Ottawa’s draft regulations for an oil and gas emissions cap have landed with a thud in the Canadian oilpatch, where the resounding response was consternation over a policy that is perceived as punishing domestic energy producers.

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'Shutting ourselves down at our own expense': Oilpatch executives slam Ottawa's emissions cap Back to video

The draft rules released on Monday are being interpreted as a de facto cap on oil and gas production in Western Canada, with many in the sector warning that price volatility combined with existing environmental obligations and the proposed emissions cap could drive an unknown number of companies to shut-in production to comply with the new rules.

“We’ll be the only (oil and gas exporting) country in the world that’s going to have an artificially higher cost due to the emissions cap and the efforts we’ll need to invest in to reduce emissions to stay inside the cap,” Precision Drilling Corp. chief executive Kevin Neveu said.

“In order to abate emissions, you have to invest more and more money to do that. So, you have two choices: either invest more money to reduce emissions or reduce production to reduce emissions.”

Under the draft rules, upstream oil and gas producers, as well as oilsands and liquified natural gas production facilities, will be required to cut emissions by an estimated 35 per cent by the end of the decade.

Companies begin reporting their emissions and production volumes in 2026, and, based on that data, the government said it will set the final emissions cap at the end of 2027, which will be at a level 27 per cent below the reported emissions for 2026.

Producers will have to demonstrate they’re in compliance with the cap starting in 2030.

Ottawa has said its regulations are based on what is “technically achievable” through technologies that could feasibly be deployed in the next few years.

Natural Resources Minister Jonathan Wilkinson has said the bulk of the reductions could come from cuts to methane emissions that are already underway and a massive carbon capture project proposed for the oilsands by a consortium of companies known as the Pathways Alliance, though one of the key backers of that project said it hopes Ottawa tosses out its emissions cap.

“It is not good enough to look at what might be technically achievable,” Jeff Lawson, chief sustainability officer at Cenovus Energy Inc., said in a statement. It is important to understand whether the target is economically achievable without putting Canadian businesses at a competitive disadvantage to the rest of the world.”

Privately, though, some in the industry have wondered if the four-year phase-in of the proposed cap is intended to give the big oilsands majors time to get moving on the $16.5-billion carbon capture project that will be key to meeting Ottawa’s greenhouse gas (GHG) reduction targets.

Beginning this week, consultations on the proposed rules will run until Jan. 8, with regulations expected to be finalized in 2025.

In the meantime, different sub-sectors of the industry are digesting the new regulations and crunching the numbers on potential costs.

A major component of Ottawa’s proposed plan that has not been fully fleshed out is the creation of a cap-and-trade system that would mean the free emissions allowance oil and gas facilities are allocated will decline over time.

If a producer doesn’t have enough allowances to cover its emissions, it can buy allowances from other companies in the sector or cover up to 20 per cent of emissions through the purchase of carbon offset credits or through payments to a decarbonization fund.

A big complaint about the proposed cap is its complexity. Ottawa is stacking regulation upon regulation, critics say, sometimes layering federal rules on top of provincial ones, making it difficult for companies and investors to assess projects.

In addition to the cap, producers face a number of targeted emissions-cutting measures, including a mandatory 75 per cent cut in industry methane emissions by 2030, carbon pricing schemes at the federal and provincial levels, and new clean fuel standards.

“(It) would seemingly serve to add yet another patch (aimed at a specific sector) onto an already complex patchwork of carbon markets across Canada’s provincial and territorial jurisdictions,” Greg Pardy, analyst at RBC Capital Markets, said in a research note about the regulations, calling for a “reset” aimed at improving transparency and stability in carbon markets.

Eric Nuttall, senior portfolio manager at Ninepoint Partners LP, said he was struck by the words used by Environment Minister Steven Guilbeault in introducing the policy Monday when he said: “Look around the world, no other major oil and gas producer is doing what we’re doing.”

Perhaps, Nuttall said, “it behooves us to take a moment and ask, ‘Well, why is that?’ It’s economic idiocy.”

In 2023, the oil and gas sector generated $209 billion in gross domestic product (GDP), according to figures from Natural Resources Canada. The sector also accounts for 25 per cent of Canada’s exports.

Yet, a federal impact analysis of the proposed cap suggests that oil and gas production could still grow up to 16 per cent between 2019 and 2032, only slightly lower than the projected growth of 17 per cent assumed without the emission cap.

The same analysis suggests Canada’s GDP will not suffer under the cap, but will continue to grow 22 per cent from 2019 to the end of the decade, only slightly below the projected growth of 22.1 per cent without the cap.

But privately, and even publicly, many in the sector are wondering if the final legislation will ever see the light of day given the likelihood of an early election.

A court challenge also seems imminent since Alberta Premier Danielle Smith has said she believes the cap is unconstitutional and pledged on Monday to use “every legal action” available to challenge the rules.

Though emissions from the upstream oil and gas sector fell around seven per cent between 2019 and 2022, it continues to account for an outsized proportion of Canada’s total emissions, around 31 per cent in 2022.

Environment and Climate Change Canada estimates the cap could result in a 13.4-megatonne reduction in Canada’s total GHG emissions between 2025 and 2030-32 (when the first reporting period for the cap ends).

But Ottawa’s argument that the cap will actually help the sector remain competitive globally as other economies decarbonize has been roundly dismissed in the oilpatch.

“Canada’s emissions profile is not unusual. What’s unusual about Canada and our emissions is we seem to be the only exporting nation of the world that is willing to self-immolate,” Michael Belenkie, chief executive of Advantage Energy Ltd., said.

“All we’re doing is we’re shutting ourselves down at our own expense and watching global emissions increase.”

— With files from The Canadian Press

• Email: mpotkins@postmedia.com

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