Canada Unlocks EOR for Federal Tax Credits in Landmark Policy Shift

A historic agreement between Prime Minister Mark Carney and Alberta Premier Danielle Smith is reshaping Canada's carbon capture landscape. For the first time, enhanced oil recovery (EOR) will qualify for federal investment tax credits, removing a barrier that long frustrated industry players.

The memorandum of understanding, signed in Calgary on November 27, 2025, ties the Pathways Alliance's $16.5 billion carbon capture project directly to a new oil pipeline to the West Coast. Neither can move forward without the other, creating a powerful incentive for both governments and industry to act.

>> RELATED: Canada's CCUS Boom Hits a Wall: Why EOR is Missing the Tax Credit

What Changed for EOR

Until now, federal tax credits rewarded companies for putting CO2 in the ground and leaving it there. Using captured carbon for enhanced oil recovery, which produces additional barrels while permanently storing emissions, got no love from Ottawa. That changes under the new agreement.

The MOU explicitly commits Canada to "extend federal ITCs and other policy supports to encourage large scale CCUS investments, including Pathways and enhanced oil recovery." This language signals a major pivot in how Ottawa views CO2 utilization as part of Canada's decarbonization strategy.

The Pathways Alliance project had previously focused on carbon capture and storage without the utilization component. The consortium's October fact sheet made no mention of EOR. That omission now appears to be a thing of the past.

Why the "U" in CCUS Matters

Saskatchewan has proven the economic and environmental case for CO2-EOR. The Weyburn Unit shows that for each tonne of CO2 injected, roughly three barrels of oil can be produced. Over 25 years, the province's EOR projects have sequestered more than 40 million tonnes of CO2 while producing over 100 million barrels of incremental oil.

CO2-EOR emits 82% fewer emissions than traditional extraction, according to Saskatchewan government data.

How the Agreement Benefits CCUS Development

1. Creates economic incentive for deployment: Oil producers pay for CO2 used in EOR, generating revenue that improves project economics from day one.
2. Builds shared infrastructure: More viable projects mean expanded pipeline networks and industrial clusters that lower costs for all CCUS applications.
3. Attracts investment: The certainty around tax credits and carbon pricing gives domestic and foreign capital the confidence to commit.

Pathways Alliance Responds

The consortium of Canada's six largest oilsands producers, including Suncor, Imperial Oil, Canadian Natural Resources, Cenovus, MEG Energy, and ConocoPhillips Canada, welcomed the agreement. Together, they represent 95% of Canada's oilsands production.

The companies have committed to identifying new emissions-reduction projects by April 1, 2026, with rollouts starting in 2027. A 400-kilometre pipeline will connect over 20 oilsands facilities to an underground storage hub near Cold Lake, Alberta.

The agreement also suspends federal Clean Electricity Regulations in Alberta pending a new carbon pricing deal. Alberta's TIER system will ramp to a minimum effective credit price of $130/tonne, providing long-term certainty for CCUS financing.

A Template for North America?

The U.S. 45Q tax credit initially excluded EOR but evolved to include it, recognizing EOR's role in scaling CCUS infrastructure. Canada's policy shift follows similar logic: creating the industrial base needed for broader carbon capture deployment.

For an industry that has waited years for clarity, this agreement represents a turning point. The pieces are now in place for Canada to become what both governments envision: a global energy superpower with some of the lowest-carbon oil production on the planet.