envisaged that there will be a minimum strike price for each technology (with strike prices up to 2017 to be announced next year) but some strike prices, particularly for nuclear and CCS, will be decided on a project-by-project basis.

Although the UK Government will initially set strike prices administratively, it proposes a move to auctions at least for some renewable energy technologies, from 2017 and seems determined to influence the generation mix by having different strike prices for each technology (at least until 2020), with offshore wind and nuclear likely to get strong support notwithstanding concerns as to their cost.

Prior to introduction of auctions or some other tendering process, it is proposed that prospective renewable energy generators should be awarded their CfDs through participating in allocation rounds, with the volume of contracts on offer reflecting both the UK Government's renewable energy targets and financial cost caps (reflecting the Treasury's cap on green levies) to be established through secondary legislation. 

It is proposed that CfDs for renewable energy projects will have a duration of 15 years while those for CCS projects will only be for 10 years and those for nuclear are likely to be for more than 15 years. 

Capacity Market

The UK Government believes that a capacity market is needed to ensure that there will be sufficient plant available to prevent future blackouts.  In part, at least, this need is driven by the increased role which wind and other intermittent or inflexible sources of energy will play in the generation mix.

The draft Energy Bill does not provide the details of the capacity mechanism but a Technical Update published by the Department of Energy and Climate Change in December last year envisages capacity being contracted through competitive auctions with the cost of securing capacity being shared between electricity suppliers.  More detailed proposals will be set out in a further document towards the end of this year following which there will be a process of consultation with the industry and other interested parties.

The capacity market is likely to favour new gas-fired plant with short start-up times and a highly versatile operating response but the UK Government has indicated that existing plant will be able to bid for capacity contracts.  However, it is likely that plants benefiting from the new CfDs will be excluded from the capacity market.  .

Emissions Performance Standard (EPS)

The draft Energy Bill proposes a statutory limit on the amount of annual CO2 emissions allowed from new fossil fuel generating stations.  It is envisaged that the limit will initially be set at 450g/kWh and apply until 2045 for projects approved before it is reviewed in 2015.  Provision is made to exempt plants which form part of the UK's CCS Commercialisation Programme or benefit from European Union or CfD funding for commercial scale CCS.

Transitional Arrangements

The Renewables Obligation (RO) is currently the main financial mechanism by which the UK Government incentivises large scale renewable energy projects.  Under this mechanism, renewable energy projects receive Renewable Obligation Certificates (ROCs) for which there is a market price.

The White Paper on EMR proposed a transition phase, between April 2014 and March 2017, during which new renewable generating stations will be able to choose between support under the RO or under the new CfDs.  Any new renewable generating stations after March 2017 will only be entitled to support under the CfDs.

The RO continues until 2037 but there are concerns as regards the income for generators during the final years of the scheme.  The draft Energy Bill therefore contains provisions whereby, from 2027, the energy regulator, Ofgem, or the Secretary of State will be obliged to purchase certificates at a fixed price which will be set by the Secretary of State and funded by a levy charged on the supply of electricity by electricity suppliers.  It is envisaged that this fixed price will be the 2027 ROC buyout price plus 10 per cent and then inflation-linked.

The Secretary of State will also be given power to issue what is being referred to as an investment instrument to a generator ahead of the introduction of CfDs.  This power is intended to address the risk that EMR could otherwise delay investment decisions and is likely to be used for the first new nuclear plant (at Hinkley Point in Somerset).  Market participants are watching these early bilateral negotiations to see the precedent set and for competition implications.  The lack of transparency of the closed door negotiations will make this a sensitive area.

Conflicts of Interest

The draft Energy Bill proposes to confer EMR functions on the System Operator, National Grid plc, a private sector company.  The UK Government considers that there is a potential risk of conflicts of interest arising between the new EMR functions which the System Operator will take on and its existing role and interests in the energy market, including its ownership of transmission infrastructure.  The draft Bill proposes to give the Government powers to manage any conflicts of interest and to confer the functions on a new delivery body if it becomes apparent that the System Operator should no longer be responsible for the EMR functions.

House of Commons Energy and Climate Change Committee Report

The Committee scrutinised the draft Bill and its Report, which draws on extensive evidence from generators and other energy companies, industry associations, environmental groups, regulatory bodies, local councils, academies and other interested parties, is highly critical of the draft Bill.  It identifies "serious concerns with the proposals as they currently stand, which could make the reforms unworkable if they are not resolved" and makes a series of recommendations, including:

  • The Government should publish draft secondary legislation, including a model CfD, prior to consideration of the Bill in Parliament.
  • The Government should set a 2030 carbon intensity targets for the electricity sector to supplement the overall carbon reduction targets set out in the Climate Change Act 2008.
  • The Government should abandon the multiparty payment model for CfDs proposed in the draft Bill and revert to a single counterparty payment model which, in the view of the Committee, should be underwritten by Government.  The Committee considered that the multiparty payment model was not bankable and the CfDs might not be legally enforceable.  Many market participants share this concern.
  • A simple fixed Feed-in Tariff would be a more appropriate form of support for smaller scale renewable energy projects.  This form of support is already available for very small projects but the Committee recommends that it be extended to renewable energy projects up to at least 10 MW and potentially up to 50 MW in size.
  • Rationing the number of CfDs under the Treasury's levy cap increases development risk and the Committee recommends the introduction of a two-step or pre-registration process to give developers greater confidence that they will be able to obtain a CfD. 
  • The Committee notes concerns that awarding CfDs through auctions may increase development risk and does not guarantee a cheaper outcome for consumers.  It recommends that the Department of Energy and Climate Change consider setting out a planned reduction pathway for strike prices which would guarantee a reduction in the level of subsidy paid by consumers over time.  Current FIT arrangements for small-scale projects have a similar policy of subsidy reduction over time, reflecting political concerns at ongoing subsidy levels.
  • The Government should provide clarity on the strike price level beyond 2017 as soon as possible in order to help secure investment for emerging technologies, such as wave and tidal power.
  • Independent generators need to be able to sell the electricity they produce at or close to the market price if they are to get the full benefit of CfDs.  This could be difficult in the UK's current vertically integrated electricity market and a solution to this issue needs to be identified before the Bill is introduced to Parliament later this year. 
  • The proposed process for setting the nuclear strike price lacks sufficient transparency and the Committee recommends that an independent panel of experts should be appointed to oversee negotiations with prospective nuclear generators. 
  • The Committee concluded that concerns regarding European Union state aid rules as well as political considerations have influenced the design of the CfD package and recommended that the Government differentiate nuclear from other low-carbon technologies within an overall support regime.  The Committee will consider further the building of new nuclear and its associated challenges later this year. 
  • The Government should set out a system reliability standard which, along with a decarbonisation target for electricity, would provide a clear framework for the System Operator to work within when operating the capacity market. 
  • The Government should clarify how the Energy Bill will ensure that the capacity delivered by auctions will have the appropriate characteristics, such as flexibility. 
  • The Government's intention to review the EPS in 2015 could cause a new "dash for gas" and an understanding is needed of the likely impact of EMR on the future role for gas generation. 
    • The initial EPS limit should not continue until 2045.  Instead, there should be a shorter period commensurate with decarbonising the electricity system by 2030.
  • The Energy Bill should provide support to demand-side and storage technologies similar to that given to the supply-side and should remove any legislative and other barriers preventing storage from competing fairly in the market. 
    • National Grid plc should not act as the EMR delivery body and this role should instead be performed by a new independent, not for profit, company. 

How Government will respond to these recommendations remains to be seen.

Conclusion

There is a broad consensus within the electricity industry and amongst politicians in the UK that EMR is needed and the UK Government has said that it will bring the Energy Bill before Parliament towards the end of this year and expects to have the primary legislation in place by the end of 2013.

Much of the criticism of the draft Energy Bill from the House of Commons Energy and Climate Change Committee and others has been directed at its lack of detail on important issues.  However, it is on the details that there is most disagreement, with strongly held opposing views on issues such as the extent of financial support which should be provided for low carbon generation and the role of nuclear and natural gas in the generation mix. 

As the details emerge, we can expect a lively debate both within Parliament and in the mass media and among the general public.  To date, there has not been much interest in EMR beyond energy and environmental circles but this will surely change as the details emerge and there is a greater appreciation of the importance of EMR and its long-term implications as regards energy policy and likely energy costs.

There is a risk that the Energy Bill will expose disagreements within the current coalition Government (formed by the Conservative and Liberal Democrat parties) and/or that parts of the Bill will be opposed by a significant number of MPs from one or both of the coalition parties.  However, now that the Government have embarked upon the process of EMR, they must bring it to a successful conclusion if they are to attract the huge investment which is so urgently needed.


Gowlings to Attend HUSUM WindEnergy 2012

Gowling Lafleur Henderson LLP will be an exhibitor at HUSUM WindEnergy 2012, taking place September 18-22 in Husum, Germany.

Representing Gowlings at HUSUM WindEnergy 2012 will be Thomas J. Timmins, chair of the Firm's Renewable Energy Group and contributing editor of Wind Energy Law: A Primer on Global Legal and Business Issues, and Nick Iliff, a partner in Gowlings' London office.

Attracting thousands of wind industry professionals, experts, leaders, decision makers and researchers, HUSUM WindEnergy is one of the world's leading wind energy trade fairs. For more information or to register, please click here.

While at HUSUM WindEnergy 2012, please stop by the Gowlings booth, number 3G-01-D in hall 3

Footnotes

1 Infrastructure Struggling to Keep Pace with Oilsands Development, Calgary Herald,  May 29, 2012: http://www.calgaryherald.com/business/Infrastructure+struggling+keep+pace+with+oilsands+development/6693201/ story.html#ixzz1wqNqSnXZ.

2 Comprehensive Regional Infrastructure Sustainability Plan - Athabasca Oil Sands Area, Government of Alberta, May 2011: http://www.energy.gov.ab.ca/Initiatives/3240.asp (CRISP AOSA).

3 Calgary Herald, supra note 1.

4 Responsible Actions – A Plan For Alberta's Oil Sands, ENERGY @ GOWLINGS, 2009: http://www.gowlings.com/resources/enewsletters/energy/Htmfiles/V7N03_20090220.en.html#c.

5 Lower Athabasca Regional Plan, 2011 – 2021, Government of Alberta: https://www.landuse.alberta.ca/REGIONALPLANS/LOWERATHABASCAREGION/PLANNINGPROCESS/Pages/DraftLARP.aspx (LARP).

6] Land-use Framework, Government of Alberta: https://landuse.alberta.ca/Planning/LocalMunicipalPlanning/PlansOilSands/Pages/default.aspx.

7 Comprehensive Regional Infrastructure Sustainability Plan, Government of Alberta, Treasury Board and Enterprise: http://www.treasuryboarduat.gov.ab.ca/1211.cfm (CRISP).

8 CRISP AOSA, supra note 2 at 2.

9 Ibid at 4.

10 Ibid at 7.

11 Ibid at 46.

12 Ibid at 48-50.

13 Ibid at 50.

14 Ibid at 52-55.

15 Multi-vehicle crash on Highway 63 kills 2, CBC News Edmonton: http://www.cbc.ca/news/canada/edmonton/story/2008/03/28/boyle-crash.html.            

16 Highway 63, Road Of Sorrow, Calgary Herald, May 25, 2012.

17 Highway 63, Government of Alberta, Transportation: http://www.transportation.alberta.ca/4942.htm.

18 Oil Industry Balks At Covering Twinning Costs For Killer Highway, Calgary Sun, December 2011.

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