In December 2023, right around COP28, Canada made an important announcement about capping emissions from oil and gas production. It seemed like good news – after all, capping emissions sounds like progress, right? But what does this announcement mean for Canada’s goal of reaching net zero emissions by 2050?
Understanding emissions from oil and gas production in Canada
The oil and gas sector is the largest contributor to greenhouse gas emissions in Canada, accounting for about 28% of all emissions. For Canada to get to net zero by 2050, it needs to figure out how to cut oil and gas sector emissions.
At 189 megatonnes of CO2 equivalent emissions in 2021, if Canada’s oil and gas sector were a country, its emissions would exceed the national total of 70% of all the countries in the world. And while Canada’s overall emissions are modestly declining, emissions from the oil and gas sector continue to grow, having increased 12% since 2005.
Let me say something here that may be obvious in hindsight, but was not obvious (at least to me) when I started looking at emissions data: oil and gas sector emissions only include emissions from producing oil and gas – they do not include emissions from using the oil and gas that is produced.
For example, if gas is used to power cars, those emissions are reflected in the Transport sector. If oil or natural gas is used to heat buildings, those emissions are in the Buildings sector. Fossil fuel emissions from operating farm equipment are captured in the Agriculture sector… and so on.
But what about oil and gas that is exported? Canada is the third largest exporter of oil in the world, sending about 85% of our oil production to other countries. We also export about half of the natural gas we produce, making Canada the world’s fifth-largest natural gas exporter. While the fossil fuels we export originated in Canada, we are not held responsible for the emissions deriving from their use. Those emissions are captured in the totals of the countries where the fuel is used1.
The fossil fuel emissions Canada exports to the world are not trivial – they are roughly equal to the total national emissions we produce at home. If exported fossil fuel emissions were added to domestic emissions, Canada’s total would come to about 1.4 gigatonnes of CO2e annually. That would put Canada ahead of Japan as the world’s 8th largest emitter (we’re currently 12th).
The point here is that the oil and gas sector is the largest contributor to Canada’s emissions footprint even without including the emissions of the fossil fuels being produced.
When you think this through, you realize that to produce fossil fuels one has to consume fossil fuels, and in very large volumes. That is true in general and it is doubly true in Canada’s case.
A bit about bitumen
Canada’s emissions from the oil and gas sector are particularly intense because of the oil sands which make up 97% of Canada’s known oil reserves.
Oil sands are a mixture of sand, water, and bitumen – oil that is too heavy or thick to flow on its own. Bitumen is so thick that at room temperature it acts much like cold molasses.
Bitumen can be extracted using one of two methods depending on how deep the deposits are below the surface: open-pit mining or in-situ production.
In open pit mining, large shovels scoop the oil sand into trucks which then move it to crushers, where the large clumps of earth are processed. Once the oil sand is crushed, hot water is added so it can be pumped to the extraction plant. At the extraction plant more hot water is added to this mixture of sand, clay, bitumen, and water in a large separation vessel where settling time is provided to allow the various components to separate. During separation, bitumen froth rises to the surface, where it is removed, diluted, and refined further. About 20% of oil sands reserves are accessible through this mining technique.
In-situ extraction methods are used to recover bitumen that lies too deep beneath the surface for mining (greater than 75 meters underground). Steam Assisted Gravity Drainage (SAGD) is currently the most widely used in-situ recovery method. This method requires the drilling of two horizontal wells, one slightly higher than the other, through the oil sands deposit. Steam is injected continuously into the top well and, as the temperature rises in what is termed the “steam chamber”, the bitumen becomes more fluid and flows to the lower well. The bitumen is then pumped to the surface. Currently, 80% of oil sands reserves are accessible via in-situ techniques.
When you boil it all down, making oil from bitumen requires steaming or cooking earth on a scale that stretches the imagination. It takes two tonnes of bituminous earth to produce a single barrel of bitumen – and millions of barrels are being produced each day. The extraction sites are so large they can be identified from space. The bucket excavation equipment and trucks used in the process are among the largest machines that exist on the planet.
Both approaches require a lot of equipment and heat2 in the extraction and refining processes, so producing this fossil fuel, requires, … well, a lot of fossil fuel.
An analysis by the Pembina Institute, a Canadian energy policy think tank, concludes that each barrel of crude oil produced from Canada’s oil sands produces 2.2 times more emissions than the North American average.
What did the Federal Government announce?
The announcement of a plan to cap emissions from the production of oil and gas is a really important step in Canada’s plans to reach net zero by 2050. But what exactly did the government announce on December 7, 2023?
On that day, the Canadian Government released a regulatory framework – essentially a set of principles that will guide the development of any new regulations. They’re not the actual regulations themselves.
The government is seeking input on the framework. Based on that feedback, proposed regulations could be published by mid-2024. The government will then seek feedback on those proposed regulations and finalize the new rules by 2025.
The biggest key principle in the framework describes what it isn’t – the government is not proposing any limits to the production of oil and gas in Canada. Its focus is on limiting the emissions associated with the production of oil and gas.
A cap and trade system
The framework proposes that the government will issue emissions allowances to regulated oil and gas producers. The regulations would cover “upstream” emissions – those stemming from the extraction and production of oil and gas, which represent about 85% of sector emissions. Other sector emissions, from refining and distribution, for instance, are covered by other regulations.
Think of these as allowances as a limited number of pollution permits, each one giving a producer permission to emit one tonne of greenhouse gasses. Under the proposed framework, emission allowances would be allocated to producers on a pro-rata basis according to production levels. Allowances would be free, at least in the initial phase of implementation. Future allocations may be auctioned.
An oil and gas producer would remit allowances as they release emissions and would be legally capped from releasing any additional emissions beyond their allowance.
Unused or unneeded allowances could be sold to other producers, creating a financial incentive to invest in systems that cut emissions.
But there would be a limit to using acquired allowances, or other similarly eligible credit. A producer could only use these acquired permits to increase their emissions by up to ~20% of their originally allocated permissions.
In principle, under this system, the number of emission allowances issued would decline at a pace and scale to meet the goal of the sector reaching net zero emissions by 2050.
The thinking is that only large facilities that account for 85% of sector emissions would be subject to the regulations. The framework mentions that the government is considering approaches to efficiently regulate the remaining 15% of sector emissions from small producers.
But how much cap?
In the framework, the government proposes that the cap on oil and gas sector emissions be set at a limit that is:
1) consistent with the emission reduction technology that is available today
2) consistent with forecasted oil and gas production by 2030 according to the Canada Energy Regulator’s Canada Net Zero scenario (CNZ)
The CNZ scenario assumes that world demand for Canadian oil and gas will increase by 24% and 12% respectively by 2030 vs. 2019. In the longer term, the scenario forecasts production declines as Canada and all parties to the Paris Agreement achieve their interim and net zero climate targets by 2050, or 2060-2070 in the cases of China and India.
What stands out, is that in a world transitioning off fossil fuels, the Canada Energy Regulator still expects a lot of Canadian fossil fuel production in the medium to longer term.
With those increased oil and gas forecasts for 2030 and assuming the implementation of currently available emissions-reducing technology, the government forecasts that the oil and gas sector could operate with emissions levels of between 131 and 137 megatonnes of CO2e in 2030. That is -20% to -23% below the emissions recorded in 2019.
Taking into account the maximum amount of emissions offsets through acquired allowances and other credits, the proposed framework expects that the net sector emissions by 2030 could be as low as 106-112 megatons of CO2e – a 35% to 38% reduction versus 2019 levels.
The government says that it has not yet determined how the cap will be phased in between 2026 and 2030. It also proposes that after 2030, the cap will be progressively reduced to reach net zero for the sector by 2050.
It’s difficult to predict the evolution of technology and the forecasted demand for oil and gas for the next 25 to 30 years, so the framework reassures producers that it will regularly review and adjust the program based on how conditions evolve.
Not popular in oil country
The points that the 2030 cap can be achieved with currently available technology and at forecasted increasing rates of oil and gas production are critical to government efforts to sell the initiative to critics. They emphasize that the regulations will be a cap on emissions, not on production, and at emissions levels that the oil and gas industry itself says they can achieve.
Predictably, industry as well as the provincial governments of Alberta and Saskatchewan were quick to condemn the proposed rule-making framework.
The Canadian Association of Petroleum Producers3 released a statement criticizing the proposed new rules, claiming the added complexity would hamper investment in clean energy projects and could result in curtailments of production, increasing fuel prices for Canadians. They conclude that the draft framework essentially amounts to a production cap.
The premiers of Alberta and Saskatchewan also blasted the plan. Alberta Premier Danielle Smith called it an “intentional attack by the federal government on the economy of Alberta and the financial well-being of millions of Albertans and Canadians.” She went on to call the federal environment minister, Steven Guilbeault, an “eco-extremist”.
Saskatchewan Premier Scott Moe said the framework would burden the oil and gas industry “with more red tape and regulations”.
Both are vowing to invoke constitutional protections to thwart any new rules.
The framework was open for comments until Feb 5, after which the government expects to release draft rules for comment by mid-2024.
With a federal election expected by October 2025, the timetable to implement new regulations is important. Federal conservatives are also not supportive of the plan to cap oil and gas emissions, claiming it would “kill” jobs and “send dollars to dictators” by shifting production overseas.
They have not said what they would do instead.
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