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Pumpjacks draw oil out of the ground near Olds, Alta. PHOTO BY THE CANADIAN PRESS/JEFF MCINTOSH FILES

Canada could pump out 500,000 more barrels of oil a day and still reach climate targets: RBC

‘The really critical piece of the puzzle is making sure that we have an economically competitive oil sector’

Canada’s largest bank issued a report six months ago on the staggering cost of transitioning the country’s economy to net-zero emissions.

If the $2-trillion mission appeared daunting before Russia’s invasion of Ukraine upended the global energy order, things have only gotten more complicated. Canada must now add bolstering the energy security of western democracies to its mission to decarbonize, said Royal Bank of Canada economist Colin Guldimann.

“What current events have really shown us is that oil and gas are, and are likely to remain, critical parts of our energy supply for at least the foreseeable future,” Guldimann said in an interview.

“Crises can be clarifying moments.”

As the world seeks alternatives to Russian oil and gas, a new report from RBC’s economic research department suggests that Canadian production could increase by as much as 500,000 barrels per day over 2021 levels without compromising Canada’s climate targets. However, the report also warned that even if Canadian barrels successfully displace those of other producers, the additional production could add 9 million tonnes of greenhouse gases per year to Canada’s emissions, and cost $1.5 billion annually to abate.

Under the Trudeau government’s first comprehensive emissions reduction plan, released last month, Canada’s oil and gas sector will have to cut emissions by 42 per cent from current levels by 2030. The federal climate plan was silent on the scale of investment that will be required to meet the sector’s climate targets, however. RBC’s report found that cutting emissions from the oilsands alone will require $45 to $65 billion in capital spending between 2024 and 2030.

And given the ambitiousness of Canada’s climate goals, there’s no time to waste.

“We need a really concerted effort over the next 24 months or so in laying out the foundation for where emissions cuts can come from,” said Guldimann, the report’s lead author. “Be that methane reductions, electrification of the oil and gas system, but also laying out major emissions plans, on top of what the government has already said, that include long-term decarbonization investments like carbon capture.”

The report found while the federal government’s newly announced carbon capture, utilization and storage (CCUS) tax credit is a significant first step, more will have to done to ensure widespread deployment of the technology, which is seen as a flawed, but vital component of Canada’s decarbonization project. De-risking pricey carbon-capture projects will require more support from governments, from a possible top-up credit from the provinces to more carbon pricing certainty from the federal government, the report said.

A big bet on CCUS also comes with significant drawbacks, the report found. Carbon-capture technology is expensive and slow to build, and governments and industry will need to ensure that oilsands production remains competitive in the long run to justify investments.

A bad outcome for Canada would be to make a number of historic investments in carbon capture, which increases our cost of production, and then not having anywhere to economically sell that oil over the lifecycle of those projects,” Guldimann said.

The report also offers a path for policy-makers, calling for the creation of an energy-focused stream of the federal government’s new Canada Growth Fund to expedite approvals and provide financial backing for decarbonization projects. Canada must also forge new energy alliances and co-operate with allies to ensure market access and to pursue long-term oil contracts with the United States and Europe that price in the sector’s environmental efforts and geopolitical stability.

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“The really critical piece of the puzzle is making sure that we have an economically competitive oil sector,” Guldimann said. “There’s an opportunity here for Canada, not just on innovation, but also on preserving the economic value of this sector of the economy… let’s make the most deliberate and measured decisions we can while facing down these sort of two distinct energy security and climate security challenges.”

Canada may have a long way to go, however, to counter its reputation as a high-cost, high-carbon source of energy — a reputation which has helped spell the demise of key energy infrastructure projects such as the now-cancelled Keystone XL pipeline.

But some investors say there is every sign that Canada is on track to reversing this reputation.

They point to the Oil Sands Pathways initiative, an alliance of six companies that have said they will co-operate to build a CO2 pipeline connecting various oilsands facilities to an underground storage hub near Cold Lake. Adam Waterous, founder of the eponymous private equity firm, Waterous Energy Fund, says the project could dramatically lower the carbon intensity of Canadian oil by the end of the decade.

“It’s our view that by the end of the decade there is a pretty good chance that there is going to be great political pressure to get Canadian barrels into the United States, not just for energy security but to help to decarbonize the fuel system in the United States,” Waterous said on a recent episode of the Veriten podcast, C.O.B. Tuesday.

“Now that’s a flip of the script,” Waterous said. “That is the opposite of what’s going on here and that’s how we see energy security and the Canadian industry lowering its emissions intersecting.”

Still, twin goals of reducing emissions and ramping up oilsands production won’t be easily met.

“We had this one decarbonization goal. Now we have decarbonization and energy security goals,” Guldimann said. “Solving one challenge is hard enough… two objectives make that journey just a little bit harder. It was already an extremely difficult challenge to begin with.”

Source: Financial Post