Take IEA’s advice, model future of Canada’s oil/gas. Then decide if sector deserves public support

“Canada’s bold policies and support for innovation can underpin a successful energy transition.” – IEA

A few years ago, I asked an economist about the effect on Canadian oil producers if global demand declined from the current 100 million barrels per day. We don’t know because no one has modelled that scenario, he replied.

I was reminded of that interview during the Thursday press conference to release the IEA’s first review of Canadian energy policies since 2015. Executive Director Fatih Birol lauded the Trudeau government’s energy and climate policies: “Canada has shown impressive leadership, both at home and abroad, on clean and equitable energy transitions.”

Watch my interview with Dr. Mark Zacharias for an overview of the IEA report.

The Turkish economist, head of the IEA since 2015, also mentioned his agency’s net-zero by 2050 scenario, released to great fanfare last year, that set mid-century oil consumption at 25 million barrels per day. “I would like to get this oil from countries, good partners, real partners like Canada,” Birol said, “who want to reduce the emissions of oil and gas.”

The IEA head’s enthusiasm for Canadian policies is understandable. Canada is one of the few countries with credible strategies, and the policies to back them up, to achieve net-zero by 2050. It may be the only country with a plan to decarbonize oil and gas production. So, we can forgive Natural Resources Minister Jonathan Wilkinson, who attended the online press conference, from taking a victory lap during his remarks.

After all, as Birol said, “The IEA is not very famous for being so complimentary.”

But the international spotlight shouldn’t blind us to the challenges that the low-carbon future will pose for Canada’s high-carbon oil and gas. As the Alberta-based industry is fond of saying, in the future Canadian hydrocarbons will have to be both “cost and carbon-competitive.”

The Western Canadian Sedimentary Basin conventional oil is traditionally a marginal barrel, only competitive when prices are high. Oil sands production costs were also quite high, but over the past seven years breakevens have been driven below $40 a barrel in many cases. Some of the more efficient producers say their costs will be south of $30 by 2025. Those costs are still well above global leaders like Saudi Arabia, which is in the $5 to $10 range.

But there are a few wrinkles that complicate a straight up comparison of production costs. For example, non-upgraded bitumen (40% of Canada’s 5 million barrels per day of production) competes in the global heavy crude market, which is 10.5 million barrels per day. This product competes with heavy crude from Mexico, Brazil, and Venezuela, not the light sweet crudes from the Saudis or US shale basins.

How will heavy crude fare in a net-zero by 2050 scenario? If the market shrinks, will Canada still be able to compete? Will new markets open in Asia, where heavy crude can be used to make petrochemicals?

The question of carbon-competitiveness is just as murky.

Oil sands bitumen averages 70 kg CO2e per barrel (a few older projects are closer to 200 kg CO2e per barrel), one of the dirtiest crude oils on the planet. Keep in mind that some of the newer projects are closer to the US crude oil national average, in the 35 to 40 kg CO2e per barrel range. While industry has made steady progress lowering bitumen carbon-intensity (it was 87 kg CO2e per barrel a decade ago), the prospects for further reductions are slim. Of the four big oil sands producers, only Suncor has committed to lowering emissions by 2030. The rest “aspire” to net-zero by 2050 and say the best they can hope for is to arrest emissions growth by decade-end.

The point here is that Canadian crude oil may be neither cost nor carbon-competitive in a low-carbon world. We can’t know the future, of course, but that’s why economists model scenarios. And one of the IEA report’s key recommendations is that Canada “model pathways to net zero by 2050 for Canada’s energy system.” This is the recommendation Canada should act upon immediately, before the federal government commits taxpayer support for the industry, not after.

This is an important point because Ottawa is hard at work on a carbon capture and storage tax credit for oil and gas that could cost tens of billions. The Oil Sands Pathway to Net-zero by 2050 Initiative estimates decarbonizing bitumen production will cost $75 billion. Several CEOs suggested last summer that governments should pay $50 billion of that bill.

Birol lauded Canada’s efforts to develop carbon capture utilization and storage, which he said is critical to global efforts to reach net-zero emissions by 2050. There are only 40 megatonnes of CO2 per year currently captured and stored underground or made into products, but seven megatonnes of that capacity is in Canada. Ottawa, several provincial governments (including Alberta), and the oil and gas industry, have committed to investing in scaling up the technology.

Watch my interview with Wood Mackenzie about Canada’s world-leading carbon capture and storage technology.

Here’s a scenario Canadians should consider. Ottawa spends $50 million to help decarbonize the oil sands and another $10 billion or $20 billion for the rest of the industry. Let’s round it off to $70 billion. Now Canadian oil and gas is carbon competitive. But costs can’t be reduced enough and as demand declines significantly beginning in the 2030s, those assets start to be stranded. By 2050, much of the industry is not competitive.  More assets are stranded.

In a worst case scenario, Canadian governments also have to pay hundreds of billions to remediate and reclaim orphan wells and related infrastructure like pipelines, oil sands facilities, and 37 oil sands tailings ponds.

In a best case scenario, the oil sands pivot to producing bitumen as a feedstock for materials manufacturing, like carbon fibre, which is then used extensively by North American automakers to create light electric vehicles with longer ranges. Instead of being a nasty fossil fuel, bitumen become a darling of the energy transition.

This research is well underway and Alberta Innovates, the provincial research agency, expects that a commercially viable process will be ready within two to three years. Watch my interview with Dr. Paolo Bomben, senior manager, Clean Technology Development, in the Clean Resources division of Alberta Innovates, about the Carbon Grand Fibre Challenge’s Phase II.

I don’t know if these scenarios are plausible, but without extensive modelling, neither does the Canadian Association of Petroleum Producers or Prime Minister Justin Trudeau.

Maybe it’s time to take a deep breath, commission a team of smart economists to model the future of Canadian oil and gas, and then decide how (or if) to support the industry with billions of public dollars.

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