Welcome to episode 380 of the Energy Talks podcast. I'm energy journalist, Markham Hislop. This morning, November 4th, the government of Canada released its draft oil and gas emissions cap regulations. Ottawa could hear the hallow protest all the way from Calgary. Does the data support an emissions cap?
Well, let's see. Of Canada's total greenhouse gas emissions of 708 megatons in 2022, oil and gas accounts for 217 megatons or 31%. Alberta's oil and gas sector all by itself accounts for a whopping 103 53 megatons or 22% of the national total. That's the same percentage as the entire country's transportation emissions. And while other sectors have fallen, oil and gas emissions are roughly at 2012 levels.
A big increase in oil sands production suggest emissions will rise again. From a climate change perspective, there is little doubt that the oil and gas sector has done a poor job of decarbonizing. With COP 29 fast approaching, federal policy to address the problem is hardly surprising. But has the Liberal government of prime minister Justin Trudeau done a good job designing the cap? To answer that question, I'm joined by Janetta McKenzie, manager of the Pembina Institute's Oil and Gas Program.
So welcome back to Energy Talks, Janetta.
Thank you for having me.
Why don't you give us, an overview of what got announced today?
Yeah. So today, we got draft regulations for the federal government's oil and gas emissions cap. This has been a regulation that's been in the making for a long time for for almost 3 years now. So it is a a great development to see this important step being taken today. This proposed regulation lays out a path to start seeing emissions reductions from the oil and gas sector, which is, as you noted, Markham is Canada's highest emitting sector.
It lays out a path based on technically achievable, emissions reductions. The 2 biggest buckets of that are methane abatement, which is already being supported by existing methane regulations and planned amendments to those regulations and carbon capture, which as we know, the Pathways Alliance has proposed to build a big foundational project in Alberta, has some financial support on tap with the federal, investment tax credit for carbon capture, as well as Alberta's, carbon capture incentive grant. And now this regulation, holds the sector accountable to start making those investments and making those decisions and seeing emissions come down.
This is, okay. So let's talk about methane emissions first. And we know, that, studies have shown that methane data, methane numbers are inaccurate as much as 1 and a half to 2 times inaccurate, and a lot of that has to do with the federal sorry. The the technology up until recently has been pretty primitive, and and, so the government, the regulators, and the producers have all agreed that the methane emissions have to go down, but the goal was Alberta's goal previously was 45% by 2030. Last year, Alberta premier Danielle Smith said, oh, we've we've already reached 45%, and we're just gonna let it go.
That's it. We're not doing anymore. We're not doing the 75% the the the federal government wants. I including I've met with I interviewed 3 economists, including 2 from the Pembina Institute. We went over the national inventory, report numbers, and we can only find 33%. Mhmm. Now I know the AER, the Alberta Energy Regulator, on their website has a chart that shows 45%. Where's the data to to back that up? They won't release that data, and Smith won't release that data. So I don't know.
What's your take on, you know, where's the beef?
Yeah. I mean, methane abatement will be a really critical part of meeting this federal emissions cap. We also know that, provinces are moving forward with developing methane regulations. We know BC has just, announced their plans to develop 2,030 methane regulations. And even in the Alberta government's own emissions reduction and energy development plan, they note a commitment to increasing ambition on methane reductions in the oil and gas sector.
As to sort of the differences between provincial and federal reporting, there are differences between those federal and provincial reporting. And sometimes, they're not always transparent or not always easily accessible as to see where certain numbers are coming from. And I think that's what's happening a little bit at the at the provincial level, for methane. But we do know that you're right. We're not very good at measuring methane.
We need to get better at it. There's, been some steps to start doing that at the federal level and also some voluntary initiatives from firms, and we know that it's one of the most cost effective ways to reduce oil and gas emissions in the short term.
Let me recap for our audience. We're not very good at at admissions, measuring emissions. So very often, the the numbers that are being quoted are wrong. The there's a difference between the federal and, and provincial governments in terms of numbers, and, frankly, I'd stick with the federal. I don't trust the provincial government as far as I could throw it on this issue.
And while the they've Alberta has kind of signaled that maybe, kinda, sorta, they might be open to increasing their ambition. You know, Smith is still resistant. We haven't seen any commitments on there. Is it any wonder the federal government would like to see them bring down their methane emissions a lot more? Okay.
Enough of methane. Let's talk about carbon capture and storage. So 2, 3 years ago, oil sands producer CEO, Alex Pourbaix, said it's gonna cost us $75,000,000,000 to decarbonize the oil sands. 50,000,000,000 of that is for, carbon capture and storage. And by the way, we want $50,000,000,000 in support from from government.
A big public sub subsidies of $50,000,000,000. Well, by god, they're gonna get it by the looks of it because the federal government keeps throwing money at them to try to get them to move on this project. The provincial government has brought in a 12% investment credit. I I mean, what do we have to do? Just pay the entire tab before the oil sands producers actually put a shovel in the ground?
Yeah. I think that the level of public support, you know, everyone will will have a different opinion on how much is enough for for the oil, sand sector to start investing in carbon capture. It is we know that it's a big component of the Pathways Alliance plan. We've seen some firms move forward on on developing their own carbon capture projects, the Shell Polaris, project, which was recently announced. The, Strathcona refinery recently announced a deal with the Canada Growth Fund, to to build carbon to install carbon capture.
So we know that there are firms starting to take advantage of of the of the public financial support that's been put on the table. And ideally, this emissions cap is, which is proposed today, but eventually implemented, will complement what's been put on offer, what these firms say they wanna do, and then they can do themselves and get, provide some of that certainty so that they can begin to take advantage of the, carbon capture incentive tax credit and the provincial, incentive grant and start start putting shovels in the ground in a way that is, predictable and begins to see those those, projects become operational.
You know why I'm so skeptical of this, Janetta? I started reporting on, decarbonization of of the oil sands in 2016, and I interviewed people like, oh, there was the VP of technology for Synovus who was involved in solvent substitution. So for those folks who don't know, Synovus is uses, steam assisted gravity drainage, where you drill a couple of wells into the the bitumen, resource. And one of them has steam and the other one. So it it basically melts the not melt, but it it it dilutes the, bitumen so that it will then drip into the other wellbore, and then you pump it up to.
The so that's so instead of doing it with steam, which you had to burn natural gas to create, they wanted to to use a light harder hydrocarbon like propane or something like that to do the job. 9 years later, we've had one announcement from Imperial Oil on this technology. And I wrote a column last year, and I said, no. We're these guys have dragged their feet. They have refused to invest in this despite all of their supposed research over the past decade or decade and a half, and, really, all it comes down to at the end of the day is they just want the the taxpayer to pick up the bill.
And here we are, 9 year 10 years later, and the taxpayer is picking up the bill. So I am really skeptical that, you know, a, they're gonna do it, and, b, it's gonna they're gonna spend any of their own money on it.
Yeah. I mean, you know, we obviously can't predict the future. I would say that these are these pieces of technology are expensive. They sort like, they they just are when you're talking about carbon capture and even some of the other innovations. That's why things like the the federal tax credit can help sort of tip, things over into becoming, you know, okay.
This makes sense for us to do. And that's the other reason that additional regulation is really needed, to kind of hold the industry to account for the commitments that they've made and the things that they say they can build and the and the decarbonization that they that they've committed to doing. It's and it's interesting that you that you bring up the solvents as well, Mark. Like, obviously, a big part of decarbonizing the oil sands is gonna be carbon capture. We know that from the Pathways Alliance plan themselves.
But there are also these other these other innovations in solvents and in energy efficiency, things like that, which are all also theoretically stands to take big steps forward now that there's a regulation in place or not yet in place, once the regulation is in place, to provide again kind of the certainty and the impetus for more innovation in that space. We know this sector can innovate. We've seen them do it, you know, many times before, including on how to how to, extract the oil sands. And they've got so this regulation will help provide the the, springboard for some of that innovation.
You made the point in your comments, that companies are reluctant to move ahead with projects unless assured of a profitable return. And I I I've mentioned this before in the podcast, but I wanna remind listeners and maybe folks who didn't hear, what I said in a previous episode. I had two sources. Dan Wicklum, who is the former head of COSEA, the Canadian Oil Sands Alliance and, innovate Innovation Alliance, and Will Ratliff, who is a long, long time oil and gas reclamation engineer in, Alberta. When projects come to the table, like so when you have a budget meeting every year and the various departments, the drilling department, the completion department, the all of that come they put their budgets on the table and say, this is our ask for this year.
The oil sands looks at the liability, the reclamation part of that, and says, we will only spend money. We will only invest capital where we can get a net prop an, a net positive return. If we're not making money, if we're not making a profit on it, we're not spending money on it. So if you create a liability and then you don't wanna spend then you don't want you should be obligated to spend money to reclaim the liability. If you're emitting and contradicting federal and provincial climate policy, then you should be obligated to spend money to bring your emissions down, especially when you're as emissions intense as the, as the oil sands are.
And and these companies, which are now giving 75 to a 100% of their free cash flow back to investors in the form of shareholder, buybacks and higher dividends, They won't spend the money. They're giving it all back to investors, and then they ask us to pay on the taxpayers to pay on top of that. This is jaw droppingly ballsy, to be honest with you, that they would do this. And nobody seems to I mean, I applaud Bambda. You guys are are one of the few, organizations whose email came across into my inbox today, you know, with some critical comments about what's going on.
And everybody else is, you know, just trumpeting the Alberta government and the industry, repeating what they have to say. Anyway, they refuse to allocate capital unless they're making prop you made the point, and I think this needs to be driven home, is that they have to pay for their externalities, whether it makes them a profit or not.
Yes. I mean, that is what a lot of this is about. Is it it is about getting a, actually, better look at what it costs to to produce a barrel of oil or produce a, yeah, produce a barrel of oil. And that is when you go look at the draft regulation that's been released today, you can see a quantification made, for, you know, this is what we think. This is the net benefit to Canadians.
And there's a dollar amount in there. Doing nothing, right? There's a cost to not mitigating emissions and not dealing with climate change. And that has a that has a that's a burden on Canadians as well. So that is also the sort of landscape that that, we're looking at this regulation from is the companies are profitable.
They've brought in some pretty good profits the last few years. They're they have financial supports on on offer from both the federal and provincial governments. Now that they have they've announced that they think they can do this, that they can get x amount, you know, it's it's not on their website anymore, but, you know, 10 to 12 megatons, from their foundational pathways project by 2030. And now we have this regulation, which is essentially saying, okay, so let's let's do it. And let's begin to see this line, this emissions trend line, for the Canadian oil and gas sector, in particular, oil sands begin to come down.
Let's talk about that a little bit. And, the oil sands emissions intensity per barrel is the highest in the world or pretty close to I mean, you know, sure there are some small amounts of crude here and there, you know, like the Placerita, crude in California that's advanced as, you know, dirtier, but it's a very small amount of production. And that's true of other other crudes in the world. But the oil sand stands at, 68 to 70, kilograms of c 02, equivalent per barrel, whereas the global average is, like, 25. And so first of all, it's it's some of the dirtiest oil in the world.
Now Rystad Energy, this is the, Norwegian consulting company, put out a report. I just saw it late last week, so it's fairly recent. And they say that the oil sands average break in per barrel break sorry. Break in. Breakeven per barrel is $55.
That's the global average, and oil sands producers are are higher than that, some as high as $75. So here's the question. I know there's all kinds of modeling. I read modeling till my eyes bleed about future oil demand and and where we're going with this. And I have asked the question of of the minister's office, that's, Jonathan Wilkinson, the Canada's natural resource minister, and I asked the question, has the minister reviewed modeling to determine whether or not Alberta oil sands companies are competitive, that is viable, economically viable, in the event of a demand decline scenario.
So the International Energy Agency came out just a couple weeks ago and said, not only is oil demand going to peak, but it's not gonna peak in 2030 like we previously thought, it's gonna be like 28, 2028 or 2029. So if there's a peak and then there's a short plateau followed by decline, can the oil sands companies compete when when consumption is falling and prices fall? And the minister's office came back and they danced around the question, and the the answer obviously was no. So here, the taxpayers are committing tens of 1,000,000,000 of dollars, and I can imagine a scenario where carbon capture and storage for the oil sands gets completed just as the companies begin to fail. So not only does the the taxpayer pay for the construction of all of the CCUS infrastructure, then it has to pay once again to dismantle it and reclaim that that land.
We haven't even done the basic basic due diligence to to ensure that taxpayers' dollars are protected here. These companies could begin to fail, and we haven't considered the worst conversation, you know, the future of demand and the whether the
I mean, I think this is this is a really big question, Markham, and, I mean, I think the simplest answer is yes. We know that, Canadian oil sands in particular are very emissions intensive. I can't tell you today how, you know, a particular or a certain oil sands facility would be able to compete in 10 years. It depends a lot on the pace and, and scale of the energy transition globally. We know that oil and gas is a global, market, one that Canada does not set.
And so we're gonna be a little bit dictated by that. We know that demand is likely to peak and begin to decline at some point in the relatively near future. But how quickly that's gonna happen and how quickly that decline is gonna happen, you know, there's a lot of variables that would have to go into answering a question like that. I would say also that we know that oil demand is not gonna go to 0 tomorrow. We know it's not gonna go to 0 in 10 years.
And even in the IEA's net 0 by 2050 scenario globally, there is still a small amount of oil being used, and we're not on that trajectory yet. So there's a lot of opportunity to reduce emissions from Canadian oil and gas production now as we're in that sort of as we're embarking on on that energy transition and that sort of messy middle. It's worth reducing those emissions now, even though we know, yes, demand is likely to peak and decline, but it's not gonna it's not gonna go to 0 tomorrow. And meanwhile, oil and gas is Canada's highest emitting sector, and we know we need to bring those emissions down. When it comes to things like the carbon capture investment tax credit, yes, oil and gas firms, can and should access that to help, defray the the very high upfront cost of their capital.
But the tax credit is also on, on the table for other sectors as well, that are gonna need access to that to that kind of financial support, like the cement sector, for instance.
Well, I hate to say it, Janetta, but that your answer didn't give me a lot of confidence. It didn't allay my my fears. And here's another issue. An economist brought this up the other day in an interview with me. He said there are a couple of firms that have got projects where the resource is running out and will run out in the in the not too distant future.
And he said it's way too expensive to build a greenfield project these days. Like, the only way you can justify expansion in the oil sands is if you're build doing what they call brownfield. So I've got an existing plant, and I'm gonna develop a project, where the resource is close to the plant in which I will process that. My infrastructure is built. My plant is built.
And so all all I have to do is put in a little bit invest more in in the extraction part of it, and I I can I can justify that? But greenfield, you know, where you actually build a whole new project, too expensive. Once again, here we are putting taxpayers' money into a an industry where you build the infrastructure today and what happens when the resource runs out on these various projects? Because they're only about, like, you know, 25, 30, 35 years, in length. That's this is not like an an an oil basin.
This is like a you know, bitumen is like peanut butter. So you know where the resource is. You know how much you have of it and how much is economic. It's not going anywhere, and eventually, you run out and you gotta move on. It was too expensive to move on. This is one more data point in the argument against throwing money at the oil sands, I guess, is my point here.
Yeah. And I think that we do have to, you know, balance the need to reduce emissions from this sector now and in the short term with over committing public funds, for sure. I mean, this is a there's an opportunity cost to allocating money to a certain a certain type of decarbonization than another. We know this is a pretty big opportunity for decarbonization in the oil and gas sector, carbon capture, probably the biggest single opportunity, that has been proposed. So there is an in my opinion, there is a reason to commit some public financial support to it, but you do have to balance, that you can't if you're paying for that entire thing, you can't commit those funds to something else.
So with what's put on been put on offer, it's kind of threading the needle in that sense. Is it a perfect amount? You know, I'm sure everybody everybody in Alberta and Canada would have a different opinion on that, but it is about balancing the sort of emissions reductions we can get in the next 5 to 7 to 8 years as well as, ensuring that we have public funds to commit to new emerging sectors as well.
Okay. So here's the bottom line for me on this. There is only one justification for for spending taxpayer dollars decarbonizing the oil cents. And that reason is because the, bitumen, as I've said many times on this podcast, is a very unique hydrocarbon model molecule, and it can be manipulated to be feedstock or advanced material manufacturing. Carbon fiber would be 1.
That's the big one that Alberta Innovates is working on. They're gonna have a, probably a commercial process next year or the year after. So I can foresee if you if you took that research and you said, okay. We're gonna we're gonna build a carbon fiber industry. So as demand for the oil sands, for for bitumen declines in American refineries, the demand for advanced material, manufacturing the demand from that sector rises.
And so the oil sands production that you've the taxpayers paid to decarbonize still has a market, and that makes perfect sense to me. I can say, okay. That the problem is I I interviewed like, in a press conference, I I asked premier Smith this question, and she goes, oh, yeah. Yeah. You know what?
If if if we're wrong and and markets begin to decline, we'll just make stuff with it. You you don't just pull that out of your back pocket. You don't build an advanced material sector tomorrow because you feel like it. It takes planning and capital, and and it's a big process. And if the governments had said to them, we have a plan for the sector such that, if demand goes down faster or if the oil sands bitumen, it it is not competitive in a declining demand scenario.
We have a plan b. The plan b is we're gonna build this non combustion use for it and so that we can just shift the production away from refineries over into this other sector, and we maintain the sector. We maintain all the, you know, the the, the government revenue that both levels of government get. We maintain the jobs, all of that kind of stuff. That I would get behind.
That makes a lot of sense to me. Throwing money at a throwing money at a an industry that's already been disrupted, its business model is disrupted by the by electric transportation in the short term, makes no sense to me. Anyway, I'm I'm that that's my basic argument, is we haven't sat down. Any MBA student could go through this argument and figure out that this is, there are big holes in the logic behind spending all this money to decarbonize the oil sands. I don't know.
I I you know, again, I applaud you guys for pointing out, you know, the things that need to change. And the other thing you've done is you've point out pointed out that the the modeling used by the industry and by the Alberta government is flawed. Maybe you just wanna give us a bit of an overview of that.
Yeah. I mean, I think there's been a lot of different pieces of analysis flying around when it comes to, you know, the impact that this proposed emissions cap will have on will have on the economy or will have on jobs. And, basically, it's always important to remember, I think, when you're looking at these pieces of analysis, any piece of modeling, that all of them have assumptions baked into them. Sometimes those assumptions, you know, don't take into account demand decline, and they see kind of growth going, increasing forever. Sometimes they don't take into account, measures that companies will be obligated to take to comply with methane regulations.
And the the federal government's own proposed regulation today shows very minimal impact on GDP and a real net benefit for Canadians due to that cost of that cost of not mitigating climate change or reducing emissions. So it is, know, this is obviously it's a sensitive topic. It's a controversial topic. It's important to get it right, in the sense that nobody wants to pull the rug out from the overtant economy. And that is why what's what's been proposed today is a pretty is a pretty doable sort of on ramp for the sector to start reducing emissions, for Canada to see those emissions trend go down, in a way that is achievable, that will that will not pull the rug out, but will get us to some of those initial disruptions in the short term.
You make a point in your comments that made a lot of sense to me. There there are 3 studies that have been trotted out by the Canadian Association of Petroleum Producers and l the Alberta Government, the S and P Global study. And all of those studies hinge on hinge on the assumption that that industry act will actually, if it's not subsidized, will take no action to reduce its emissions, which really is is an invalid assumption. I I agree with you on that point, but here's the point nobody wants that that nobody talks about. The industry doesn't wanna take action.
Carbon emission reduction compliance has a cost, and the industry right now is under tremendous pressure from investors to return all of its money, as much of its money as possible to those investors. And they have to do that to maintain their stock price. Because if you don't maintain your stock price, the CEO and the senior managers are out the door the next day. And so they don't want to spend money decarbonized. They see it as an unnecessary expense, and many of them, frankly, are climate deniers.
Now how do I know that? It's because I get emails from them. I get emails saying, you know, that ranting about the Trudeau Liberals and the prime minister and and, you know, all this phony baloney stuff about about, you know, climate is a hoax. We had the the the premier's party, the United Conservative Party, pass a resolution on the weekend at their annual general meeting saying that that c o two is a bet net benefit to the world, but that's that's plant food. I mean, this is light your hair on fire kind of stuff, and and they get away with this over and over again.
I mean, no reasonable person would advance modeling based on the assumption that the that the producers do nothing. And no reasonable industry in in 2024 would work on the assumption that they could get away with doing nothing, unless you're in Russia or Nigeria or some other place like that, but not Canada. Good lord. Okay. I I don't know what to where we go with this, Janetta, because every time I have you on to talk about the oil sands, I wind up ranting at you because this is this is such an I think this is an egregious breach or, egregious irresponsibility on behalf of both the Alberta government and the federal government.
I think that they're they're playing fast and loose with taxpayer dollars, and I think that's absolutely wrong. They should not be doing that. So I'm gonna leave the last word to you. Why don't you wrap it up for us and, you know, where do we need to go from here?
Yeah. I mean, listen, I would say this is what regulation is for. Right? It is about finding a way to internalize some of the costs of climate change that have ultimately been externalized up until this point. This is what emissions cap is trying to do.
This is what methane regulations try to do. This is what the, this is what industrial carbon pricing tries to do, which is obviously applies, to more than the oil and gas sector. But this is what regulation is for. But we also know that it is it is challenging to reduce these emissions in in the way that it is. And that's why what's been proposed provides this this on ramp for the sector to start making these investments, while hand in hand, we're also developing our clean economy.
We are pursuing, you know, clean emerging sectors. We are working on making our grid net zero across the country so that we can maintain our competitive advantage in clean electricity. This is all they're all pieces of the sort of quilt that is climate policy. Some of it's easier than others, definitely. But this is this is one piece, and even the oil and gas sector is a few pieces on that quilt.
I am gonna have a last word because you mentioned climate policy. I was I was just gonna thank you for for, coming on and doing the interview until you mentioned climate policy. I am reluctantly of the opinion that we need to leave climate policy in our rearview mirror. I don't think it's worked, and I don't think it has the political support. And there's a whole debate amongst economists like Mark Jackard of the of Simon Fraser and Danny Cullenward of of Stanford about what happens when you lose political support for carbon pricing.
What do you replace it with? So but here's the the rub. China and the United States in particular, and to a lesser extent, Europe, have all pivoted to clean energy industrial policy. So instead of of focusing on decarbonization, they focus on, first of all, the manufacturer of clean energy technology like wind and solar and batteries and EVs and heat pumps and electrolyzers and all that stuff. Then they folk they also provide policy and financial support on the deployment of those technologies.
And I would argue that China in particular, but the the emerging situation in the US after they announced the, you know, 2, 3 years ago, they began announcing industrial policies like inflation reduction act, demonstrates that clean energy industrial policy and by the way, where the government plays a much bigger role in the policy framework than it does in climate policy. Industrial policy is far more effective at actually making reductions in greenhouse gas emissions that climate policy ever will or has to date, and we're looking at this wrong. I really I really have come to that conclusion that we are taking the wrong approach in Canada. We're sticking with this while our trading partners, like the US, are going in a different direction, and I don't even think we've understood that they are going in a different direction yet. So I think that's a fundamental we have some fundamental problems here in the conversation around the oil sands, not only about the oil sands itself, but the broader framework around, around the energy transition, at the full at the federal and the provincial level that we haven't resolved.
We're not having that conversation about those issues. We just kinda pretend that everything's okay. We'll just throw some money at it. The problem will go away. So to my listeners, it is time for a new energy conversation in Canada, but most particularly in Alberta where which is far and away the emissions leader of all of the provinces at 38% of national emissions, even though it only has 12% of the population.
If we don't start talking about it and thinking about this issue differently, we're going to continue to make mistakes that's going to cost us in our pocketbook, and then I'm talking about taxpayers, and we need to fix that. So given the fact that I've given you a little bit of a a a rant, I'm gonna I'll yet again give you a chance to respond to that.
Yeah. I mean, I agree with you, Mark. I mean, I think that a coordinated strategy to, address economic diversification in our country and to ensure that we're lifting up, and supporting new emerging sectors is is how this country gets competitive, stays competitive, and thrives in, in the net zero economy, which is not set by Canada. You know, the world is moving in that direction. The world will move in that direction regardless of what policy Canada sets.
So now is the time to start thinking about how how we diversify, how we stay competitive, and and stay in lockstep with with the rest of the world, for sure.
Well, that is absolutely true. The world the ex the global energy transition just accelerates, and then not only on a yearly basis. I mean, it's like every quarter. Things are so much faster. You know, the the deployment of solar is so much faster than we thought.
You you we think that EV adoption is slowing down, and then it turns out that it's not slowing down at the you know, and and on and on and on. There's so many of you examples of how the world is electrifying, and and here we are investing tens of 1,000,000,000 of dollars in the the energy of the 20 20th century, not the energy of the 21st century. And so, anyway, on that note, Janetta, thank you very much. It's lovely having you on again. Really appreciate it.
Thank you, Mark.