Canada’s oil industry stands at a crossroads: Decarbonize or suffer energy-transition shock

Sooner corporate and government leaders get out in front of inevitable decrease in demand for crude oil, the less devastating job losses will be

Canada decarbonize oil industry

Hugh Helferty has more than 30 years of experience in the energy industry, including a long career at ExxonMobil. He is the president of the non-profit Producer Accountability for Carbon Emissions (PACE).

Jane Savage has 37 years of experience in the Canadian energy industry in senior roles in fuel production, supply and trading. She is a co-founder of PACE.

Jobs matter to Canadians, – and over 500,000 of them are associated with the oil and gas industry in this country. Unfortunately, the production and combustion of Canadian crude oil results in higher carbon emissions than production and combustion from most other countries.

With 80% of Canada’s crude oil exported to the United States, which is on a path toward decarbonization, the threat to Canada’s oil industry jobs cannot be ignored. It’s not domestic federal government policy, nor domestic loss of demand for fuel products, nor the drive to net-zero domestically, nor the environmentalist fight against pipelines that are threatening Canadian oil jobs. Rather, it is the predictable decline in U.S. appetite for Canadian crude oil.

The sooner Canadian corporate and government leaders get out in front of this inevitable demand loss, the less devastating the energy-transition shock will be to Canada’s jobs and the economy.

The consulting firm McKinsey has documented a shift toward electric vehicles: global EV sales grew an average of 62% per year in the last four years and by 96% in 2021 alone. The report predicted that 42% of new vehicles sold in the U.S. will be EVs by 2027; the Biden administration is targeting 50% of new car sales to be EVs by 2030.

Automakers don’t want to get left in the dust as this transition accelerates and are rapidly moving away from the internal combustion engine. General Motors says it will stop selling gasoline and diesel vehicles by 2035. Ford is spending US$22 billion over the next four years to increase EV production. Stellantis (formerly Fiat Chrysler) is spending US$35 billion in the same period. Even Bentley will be all electric by 2030.

But electrification isn’t the greatest threat facing Canadian crude production and associated jobs. The larger competitive problem for Canada is that the United States – one of the world’s highest emitters of greenhouse gases – will need to find ways to decarbonize consumed fuels on its path to meet the Paris Climate Agreement’s goal of net-zero emissions by 2050. Since Canada’s crude oil has a higher carbon footprint than almost any other, the country’s crude will tumble in attractiveness for U.S. buyers. 

So far, the steps being taken in Canada to address this inevitable loss of thousands of jobs are not nearly bold enough. The recently announced tax credit for carbon capture, utilization and storage motivates producers to engage in carbon dioxide storage but doesn’t require it, and therefore can’t promise to result in the storage of enough carbon dioxide to make a difference to the U.S. The net-zero plans of the Canadian oil industry are laudable on many fronts but are narrowly limited to reducing the emissions from the extraction of Canada’s heavy crude oil, ignoring the carbon footprint of the refining and burning of these products. To be “carbon competitive” in the U.S. market, Canada will need to address all carbon dioxide emissions resulting from the use of its crude.

Electrification isn’t the greatest threat facing Canadian crude production and associated jobs.

We need to think about how to best decarbonize Canadian oil before the U.S. imposes low-carbon requirements at its borders. Regulating that requirement in the near-term is the only way to ensure Canada’s jobs are preserved during the energy transition. In the 1970s, as the adverse health impacts of lead in gasoline and the threat to Canadian oil jobs became clear, legislation was implemented to begin removing that lead. We must do the same now by finding a legislated solution to protect both Canadian jobs and the environment.

A workable policy solution for both industry and government to consider is an idea proposed by Oxford Net Zero and the ClimateWorks Foundation called thecarbon takeback obligation” (CTBO). This regulation would require all oil producers to permanently store an amount of carbon equivalent to what they produce, including emissions resulting from refining and burning their products. Phased in over time, carbon dioxide storage must reach 100% of the Scope 1, 2 and 3 emissions associated with whatever crude oil is still being produced by 2050. This would result in a concrete plan for emission reductions and decarbonization, and it could create a predictable regulatory environment in which producers can operate. And importantly, any Canadian crude oil produced and exported would be carbon competitive for the U.S. market.

While some carbon capture and storage (CCS) projects have shown success, others have not. But the oil and gas industry has the technology, enormous innovative capacity, and money needed to support swift development in the field. Think of how quickly the industry mobilized to adopt fracking, a complicated and previously unheard-of technology that proved to be extremely good for business. If capturing and storing carbon dioxide becomes essential to the continuation of crude oil extraction, the industry will find scalable solutions. And complying with a CTBO would not be limited to CCS – it would be up to the industry to find the safest, most cost-effective methods of reducing emissions associated with their production. 

This regulation would motivate companies to spend their cash to develop and deploy the technologies – most of which exist already but are not fully utilized – to take responsibility for the emissions from their product. The cost of oil production in Canada will increase, driving the industry to produce more carbon-competitive products and invest in renewable energies. The ball will be in producers’ court as to how best to construct their future.

Oil industry leaders in Canada are at a crossroads. They can continue to lobby against changes to the business model that has been successful for the Canadian economy in the past, or they can reinvent themselves to get out in front of the inevitable job losses associated with U.S. decarbonization, driving toward a soft landing for Canadian companies and their employees. For the sake of Canadian jobs and a just energy transition, Canadian industry and government leaders must take decisive action now. 

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