Commentary

February 21, 2016

Policies play pivotal role in realizing (or stifling) Canada’s energy potential

EST. READ TIME 4 MIN.

Recently, the National Energy Board released its energy outlook for Canada to 2040. Its projections help highlight the potential prosperity that Canada could achieve from its energy resources. So what does the NEB project?

Focusing on the reference case (a baseline outlook, with a moderate view of energy prices and economic growth), the first chart (below) shows that oil production could grow dramatically from 1.52 billion barrels of oil per year in 2014 to 2.43 billion barrels per year in 2040, an increase of just under 60 per cent. While considerably less dramatic, natural gas production is also expected to grow during this period from 0.95 billion barrels of oil equivalent in 2015 to 1.12 billion barrels of oil equivalent in 2040. The report notes that LNG (liquefied natural gas) exports will be a key driver of natural gas production growth.

Let’s take a closer look at growth in oil production, since this is where most of Canada’s future increase in energy production is expected to come from (see second chart below). Much of the growth presented in the chart above will be dependent on price. In a low-price environment, oil production may still grow but it will reach a much lower level, from 3.88 million barrels of oil per day in 2014 to 4.84 million barrels per day in 2040, a modest growth of 25 per cent. However, in a scenario where prices are high, Canada’s oil production potential is considerable, reaching 6.94 million barrels of oil per day in 2040, or a growth of 78 per cent.

The NEB report also projects that most of the growth in oil production is expected to come from the oilsands (see third chart below). In 2014, the oilsands accounted for about 40 per cent of total oil production but by 2040 they may account for almost 80 per cent.

Presented above is an estimate of Canada’s energy development potential. But the question remains: will the policies be right to allow Canada to achieve its potential?

Unfortunately, the current policy environment could result in barriers to energy development. Although Alberta’s royalty review, which contributed to a large increase in investor uncertainty in the province, resulted in little change, the province has implemented a number of other policy changes that may hinder Alberta’s ability to reach its potential.

One of the policies that may hinder the future growth of Canadian oil production the most is the 100 megatonnes (Mt) annual cap on oilsands emissions being implemented by the Alberta government. For reference, emissions from the oilsands are currently about 70 Mt and they amounted to a sliver of global emissions at 0.1 per cent in 2012.

This cap means that once oilsands emissions hit 100 Mt, no further development will be allowed, regardless of global demand. Given that the oilsands currently produce about 2.3 million barrels per day, with emissions of about 70 megatonnes a year, some analysts have pointed out that this leaves room for additional production of about a million barrels of oil per day. Unfortunately for Alberta, in June 2015, CAPP projected that by 2030 oilsands production would reach just under four million barrels per day.

But it’s not just the Alberta government that is instituting policies that may hinder energy development. The federal government has most recently instituted new rules that will require the environmental reviews of pipelines and LNG terminals to consider the upstream greenhouse gas (GHG) effects of those projects.

However, these new rules are unnecessary, particularly if you consider that the alternative to pipelines is rail and the alternative to natural gas-fired electricity is coal. Given those realities, pipelines and LNG facilities would likely reduce rather than increase CO2 emissions.

C. Peter Watson, the Chair and CEO of the NEB, makes an important point about the reality of energy development in his opening to the energy outlook:

“As long as there is demand for energy, markets will function to provide the supply, whether from domestic or international sources, with little consequential impact on global energy use and the associated emissions.”

Ultimately, policies may be the driving force behind just how much of Canada’s energy potential will be realized by servicing growing global demand.

 

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