Canada needs a climate strategy that leverages wealth of hydrocarbons to transition to low-carbon energy systems

Note from Eric Newell: I am still occasionally asked to speak. At a talk to the Ditchley Foundation in the U.K., I said: “I have nine grandchildren, and they say, ‘Grandad, climate change is destroying our future.’” The KEI Network webinar focused on energy decarbonization followed. This op-ed offers a summation of that discussion, its conciseness impossible without the expertise and contribution of Jim Carter, Eddy Isaacs, Hal Kvisle, Dennis McConnaghy and Oskar Sigvaldason.

Balancing energy, environment and the economy is critical. Yet current climate policies and plans — including Canada’s — are designed to phase out fossil fuel production entirely as rapidly as possible, largely ignoring the several decades-long transition required to develop reliable alternative energy systems.

These climate plans need to broaden their focus from primarily just energy sources/mix to also include focus on energy availability/reliability and energy affordability. Otherwise, it will not be possible to secure ongoing public, investor and political support for such plans.

Simply put, hydrocarbons — oil and natural gas — are required to effect an orderly transition to low-carbon, net-zero emissions energy systems.

Hydrocarbons are the only energy option, given that renewables, hydropower, large-scale electrification and hydrogen cannot yet meet immediate high-temperature thermal and power generation needs. Longer term, small modular reactors and nuclear fusion offer considerable promise.

Motive power sources such as electric vehicles and hydrogen-powered fuel cells will take time to fully develop the infrastructure for required minerals, facilities and distribution systems.

Moreover, the premature shutdown of hydrocarbon energy ignores domestic and international geopolitical realities, supply disruptions and unusual weather patterns that can trigger unacceptable energy shortages. This can lead to very volatile high energy prices and “energy crises,” as experienced recently in Western Europe and China.

In fact, hydrocarbons will remain a source of energy and materials even after transitioning to net zero.

Yet in Canada, the federal government has introduced extraordinary regulatory requirements limiting access to export markets, resulting in pipeline cancellations. Burdensome energy decision processes — including regulatory approvals that are subject to reversal — destroy investor confidence and have caused the flight of foreign investment capital from Canada’s energy and natural resources sectors.

The pricing of carbon emissions is already underway to reduce the usage of hydrocarbons for energy. While such pricing serves to motivate innovations for greener and cleaner energy, mechanisms are not yet in place to avoid placing Canadian energy at a competitive disadvantage with other hydrocarbon-producing countries.

Narrowly focused climate policies hurting natural resources potential

Canada’s oil sands have the world’s third-largest proven reserves of oil. They represent the fifth-largest oil producer and exporter, and have a proven track record for significant greenhouse emissions reductions using emerging technologies. Our oil sands industry is in the rarified category of a global business worth in excess of $1 trillion.

Oil sands operations are a major driver of the Western Canada economy and a significant contributor to Canada’s GDP. Of note, the oil sands are a large employer of world-class technical, financial and management experts, offering high-quality career opportunities over the longer term.

The oil sands could sustain current rates of production for at least 200 years, with the potential to triple production through ongoing development of an enormous resource base.

Canada’s natural gas resource base is equally impressive, with a developable resource base of more than 1,300 trillion cubic feet — roughly comparable to the natural gas resource base of the United States.

Canada’s natural gas production is currently one-sixth that of the U.S., so the opportunity to grow Canadian natural gas production is comparable in scale to that of the oil sands. The Deep Basin and Montney plays of northwest Alberta and northeast B.C. are two of the most attractive natural gas opportunities worldwide, with potential economic value of more than $1 trillion and high-value career opportunities for Canadians.

While the U.S. has aggressively developed its natural gas resources and emerged as the world’s largest exporter of LNG, western Canadian gas development has lagged due to regulatory and social delays and higher costs of LNG construction in Canada.

Global demand for natural gas is growing faster than readily available supply. With a sound LNG export strategy and overdue regulatory improvements, Canada would be well positioned to realize both social and economic benefits and contribute to a 50-percent reduction in Asian power generation emissions, through conversion from coal to Canadian natural gas in the form of LNG.

Unfortunately, Canadian regulatory and climate policy have gone in the wrong direction over the past decade. Canada’s regulatory constraints and narrowly focused climate policies do not reflect global realities.

The application of carbon taxes on natural gas, without harmonizing carbon tax with competing countries (especially U.S. and Mexico), is deterring Canadian power generators from building high-efficiency combined cycle gas plants in Canada. Similarly, steeply escalating carbon taxes in Canada also are a significant and uncompetitive burden on Canadian industries and manufacturers competing in the North American economy.

Simply put, our American and Mexican competitors do not face the same carbon taxes or regulatory burdens that Canadians are increasingly facing. This is not just a problem for oil and gas producers; it is a serious competitive issue for any Canadian enterprise that consumes increasingly expensive Canadian oil, natural gas or electricity.

Institutional and technological innovation both needed

Technology innovation and knowhow is another potential major area for Canada’s energy sector to contribute to not only meeting domestic climate change targets, but also providing a smoother energy transition globally.

Canada’s energy industry is a world leader in the development of emissions-reduction technology. Key areas include: methane emissions reduction, carbon capture utilization and sequestration (CCUS), hydrogen and net-zero emission petrochemicals, LNG exports and development of small-scale modular nuclear reactors.

But technological innovation by itself is not enough. Canada needs to expand that focus to include institutional innovation.

By far, the most voiced concern is Canada’s burdensome and politically uncertain energy decision-making process, including regulatory requirements and approvals for major resource developments. This is a common priority concern for numerous projects, such as:

• meeting expanded electricity usage, including inter-jurisdictional interconnections;
• expanding hydrogen-based infrastructure;
• pipelines and export terminals; and
• mineral resource mining projects (e.g. battery-grade nickel, copper, cobalt; lithium and other rare earth metals; and uranium), manufacturing facilities and distribution systems.

Canada’s objective should be a significant streamlining of bureaucratic regulatory and approval processes. We need clear roles and responsibilities for all the stakeholders, and the political certainty necessary for timely decisions and securing high levels of investor confidence.

This initiative should be led by the federal government, with strong input and representation from: provincial and territorial governments, industry (e.g. Canadian Association of Petroleum Producers, Mining Association of Canada, Canadian Nuclear Association, Canadian Manufacturers and Exporters) and the banking/investing/insurance sectors, municipalities and communities (with a special emphasis on Indigenous communities).

Path to energy, environment and economic sustainability

Here are the key components of a proposed Path To Energy, Environment and Economic Sustainability:

1. Balancing between domestic climate adaptation and emissions reduction (mitigation) efforts and resources. This would ensure Canadians are better prepared to prevent and respond to extreme weather events.
2. Collaboration and incentives to foster/accelerate technological innovations for reducing greenhouse gas emissions and advancing low-carbon alternative energy systems. Specifically, this includes methane emissions reduction, carbon capture utilization and sequestration, hydrogen system “build out” and small modular reactors.
3. Streamlining energy decision making, including regulatory systems and approval processes, to permit timely decisions and large project approvals to secure investor confidence and make good progress on the major resource projects, manufacturing facilities, supply chains and distribution systems associated with the transition to a lower carbon economy and alternative energy systems.
4. Messaging: branding Canada’s pristine environment and bounty of natural resources while leading in innovation to finance Canada’s energy transition and, globally, to help other countries achieve their emissions targets and a smoother energy transition.
5. Inclusive planning with collaboration as the cornerstone of success. This means immediately engaging in an integrated, inclusive planning process with the overall objective of aligning all stakeholder groups to achieve energy, environment and economic sustainability throughout the energy transition period over the next several decades.

Canada needs bold leadership to meet our domestic climate change targets and commit to helping others globally. With our vast natural resources including oil and gas, our technology leadership, and our proven track record for innovation, we can do so much more than just reduce domestic greenhouse gas emissions. We have a moral obligation to the rest of the world to do so.

Eric Newell is Chancellor Emeritus at the University of Alberta and former CEO at Syncrude Canada Ltd. Perry Kinkaide is President of Kinkaide Enterprises Inc. and a former managing partner at KPMG Consulting.

R$