Last December, the Canada Energy Regulator (CER) released its Canada’s Energy Future 2021 report, an annual exploration of possible long-term scenarios for energy production and consumption in Canada. This includes modeling oil production levels to 2050 under two sets of assumptions about the future: an Evolving Policies Scenario (EPS) and a Current Policies Scenario (CPS).
To the surprise of some, both scenarios highlight the resiliency of Canada’s oil production. They project output remaining above 2021 levels until at least 2046, with the CPS projecting higher output through 2050.
But every scenario forecast is only as good as its underlying assumptions. In this Quick Read, we’ll look at each scenario’s assumptions, where they may be lacking, and why they model resilient Canadian production.
Broadly, the EPS assumes that Canadian and global climate policy action accelerates at a pace consistent with historical trends.
In Canada, these assumptions include the carbon price increasing from $40 per tonne in 2021 to $170/t in 2030), and then increasing by approximately $15/t each year until 2050 (nominal 2020 Canadian dollars). Emissions regulated under output-based carbon pricing mechanisms, such as Alberta’s Technology Innovation and Emissions Reduction (TIER) regulation, are subject to benchmarks tightened 2% annually from 2022 to 2050.
More stringent climate policy is anticipated to lower global demand for oil, pushing benchmark prices steadily down from about US$70/barrel (bbl) in 2021 to approximately US$40/bbl.
Climate action is also expected to increase the uptake of low-carbon technologies thanks to their reduced costs and energy efficiencies over time. This includes: significantly cheaper and more efficient electric vehicle batteries; much less expensive low-carbon hydrogen production; steady improvements to the cost and efficiency of renewable power generators; and significant uptake of solvent-assisted oil sands extraction, among other advancements.
The EPS projects Canadian crude production to peak 17% above anticipated output in 2021 by 2032, followed by a steady decline to about 4% below 2021 output levels by 2050. Production isn’t expected to drop below current levels until 2046.
In contrast to the EPS, the CPS assumes that global and domestic climate policy stringency matches today’s expectations.
This means that the carbon price in Canada will increase to $170/tonne by 2030 and remain steady until 2050, and TIER’s facility-specific emissions benchmarks remain at their anticipated 2030 stringency from 2031 – 2050. Global oil demand is expected to be much higher, keeping the Brent benchmark steady at around US$70/bbl for the forecast period.
Unlike the EPS, the CPS anticipates only the gradual improvement of proven low-carbon technologies with very little uptake of emerging cleantech. For example, electric vehicle battery costs only fall 40% by 2050; renewable power capacity costs remain relatively more expensive than in the EPS; and solvent-assisted oil extraction sees little-to-no take-up. The CPS projects Canadian production to peak approximately 34% above anticipated 2021 output in 2044, followed by a modest decline that will still be 32% above 2021 levels in 2050.
Why is oil production so resilient under these scenarios?
Simply put, extracting the next barrel from the oil sands—which accounts for an increasing proportion of Canada’s production—does not cost very much once the initial (expensive) buildout of projects is completed. Oil sands facilities have long lives, meaning that they can produce for decades to come. As oil sands production increases, so too does the resiliency of Canada’s output.
Many global oil reserves do not have this luxury. For example, tight oil extracted in the United States requires ongoing, costly drilling to maintain production levels.
Accordingly, even under scenarios projecting lower global oil demand, Canadian oil sands output may be resilient if the following two conditions are met:
- The cost of extracting the next barrel of oil is lower than not extracting it; and
- The cost of extracting the next Canadian barrel is globally cost-competitive enough to maintain market share.
To be clear, this is a simplification. But these are the kinds of dynamics that can make sense of Canadian oil’s resiliency under even the EPS.
What about net-zero?
As acknowledged by the CER, neither the CPS nor the EPS align with net-zero emissions assumptions despite Canada’s 2050 net-zero target.
That said, the CER will be including a net-zero scenario in future reports. While it is impossible to know which underlying assumptions will closest match future realities, having a net-zero scenario is helpful for policymakers as they analyze trade-offs in pursuit of Canada’s climate targets.
Nonetheless, the CPS and EPS are valuable in their own right; if the actual future—much of which is out of Canada’s control, such as global climate policy, commodity prices, and technological development—aligns with either of these scenarios’ assumptions, they will have provided helpful insight into oil’s resiliency and how policymakers can respond.