Take it from Deloitte: Carbon capture is a terrible investment

You can be forgiven if you thought the federal government and the Pathways Alliance, the oilsands industry consortium promoting carbon sequestering, were submarined last week by a report produced by the consulting firm Deloitte for the Alberta government. The headlines that appeared in multiple media sources said, “Emissions cap means cut in oil & gas production, says report.” But before fully accepting that headline we should take a close look at the actual report.

The report had three main findings. The first is that Deloitte found carbon sequestering was less economic than cutting production. The second followed from that and concluded the emissions cap would result in production cuts. The third was that these cuts would have substantial economic impacts across the Canadian economy.

If this is an accurate read of the future, it calls into question the proposed cap, the substantial funding that governments are throwing at sequestration projects and the industry consortium’s multi-billion dollar project. However, if you take a hard look at the report and the basis they used to generate these conclusions you can put an entirely different spin on it.

Let’s start with that cut in production. Deloitte used a scenario assuming a 15 per cent increase in Canadian oil production from 2024 to 2040. Deloitte is up front about using the Canadian Energy Regulator’s (CER) Current Measures scenario because it reflects “business as usual.” And therein lies the problem.

The CER outlook offered multiple scenarios. The first is the Current Measures scenario used by Deloitte which assumes “limited action in Canada to reduce GHG emissions beyond measures in place today” and “assume limited future global climate action.” It assumes oil grows because the world doesn’t act. This vision of the future foresees a world that isn’t bothering much about emissions reductions and concludes it will cost our economy to reduce emissions on our own.

That assumption of global failure to act should not be used to set climate change policy in Canada, because it assumes massive climate disaster. But more importantly, though the report is silent on this point, the opposite is also true. In a world doing something about emissions, assuming business as usual in Canada would be economically devastating.

One of CER’s other scenarios, Global Net Zero, assumes a future where countries work to reduce carbon pollution. In this scenario, the CER has Canadian oil production falling dramatically by 2040, from over 5 million barrels per day to 1.2 million barrels per day. The price of crude also takes a huge hit (the Current Measures scenario has Brent crude at $75 US/B. The Global Net Zero scenario has crude at $30 US/B.) These production levels and prices are based on global actions and economics, not Canadian policy. The majority of global oil in use in that report ends up being just for asphalt and chemicals because very little global demand for gasoline and diesel remains by 2040.

This is the scenario we should be discussing because we expect the world to do much more than they are right now. Production cuts are coming, with or without an emissions cap, at levels far greater than what Deloitte calculated with the cap. Deloitte predicted a one per cent hit to GDP in 2040 with a 10 per cent production cut. But that 10 per cent production cut is dwarfed by the 80 per cent cut in CER’s net zero scenario. In a net zero future, the GDP hit from relying on continuing oil production is almost unfathomable.

Canada is about to see a massive drop in GDP as the world decarbonizes. And to pretend otherwise is sleepwalking over a cliff. As far as the cap goes, it seems immaterial in the long term. The market will quickly overtake government policy. But if it makes producers think now about whether they want to bet on the long term that is a good thing.

And now we get to what really was an unintended consequence of Deloitte’s work. It states carbon sequestering relative to cutting production is not economic even in an environment with growing crude demand and a fairly high price. That equation will tip even further under the net zero scenario of collapsing demand and low prices. In that future, carbon sequestering becomes even more of a money loser.

It’s no wonder the industry is balking at making that investment. It makes sense for the oil giants to slow-walk the decision so they can see if the world is acting. It’s also why the industry insists the only way they can move forward with carbon capture is if you and I fund it.

But from a government perspective, based on the Deloitte analysis, it would be a ridiculous waste of money and resources. We are going to see a huge drop in demand for our oil. Cap or no cap. Carbon sequestering or no carbon sequestering.

It bears repeating. The implications from the Deloitte report are clear; oil industry carbon capture investments make no economic sense under any scenario. Canada should not invest public money in that exercise and let the oil industry sink or swim. If the industry decides not to invest, it’s because they are good at reading the tea leaves. The sun is setting on Alberta’s fossil industry.