CALGARY, Alberta (Reuters) - The Alberta government said on Monday it canceled C$285 million ($278 million) in funding for a carbon-capture project tied to a proposed synthetic natural gas plant, the second withdrawal of such an environmental initiative in less than a year.
Alberta said the privately held company planning the project, Swan Hills Synfuels, has delayed it because lower-than-expected North American gas prices have made producing coal-to-gas fuel uneconomical.
The cancellation comes at a tricky time for the Alberta government, which is trying to convince the Obama administration it should approve TransCanada Corp's Keystone XL pipeline, which would move oil sands-derived crude to Texas refineries.
Alberta Premier Alison Redford was in Washington this past weekend trying to send the message that her government and the energy industry have made serious moves to reduce greenhouse gas emissions as they seek a green light for the pipeline.
Five years ago, former Alberta leader Ed Stelmach set aside C$2 billion in funding for carbon capture and storage projects.
But last year, TransAlta Corp scrapped one of the program's marquee projects, a C$1.4 billion carbon capture facility that would have been tied to a coal-fired power plant. The company said it could not find buyers for the CO2 and had no way to sell emission-reduction credits.
In 2011, the province granted Swan Hills Synfuels the 15-year funding commitment. The company had planned to capture the CO2 from its underground coal gasification process and sell it for use in enhanced oil recovery.
However, Swan Hills is not producing gas yet.
"At present, it's more economical to purchase natural gas than it is to manufacture synthetic gas,' Swan Hills Chief Executive Martin Lambert said in a statement. "It's a market reality that has led to significant delays on the (carbon capture) side of the project."
Alberta Energy Minister Ken Hughes said there have been no decisions made on how to reallocate the funding.
Two government-funded carbon projects are going ahead. Royal Dutch Shell is building the Quest CO2 capture project at its Scotford oil sands upgrading site near Edmonton.
Privately held Enhance Energy Inc is proceeding with the Alberta Carbon Trunk Line, which will transport the gas from a fertilizer plant and an upgrader near Edmonton to a storage site in the central part of the province.
(Reporting by Jeffrey Jones; Editing by Dan Grebler)