The Canadian government must take the lead in protecting Canadians from an inevitable “terminal decline” of the global oil and gas sector, the International Institute for Sustainable Development (IISD) concludes in a detailed analysis released yesterday.

While record fossil fuel profits driven by Russia’s war in Ukraine have brought new short-term interest in expanding Canadian fossil fuel infrastructure, “the current boom will not last,” IISD concludes in its 114-page report. The European Union and the United States are leading a global shift away from oil and gas and multiple independent analysts—from the International Energy Agency to the Canada Energy Regulator—have acknowledged the trend.

“Though [energy futures] scenarios have yet to align with 1.5°C pathways, it’s clear that economic trends, including oil and gas demand, are swiftly departing from business as usual,” IISD writes. “Since the most influential factor affecting the viability of the Canadian oil and gas sector is global demand, it will be impossible to avoid disruption to this industry.”

Based on experience in a variety of other jurisdictions, the report lays out three pillars of a “proactive approach” by governments: ambitious climate policy, energy policies oriented toward phasing out fossil fuel production and use, and economic diversification, all guided by a “clear, equitable transition framework” that flexes to meet local conditions and cultures. Even in the face of complex federal-provincial dynamics, “the federal government must ensure no region is left behind by spurring a federation-wide approach to address oil and gas sector decline.”

The Shift Has Begun

Although government policies and fossil fuel industry climate targets often focus on a 2050 target date, the report emphasizes that the oil and gas industry’s “historic role as one of Canada’s primary economic sectors is already changing.” With global oil demand headed into “terminal decline” by the end of this decade, “business as usual in the sector is no longer an option. To minimize the risks to dependent workers, communities, and regions, governments must take an active role in overseeing a predicted phasedown of oil and gas production and diversifying the economy.”

IISD stresses that it won’t be enough for the industry and its political allies to continue touting Canadian oil and gas as a supposedly clean, “ethical” product. “Canadian producers cannot preserve markets on price, nor on their reputation as clean or ethical producers,” the report warns. “Buyers of Canadian oil are focused on price, reliability, and quality—not on environmental, social, and governance (ESG) credentials.”

“Our market is highly export-dependent and markets are highly dependent on price,” lead author Nichole Dusyk, senior policy advisor on IISD’s Canadian Energy Transitions Team, said Tuesday. “Generally speaking, we can say that Canada is not a low-cost producer, and we’re competing on a global stage.” So in a declining global market, “we won’t be a first choice.”

Many of the same trends are driving down future projects for natural gas demand, the report adds. “Limiting climate change leaves no room for increased natural gas production,” IISD states. “High-ambition climate scenarios show gas peaking in the near term and declining rapidly. Although liquified natural gas (LNG) demand is expected to grow, if governments meet their existing climate objectives, projects already under construction will be sufficient to meet global demand. New gas and LNG infrastructure risks being stranded if the world successfully limits climate change.”

Communities at Risk

All of those factors put fossil fuel communities and the wider Canadian economy at risk, making it imperative that Canadian governments take charge.

“Letting markets decide when and how Canadian oil and gas are ramped down is not in the public interest,” IISD says. “The history of resource dependence and collapse show us—even in Canada—that without a proactive approach, large numbers of workers could lose their jobs, with devastating impacts to communities and regions.”

The report adds that “if oil and gas infrastructure and investments are rendered uneconomic—that is, are stranded—by falling demand, the effects will go beyond the people employed in the sector to risk the destruction of a vast amount of national wealth, to the detriment of all Canadians. Canada also risks losing government revenues, incurring major opportunity costs if investment flows to sunsetting industries rather than to emerging ones, and entrenching infrastructure that will make the energy transition more costly and difficult.”

The report calls on Ottawa to respond with four complementary strategies:

• Continuing to implement and strengthen national climate strategies and the federal Sustainable Jobs Action Plan;

• Supporting economic diversification efforts by provincial, territorial, and Indigenous governments;

• Aligning fiscal policies with the “realities of the expected decline of the oil and gas sectors” by eliminating fossil fuel subsidies, regulating the financial sector, and not “risking taxpayer dollars by artificially prolonging or increasing production”;

• Exploring options within federal jurisdiction to end fossil fuel expansion and prepare for the industry’s phasedown.

Not An Easy Conversation

Dusyk acknowledged that it’s “a very difficult issue” when any industry goes into decline after playing a central role in a national or regional economy. “That is not an easy conversation to have,” she told The Energy Mix. “Obviously, it’s a very politically fraught conversation right now.”

But “we need to find some constructive ways to get beyond the politics and start putting in place the processes and policies that will help ensure that as oil and gas production declines in Canada, which is inevitable, the phasedown and the transition are as smooth as possible and protect the long-term interest of Canadians.”

Dusyk said the federal government’s recently-introduced Canadian Sustainable Jobs Act, Bill C-50, covers a lot of that ground. The legislation “is very much an accountability act for the government,” she said, putting in place some structures “to look out for workers who are impacted by the transition” and making sure the right voices are heard when decisions are being made.

But “the solutions are not going to be simple, across-the-board solutions. It’s going to depend on the region and the industry that we’re talking about,” and on the varied needs of workers who are retraining or departing the industry entirely.

In its current form, the bill also lacks any role for Indigenous government and contains no mention of climate change.

“Obviously, we’re looking at a transition away from fossil fuels and toward a clean economy,” Dusyk said. “We do need to clearly identify what we mean by a sustainable job and clearly link the requirements in the sustainable jobs legislation to Canada’s climate objectives to make sure the processes, the funding, the discussions that are happening are all clearly linked” to those decarbonization targets.

The IISD analysis coincides with a report this week that shows greenhouse gas emissions from the global energy industry continuing to rise, despite record deployment of wind and solar. The report concludes that fossil fuels still accounted for 82% of world energy consumption in 2022, enough to drive a 0.8% increase in the sector’s climate pollution.

“Despite further strong growth in wind and solar in the power sector, overall global energy-related greenhouse gas emissions increased again,” said Julia Davenport, president of the London, UK-based Energy Institute, which has taken over publication of the annual Statistical Review of World Energy previously produced by colossal fossil BP. “We are still heading in the opposite direction to that required by the Paris agreement.”