Why the Liberals approved Bay du Nord

“Beyond projects already committed as of 2021, there are no new oil and gas fields approved for development in our pathway…” – IEA’s net-zero by 2050 scenario

The IEA was kidding, right? Otherwise, why would the Canadian government, which says it is deeply committed to net-zero by 2050, approve the Bay du Nord project? An April 6 announcement explains the Liberals’ view of hydrocarbons in a low-carbon future.

To reach net-zero greenhouse emissions by mid-century, the International Energy Agency’s modelling says oil consumption will drop from 100 million barrels per day to 25 million barrels per day. The Alberta-based hydrocarbons sector, which extracts 5 million barrels per day, believes it can compete in that much constrained market (watch interview below, “Surprising insights re. oil sands production costs, GHG emissions – economist Kevin Birn, IHS MarkIt”). This messaging is a key part of the industry’s narrative.

The federal government is onside. “Fuels that are produced in an ultra-low carbon fashion will have significant value internationally going forward,” says Natural Resources Minister Jonathan Wilkinson, “and Canada is positioned to provide these fuels as part of our broader suite of domestic and international climate measures.”

What the government is implicitly arguing is that market forces will determine the long-term fate of Canadian hydrocarbons. This should come as no surprise. Justin Trudeau and his party have made this point consistently since being elected in 2015.

And not long ago, former Greenpeace climate activist and now Canadian environment minister Steven Guilbeault said there will be no oil and gas production cuts to achieve emissions cuts. Again, this reflects the priorities of industry, which in negotiations with environmental groups in 2014 and 2015 conceded ground on carbon pricing and other climate policies in exchange for promises of support (eventually embedded in the NDP government’s Climate Leadership Plan) for no production cuts.

Look at this from the government’s point of view. If domestic hydrocarbon production can be made cost and carbon-competitive by 2050, as industry claims, Ottawa retains a good measure of the current 182,000 direct jobs and several billions per year (perhaps more if prices stay high) in tax revenue. If industry fails to remain competitive and fades away as consumption declines, the cost to the national treasury has been relatively small (the caveat here is potentially hundreds of billions in environmental liabilities).

Can industry be competitive? (watch interview above, “Oil sands are low-cost, competitive producers – economist”)

While the average emissions-intensity of a barrel of oil sands ultra heavy crude is 69 kg of CO2e per barrel (according to IHS MarkIt), averages disguise significant variability. Some new projects come in under 40 kg of CO2e per barrel, around the threshold for the average North American crude. And breakeven costs for most oil sands supply (the source of most Canadian oil exports) have dropped to between $30 and $40 per barrel West Texas Intermediate. Some are projected to be in the mid to high $20 range by mid-decade.

This is why Wilkinson and Guilbeault announced “plans to develop guidance that will require proponents of new oil and gas production projects subject to a federal impact assessment to demonstrate that they will have ‘best-in-class’ low-emissions performance.”

Which brings us to the controversial Bay du Nord project 500 kilometres east of St. John’s, Newfoundland and Labrador. The joint venture between Norway’s Equinor and Canada’s Cenovus will produce 200,000 barrel per day to start with an average emissions-intensity of 8 kg of CO2e per barrel. That’s 20 per cent of the average Canadian intensity of 40 kgs and 10 per cent of the oil sands average (the government uses the higher figure of 80 kgs).

And Bay du Nord will be required to achieve net-zero by 2050. Given that Equinor is one of the world’s leading low-carbon oil producers, odds are pretty good it will.

Environmental groups loudly condemned Ottawa’s approval, citing the IEA scenario. Fair enough. But if Canada’s goal is to compete in a 2050 global oil market by lowering the domestic industry’s emissions to zero, then approving such low-emissions crude makes sense.

The question environmentalists should be raising is, why are oil sands projects with average emissions-intensities close to 200 kg of CO2e per barrel still allowed to operate?

In fact, if environmentalists are going to tout the IEA’s net-zero scenario with its 25 million barrels of oil per day, then they have to explain why Canadian producers should be excluded from competing in that smaller market.

Until they come up with a persuasive argument, projects like Bay du Nord will be approved by the Canadian government.

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