Canadian oil production could peak as early as 2026 in net-zero future, energy regulator says

For the first time, Canada's national energy regulator has looked at how oil and gas production will change in a net-zero world, where countries hit their climate goals — and it shows a future without much demand for Canadian fossil fuels.

In its widely read annual report on the country's energy future, the Canada Energy Regulator (CER) modelled scenarios where the world and Canada successfully head toward net-zero carbon emissions by 2050, which is seen as key to limiting global warming to 1.5 C above pre-industrial levels — the goal of the international Paris Agreement.

The regulator found that in such scenarios, oil and gas production in Canada would start declining as early as 2026, because of falling oil prices and demand, as the rest of the world turns toward cleaner energy sources.

"We can't ignore what's happening internationally, and betting on failure internationally is an economically risky thing to do for Canada," said Dale Beugin, executive vice-president at the Canadian Climate Institute, a climate policy think-tank in Ottawa.

Global prices drive Canadian oil exports

The projections come at a particularly lucrative time for the industry; the five largest companies that operate in Canada's oilsands made about $35 billion in profits in 2022.

But the models should be a warning for many oil and gas companies, climate experts say, calling into question the future of fossil fuel use and production in Canada. 

On the other hand, the analysis spells out a dramatically expanded role for cleaner energy in Canada's future, from sources like hydro, wind, nuclear and hydrogen.

"The rate of international decarbonization — the rate at which the rest of the world takes seriously climate change and reduces its emissions, maybe very quickly — has really big implications for demand for the exports of Canadian oil and gas," Beugin said.

"And the biggest threat to the oil and gas sector in Canada isn't domestic climate policy. It is actually market conditions over the longer term."

Exactly when oil and gas production peaks depends on how far other countries go in their efforts to slash greenhouse gas emissions, according to the CER. It modelled two net-zero emissions scenarios: one where global emissions head to net-zero by 2050, and one where the world doesn't act as fast, but Canada still heads to net-zero for its own emissions by 2050.

Canada's oil production starts declining by 2026 in the global scenario and by 2029 for the Canada-only scenario, with similar results for gas. 

Beugin stressed that these were projections based on different scenarios, and not predictions of what was going to happen. 

But the projections could still influence decisions on expanding oil production and investing in carbon capture technologies, which would capture the industry's carbon emissions and keep them out of the atmosphere.

Choosing where to invest

The report shows that "we need to be careful, especially where public money is dedicated. We need to ensure that it goes to projects that are going to be competitive in the long term," said Jan Gorski, director of the oil and gas program at the Pembina Institute, an energy think-tank.

"And not every project will be competitive. Some of those projects will likely come offline as oil demand declines, but some will be competitive and will stick around."

The CER's analysis also looked at how much carbon Canada's oil and gas industry would have to capture during production. In the global net-zero scenario, the industry would need to capture about 22.5 megatonnes of CO2 per year by 2036.

By the end of 2022, Alberta had the capacity to capture around three megatonnes of CO2 every year, although this could increase if several proposed carbon capture projects go ahead.

That depends on more help from the government, according to Mark Cameron, vice-president of external relations at Pathways Alliance, the oilsands industry group.

Cameron says globally, in places like Norway or the U.S, public investment in carbon capture pays for much more of a project's costs than in Canada.

"We need more fiscal certainty," he said. 

The need for more public support has been disputed by some. The federal government's tax credit for carbon capture projects is expected to cost about $1.5 billion a year.

Cameron also said he doubts the CER's global net-zero emissions scenario will come to fruition, or that demand for Canadian oil will slow so soon.

"The global net-zero scenario implies a very aggressive collective action on reducing emissions, which, right now, we're not seeing things moving that quickly. Last year, we actually saw oil demand hit a record level in 2022," he said, 

"And we're still seeing the Chinese economy rebounding from COVID and so on. So we don't think that we're seeing peak oil demand as early as 2026."

Much more clean electricity

The CER's scenarios show electricity use increasing to power all the electric cars, building heating systems and other clean technologies that will replace fossil fuels in the lives of Canadians. And that new electricity will come from cleaner sources — with wind energy growing nearly seven to nine times its current levels by 2050.

That's not surprising for Binnu Jeyakumar, director of the electricity program at the Pembina Institute.

"The reason models do this is because wind is the cheapest source of electricity, so it makes sense to build a lot of wind," she said.

That's because wind plants have become much less expensive to build and install and, unlike other power sources like gas plants, they don't consume any fuel — an advantage it shares with solar energy.

"By 2030, you'll get to a place where new wind and solar will be cheaper than existing gas power plants. So that's how fast the economics are changing for clean energy," Jeyakumar said.