The Covid-19 pandemic heralds major changes on the international energy markets. A stumbling demand for oil and gas means that we can expect that only the cheapest sources of hydrocarbons will be recovered. Canada’s oil industry, one of the world’s largest, is now bracing for a tough and uncertain future.
Although we still do not have a full grasp at the social and economic implications of the deep recession that both the advanced industrial and emerging worlds are in, there seems to be a near consensus among key players as to the impacts this will have on the energy scene. With the national stimulus package plans they are putting forward, most advanced economies are planning to accelerate investments in energy transition. That, combined with what could well prove to become a long-term secular decline in the number of long-haul flights and of energy-intensive economic activities, most likely herald the end of easy money for many oil-producing countries.
This is not to say that this decline will be felt evenly among jurisdictions endowed with large reserves of hydrocarbons. Those with the highest marginal cost of extraction per barrel will be the most severely impacted, as they will struggle to break even. With a marginal cost of extraction for the next barrel standing at around $50, Canada’s tar sand deposits are growing increasingly uneconomical. In addition to being expensive, tar sands are also highly carbon-intensive at the point of extraction. The federal mandate on provinces to put a price on carbon, which is set to increase to $50 per ton by 2022, therefore compounds difficulties for an industry already struggling with nose-diving oil prices.
It increasingly seems like Canada is looking upon Norway, another large oil-producing nation, as an example to better negotiate the challenges ahead. With an oil industry dating back from the 1960s, Oslo has an unmatched expertise in offshore drilling. Its most recent offshore field, the Johan Sverdrup deposit, boosts the best environmental practice in the industry, with emissions at the point of extraction of merely 700g of CO2 per barrel, against a global average of 18kg per barrel. In Alberta, the extraction of one barrel of oil emits twice that amount of carbon, at 36kg. Splitting oil from tar indeed involves heating it with natural gas, thus making the transformation process very polluting in itself. Yet, Ottawa is still betting on the continuation of a thriving oil industry (and the good paying jobs it provides to thousands of Canadians), but only if this goes hand in hand with declining territorial emissions in order to meet the country’s COP21 targets.
It is in this context that Canada’s Minister of natural resources recently granted a series of exploration permits along Newfoundland’s Atlantic coasts. Unlike Alberta’s tar sands, Newfoundland’s offshore oil is not particularly carbon-intensive to extract, thus offering Canada with the possibility to transition away from its most polluting form of oil towards one that would only modestly add to the country’s territorial emissions. Furthermore, this would represent a lifeline for Newfoundland, which is currently the province with the most disadvantageous demographic and economic profile, and which faces a tough reckoning because of its skyrocketing public debt.
If anything, the economic crisis we are experiencing has hardened the domestic opposition to the carbon tax, notably from the right-wing Conservative party and from provinces with high carbon emissions per capita, such as Alberta and Saskatchewan. Yet, the governing Liberals, along with the Green Party and the social-democratic NDP and Bloc Québécois all stand by the carbon tax. As a small trading nation, Canada is acutely aware of the growing calls, notably from the EU, to impose a “border adjustment tax” on products imported from jurisdictions that do not put a stringent price on carbon. Ottawa has grown convinced that unless the country keeps operating a market-based carbon mechanism on its own terms, its main trading partners could retaliate, as suggested many times in the past. Pursing a Norway-like strategy regarding hydrocarbons, with the dual objective of boosting oil and gas production and exports while at the same time reducing greenhouse gases emissions at the point of extraction thus appears to be the most promising way for those trying to straddle the fence between environmental objectives and the growth of the fossil fuel industry.
This is not to say that the transition away from emission-intensive sources of hydrocarbons will be in any way smooth and straightforward. As the price on carbon increases and as aggregate demand for oil remains sluggish, there will be more stranded assets in the tar sands sector, which implies steep redistributive conflicts between oil producing regions and the rest of the country. Boosting offshore production does not mean that all jobs in that sector can be saved, and although Ottawa is pushing for reconversion in the renewable sector, most new jobs will require more qualifications without as good of a salary. The jury is still out there as to whether the country will successfully negotiate this much needed transition, while at the same time safeguarding a strategic sector which role remains prevalent in the Canadian economy.
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