The world still needs Canadian oil

Federal emissions policies will cut jobs and public revenues. But is there a better way to reduce emissions? Josiah Haynes dives in.

Steven Guilbeault, Canada’s Minister of Environment and Climate Change. Photo from Bloomberg.

Canada’s oilsands producers began the summer looking forward to increased oil sales produced with lower emissions. Canadians are ending the summer with these benefits, from investment to jobs, risked by new federal policy.

Market-watcher S&P Global Commodity Insights forecast oilsands production of 3.7 million barrels per day by 2030, which is half a million barrels per day more than today. That’s a positive forecast, showing how Canadian oil has an important role to play for some time. In fact, it’s 140,000 more barrels per day forecasted for 2030 than thought in last year's outlook.

“Looking to the future, Canada is expected to continue to post new record production and export levels,” read the report.

S&P cited increased efficiencies and optimization, with new technologies such as steam displacements in thermal oilsands extraction, plus “debottlenecking projects—another form of optimization.”

The expected opening of Trans Mountain’s TMX pipeline expansion in 2024 would give the producers another route to reach US and overseas customers, contributing to S&P’s “debottlenecking.”

Is red the new orange?

Despite the business case for more Canadian oil and gas, S&P’s report also carried a warning that, as an ever-present risk in the Canadian economy, self-sabotage could undermine natural potential.

“Policy — and in particular the advancing federal oil and gas cap which intends to establish an absolute oil sands emissions target — remains the most likely source of downside risk.”

If the emissions targets prove too stringent, unrealistic or unattainable, further investment, jobs and economic benefits to Canadians could be at risk.

Canada’s oilsands have already reduced emissions per barrel (emissions intensity) by 20 percent, according to IHS Markit (part of S&P), which expects total oilsands emissions – not just per barrel – to go down within the next five years.

New analysis from the Canadian Association of Petroleum Producers shows that between 2012 and 2021, conventional oil production in Canada remained relatively flat (down 9 percent), with CO2e emissions from production dropping by 27 percent, demonstrating the work producers have done to lower their emissions intensity.

Meanwhile, methane emissions from total natural gas and oil production have fallen by 34 percent, with a remarkable decline in methane emissions intensity of 46 percent.

“This track record of lowering emissions while growing production is a demonstration of why Canadian oil and natural gas should be the barrels of choice for the world's energy needs,” said Lisa Baiton, CAPP President and CEO. “As long as the world needs oil and natural gas, Canada's barrels should be a part of that supply."

Yet the federal government has spoken of an ambitious 42 percent reduction from 2019 levels by 2030 in carbon emissions from the oil and gas sector, which S&P suggested may require the oilsands to cut potential production by up to 1.3 million barrels per day. That, said S&P, could kill 5,400 to 9,500 jobs.

The Fraser Institute, meanwhile, said it would force a reduction of production and exports, leading to a loss of $45 billion in economic activity in 2030 alone. A major corresponding drop in government resource royalties and tax revenue would follow.

Federal Environment and Climate Change Minister Steven Guilbeault followed up a discussion on the emissions cap and called for the world to agree to “phase out unabated fossil fuels” and said he expects Canada’s oil and gas sector to reduce production by 50 percent to 75 percent by 2050.

“Currently, our position is that it should be done no later than 2050. We’re certainly open to a conversation to see whether we can agree on an earlier date and what it means.”

That’s an alarming statement for a government official in a market economy. Let’s not pass over it. S&P, among others, says there’s a business case for Canada not only to continue producing oil but to increase production – production coupled with a truly incredible reduction in emissions intensity in recent years. Meanwhile, the federal government intends to deliberately prevent that from happening.

Imagine if the government showed up to the GM plant in Oshawa and said, “Look, we know people are buying more and more of your Chevys. But we expect you to cut production by 50 percent to 75 percent in thirty years and fire who you have to.”

But, it appears that climate goals are selectively enforced. And yet, at a certain point, you have to begin to wonder just how “red” the Liberal shade has become.

Alberta Premier Danielle Smith. Photo from her Twitter.

Unsurprisingly, Alberta Premier Danielle Smith and Saskatchewan Premier Scott Moe hit back, with Moe declaring: “The Trudeau government doesn’t want to just reduce emissions in our energy sector, they want to completely shut down our energy sector.”

Alberta’s Smith went further: “Alberta will not recognize any federally imposed emission-reduction targets for our energy and electricity sectors under any circumstances unless such targets are first consented to by the Government of Alberta.”

Smith proposed: "Instead of seeking ways to sow investor uncertainty and reduce support for Canadian energy globally, the federal government should focus on partnering with Alberta and investing in our national energy sector to achieve carbon neutrality by 2050 while simultaneously increasing energy production, jobs and economic growth for Canadians.”

The Canadian Energy Centre said it’s not just about Alberta that benefits from oil and gas. “In addition to jobs, the industry is also an economic bulwark, generating $168 billion in GDP in 2021, about 7.2 percent of Canada’s economic activity,” said the centre.

“Oil and gas also accounted for nearly a third of Canada’s exports in 2021, injecting $140 billion into the economy.”

Oh subsidies, where art thou?

In a further step, Minister Guilbeault recently released guidelines that will limit when public funds are used to support oil and development in an effort to crack down on what the federal government is calling “inefficient fossil fuel subsidies.”

Oil and gas subsidies have been hotly debated in the Canadian political scene. Indeed, some appear to suggest that Canada is bankrolling the energy industry, not the other way around.

Yet, considering the National Bank of Canada’s latest hot chart using International Monetary Fund data, Canada doesn’t have a fossil fuel subsidy problem. In fact, at just 2 percent of GDP, we have the lowest subsidies of any G20 country, even behind those infamous petroleum pariahs like Italy and Germany.

Considering that Canadian oil and gas generate about 7.2 percent of national economic activity, an investment of 2 percent seems to contribute to a more than favourable return.

Chart from the National Bank of Canada showing Canada’s fossil fuel subsidies.

In fact, what some might call a subsidy is, on economic grounds, closer to an incentive. Incentives in energy are significant drivers of income for municipalities, provinces, and the federal government. It’s worth remembering that resource production in Canada is subject to royalties charged by the provinces that own the resource and taxes from every level of government. From 2017 to 2019, the upstream oil and natural gas sector contributed an average of $10 billion per year to governments across Canada through royalties, taxes, and other revenues.

Take BC as an example. Since 2003, when BC introduced the Deep Royalty Credit program, the natural gas and oil industry has invested $90 billion into the province. That investment, in turn, generated $24 billion in direct provincial government oil and natural gas revenues – an average of over $1.3 billion of direct resource revenues every year.

Not counting the federal subsidy for cleaning up orphaned and inactive wells, the Canadian Energy Centre shows that between 2010-2016, all subsidies to the Canadian oil and gas sector, including federal, provincial, and local subsidies, came to $1.9 billion.

Compare that number with the $131.8 billion Canadian governments spent on other industries. When all is said and done, oil and gas represented only 1.4 percent of all subsidies to Canadian enterprises, well below urban transit and film subsidies.

For an industry worth 9.7 percent of Canada’s nominal gross domestic product in 2021, that exported $153.3 billion worth of goods in 2021 and which contributed an average of $13 billion to government revenues between 2015-2019, $1.9 billion in subsidies (over six years no less) seems a rather good return on investment.

Indeed, considering the enormous cost of emissions reduction plans currently proposed by the Pathways Alliance, a partnership between Canada’s six largest oilsands producers, the case could be made for further government investments. Or, alternatively, for regulatory and tax reforms to attract further investment into the sector and in Canada’s ongoing energy transformation, being led by the domestic energy industry.

A better pathway

Despite the confusion surrounding subsidies in Canadian energy, the promise that tax credits or federal aid that helps companies lower their emissions will continue should be welcome news to the Pathways Alliance, through which six big oilsands producers have long been working on plans to reduce carbon emissions and achieve net-zero emissions by 2050.

The Alliance plans to spend around $24 billion on a CCS (carbon capture and storage) network and other technologies to achieve net-zero emissions in the oilsands by 2050. Its CCS project will have a 400-kilometre pipeline connecting oilsands facilities to a storage hub in northern Alberta, through which the project is expected to remove up to 12 million tonnes of emissions annually by 2030. It’s one of Canada's most important climate initiatives, and it’s being undertaken voluntarily by the private sector through its own natural resource revenues.

The Alliance supports the government’s goals of achieving a large absolute reduction in emissions by 2030 from the oil and gas sector and the goal of achieving net-zero by 2050. The question is how to achieve those emissions reductions. It noted: “Canada’s energy transition will require significant investment into a broad suite of technologies, some of which are not yet commercially available.”

Core to energy transition investment is that, not surprisingly, the companies investing in energy transition have the funds to invest in transforming their businesses.

As energy economist Peter Tertzakian said at a Resource Works lunch event, natural resource industries like oil and gas require capital investment to create the infrastructure in which they operate. In the last seven or eight decades, an enormous amount of money was invested in those industries to the tune of about $1.5 trillion on a real-dollar basis.

With 75 percent of that investment coming from the US, it was foreign investment that built Canada's energy infrastructure and the pillars of our economy. But, if Canada wants to reduce emissions significantly, that infrastructure will need to be modernized for newer and greener technologies.

Achieving Canada's net-zero goals will require a Herculean effort to attract the capital needed to rebuild or create that infrastructure, as the Pathways Alliance is now doing. Government support is not enough. Who will pay for the transition, if not the transitioning industries? And if that is the case, federal policies must not simply convince companies to relocate to where they don’t have emissions caps or other punitive regulations.

Indeed, Pathways continues: “Canada needs an enabling policy framework and a competitive investment structure that will attract global capital and incentivize investment in decarbonization technologies within the specific context of Canada’s climate goals otherwise, the country is at risk of flight of capital to jurisdictions with more competitive fiscal policy.”

Or, to put it another way, the oilsands can only invest in decarbonization if the government doesn’t force them into decline or tax them out of business.

The existing layering of carbon taxes, clean fuel standards, emissions caps and new grid electrification requirements all risk the future of a strong energy economy in Canada. That, in turn, threatens the ability of the sector to invest in energy transition technology like CCS, hydrogen and more.

Ongoing capital formation in Canada is necessary for both meeting global energy demand, as indicated by S&P, and ensuring that decarbonization efforts like Pathways and others can receive adequate investment in line with net-zero by 2050 objectives.

A more — not less — competitive business environment is needed to enable the necessary investment. Federal tax and regulatory systems should better promote innovation, agility, and public and investor confidence. It is becoming increasingly apparent that the new slate of policy changes does not.

Efforts to reduce emissions should not prematurely cut Canadian oil and gas production. The world continues to rely on fossil fuels, and it should be Canada, not Russia, Iran or others who benefit. Lowering the emissions intensity of the products we sell on global markets is the objective – not merely replacing Canadian oil and gas products with those produced in other, less climate-conscious jurisdictions.

So how can the Environment Minister meet his climate goals without crippling the industry – one of Canada’s most important drivers of prosperity – and (as Alberta Environment Minister Rebecca Schulz fears) without torpedoing those 9,500 direct jobs?

Minister Guilbeault met with oilpatch leaders and Schulz in Calgary on July 19, calling it “a very good meeting.” Minister Schulz told reporters: “The indication we got from the minister was that there’s still time for negotiation and discussions.”

Draft regulations on the emissions cap will likely come out in the fall. One can hope that moderation carries the day.

Minister Guilbeault questioned the S&P Global study that indicates Ottawa’s stated 2030 goals could put up to 1.3 million barrels per day of oilsands production at risk.

“It fascinates me that people would come to those conclusions without even knowing what the target is. . . I don’t even know what the target is.”

Josiah Haynes is the Director of Content at Resource Works, an educational advocacy not-for-profit supporting responsible natural resource development.

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