Hit Me With Your Best Shot - Will Emissions Limits Force Canadian E&Ps to Reduce Production?

Despite global energy insecurities, many countries continue to push forward with efforts to incentivize an energy transition and fulfill emission-reduction targets. Canada has been no exception, with its federal government earlier this year introducing detailed climate goals for each of its major economic sectors, with particular emphasis placed on oil and gas, the country’s largest emitter. With the aim of a 42% emissions reduction for this sector by 2030 versus 2019 levels, Canada has set a target that may well be beyond reach, raising the possibility that production cutbacks later this decade will be the only alternative. In today’s RBN blog, we examine this potentially disruptive prospect.

All eyes have been on Europe this year as the continent grapples with low natural gas supplies, exacerbated by the loss of Russian gas, and the worry that it may have been shifting too quickly to renewables at the expense of energy security. Still, Europe, like the U.S., Canada and many other countries, is trying its best to maintain — or even accelerate — efforts to transition the global energy complex away from fossil fuels and reduce emissions of greenhouse gases (GHGs) such as carbon dioxide (CO2) and methane. In Canada, the federal government has been crafting an emissions-reduction strategy for the past several years and in March it released additional details on the climate goals for the country’s major economic sectors, including oil and gas. Entitled “2030 Emissions Reduction Plan,” the government considers each sector’s emissions and outlines various pathways that could be utilized to achieve the desired reduction for each sector. In that document, the 2030 emissions-reduction goal for the oil and gas sector was set at 42% (versus the 2019 levels).

In July, that document was followed up by a more specific discussion paper with the lengthy title of “Options to Cap and Cut Oil and Gas Sector Greenhouse Gas Emissions to Achieve 2030 Goals and Net Zero by 2050.” There the government suggested two possible approaches to achieve the 42%-cut-by-2030 goal: (1) a hard emissions cap that would be steadily lowered to the 2030 emissions target with a related emissions trading system, or (2) an increasing price placed on oil and gas sector emissions that would attempt to achieve the same emissions-reduction goal. (In other words, make emissions so expensive that oil and gas companies would have no choice but to reduce their emissions by whatever means possible.) These two potential paths forward appear to have caught the energy industry by surprise, especially given the implications that emission reductions, however they are achieved, might affect future production levels.