Emissions cap not possible without cuts in oil and gas production: Deloitte

CALGARY — Canadian oil and gas companies facing a federally imposed emissions cap will decide to cut production rather than invest in expensive carbon capture and storage technologies, a new report says of Deloitte.

The Alberta government-commissioned report — a copy of which was obtained by The Canadian Press — aims to assess the economic impact of the proposed cap.

Its findings contradict the federal government’s position that the proposed cap on greenhouse gas emissions from the oil and gas sector would be a cap on pollution, not a cap 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 questions the idea that widespread use of carbon capture and storage technology will reduce emissions from the oil and gas sector in the coming years, suggesting that this scenario does not make financial sense.

“We expect the cap (will require) 20 megatons of emission reductions from producers by 2030, which will have to be achieved through investments in CCS (carbon capture and storage) or by reducing production,” the Deloitte report said.

“Reducing production would be a more cost-effective option compared to investing in CCS.”

The oil and natural gas sector is the largest emitting industry in Canada, and rising oil sands production has meant that total emissions from the sector are rising at a time when many other sectors of the economy are successfully reducing total emissions.

Globally, oil demand is rising, with the International Energy Agency forecasting 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 outpace demand growth this decade.

In a draft framework released last December, the federal government proposed capping oil and gas emissions to help slow climate change. The rules would require industry to cut greenhouse gas emissions by 35 to 38 percent from 2019 to 2030 levels. Companies would also have the option to buy offset credits or contribute to a decarbonization fund which would reduce this requirement to a reduction of only 20 to 23. percent.

But the Deloitte report suggests that country’s oil production could increase by 30% and gas production by more than 16% from 2021 to 2040. These figures are based on a forecast by the Canadian Energy Regulatory Authority and current government policies.

This means manufacturers will have two options to meet the constraints of an emissions cap, says Deloitte. They can invest heavily in carbon capture and storage—capturing greenhouse gas emissions from on-site oil production and storing them safely underground—or scale back planned production increases.

The oil and gas industry itself has promoted carbon capture and storage as the key to reducing emissions while increasing production. The oil sands industry, which is responsible for the majority of total emissions from Canada’s oil and gas sector, 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 the Pathways Alliance, has yet to make a final investment decision, saying more certainty is needed about 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 it is “economically unviable” in many cases.

It says many companies are unlikely to go that route in an effort to meet an emissions cap and would instead simply cut production.

“It is important to note that once implemented, the investment in CCS is irreversible,” the report states.

“However, the reduction in production can be reversed. Given these factors, we do not foresee oil sands CCS investments being implemented.”

The Deloitte report concludes that a mandatory cap on greenhouse gas emissions from the oil and gas sector would result in lower production, job losses and investment, as well as a “significant” decline in GDP in Alberta and the rest of Canada.

The mining, refining and utilities sectors will also experience a decline in real output under an emissions cap, Deloitte says, due to their 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 a drop in fossil fuel production in BC, Saskatchewan and Newfoundland.

By 2040, Deloitte says, Alberta’s GDP would be 4.5 per cent lower and Canada’s GDP would be 1 per cent lower than if no cap on emissions had been set.

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 socio-economic data into perspective when you look at policies like (an emissions cap),” Shulz said in an interview.

“I don’t think Canadians want to see us plunge the country into further economic decline.”

Shulz added that Alberta recognizes that the economics of carbon capture and storage are challenging. She said heavy-handed government policy that makes companies less profitable will only have the effect of discouraging investment in reducing emissions.

“From a policy perspective, the layering of all these punitive measures continues to drive out the emissions-reduction technology that we actually want to see happen here,” she said.

The Deloitte report projects that Alberta will have 54,000 fewer jobs in 2030 with an emissions cap than without one.

This report by The Canadian Press was first published on June 17, 2024.

Amanda Stephenson, Canadian Press