Down to the last barrel?

by Rachel Samson. Originally published on Policy Options
March 8, 2023

(Version française disponible ici)

This is the second of two articles by the author on the future of energy and workforce transition in Canada. The first part is here.

There are essentially two schools of thought on the best economic strategy for Canada through global energy transition. The first is based on preservation of Canada’s oil and gas sector at all costs, even if it takes billions of dollars in subsidies to reduce its emissions. The second is based on going all-in to capture global opportunities in clean energy, clean technology, and critical minerals.

Putting all of our eggs in either basket is likely to be a mistake for Canada’s economy and workers for three reasons: (1) declining markets offer short-term wins but ultimately leave a hole that needs to be filled; (2) subsidies for oil and gas emission reductions could break the bank; and (3) global economic opportunities are bigger than energy and minerals.

What does an effective economic strategy look like? Focusing on generating long-term value in the best interests of Canadians. That means an emphasis on diversifying exports, attracting investment, expanding value-added activities, and attaining better outcomes for the environment, workers, and Indigenous Peoples.

Temporary reprieve from the inevitable

While there is uncertainty on timing, global demand for oil is poised to decline this century. Existing oil sands projects are likely to survive for a while, with one study showing they could continue to operate at oil prices as low as C$40/barrel (provided governments foot the bill for emission reductions). A C$40/barrel oil price is equivalent to about US$30/barrel, with Western Canada Select priced at around US$56 in early March 2023. Individual companies, and the governments that benefit from royalties, will want to eke out as much value as they can through that decline.

However, a strategy based on holding market share in a declining global market is not in the best long-term interest of Canada’s economy or workforce. Would it have made sense in the 2000s to have an economic strategy focused on having the last Blockbuster video store as streaming services started to supplant DVDs? Government support could have saved the jobs of the store’s employees, at least for a time, but it would only be staving off the inevitable. And government spending to keep the store operational would generate no long-term value to the broader economy or workforce.

A declining global market does not mean that governments should walk away from oil, or natural gas, in the near term. But it does mean planning for a future where their economic role is diminished.

The money pit

The federal government has announced several initiatives in response to the economic and workforce challenges associated with transition, including the $15 billion Canada Growth Fund, a carbon capture utilization and storage tax credit, and a Sustainable Jobs Plan. More measures are expected in the upcoming federal budget.

Oil and gas projects could eat up a substantial amount of government investment over the coming decades. Oil sands companies have called for a $50-billion government contribution to reach net-zero emissions by 2050, and a proposed major carbon storage hub is priced at $16.5 billion. A liquified natural gas (LNG) project in British Columbia needs electricity transmission lines to reduce emissions and it remains an open question if the government will pay for it.

Before governments devote substantial resources to reducing emissions in oil and gas as part of their economic and climate strategies, they should reflect on the opportunity costs of doing so. With growing market risk in oil and gas, some funding may be better spent leveraging private investment to establish strong footholds in markets poised to grow through transition.

Thinking bigger

As governments contemplate the economy of the future, and ways to capture emerging market opportunities, there can be a temptation to get caught up in the hype of a certain technology or product.

The reality is that there is no one product that will replace oil or natural gas. Hydrogen will not be the saviour, and neither will small modular nuclear reactors. They both have a role to play, but not on the scale of oil and gas.

Instead, Canada will need to capture a myriad of opportunities across a wide range of goods and service markets to maintain its standard of living. Those opportunities are not just in energy and minerals markets – they are in agriculture and food, in manufacturing, in biotechnology, in artificial intelligence, in services, and more.

Fortunately, Canada has many companies and entrepreneurs active in those areas. What many of them need to compete is private financing that allows them to scale up in Canada.

Setting priorities

The federal government would benefit from a coherent framework to make tough choices. That framework needs to be based on de-risking and enabling private-sector ambitions rather than a predetermined view of the technologies and projects that should move forward.

Priority number one should be diversifying and growing Canada’s exports. More than 60 per cent of Canada’s goods exports are vulnerable to global low-carbon transition, and Canada’s standard of living depends on successful trade. Companies making investments to compete in growing global markets, and those willing to adapt their product to remain competitive, should be first in line for public support.

Workforce development is the missing piece in the transition to net-zero

The two best ways to help oil and gas workers exit the sector

Priority number two should be attracting investment. Global competition for investment dollars is heating up, and Canada needs to find a way to stand out. Financial incentives play a role, but there are many other attributes Canada could lean on such as its favourable carbon pricing and regulatory regimes, skilled workers, low-carbon electricity supply, and natural resources. Riskier projects, such as first-of-their-kind commercial-scale technology deployments, may justify a stronger government role as they offer the greatest societal benefit by lowering investment risk for similar future projects.

Priority three should be capturing value-added, which is more likely to improve Canada’s lagging productivity performance and generate long-term wealth. Instead of just exporting raw critical minerals, developing capacity in mineral processing. Instead of just exporting peas and lentils, building capacity in plant protein processing and food production. And instead of just exporting wood pellets, developing strong bioenergy and bioproduct projects in Canada that will gain a competitive advantage through secure access to feedstock. The focus on hydrogen could also extend to fuel cell manufacturing or assembly of fuel cell trucks or boats. Transport electrification is also much broader than cars, with huge potential in buses and recreational vehicles.

A cross-cutting priority should be to improve environmental and social outcomes. Projects will need to meet minimum criteria for respecting Indigenous rights and ensuring Indigenous communities financially benefit from economic activity on their traditional territory, as well as minimizing the impact on nature and ecosystems. Communities with high unemployment or those facing risk through transition should get preference for public support. There are also many Canadian companies with technologies that can help address negative environmental impacts, such as EV battery recycling or improved mining efficiency. These technologies often get left out of sector- or technology-specific strategies focused on emission reductions.

At the same time, there needs to be a renewed effort to prepare Canada’s workforce for upheaval. Even if the number of new jobs created exceeds those lost, the transition is going to bring widespread change and adjustment. Current supports for training and adult education are inadequate, and too many workers fall through the cracks of the employment insurance system.

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An effective economic strategy for Canada in the face of global energy transition doesn’t require a revolution, but it does require a hard-nosed mindset and a coherent framework for decision-making.

This article first appeared on Policy Options and is republished here under a Creative Commons license.