CCUS enhanced oil recovery: Small legislative change equals big economic and environmental impact

This article was prepared with the assistance of summer student Chan-Min Roh.

The Government of Canada’s Carbon Capture Utilization and Storage (CCUS) Investment Tax Credit (ITC) is a cornerstone policy designed to position the country as a global leader in carbon capture technology. Since its introduction in 2022, the ITC has incentivized the development of CCUS infrastructure, particularly across Western Canada, by offsetting the significant costs associated with these projects. However, the ITC currently excludes enhanced oil recovery (EOR) as an eligible use of captured carbon, representing a policy gap in the Federal Government’s tax scheme.

By way of background, CO2-EOR is a process that injects carbon dioxide (CO2) into oil fields to recover more oil and store the CO2 in geological formations. This established technique involves capturing CO2 from industrial sources, transporting it to oil fields and injecting it underground to mix with and displace oil from porous rock. The CO2 then becomes trapped, providing both enhanced oil production and large-scale storage of greenhouse gases. These projects are often combined with traditional CO2 storage to provide two options for storage of the CO2. Having a storage option mitigates the risk of CO2 being released into the atmosphere where it can’t be used for EOR. Using CO2 for EOR also improves the economics of the overall project because the oil producer will pay to use the CO2 for EOR.

As it currently operates, the ITC provides a refundable tax credit for expenditures related to the use, storage and transportation of carbon, applicable to projects initiated after January 1, 2022, and before the end of 2040. Eligible projects must be overseen by a taxable Canadian corporation and meet specific technical and operational criteria, including a minimal operational lifespan and a threshold for eligible use percentage of captured carbon. Currently, only two uses of captured carbon qualify for the credit, which are geological storage and concrete production. EOR, despite its prevalence in Canadian CCUS projects, remains explicitly excluded from the ITC.

EOR is not a novel technology in Canada. Six out of eight commercial CCUS projects in Canada already employ captured carbon for EOR purposes. These facilities, such as the Boundary Dam Power Station in Estevan, Saskatchewan, demonstrate that EOR is a natural extension of CCUS operations, redirecting captured carbon from storage sites to oil reservoirs for enhanced oil extraction.

Including EOR in the ITC would incentivize further investment in EOR technology, making it more financially viable for traditional energy producers. This would lead to more efficient oil extraction, increased domestic energy supply and greater energy security. Moreover, by encouraging oil producers to adopt carbon capture technologies, Canada can simultaneously advance its environmental goals and economic interests.

Enhanced oil recovery tax credit in Saskatchewan

In comparison, the Government of Saskatchewan has tailored the Oil and Gas Processing Investment Incentive (OGPII) to include EOR. Among other things, CCUS projects for EOR are eligible for this incentive by way of a transferable crown royalty and freehold production tax credits. The OGPII tax credit regime in Saskatchewan is governed by The Crown Minerals Act (Saskatchewan) and The Freehold Oil and Gas Production Tax Act, 2010 (Saskatchewan), alongside their respective regulations.

The OGPII regime recognizes the substantial capital and operating costs associated with CCUS projects. The Saskatchewan Ministry of Energy and Resources (MER) administers the system, and only EOR projects approved under The Oil and Gas Conservation Act (Saskatchewan) and subsequently designated as EOR projects under the royalty and tax regulations are eligible for the tax credit. Colleen Young, the Sask Energy Minister, recently visited a carbon dioxide EOR facility in southeastern Saskatchewan and expressed her continued support for the development of CCUS and EOR operations in the province.

Operators utilizing the OGPII must file annual estimates and actual returns using the MER’s IRIS Self-Service module, with strict deadlines and audit provisions. Interest and penalties apply to underpayments and late filings, reinforcing the importance of diligent record-keeping and timely reporting. From a compliance perspective, it is crucial to ensure that project documentation, cost tracking, and regulatory submissions align with the requirements set out in the governing legislation and the MER’s guidance. The OGPII tax credit regime represents a significant opportunity for operators to optimize their fiscal position while advancing resource recovery in Saskatchewan’s energy industry. More information on the OGPII, including information on eligibility and how to apply, can be found on the Government of Saskatchewan’s webpage.

Enhanced oil recovery crown royalties and freehold production taxes in Saskatchewan

Saskatchewan’s EOR royalty and tax system is fundamentally cost-sensitive, with rates that adjust according to EOR project profitability. For Crown lands, the royalty is 1% of gross EOR revenues before investment payout, rising to 20% of EOR operating income after payout. For freehold lands, the production tax is zero before payout and 8% of EOR operating income after payout. Notably, the system provides for lower royalty/tax rates during the payout phase, directly supporting capital recovery and encouraging reinvestment in innovative recovery methods. In special circumstances, such as small-scale field tests, the Minister may simplify the calculation and reporting requirements by applying a fixed rate to gross revenues.

Eligible costs under Saskatchewan’s EOR regime are strictly defined. These eligible costs include direct operating costs (lifting, injection, disposal, maintenance), capital investments (drilling, equipment, compressors, steam generators) and certain regulatory compliance costs, such as those related to output-based performance standards for greenhouse gas emissions. However, the regime excludes a wide range of expenses, including costs incurred before project approval or after termination, non-project-specific engineering and research, land acquisition, penalties and administrative overheads. All eligible costs are subject to audit and must be approved by the Minister.

Opportunity for federal amendments

At a high-level, amending the Federal ITC to include EOR would be a relatively straightforward process. The Federal Government would need to:

1. Remove EOR from the list of ineligible uses of captured carbon
2. Explicitly add EOR as a third eligible use alongside geological storage and concrete production

As for the specifics of an ITC relating to EOR, the Federal Government could leverage the progress made by the provincial governments of Saskatchewan and Alberta in their respective, related incentives.

EOR is poised to remain a key component of Canada’s energy landscape. By amending the ITC to include EOR, the Federal Government can unlock greater energy productivity, strengthen energy autonomy and provide powerful incentives for traditional energy producers to embrace carbon capture technology. This policy shift would not only drive economic growth through large industrial projects but also reinforce Canada’s commitment to environmental protection by promoting responsible use and storage of captured carbon.

For assistance with CCUS projects and solutions, including EOR projects, please reach out to the CCUS team at MLT Aikins. We have in-depth knowledge of carbon capture, utilization and storage (CCUS) technologies and projects, and have advised on some of Western Canada’s major carbon capture projects. Our lawyers actively follow CCUS developments, and we are involved in a broad range of work, including advising on regulatory and compliance issues.

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