Setting the Pace
The economic case for managing the decline in oil and gas production in Canada
EXECUTIVE SUMMARY
By Nichole Dusyk, Aaron Cosbey, Angela Carter, Lasse Toft Christensen, Laura Cameron, and Sarah Norton
From Energy Crisis to the End of Business as Usual
The world is emerging from a far-reaching energy crisis. As the pandemic hit in 2020, demand plummeted suddenly. In the years that followed, COVID-19 continued to impact energy supply and demand, as well as the broader economy. Instability turned into crisis when Russia’s illegal invasion of Ukraine further tightened energy markets.
The result was unprecedented volatility and high oil and gas prices, leading to windfall profits for global oil and gas producers, including those in Canada. This influx of revenue has renewed interest in expanding Canadian production and infrastructure.
However, the current boom will not last. Despite the supply crunch, the shift away from oil and gas has only accelerated. The European Union has moved quickly to curb its use of Russian supplies, and global climate action is accelerating, including via the United States’ Inflation Reduction Act. Though scenarios have yet to align with 1.5-degree pathways, it’s clear that economic trends, including oil and gas demand, are swiftly departing from business as usual.
It’s clear that economic trends, including oil and gas demand, are swiftly departing from business as usual.
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.
Setting the Pace examines how global demand trends and increasingly volatile global markets will negatively affect Canada’s oil and gas sector. We examine projections for oil and gas demand, what this means for end uses and exports of Canadian product, and the implications for Canada’s economy. We then explore lessons from jurisdictions that have successfully managed to phase down fossil fuels. Finally, we propose a proactive role for the federal government to reduce risk, safeguard jobs and economic stability, and support Canadian communities by sending clear policy signals to the energy sector.
Findings
Overall, we find the Canadian oil and gas sector is set to decline and the industry is not well positioned to weather drops in global demand. The oil and gas sector’s historic role as one of Canada’s primary economic sectors is already changing. Given demand projections, 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 phase-down of oil and gas production and diversifying the economy.
The oil and gas sector’s historic role as one of Canada’s primary economic sectors is already changing.
Oil markets will soon decline, with a poor outlook for Canada.
Global demand for oil will go into terminal decline by the end of the decade. The coming peak and decline of global demand are predicted by most for around 2030, primarily but not only driven by uptake of electric vehicles. Other end uses, such as plastics, will not make up the shortfall.
Canadian producers are vulnerable both to loss of markets and low and volatile prices. Canada will eventually be vulnerable to changes in U.S. and global demand for retail gasoline as transportation is electrified. Even the captive purchasers of Canadian heavy crude will ultimately be impacted. The oil that continues to be sold will fetch ever less revenue in the face of falling global prices. Volatility alone, which will be experienced by all producers, is a major negative influence regardless of price.
Canadian producers cannot preserve markets on price, nor on their reputation as clean or ethical producers. Buyers of Canadian oil are focused on price, reliability, and quality—not on environmental, social, and governance (ESG) credentials.
Gas market trends mean unsustainable economics for Canadian producers and projects.
Global demand projections for gas have been downgraded, including in Canada’s export markets. Gas outlooks, which were growing only a couple of years ago, have been fundamentally altered by high prices, viable renewable alternatives, and energy transition responses by the European Union and United States. Natural gas demand in the United States will be reduced by the Inflation Reduction Act, limiting potential in Canada’s only current export market.
New gas and LNG infrastructure risks being stranded if the world successfully limits climate change.
Limiting climate change leaves no room for increased natural gas production. 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.
Canada’s gas industry is facing unsustainable economics. Given declining demand in North America, maintaining momentum in Canada’s natural gas industry hinges on new LNG markets. There is a fundamental mismatch between short-term European demand and Canada’s ability to build export infrastructure on the east coast. Lacklustre demand growth in Asian markets combined with an anticipated glut of LNG supply beginning in the middle of the decade will drive down LNG prices.
High-growth markets in emerging Asia are price-sensitive, making it questionable whether Canadian LNG exports—with relatively high capital and pipeline transportation costs—can compete with lower-cost suppliers.
Coastal GasLink pipeline protesters block a rail line in Seattle in support of the Wet'suwet'en First Nation. (Photo: Joseph Gruber/Shutterstock)
Coastal GasLink pipeline protesters block a rail line in Seattle in support of the Wet'suwet'en First Nation. (Photo: Joseph Gruber/Shutterstock)
Planning for climate success requires planning for declining oil and gas production.
In addition to market trends, the scientific evidence supporting phase-out is clear and should be a wake-up call to accelerate market decline. Based on credible 1.5°C-compatible scenarios, global oil and gas production must decrease by at least 65% by 2050.
Research is clear that to meet the Paris Agreement goals, governments must not only stop new fossil fuel projects but also retire a significant number of existing projects ahead of schedule.
Canadians are already experiencing high economic and social costs from climate change. Although markets are shifting rapidly due to global climate action, they do not yet adequately reflect these costs. The health, economic, and environmental consequences of not aggressively mitigating climate impacts are enormous, including potentially hundreds of billions of dollars in annual losses for Canada if the world fails to act.
The Canadian oil and gas sectors are set to decline. Allowing markets to decide the timing and rate of change has unacceptable economic risks.
Letting markets decide when and how Canadian oil and gas are ramped down is not in the public interest. 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. 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.
With declining prices and increased volatility, governments can expect more pressure to support the industry at the expense of economic and public interest. The oil price crash during the COVID-19 pandemic foreshadows what an unmanaged decline of the oil and gas sectors would look like in Canada. This includes massive remediation and cleanup cost burdens shifted to taxpayers; unpaid municipal taxes and landowner lease payments; and intense industry pressure on governments for fiscal supports, bailouts, and relief from important climate and environmental regulations. Meanwhile, workers in this sector continue to be exposed to job losses. The oil and gas sector terminated over 53,000 jobs from 2014 to 2019 even as oil production increased, and then terminated over 17,000 more jobs in the first year of the pandemic.
Canada has an opportunity: evidence from other jurisdictions shows a proactive, managed decline will yield more economic benefits at lower risk.
A proactive approach that includes policies to phase down production and use has clear advantages. These include limiting overinvestment and stranded assets; redirecting investment to viable alternative energy sources, industries, and jobs; establishing the time frame for effective economic transition planning; limiting economic and social disruption; and demonstrating global leadership to seize opportunities in emerging sectors while encouraging other jurisdictions to act.
Lessons from Illinois, Colorado, Germany, and Denmark illustrate the importance of clear policy direction, interjurisdictional cooperation, and inclusive processes with social engagement. Three central interacting policies can support an equitable transition and economic diversification:
- Ambitious climate policy with clear targets and timelines for emissions reductions with near-term milestones, including by sector.
- Energy policy that prioritizes managing the decline of fossil fuel extraction and/or use. This includes long-term and clear signals and information about the reality of the decline of the fossil fuel sector.
- Economic diversification policies. Recognizing low-carbon sectors’ economic and job growth potential, this strategy includes acting proactively, beyond retraining workers, to carry out large-scale green industrial policy through inclusive processes and significant public investment.
A large wind turbine being constructed on a ranch in Alberta. (Photo: iStock)
A large wind turbine being constructed on a ranch in Alberta. (Photo: iStock)
The federal government must signal that it is proactively guiding and preparing for the decline of the sector.
Protecting Canadians from a disruptive decline of the oil and gas sector requires governments to take an active role in phasing down production. Current federal climate policies focus on emissions, including fiscal policies to support oil and gas decarbonization. Initiatives such as the Regional Energy and Resource Tables seek to transform Canada’s traditional resource industries and prepare the workforce via a sustainable jobs policy. While Canada has made historic progress, these policies are insufficient to safeguard against economic risks without clear guidance on the direction of the sector.
The federal and provincial governments coordinated similar work in the coal sector starting in 2005, and this effort must now be extended to oil and gas.
The federal government must ensure no region is left behind by spurring a federation-wide approach to address oil and gas sector decline. Division of jurisdictional powers, including over natural resources, means that supply-side policy is not a simple issue in the Canadian context. But this complexity should not cause the federal government to refuse to broach the issue, as it is critical to ensure economic stability and to support Canadians through the energy transition. Models for such efforts exist in other countries with split jurisdiction, and Canada should explore ways to navigate phase-down in the interest of Canadians.
The federal and provincial governments coordinated similar work in the coal sector starting in 2005, and this effort must now be extended to oil and gas. In addition to positive economic benefits, it will also have knock-on effects for global climate action and international cooperation as we saw with coal.
The federal government should act in four complementary ways:
Continue to implement and strengthen climate policies and the Sustainable Jobs Action Plan. The government should base these policies on robust and internationally credible sectoral analyses of the future of the oil and gas sector, including projections for demand and employment.
Support subnational and Indigenous governments’ plans and programs on economic diversification. The Regional Energy and Resource Tables are a start, but plans must be fully aligned with sectoral analysis, net-zero pathways, and inclusive processes, including social dialogue.
Align fiscal policy with the reality of the expected decline of the oil and gas sectors. This includes eliminating fossil fuel subsidies and public finance, regulating the financial sector, and ensuring that government spending is not risking taxpayer dollars by artificially prolonging or increasing production.
Explore tools within federal jurisdiction to end expansion and prepare for phase-down of the production and use of oil and gas. This includes discussion with subnational governments on collaborative solutions, considering the implications of declining production in areas of federal responsibility (such as the regulation of international and interprovincial pipelines), and exploring options and legal limitations that respect jurisdiction while addressing sectoral transformation.
“As economies decarbonize, the risks and economic costs associated with Canada’s continued reliance on fossil fuels will intensify as time goes on. These risks and costs must be factored into policy and business decisions and signalled to investors. The consequences of not doing so are potentially catastrophic for a workforce and the communities that depend on this industry.”
Nichole Dusyk
Senior Policy Advisor, IISD
© 2023 The International Institute for Sustainable Development
Published by the International Institute for Sustainable Development.
This publication is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
Built with Shorthand