Contributed by Robert Lyman © 2024. Robert Lyman’s bio can be read here.
EXECUTIVE SUMMARY
In December 2023, the government of Canada announced its intention to implement a country-wide cap-and-trade system covering the greenhouse gas emissions from the upstream (i.e. exploration, development and production) parts of the oil and natural gas industry. The cap would help attain government’s goal of reducing Canada’s emissions to at least 40 per cent below 2005 levels by 2030.
Deloitte, the consulting firm, was engaged to conduct an economic analysis of the cap. Its report, published in March, 2024, received very little media coverage.
Deloitte’s analysis proceeded in four stages.
- It projected Canada’s oil and gas production and emissions under a “business-as-usual” scenario (i.e. if current policies were to continue) over the period 2022 to 2040
- It made some key assumptions about how the financial and policy contexts will evolve over the period to 2040, including notably how costs and cash flows will change for low-cost and high-cost oil sands projects
- It projected the costs of reducing emissions by investing in carbon capture and storage (CCS) projects and, alternatively, by reducing production
- It assessed the impact of possible production declines on the national and provincial economies in terms of growth and employment
Deloitte projected that, with ongoing efficiency improvements and ongoing abatement of methane emissions (reaching a 75% reduction from 2012 levels by 2040, an ambitious goal) and the implementation of already approved CCS projects, GHG emissions would decrease from 161 Mt CO2e in 2021 to 157 Mt CO2e in 2030 and 152 Mt CO2e in 2040.
Deloitte estimates that CCS projects would need to incur a capital expenditure for capture ($1,747,000) and other costs ($427,000) for a total of $2,184,000. These capital costs were halved as a result of the federal government CCS investment tax credit, which pays 50% (i.e. $663,000 in this case) of the capture costs and the Alberta Carbon Capture Incentive Program (ACCIP), which provides a grant covering 12% of the CCS capture capital costs ($210,000 in this case). Federal and Alberta taxpayers, in others words, pay subsidies equal to 62% of the capital costs of CCS capture and 50% of all the total capital costs of a CCS project.
The net income of a low-cost asset over a 2024-2040 period is estimated to be $8,648 million (discounted $4,617 million) while that of a high-cost asset is estimated to be $528 million (discounted $401 million). CCS investment entails a negative ROI (Return on Investment) regardless of the type of oil sands asset. In other words, It makes no economic sense for an oil sands company to invest in a CCS project.
Deloitte estimates that meeting the cap obligations through production curtailment would mean reducing total Canadian oil production by 626,000 barrels per day, or about 10% compared to the production in 2030 under business-as-usual. Most of this reduction (526,000 barrels per day) would be in Alberta. Canada also would have to reduce natural gas production by about 2.2 billion cubic feet per day, equivalent to a 12% reduction in production under business-as-usual in 2030.
If production is curtailed as Deloitte projects, GDP in Alberta’s oil and gas sector would be $16.2 billion (20%) lower compared to the baseline in 2040. In the rest of Canada, GDP in the sector is projected to be $2.7 billion lower by 2040 compared to the baseline.
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