The Inevitable is Arriving Sooner than Expected

The global shift to a lower carbon future is occurring more quickly as the pandemic and government policies take hold.  These factors demand a more rapid and different energy transition. Are industry and government nimble enough to make the necessary adjustments without further reducing the Alberta economy?

Alberta’s GDP strongly linked to oil and gas production and exports

The pandemic cratered energy demand globally. The International Energy Agency estimates that oil demand will fall 9% in 2020. 

Over the last decade, North American oilsands and shale oil production grew by 10 million barrels per day. Offshore imports fell from 70% to 20% of total supply. This partly inspired the Saudi-Russian price war. The Saudis and the Kremlin got into a game of “chicken” to flood the market and drive down US and Canadian production.  The war didn’t last long but it caused Canadian production to fall by something near a million barrels per day.

In the name of climate change, the Canadian government has harpooned the oilsands repeatedly; with pipeline restrictions, rail transport rule changes and ever-changing regulatory goal posts.

Facing a mostly hostile business environment, some international investors in the energy business decided to sell off about $60 billion in assets in favour of more lucrative investments elsewhere. And a few iconic Canadian companies departed too. 

Those operators that remained reduced capital expenditures and production. The oil sands industry experienced the fifth consecutive annual decline in investment.  The Bank of Canada estimates that capital spending in the energy sector will decline about 20% over 2019. Production cuts will be in the 5% to 8% range. Going forward Canadian production increases are likely to be only about 1% per year.

The Canadian economy is taking a big hit.  The oil and gas industry contributes about 5% of Canadian GDP and 21% of Alberta’s GDP.  Statistics Canada estimates that if capital spending is reduced by 20% and production by 5%; Canadian GDP will drop a full percentage point. Losses of 16,000 direct jobs and 95,000 other jobs are likely.  For every job lost in the energy sector, another job is lost elsewhere in the Canadian economy.

The lesson of the price war is that geo-politics will be fraught with uncertainty.  Future demand is difficult to predict, a small rebound in 2021 is forecast, and then longer-term decline.  Post pandemic, consumption will likely drop; perhaps leading to a 3 million barrel per day reduction in North American production.

Today the debate in Canada is mostly a simplistic argument about climate versus oil production.  Canada needs an adult conversation about a successful transition to a lower carbon future. That discussion might include:

  1. Adopting a policy of North American energy self-sufficiency.
  2. Placing the burden for reaching climate change targets more equitably across the entire economy and public.
  3. Reversing the punitive federal policies aimed at energy companies.
  4. Changing the business model of Canadian industry from “rip it and ship it” to increasing the value of end products through more refining and petrochemical processing.
  5. Aggressively deploying technology to reduce the carbon footprint of the oilsands development. This might mean better carbon emission control, hydrogen separation underground, and improved recovery techniques.
  6. Expanding renewable energy production, deploying nuclear power and encouraging consumer energy efficiency.
  7. Maintaining world class environmental regulations particularly related to tailing ponds, GHG emissions and water use.

So, a question for severely normal Albertans: Are our federal and provincial governments nimble enough to pivot from the zero-sum game of ‘climate versus oil’ to a transition that preserves the economy?