What does the future hold for Canada’s oil and gas industry?

After fighting the Covid-19 pandemic for almost two years, Canadians have recently turned their attention back to the environment as their primary concern [1]. While prior to the pandemic one in five Canadians considered the environmental issue to be their primary concern, today 17.1% are again of that opinion.

You cannot ignore climate change when it comes to environmental protection. In Canada, the oil and gas sector and the transport sector are the largest GHG emitters. In 2019, according to data provided by the Government of Canada [2], these two economic sectors accounted for 52% of total emissions.

As the country’s largest GHG emitters, the oil and gas industry is literally faced with its greatest challenge ever: transforming the industry and becoming part of the solution, the only way for it to survive in the current sociopolitical context.

More broadly, Canada needs to find the right balance between its economic interests and its international responsibilities in the fight against climate change. No small feat, since the oil and gas industry is unlike any other in the land of the maple leaf.

Some numbers

Reserves and production

Canada has the third largest proven reserves of oil in the world; 97% of these reserves are in Alberta in the form of oil sands. Canada is also the fourth largest producer and third largest exporter of oil globally.

With respect to natural gas, Canada is the fourth largest producer and sixth largest exporter of natural gas in the world. According to Natural Resources Canada, “Canadian marketable resources of natural gas can sustain current production levels for up to 300 years.” [3] We therefore have a long way to go before we run out of natural gas!

Contributions to the Canadian economy

In 2020, the oil and gas industry contributed $105 billion [4] to the Canadian economy, or 10% of the national GDP. Some 500,000 jobs depend on the industry across the country.

In addition, crude oil is by far the top Canadian export product. In 2020, mineral fuel exports including oil amounted to $87 billion [5], or 17.7% of total Canadian exports. That same year vehicle exports came in second at $58.6 billion, or 11.9% of total exports.

Regarding oil exports, from a Canadian perspective, 2020 was a relatively minor even disappointing year. By way of comparison, in 2012 [6], crude oil exports alone accounted for $94.8 billion. The decline in 2020 was tied to a drop in global energy demand triggered as of March that year by the Covid-19 pandemic. The decline however will not last long because international demand for oil is expected to return to pre-pandemic levels by the beginning of 2022 [7]. The industry’s contributions to the Canadian economy have not prevented the industry from facing issues that currently threaten its development as well as long-term vitality.

Major issues

Oil issues

Ninety-eight percent (98%) of Canadian oil exports is destined for the United States, making the Land of the Free the only real export market for Canadian oil. Under these circumstances, US buyers hold the balance of power. And their power disadvantages Canadian producers who are compelled, given the lack of other potential export markets, to sell their resource at a discount: the Canadian Oil Discount.

The lack of access to international markets – along with the environmental issue – is one of the main issues the Canadian industry has had to face in recent decades. Without access to the coast, Canadian producers, in land-locked Alberta and Saskatchewan, the country’s second oil producing province, are unable to export their product on international markets, owing to the lack of adequate transportation capacity.

To overcome this issue, several oil pipeline projects, Northern Gateway, Keystone XL, Energy East and Trans Mountain, have been promoted since 2010. Three of these have failed to come to fruition. Trans Mountain is the only remaining active project.

Climate change

The other major issue the Canadian hydrocarbon industry is facing is the fight against climate change.

Known to be more polluting than conventional oil, oil sands crude has substantially decreased its carbon footprint in recent decades, with greenhouse gas (GHG) emissions per barrel decreasing by more than 36% since 2000. Regardless, its reputation as a “dirty” oil seems to persist, periodically haunting public perceptions.

The industry however hopes to win over the skeptics. A number of initiatives specifically Canada’s Oil Sands Innovation Alliance (COSIA [9]), have been launched in recent years aimed at reducing the oil industry’s GHG emissions. Since 2012, the group has shared technological innovations designed to improve the environmental performance of oil producers operating in the oil sands. Such cooperation among competitors may seem unusual, even surprising, but it is allowing the entire industry to improve. Oil producers understand that they need to work together so that they can all enhance their environmental performance.

Pembina and TC Energy recently announced [10] a plan to jointly develop a carbon transportation and sequestration system, which when fully constructed will be capable of transporting more than 20 million tonnes of CO₂ annually throughout Alberta. With this ambitious project, called the Alberta Carbon Grid, Pembina and TC Energy intend to use their pipeline infrastructure to reduce their own GHG emissions as well as emissions generated by the entire Canadian oil and gas industry

Gas issues

Strangely enough, issues tied to the natural gas industry are increasingly similar to those the oil industry has faced in the past decade. In an effort to export Canadian natural gas to markets other than the US, liquefied natural gas (LNG) projects proliferated on the west coast of British Columbia, as well as in Quebec where the defunct Energy Saguenay project was until recently promoted by GNL Québec.

However, LNG projects are overall more complex than oil projects. They are indeed less polluting and produce concrete reductions in GHG emissions internationally by replacing sources of more polluting energy such as coal. On the other hand, they increase the carbon footprint of the regions from which LNG is exported. There is therefore an intrinsic locality versus globality duality to these projects. Finally, in terms of social and political acceptability, some of these projects in British Columbia are being promoted by First Nations [12] that live on the impacted land.

On the basis of these considerations, it’s difficult to say whether the LNG projects on the west coast of British Columbia will be subject to the same fate as the other projects referred to above, or whether they’ll be approved. At any rate, they’ll face the same issues accessing international markets and overcoming climate change.

Global energy

Where does the Canadian oil and gas industry fit into the global energy sector?

While the future of Canadian oil and gas resources has always been ambiguous due to its higher extraction costs than those of conventional resources, the most recent projections [13] developed by the International Energy Agency (IEA) indicate that things could quickly get complicated for Canadian oil producers.

First, the IEA predicts that the price of oil could remain just above US $65, a relatively low price. Then, on the sidelines of COP26, several countries have made additional climate commitments. This is particularly the case of the member countries of the European Union which have set themselves Net Zero objectives. Thus, if the aforementioned conditions were to materialize, demand for Canadian oil could be the first to contract internationally, a trend that could be observable as early as 2030 (see APS scenario, in the figure below).

This does not mean that this is the death warrant for the Canadian oil industry. For the Canadian Energy Center [14], this analysis rather indicates that Canada has implemented public policies that penalize the Canadian oil industry more than any other in the world. For the organization funded by the Government of Alberta, while Canada is not even responsible for 2% of global GHG emissions, Canadians have the opportunity to provide the most responsible oil in the considering the environmental, social and governance (ESG) criteria. Therefore, there would be an opportunity for internationally competitive Canadian oil. To this end, the situation must receive special attention from the federal government, the main actor capable of overcoming the aforementioned issues.

Natural Gas and Bioenergy

LNG exports from North America to Chinese markets, or more broadly Asia, are expected to increase steadily until 2050. Even, the proportion of natural gas coming from North America imported into Asia could be even greater if North American demand for natural gas were to decline, allowing resources not consumed locally to be exported. Canada could therefore benefit from its gas resources by facilitating their export to Asian markets.

In an ideal scenario, the use of natural gas for electricity production, which today accounts for around a quarter of total electricity production, would decrease drastically to only 1% of global electricity production in 2050. That same year, more than 50% of the global production of natural gas would rather be used to produce blue or turquoise hydrogen, depending on the mode of production.

In addition to hydrogen, the IEA report predicts an increase in supplies of bioenergy in the broad sense, including biofuels and biogas, thus confirming what was already envisaged in its key energy statistics for the year 2021 [15] unveiled last September.

As shown in the figure above, bioenergy will play a crucial role in the current energy transition. Other international energy experts share this analysis.

Molecules

On June 11, 2019, Christoph Frei, the Secretary General of the World Energy Council at the time, was in Montreal [16] to present a conference on the future of energy in the world. He said “Electricity currently accounts for only 20% of final energy demand. Eighty percent (80%) of that demand is met by “molecules.” So even if we double renewable electricity production in the next 20 years, and given that demand will continue to increase, that will meet only 30% of final energy demand. We will still need to meet 70% of final energy demand with molecules.”

Although renewable electricity is one of a range of solutions needed to drive the energy transition, it cannot be the only solution – hence the importance of bioenergy to as a complementary and substitute energy for fossil fuels, as molecule-based energy is not only here to stay, but it will also remain dominant in the decades to come.

It is therefore essential to understand the traditional hydrocarbon value chain and the applications in which hydrocarbons are used in our daily lives, otherwise it will be difficult to determine how to achieve the greening of molecule-based energy.

Conclusion

In light of our GHG reduction objectives, not only do we need to do everything in our power to produce as much renewable electricity as possible, but it is also imperative that we improve the environmental performance of the molecule-based energy value chains, specifically the traditional hydrocarbon value chain.

For the Canadian economy, the development of cutting-edge expertise in renewable energies is all the more important as it will have to compensate for possible job losses in the oil and gas sector, not to mention the loss of income of the various levels of provincial and federal government. Canadian consulting engineers must contribute to this development and aim to export their know-how.

It is therefore an array of solutions – carbon capture and sequestration (CCS), renewable electricity, bioenergy – that Canadian engineers will need to implement in the industry over the coming decades. Many projects are emerging that will require a collaborative and renewed professional approach.

References

[1] AGENCE QMI. L’environnement redevient la priorité des Canadiens, dépassant la COVID-19, [Online]. [https://www.journaldemontreal.com/2021/10/06/lenvironnement-redevient-la-priorite-des-canadiens-depassant-la-covid-19] (Consulted on Octobre 12, 2021)

[2] GOVERNMENT OF CANADA. Greenhouse gas emissions [online]. [https://www.canada.ca/en/environment-climate-change/services/environmental-indicators/greenhouse-gas-emissions.html] (Consulted October 12, 2021)

[3] GOVERNMENT OF CANADA. Natural Gas Facts [online]. [https://www.nrcan.gc.ca/science-and-data/data-and-analysis/energy-data-and-analysis/energy-facts/natural-gas-facts/20067] (Consulted on October 12, 2021)

[4] NATURAL RESOURCES CANADA. 10 Key Facts on Canada’s Energy Sector [online]. [https://www.nrcan.gc.ca/science-and-data/data-and-analysis/key-facts-and-figures-on-the-natural-resources-sector/16013] (Consulted on October 12, 2021)

[5] WORKMAN, Daniel. Canada’s Top 10 Exports [online]. [https://www.worldstopexports.com/canadas-top-exports/] (Consulted on October 12, 2021)

[6] WIKIPÉDIA. List of exports of Canada [online]. [https://en.wikipedia.org/wiki/List_of_exports_of_Canada] (Consulted on October 12, 2021)

[7] SAMANTA, Koustav, Roslan Khasawneh et Florence Tan. APPEC-Global oil demand seen reaching pre-pandemic levels by early 2022 [online]. [https://www.reuters.com/business/energy/appec-global-oil-demand-seen-reaching-pre-pandemic-levels-by-early-2022-2021-09-27/] (Consulted on October 12, 2021)

[8] THIBAULT, Jean-François. Étude du projet Énergie Est de l’entreprise TransCanada à l’aide de l’analyse stratégique de Crozier et Friedberg [online]. [https://biblos.hec.ca/biblio/memoires/m2019a613646.pdf] (Consulted on October 12, 2021)

[9] Canada’s Oil Sands Innovation Alliance (COSIA). Page d’accueil, [online]. [https://www.cosia.ca/] (Consulted on October 12, 2021)

[10] TC ENERGY. Pembina and TC Energy Partner to Create World-Scale Carbon Transportation and Sequestration Solution: The Alberta Carbon Grid [online]. [https://www.tcenergy.com/announcements/2021-06-17-pembina-and-tc-energy-partner-to-create-world-scale-carbon-transportation-and-sequestration-solution–the-alberta-carbon-grid] (Consulted on October 12, 2021)

[11] LARIN, Vincent. Québec rejette officiellement le projet de GNL Québec [online]. [https://www.journaldequebec.com/2021/07/21/quebec-rejetterait-gnl-quebec-1] (Consulted on October 12, 2021)

[12] RADIO-CANADA. La Première Nation Nisga’a propose un mégaprojet de GNL dans le nord de la C.-B. [online]. [https://ici.radio-canada.ca/nouvelle/1810065/projet-gnl-pipeline-gaz-naturel-nisgaa-prince-rupert] (Consulted on October 12, 2021)

[13] INTERNATIONAL ENERGY AGENCY (IEA). World Energy Outlook 2021, [online]. [https://iea.blob.core.windows.net/assets/88dec0c7-3a11-4d3b-99dc-8323ebfb388b/WorldEnergyOutlook2021.pdf] (Consulted on October 18, 2021)

[14] CANADIAN ENERGY CENTRE, A Matter of Fact: Report misrepresents long-term demand for Canadian oil, [online]. [https://www.canadianenergycentre.ca/a-matter-of-fact-report-misrepresents-long-term-demand-for-canadian-oil/] (Consulted on October 19, 2021)

[15] INTERNATIONAL ENERGY AGENCY (IEA). Key World Energy Statistics 2021, [online]. [https://iea.blob.core.windows.net/assets/52f66a88-0b63-4ad2-94a5-29d36e864b82/KeyWorldEnergyStatistics2021.pdf] (Consulted on October 18, 2021)

[16] THIBAULT, Jean-François. Christoph Frei du Conseil mondial de l’énergie : une double transition énergétique [online]. [https://blogue.genium360.ca/article/innovation/innovations-energetiques-une-double-transition/] (Consulted on October 12, 2021)