Natural Resources Minister Seamus O’Regan has issued a mighty challenge to Canada’s oil and gas sector to embrace the technological innovations that will help the industry and the country reduce greenhouse gas emissions to net zero by 2050.
O’Regan’s call to action is the latest iteration of the Liberal government’s “balanced” policy, in which it pledges tough action on climate change while supporting the oil and gas industry’s growth aspirations.
The Liberals’ stance is criticized by those on the right as essentially kneecapping western Canada’s leading industry with environmental rules, and by politicians and activists on the left as propping up a sector that has been the country’s fastest-growing source of GHGs.
The Liberal vision — backed by some of the biggest oil sands companies — faces tremendous hurdles. The industry will have to make massive investments in technological change even as experts say that global oil demand must soon decline if the world is going to limit the damage of climate change.
Therein lies the problem. It is highly doubtful that capital markets will provide the debt and equity financing needed for such an expensive effort. At least, not without huge government subsidies to underwrite the technological changes.
In a conversation with Calgary-based ARC Research Institute last week, O’Regan touted the importance of the industry to the Canadian economy. And he insisted the country will not meet its net-zero target without a successful effort by oil and gas sector to essentially eliminate its own emissions.
It’s understandable that the Liberal government is eager to see a healthy oil industry that can be part of Canada’s climate solution.
Even in its comparatively weakened state, the oil and gas industry generated $62 billion in export revenues last year, and it remains a crucial contributor to jobs and tax revenues, especially in western Canada and in Newfoundland and Labrador.
But its fast-paced growth is over. When oil prices collapsed in 2014, the industry slashed its capital expenditures, which topped $34 billion that year for the oil sands alone. With the impact of the COVID-19 pandemic, industry budgets are being hammered again, and oil sands capital spending is likely to fall below $10 billion this year.
With nearly two decades of growth behind it, the sector has been a major contributor to Canada’s emissions problem.
In 2018, oil and gas companies accounted for a quarter of Canada’s GHGs. All told, they emitted 193 megatonnes, up from 158 MT in 2005. More than 40 per cent of the sector’s emissions came from the oil sands in 2018.
Some major producers have set targets to reduce their GHG intensity by as much as 30 per cent — meaning they’ll reduce emissions per barrel. A few have expressed their “aspiration” to eventually get to net-zero emissions from their extraction processes.
However, the industry is still expecting some production growth over the next decade, which would likely offset reductions in per-barrel emissions.
To date, no one has published a plausible scenario that would see the industry scale back its emissions to be consistent with the net-zero goal. And the industry is ill-equipped to finance any technological moonshot.
Crude oil prices are not likely to recover to the previous US$50- to $60-per-barrel levels for several years as the global economy struggles to recover from the COVID-19 pandemic. In a recent research note, analysts at Deloitte Research Centre for Energy and Industrials said worldwide demand for oil may well have peaked last year.
Institutional investors are increasingly concerned about climate-related financial risks for companies in which they invest, and investment returns from the oil industry in recent years have been poor. Oil sands producers, in particular, are seen as highly vulnerable.
Still, the industry argues it can reinvent itself to become a low-carbon producer. Technology exists in the laboratories and in pilot projects that would result in dramatic reductions in emissions at the production sites.
That technology includes the use of solvents and electricity to recover bitumen from underground reservoirs, either significantly reducing the use of steam or eliminating it altogether.
Companies are touting carbon carbon and sequestration technology (CCS), which allows producers to divert carbon dioxide from boilers, upgraders and other sources, and then dispose of it underground. Natural gas producers could manufacture clean-burning hydrogen and sequester the carbon dioxide that would normally be emitted in that process.
But that innovation is costly. Some technologies require major capital expenditures but can reduce operating costs over the long haul. Others offer little hope of recouping costs, but may be necessary to meet increasingly-stringent emission regulations imposed by government.
If it is serious about meeting its climate targets, the Trudeau government will have to impose carbon pricing and regulations that force industry to respond.
Much depends on how quickly the world shifts to electric vehicles and other strategies for reducing reliance on oil. That transition — along with broader economic growth — will dictate the demand for Canadian crude, as well as the fortunes of competitors like the U.S.-based shale oil sector.
Ottawa can provide industry with tax breaks and other financial support to adopt new technology but there are no assurances that companies will have financial means to do so. That’s particularly true if they are expected to build the technology into existing plants, rather than incorporate it into new production projects.
To ensure it is not financing pipe dreams, Ottawa would have to insists that any direct support include clear commitments from companies to dramatically reduce their overall emissions.
Climate change activists, meanwhile, will strenuously oppose any subsidies that would result in supplying more crude to global markets.
Without some combination of carrots and sticks from government, the oil industry will limp along, making modest reductions in per-barrel emissions that result from improved operating efficiency.
That’s not a recipe for a healthy industry, or for Canada achieving more ambitious climate change targets.
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