Tap and Trade: Water Valuation as a Conservation Tool for Alberta’s Oil and Gas Industry

Access to freshwater for consumption and sanitation is considered a human right, however, water also has a wide range of uses including recreation, agricultural production, and energy development. The oil and gas industry is a vital component of the Albertan and Canadian economy, contributing $89.4 billion to Alberta’s economy in 2018. The oil and gas industry uses freshwater for many volume intensive purposes making it one of the largest freshwater consumers in Alberta, using 300 million m3 in 2018 alone. However, unlike uses for agriculture and municipal servicing, freshwater used for oil and gas resource development generally becomes too contaminated to be returned to the water cycle. The permanent extraction of large amounts of freshwater can negatively affect the health of aquifers and aquatic ecosystems, and threaten potable water accessibility for communities. Water scarcity is one of the defining issues of the 21st century. For the past five years, the Global Economic Forum has identified water crises as one of the top five impacts and most likely risks facing the planet. Issues related to climate change such as droughts, varying precipitation levels, and earlier snow melt, are creating a fluctuating and unpredictable provincial water supply. The demand on Alberta’s water supply will continue to increase due to agricultural development, population growth, and the expansion of the oil and gas industry. If high usage of water continues to occur with no incentive to protect it, this resource will become increasingly scarce in the future. The province acknowledges that water has a value through its regulatory approaches. However, the province does not charge users, including oil and gas companies, when they divert and use water in a way that properly reflects this value. Standard economic principles tell us that an undervalued good will be overused. This Capstone Project analyzes and provides policy options for water conservation in Alberta’s oil and gas industry, addressing the following research question: Could water valuation play a role as a conservation tool for Alberta’s oil and gas industry to address future potential environmental challenges? To address the research question, current Alberta water policies and regulations are reviewed to understand how current water management and conservation practices impact the oil and gas industry. An analysis of the current industry water use and conservation practices is also undertaken to determine the value water provides the oil and gas industry. A literature review of different water valuation methods and their implementation in different jurisdictions is conducted to understand how this tool can be used. Three policy options that separately address the issue of whether water valuation can be integrated into water management and conservation in Alberta, are discussed. Changes to the current system of provincial water management, which relies heavily on regulation and does not utilize water valuation, would likely face opposition. As such, a policy option that does not utilize water valuation is also explored. The three options are summarized in the table below: v Policy Option Water Valuation Strategies Risks, Costs, and Considerations Benefits Update Current Regulations and Directives for Water Use in Oil and Gas Production No - Set 5-Year CEP Plans - Allow for Longer Storage and Transportation of Water - Implement the Updated Water Conservation Policy - Hidden costs such as administration costs, technological upgrading, and enforcement. - Regulatory approaches inhibit continuous improvement as they encourage firms to only undergo the minimum required - They are also slow to change and adapt to new conditions. - Regulatory approaches are seen as less controversial than implementing valuation tools Expand Provincial Water Markets Yes - Create a forum where buyers and sellers may find each other - Increase the transparency of transactions - Explore different forms of auctions - Complete WCOs and Regional Plans - Implement the Updated Water Conservation Policy - Would require intricate monitoring of supplyside factors of provincial water availability and water use - Fill information gaps related to water availability data - Would likely face backlash from the oil and gas industry - A way to ensure available and sustainable management of water, especially in times of scarcity - Allows the government to control how much water will be accessible in a given time frame based on environmental constraints - Could create incentive for the industry to develop new technologies - Would allow those firms who can reduce their water consumption the opportunity to economically benefit from trading or transferring their water allocations Impose Volumetric Pricing for Water Use Yes - The government could create a pricing scheme using a similar method to “True Value of Water” - The province could look to literature on this topic - Would be considered a corrective tax, so this would likely be the most controversial option to implement - Argument against such a tax is the belief that firms should not be allowed to pollute for a fee, but should be incentivized through regulation to adjust their behaviour - The volumetric price would act as a corrective tax, incentivizing actors to correct their negative behaviour and be more efficient in their consumption of water An extensive review of the regulations, different water valuation tools, and an analysis of publicly available information suggests that water valuation could play a role as a conservation tool for the oil and gas industry in Alberta. A foundation for water valuation through a tradable permit system has already been established in the province, and there is precedent from other Canadian jurisdictions to implement corrective taxes for water use in industry. However, due to information gaps related to water availability in the province, and stakeholder perception of usage fees, these methods would be difficult to implement at this time. This suggests that an expansion and refinement of existing provincial regulations for water use in the oil and gas industry may be a more practical approach in the short term. However, as issues related to climate change such as droughts, varying precipitation levels, and earlier snow melt, impact water availability the government will need to assess what future water uses will look like. As hydrocarbon production moves closer to larger population areas, there will be a competing interest for water. Properly valuing water use through a pricing and/or trading scheme should be seriously considered as a way to bridge the gap between the economy and the environment

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