Canadian oil and gas companies facing a federally imposed emissions cap will decide to cut production rather than invest in overly expensive carbon capture and storage technology, according to a new Deloitte report.
The report commissioned by the Alberta government (a copy of which was obtained by The Canadian Press — aims to evaluate the economic impact of the proposed limit.
Their findings contradict the federal government’s stance that its proposal to limit greenhouse gas emissions from the oil and gas sector would be a limit on pollution, not a limit on production. And he supports Alberta’s position that a mandatory cap would lead to production cuts and serious economic consequences.
But the Deloitte report also casts doubt on the idea that widespread deployment of carbon capture and storage technology will reduce emissions from the oil and gas sector in the coming years, suggesting that such a scenario does not make financial sense.
“We expect the cap to impose 20 megatonnes of emissions reductions on producers by 2030, which will need to be achieved through investments in CCS (carbon capture and storage) or by reducing production,” the Deloitte report states.
“Reducing production would be a more cost-effective option compared to investing in CCS.”
The oil and gas sector is Canada’s highest-emitting industry, and increased tar sands production has meant the sector’s total emissions are increasing at a time when many other sectors of the economy are successfully reducing general emissions.
Globally, demand for oil is growing, and the International Energy Agency forecasts that global oil demand will be 3.2 million barrels per day higher in 2030 than in 2023, although the agency also suggests that growing supply will exceed demand growth at some point this decade.
In a draft framework released last December, the federal government proposed imposing a cap on oil and gas emissions to help curb climate change. The rules would require the industry to reduce greenhouse gas emissions by 35 to 38 percent from 2019 levels by 2030. Companies would also have the option of purchasing offset credits or contributing to a decarbonization fund. which would reduce that requirement to just 20 to 23 percent.
But the Deloitte report suggests that oil production in this country could increase by 30 per cent and gas production by more than 16 per cent between 2021 and 2040. Those figures are based on a forecast from the Canada Energy Regulator and on current government policies.
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This means that producers will have two options to comply with the limitations of an emissions cap, Deloitte maintains. They can invest heavily in carbon capture and storage (trapping greenhouse gas emissions from oil production on site and storing them safely underground) or cut back on planned production increases.
The oil and gas industry itself has been promoting carbon capture and storage as key to reducing emissions while increasing production. The tar sands industry, responsible for the majority of Canada’s oil and gas sector’s total emissions, has proposed spending $16.5 billion on a massive carbon capture and storage network for northern Alberta.
But the group of companies behind the proposal, called Pathways Alliance, has not yet made a final investment decision, saying more certainty is required over the level of government support and funding for the project.
In its report, Deloitte concludes that the cost of carbon capture and storage is so high that, in many cases, it is “economically unfeasible.”
He says many companies are unlikely to follow that path in an effort to meet an emissions cap and instead simply reduce production.
“It is important to note that once implemented, investment in CCS is irreversible,” the report states.
“However, the reduction in production can be reversed. Taking these factors into account, we do not foresee any investment in oil sands CCS being implemented.”
Deloitte report concludes that a mandatory cap on greenhouse gas emissions from the oil and gas sector would result in decreased production, job and investment losses, as well as a “significant” decline in GDP in Alberta and the rest of Canada.
The mining, refinery products and utilities sector will also see a decline in actual production in the event of an emissions cap, Deloitte says, due to its proximity to the oil and gas sector.
Alberta’s oil production in 2030 would be 10 per cent lower with a cap than without it, the Deloitte report suggests, and its natural gas production would be 16 per cent lower. The cap would also mean decreased fossil fuel production in British Columbia, Saskatchewan and Newfoundland.
By 2040, Deloitte says, Alberta’s GDP would be 4.5 per cent lower, and Canada’s GDP one per cent lower, than if there were no emissions cap.
Federal Environment Minister Steven Guilbeault told reporters in Ottawa on Tuesday that the findings are “disconcerting,” given that the government has not yet even released a draft regulation on emissions limits.
“How can they come up with these scenarios about production cuts when all they’ve seen is basically a white paper, defining the contours of what the regulations could be?” he said.
Guilbeault added that oil and gas companies themselves, including Pathways Alliance, have committed to achieving net-zero emissions by 2050.
“All we’re doing with the oil and gas emissions cap is taking companies at their word,” he said.
“They said they wanted to be carbon neutral by 2050, and what we are doing with these regulations is making sure that no one waits until 2048 to start implementing the necessary measures.”
But Alberta Environment Minister Rebecca Shulz said the report backs up what the province has been saying all along.
“We have to use common sense. You have to take socioeconomic data into perspective when you analyze policies like (an emissions limit),” Shulz said in an interview.
“I don’t think Canadians want to see us throw the country into further economic decline.”
Shulz added that Alberta recognizes the economics of carbon capture and storage are challenging. He said a heavy-handed government policy that makes companies less profitable will only have the effect of discouraging investment in emissions reductions.
“From a policy perspective, the layering of all these punitive measures continues to push away the emissions reduction technology that we really want to see happen here,” he said.
The Deloitte report predicts Alberta would have 54,000 fewer jobs in 2030 with an emissions cap than without it.
–With files from Mia Rabson, The Canadian Press