Federal government proposed emissions cap impact on oil production costs

Energy analysts and executives say Ottawa’s proposed emissions cap on the oil and gas industry would cause regulatory uncertainty, curtail investment and possibly even raise prices.

 

Senior federal government officials said Monday during a briefing that the proposed regulations, which would cap greenhouse gas emissions from Canada’s oil and gas sector at 35 per cent below 2019 levels, would not affect the price of oil.

 

But while the proposed cap would be unlikely to alter global benchmark prices, energy economist Peter Tertzakian, the managing director of ARC Financial Corp., says that doesn’t preclude it having an impact on the price of petroleum products domestically.

 

And because it is layered on top of other policies targeting emissions – such as carbon pricing and methane regulations – it’s difficult to assess its impact on the cost structure of individual oil products, Mr. Tertzakian said in an interview.

 

“There is a high probability that some of these products will be competitively encumbered to the point where supply and price will be affected,” he said.

“If the production cost goes up, then the whole cost per barrel of delivery to a refinery goes up … then whatever product they’re making necessarily has to go up.”

 

As such, it’s “disingenuous to claim conclusively” that an emissions cap wouldn’t affect the price of end use petroleum and natural gas in Canada, he said.

 

A recent research note from Scotiabank’s global equity research team said the cap would add another layer of regulation to Canada’s oil and gas sector. It could also increase costs for companies choosing to increase production more aggressively, constrain upstream oil and gas growth and limit infrastructure buildouts to export liquefied natural gas, the note said.

 

Absolute greenhouse gas emissions from the oil sands were 3 per cent higher in 2023 than they were in 2019, even though production increased 9 per cent, according to an analysis by S&P Global Commodity Insights released Thursday.

 

Kevin Birn, the chief analyst of Canadian oil markets at S&P, said in a statement that a years-long trend of declining greenhouse gas intensity, coupled with slower production growth, continues to slow the rise of absolute emissions.

 

Still, anticipated production additions are expected to outstrip intensity reductions in the near term, which means greater decarbonization efforts will likely be required to meet the proposed oil and gas emissions cap by 2030, he added.

 

“Bringing sufficient carbon and storage capacity online in just a few short years will be a challenge. However, the slower pace of emissions additions could make the proposed 2030 emissions limit more achievable,” he said.

 

Canadian oil and gas companies have enjoyed record profits in recent years, most of which has been returned to shareholders. But producers have roundly voiced their opposition to the proposed emissions cap, saying it would ultimately impose a ceiling on production.

 

Suncor Energy chief executive officer Rich Kruger said in a statement that the cap would single out the Canadian oil and gas industry for punitive treatment.

 

“The proposed policy will create further uncertainty and impede investment at a time when energy security, economic stability and industry competitiveness are more important than ever,” he said.

The proposed regulations would also add a layer of unnecessary complexity to an already complex regulatory framework at a time when Canada should be simplifying the rules to promote global economic and carbon competitiveness, Mr. Kruger said.

 

“We have said from the beginning that we don’t support this flawed policy – and we don’t support it today. We believe it is punitive, redundant in intent, overly complex and consequently will have material adverse consequences on Canada and its economic competitiveness.”

 

François Poirier, the president and chief executive officer of TC Energy Corp., has also criticized the proposed cap.

 

Mr. Poirier said in a statement that it would raise the price of natural gas and set back global efforts to combat climate change by slowing the coal-to-gas switch.

 

 

 

 

This article was first reported by The Globe and Mail