Calgary (Platts)--25Feb2013/520 pm EST/2220 GMT

The Alberta government said Monday it has canceled an agreement with Calgary-based Swan Hills Synfuels to provide C$285 million ($285.6 million) in funding for a carbon capture and storage (CCS) facility to be built some 192 miles northwest of the provincial capital, Edmonton.

Lower-than-expected natural gas prices have pushed back timelines for Swan Hills' production of synthetic gas and associated carbon capture plans, the provincial government said.

Alberta Energy Minister, Ken Hughes said: "Persistent low prices for Alberta's natural gas have driven this business decision."

In 2011, the Alberta government committed the funding for a period of 15 years to a project that would capture carbon dioxide (CO2) through the gasification of underground coal and sell it for use in enhanced oil recovery, the provincial government said.

But deferred project timelines moved the carbon capture components beyond the scope of the government's funding requirements, it said, adding that as yet no money had been handed over for the planned facility.

"The project was aimed at capturing 13 million metric tons of CO2 during a 10-year operational period. Our deadline for start-up was December 31, 2017 and clearly given the current gas prices we will not be able to maintain that schedule," Douglas Shaigec, president of Swan Hills said in a phone interview.

The company will look for a "sustained" gas price of $5/MMBtu before it looks into moving ahead with the planned venture again, Shaigec said.

Privately-held Swan Hills is the owner of coal reserves in the Swan Hills area and the CCS project was aimed at turning unmineable coal at depths of some 1,400 meters into clean synthetic gas (syngas) from which CO2 would be captured for EOR in maturing conventional oil fields in Alberta, while the rest of the syngas would be used for power generation, Shaigec said.

Swan Hills Synfuels planned to build a 300 MW power plant near the mine, he said, but that project is also on hold.

"We have spent company money on the in-situ coal gasification [ISCG] technology by building -- in 2009 -- a demonstration plant. The technology has been tested and can be applied for the planned CCS project. However, the low gas prices have made us think otherwise as at present it is more economical to purchase natural gas than it is to manufacture syngas," Shaigec said.

Swan Hills has deferred the project for now, but Shaigec says the company is committed to using the ISCG technology as a long-term supply of natural gas in Alberta.

"The economics of this project clearly could not compete with the new long-term realities of abundant and cheap North American natural gas," Gary Leach, president of the Explorers and Producers Association of Canada said in an e-mail, terming the Alberta government's decision a "sensible" move.

The Swan Hills project is the second provincial government-aided CCS project that has been canceled.

In April 2012, the TransAlta, Enbridge and Capital Power partnership pulled the plug on its Project Pioneer scheme, saying the economics of EOR were too shaky for it to proceed.

Project Pioneer was designed to capture and store 1 million mt/year of CO2 emissions from TransAlta's 450-MW Keephills-3 coal-fired power plant west of Edmonton.

At present, Alberta is providing funding for two oil sands-related CCS projects. They are the Alberta Carbon Trunk Line and Shell Quest projects.

Combined, they are expected to reduce greenhouse gas emissions by 2.76 million mt annually by 2016, the equivalent of taking 550,000 cars off the road, the provincial government noted.

However, the cash for the Swan Hills project will not be re-allocated to any other CCS venture, it said.

--Ashok Dutta, newsdesk@platts.com --Edited by Keiron Greenhalgh, keiron_greenhalgh@platts.com