June 20, 2023: Global fossil fuel demand falls steeply, Canadian oil and gas producers are in for a major price squeeze, electricity use more than doubles to become the “cornerstone” of the country’s energy system, and oil sands producers face higher transition costs in the net-zero by 2050 scenarios released in mid-June by the Canada Energy Regulator (CER).
In that future, “the types of energy that Canadians use will be vastly different than what they are today,” CER Chief Economist Jean-Denis Charlebois told a media briefing Tuesday morning. “In practice, this means a lot less fossil fuels.”
The report shows fossil fuel use in Canada falling 56 to 65% from 2021 levels by 2050, with much of the remaining demand coming from industrial facilities outfitted with carbon capture technology, or non-energy uses like asphalt, lubricants, and petrochemicals. But to get there, “every industry, every province, everyone will need to make a difference,” Charlebois said, stressing that climate policies that Canadian governments have adopted to date won’t be enough to hit a net-zero target.
Binnu Jeyakumar, electricity program director at the Calgary-based Pembina Institute, said the analysis underscores the importance of current federal initiatives like the Clean Electricity Regulations and the upcoming cap on oil and gas emissions, both of which are factored into the CER’s net-zero modelling but not its baseline or “business as usual” scenario. “These are steps the government is involved in right now, and they need to get them right in order for us to have a chance of making these scenarios,” she told The Energy Mix.
The report is also “a call to action to provinces to step up and create credible plans to decarbonize their economies in a manner that is affordable, is reliable, and is equitable,” Jeyakumar added.
Crashing Global Demand for Oil and Gas
The scenarios show global export markets for oil and gas dropping sharply, as countries around the world embrace a faster energy transition and tougher climate policies.
Canadian fossil fuel production falls as a result—the only question is how far and how fast. In a scenario where Canada moves faster than other countries on net-zero strategy, oil production peaks in 2029, gas in 2030. In a global net-zero scenario where other countries adopt faster, deeper carbon cuts, gas peaks in 2025, oil in 2026. Liquefied natural gas (LNG) exports hit their peak by 2030 in both scenarios.
Oil prices in 2050 land between US$24 and $60 per barrel in the two net-zero scenarios, compared to $75 with no further momentum toward net-zero. Gas price drop as much as 59%, from $4.40 to between $1.80 and $2.60 per million cubic feet.
That means “producers of hydrocarbons will need to be increasingly efficient at managing their costs in order to remain competitive,” Charlebois told reporters. Those same producers will have to absorb the cost of carbon capture or other technologies that are built into the CER’s path to net-zero (unless they expect taxpayers to foot the bill).
“The Canada Energy Regulator today acknowledges a simple fact for the first time ever: the world has started moving to net-zero, and as a result, global demand for Canadian oil and gas will inevitably decline,” Climate Action Network-Canada Executive Director Caroline Brouillette said in a release. “With this acknowledgement must come a robust conversation—across government, across the political spectrum, and across jurisdictions—about planning to diversify Canada’s economy to seize the opportunity of the transition, and provide certainty to people and communities.”
Parts of the analysis show far less use of carbon capture, utilization and storage (CCUS) technologies if their cost exceeds the CER’s estimates. But the CER also counts on CCUS as an “important decarbonization option” for industrial processes that rely on high-temperature heat or produce high emissions. The Regulator sees CCUS in heavy industry rising to 40 megatonnes by 2040 in the more ambitious net-zero scenario.
Deep Uncertainty for Oil Sands
The CER’s modelling shows some Canadian oil and gas companies coping with low prices and sinking demand for their product. “We factor in that they have their own cost structure, including the cost of decarbonization technologies and the price of carbon for any outstanding emissions,” Charlebois explained. “Then as the projection period unfolds, prices for oil and gas decline, and we model that the producers that are able to be efficient actually make money.”
But those shifts will be particularly challenging for oil sands companies, where “the uncertainty about prices creates an impairment for the incentive to invest and maintain a certain level of production,” he said. “This is not a dynamic some of us were foreseeing a couple of years ago,” when “there wasn’t an acute enough realization of the impact of the cost of decarbonization technologies that are needed for Canada to meet net-zero.”
The end result is that oil sands production grows by 4 to 7% between 2022 and 2030, mostly due to expansions at a small number of existing facilities. After that, the net-zero scenarios show oil prices falling and oil sands production declining in turn, more quickly in the global scenario.
Compared to oil sands operations, “conventional [oil] production fares a bit better” in both net-zero scenarios, Charlebois said.
Overall, “under the global net-zero scenario, oil production declines after 2026, dropping 76% by 2050, challenging the economic viability of many Canadian producers. This matches analysis by the International Energy Agency,” Pembina Institute Executive Director Chris Severson-Baker said in a release. “We congratulate the Canada Energy Regulator for advancing the conversation on how Canada can prosper during the ongoing global energy transition.”
Electricity Replaces Oil and Gas
Under the CER’s two net-zero scenarios, electricity use more than doubles, with many of today’s energy technologies “steadily replaced with devices that do the same things but use electricity instead, like electric vehicles replacing vehicles with internal combustion engines and heat pumps replacing gas and oil furnaces.” The scenarios show the electricity system in 2050 relying primarily on wind, followed by nuclear and hydropower, with smaller contributions for bioenergy, solar, and natural gas plants with carbon capture.
Both of the scenarios point to an electricity grid that is actually net-negative in 2035, with renewable energy as its backbone and use of controversial biomass with carbon capture and storage (BECCS) installations to store more climate pollution than the system emits. Battery storage grows to 1.5 gigawatts in 2030 and 9 GW in 2050. The modelling also looks into how differing assumptions about hydrogen, carbon capture, small modular reactors, direct air capture, and electric vehicle charging patterns could affect the path to net-zero.
The CER foresees new electricity demand from iron and steel production and manufacturing, green hydrogen production, and the eventual introduction of direct air capture (DAC) technologies to suck CO2 out of the atmosphere. Overall energy use decreases 22% because, “in many instances, using electricity is much more efficient than using fossil fuels.”
But “while the types of fuels and technologies that shape our energy system change considerably over the next 27 years, we project little change to the energy services Canadians receive in both net-zero scenarios,” the CER stresses. “Energy services are not the energy or technologies we use, but rather the things that energy enables us to do, like heat our homes, travel from place to place, or run equipment at a business. In 2050, Canadians continue to comfortably heat and cool their homes, get around how they prefer, and have their electricity needs met.”
“One of the things this analysis shows us is that we can decarbonize Canada’s grid while meeting the increasing electricity demand in the country in a reliable manner,” Jeyakumar said. “That’s a worthwhile conclusion to note, because reliability is something people have been wondering about.”
Beginning with the End In Mind
The 134-page report is a departure from the last round of modelling in the CER’s Canada’s Energy Future series, released in December, 2021, which projected the country’s oil production rising through 2032 and was greeted as a recipe for climate failure. Shortly after that release, Natural Resources Minister Jonathan Wilkinson instructed the CER to come up with a net-zero scenario that matched the emission reduction goals in the 2015 Paris agreement, so Charlebois said the agency started this round of analysis with the final outcome already determined.
That led the modellers to an “iterative approach”, where the CER team ran their net-zero models, then kept adjusting the assumptions and rerunning them until they hit the target. “We begin with the end goal in mind: net-zero GHG emissions in 2050, and use our models to identify a pathway to that point,” the report says.
From that starting point, the modellers concluded that a “business as usual” scenario—based on policies Canadian governments had announced or implemented through March, 2023—would drive up oil production by 20% between 2022 and 2050 and fall short of the country’s legislated goal of bringing emissions to net-zero by 2050.
But “ultimately, it’s fair to say the federal government has recognized, as well, that more needs to be done, given the ambitious goal it has set for itself,” Charlebois said.
In the hours after the CER release, some discussion and at least one critique focused on the disconnect between the agency’s net-zero scenarios, the serious technical and economic limitations of some of the technologies it cast as solutions, and the small but scaleable innovations that have been bubbling up in distributed renewables, energy efficiency, and energy storage. But Jeyakumar said the net-zero scenarios are still an important advance.
“This is a major step they’ve taken for 2023, and that should prompt real action from governments,” she said. The gaps in the analysis “would be good things to consider in the next steps, like how can the CER take this and further support the real-world action that needs to take place.”