When the federal government delivers a plan this coming week to meet Canada’s climate targets, it will include a projection for the oil-and-gas industry that seems wildly optimistic. Despite that sector having shown little ability to reduce its total greenhouse gas emissions, it will be expected to cut them by somewhere in the range of 30 per cent to 40 per cent by decade’s end.
From the heart of the industry in Alberta, the message is that this level of reduction may be possible – but only with a great deal of government support and attentiveness to its needs.
That means a high degree of flexibility in regulated caps on the sector’s emissions that Ottawa plans to introduce. It means fast-tracking approvals for infrastructure and other projects to help decarbonize operations. Most of all, it means a whole lot of public subsidies, especially for carbon-capture technology on which producers are pinning hope for remaining competitive in a decarbonizing world.
Industry leaders and representatives know, based on recent interviews here, that the timing of the funding demands make for bad optics. They understand that as profits soar because of high oil prices amid a global energy crunch, many will question why companies can’t finance investments in their long-term viability themselves.
The reality, they say, is this is no ordinary boom. Skepticism among investors about how long it will last, and concern about the industry still facing long-term decline, has contributed to shareholder demand for immediate returns. Even if they want to, companies can’t put much of their own funds toward new production, let alone cleaning up existing operations.
For now, they seem to have found a receptive audience in Ottawa. This spring’s federal budget is expected to include a large investment tax credit for carbon capture, utilization and storage (CCUS). Industry speculation is that it will cover about half the cost of such projects, although the exact level and other telling details around eligibility remain a subject of some suspense.
But the central premise to which both industry and government seem to buying in – that they’re capable of working together to dramatically cut emissions without significantly curtailing production – is fragile at best. And the relationship will be put to the test by many demands to come.
If Canada is to have any serious chance of meeting its international commitment to cut economy-wide emissions 40 per cent from 2005 levels by 2030, there is little room for error in decarbonizing oil-and-gas production – the largest sectoral contributor, responsible for more than a quarter of the current emissions total.
Somehow, oil-and-gas emissions need to come down at something close to the 40-per-cent rate – if not from 2005 levels, from which they have grown significantly, then from their current levels. Otherwise, the entire national target will collapse.
Purely from an environmental perspective, the easiest way to achieve that would be to produce less. But while that could happen because of market forces, and is likelier in subsequent decades, it’s not something anyone seems to be counting on or looking to force before 2030.
Mandating production decreases may not be within Ottawa’s constitutional powers, and even if it were, the government has indicated no wish to do so. In fact, Natural Resources Minister Jonathan Wilkinson this week expressed desire to increase oil-and-gas exports by up to 300,000 barrels daily in the short term, to help ease the supply crisis stemming from Russia’s invasion of Ukraine.
If production remains constant, one sure way to significantly reduce emissions anyway is by minimizing methane leaks, which make up a big share of emissions in natural gas and conventional oil extraction (less so in the oil sands).
Industry has been needlessly slow to prioritize detecting and repairing leaks. That has Environment Minister Steven Guilbeault now consulting on a toughening of methane regulations aimed at reducing the emissions by about 75 per cent – which, if achieved, would probably get the industry at least a third (and perhaps closer to half) of the way to the total emissions reductions expected of it.
Pushback to those coming rules seems muted, and while there will inevitably be calls for government subsidies for related technologies, all concerned seem to agree this is the low-hanging fruit.
After that, it gets iffier – including with the carbon-capture technology for which the biggest supports are being sought.
Industry insiders generally concede that even in the rosiest scenarios for how quickly CCUS is ramped up, it won’t start to have a big emissions impact before 2028 or 2029 at the earliest. And some environmental groups frown on its use at oil-and-gas facilities at all, since it does nothing about all the emissions caused by consumption of fossil fuels as opposed to their production.
But that hasn’t dissuaded the government from considering it as a means of hitting the 2030 target, or industry from wanting help to keep pace with international competitors making similar investments.
The generous and likely refundable tax credit for CCUS capital costs expected in the budget is unlikely to be the final ask in that regard. Industry had called for it be as high as 75 per cent, but its representatives concede that 50 per cent is likelier. The general line now is that the credit will kick-start investment, but other direct government subsidies will also be needed.
“Without the investment tax credit, it would be impossible,” is how Mark Cameron, a former Alberta government official who works for MEG Energy and serves as a senior adviser to a net-zero alliance of major oil-sands producers, described CCUS scale-up. “With the investment tax credit, we then have to see what remains to fill the gaps.”
There will also likely be requests for public support of other decarbonization, such as electrifying industrial processes. And there is much talk about potential early adoption of small nuclear reactors to power facilities – technology still in development, but which Ottawa is under pressure to build more detailed strategy around.
Speaking of demand for national strategies, nothing comes up more often in conversations about sectoral transformation than the prospect of leveraging existing operations to produce hydrogen for use in heavy industry, transportation and other sectors needing low-carbon energy sources. CCUS factors in there, since it’s required to make that form of hydrogen production environmentally viable. So does funding for infrastructure and other supports for using hydrogen domestically and exporting it.
And then, as pressing as all the carrots, there is the question of how Ottawa wields its stick by imposing the sectoral emissions caps that it has promised.
The sectoral projection in the national Emissions Reduction Plan being presented by Mr. Guilbeault in the coming days will hint at what level of cuts the government will try to enforce. But the caps’ structural details are still in early stages of development, and the industry is doing its best to try to shape them.
There seems limited pushback against the notion of ambitiously capping emissions, possibly because government is calling companies’ bluff on committing to move toward net-zero emissions by mid-century. But the operative word is flexibility, with the industry preferring to avoid new, hard caps that the government could try to impose under the Canadian Environmental Protection Act.
“Where possible, you want to use a market-based system,” said Tristan Goodman, the president of the Explorers and Producers Association of Canada. “Especially in the oil-and-gas sector, they tend to find ways to do things, provided they’re not driven to a specific technology and that the market is allowed to work.”
Like other industry representatives, Mr. Goodman suggests the best approach would be for the government to tailor existing mechanisms – carbon pricing, clean fuel standards, methane regulations – to achieve desired reduction levels, rather than adding another layer.
Mr. Goodman also went out of his way to credit Ottawa for genuinely seeking out industry’s views on the caps so far.
That’s a running theme at the moment, which might come as a surprise to Canadians given the impression – notably by Alberta Premier Jason Kenney – that the governing Liberals are at war with the industry.
In interviews, federal ministers insist that the sector is eager to co-operate on caps that could challenge their operations. Oil-and-gas executives, meanwhile, find even the likes of Mr. Guilbeault – a former environmental activist – somewhat sympathetic to those challenges.
But they’re still a long way from landing on actual plans for clean-economy transition that both sides are comfortable with, and deciding who owes what.
It’s not easy to imagine the country’s climate targets and its fossil-fuel industry both surviving this decade in good shape. But at the moment, at least, there are plenty of ideas coming out of Alberta – few of them cheap – for how Ottawa could keep that prospect alive.
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