The market for TIER credits has seen a significant decrease in transaction volume following the June compliance deadline. Registry volumes have fallen from a peak of 6.5 million tonnes in May to 5.6 million tonnes in June, and only 1.5 million tonnes changed hands in July. As a result, prices have drifted into the mid-to-low $20s.
The 2024 compliance year marked the beginning of significant drawdowns in the existing credit surplus. For the year, we project that 9.6 million credits were generated while 13.7 million credits were retired, resulting in a 4 million credit deficit. This is the largest drawdown since 2021.
The 28 million credit surplus currently overhanging the market was a result of massive credit generation and limited retirements between 2021 and 2023.
Assuming the current policy framework remains unchanged, we anticipate that the annual credit deficit will grow to approximately 6 million tonnes in 2026. This is largely due to benchmark tightening and a planned increase in allowable credit utilization rates.
We anticipate it will take another three to four years to eliminate the current supply overhang. While this will eventually be reflected in higher credit prices, a price recovery will likely take time to develop.
SMALL EMITTER OPT-OUT: OUTLOOK AND IMPLICATIONS
Following the removal of the Federal Fuel Charge, some small emitters who had previously opted-in to TIER will likely opt-out. We've quantified the potential impact this could have on both credit balances and the anticipated recovery in prices.
In 2023, regulated emissions from all aggregated oil and gas facilities (small emitters) totaled 22.2 megatonnes, representing 13.5% of TIER's total emissions for the year of 164.5 megatonnes.
The true-up obligation (the amount by which emissions exceeded benchmarks) for emitters who were above the benchmark was approximately 1.9 megatonnes. This is about 10% of the total obligation of 20 megatonnes covered by TIER.
This suggests a "worst-case" reduction in credit demand of 1.5 to 2.0 million credits per year. While such a reduction would extend the timeframe for eliminating the supply overhang, the impact would not be dramatic.
A CARBON LENS ON THE CENOVUS ACQUISITION OF MEG
Big news broke last Friday that Cenovus Energy Inc. (Cenovus) tabled a cash-and-stock deal to acquire MEG Energy Corp. (MEG), valuing the company at $7.9 billion, including debt. This comes after Strathcona Resources Ltd. made an unsolicited offer for MEG in June.
A key component of MEG’s operations are its SAGD facility in Christina Lake. Cenovus also has in-situ oil sands production on neighboring lands in Christina Lake. According to sources familiar with this matter, Cenovus believes it can increase production of MEG’s Christina Lake assets to over 150,000 bbl/d by 2028, up from 98,700 bbl/d in 2023.
According to data published by the Government of Alberta, both of these Christina Lake assets had carbon emissions below benchmark levels in 2023 and were generating EPCs:
MEG: 98,700 bbl/d of production generated 55,796 EPCs (tonnes of CO2), translating into 0.0015 EPCs/bbl.
Cenovus: 237,000 bbl/d of production generated 86,582 EPCs (tonnes of CO2), translating into 0.001 EPCs/bbl.
MEG's Christina Lake operations generate EPCs per barrel at a rate 50% higher than Cenovus. Assuming Cenovus can achieve the same environmental efficiency after the acquisition and expand operations on the MEG side to over 150,000 bbl/d, the net incremental carbon credit generation (or reduction in demand) would be around 80,000 tonnes annually. For the 2024 compliance year, MEG retired around 74,683 credits. Currently, Cenovus owns over 1.3 million credits in the Alberta Carbon Registry, which is more than enough to cover the combined entity's compliance needs without purchasing credits in the secondary market.
While this does not represent a significant shift in the TIER credit balance, a consolidation of these two companies could have implications for the future of the Pathways Alliance. A merger of two key members could streamline the group's decision-making process. Moreover, the potential for increased scale and efficiency of the combined entity could be leveraged to more effectively fund and execute the large-scale, capital-intensive projects involved in Pathways.
At ATB Financial, we actively engage with clients to navigate complex carbon markets, offering diverse solutions to meet their unique needs. Our team provides efficient, comprehensive market insights and strategic guidance, helping clients make informed decisions and capitalize on market movements to achieve their environmental and compliance objectives.
Our Strategy
Broad Client Coverage: ATB has a wide range of clients with exposures to the Alberta TIER Market.
Process Management and Documentation: ATB uses a Master Purchase and Sale Agreement for TIER deals, streamlining transactions and minimizing operational and legal effort for each deal.
Price Transparency: ATB's extensive reach enables the provision of competitive pricing and market transparency for our clients.
Trusted Name: Credit and legal risks are minimized when dealing with ATB.
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This report is provided to you for informational purposes only. Nothing contained in this report is, or should be, relied upon as a promise or representation as to future performance. The estimated financial information contained in this report, if any, is based on certain assumptions and the analysis of information available at the time that this information was prepared. There is no representation, warranty or other assurance that any projections contained in this report will be realized. If this publication has any information or data from third party sources, ATB cannot guarantee its accuracy or reliability.
This report is not intended to provide personal investment advice. Investors should seek advice regarding the suitability of any investments or strategies discussed in the report. Opinions, estimates and projections are those of ATB Financial Markets Group and are subject to change without notice.
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