The Future of Energy: Our Neighbors to the North?

Canada, which is home to the third largest oil reserves in the world, is at the forefront of debates involving climate and energy policy, due to the carbon-intensive nature of most Canadian oil. According to the U.S. Energy Information Administration (EIA), annual U.S. crude oil imports from OPEC countries have fallen by 23 percent from 2008 levels, while U.S. crude oil imports from Canada have risen by 12 percent over the same period. The increasing reliance of the U.S. on Canadian oil has sparked an intense debate about energy security and where the U.S. will turn to meet its increasing energy demand if Canadian oil is not an option.

A new article in Energy Policy, “The Canadian Oil Sands Industry under Carbon Constraints” by Gabriel Chan, John M. Reilly, Sergey Patsev, and Y.-H. Henry Chen, investigates how the Canadian oil sands industry will respond to different carbon emissions regulations.

Canadian crude oil reserves are of particular interest to climate researchers because over 95 percent of Canada’s reserves are a particular type of oil known as bitumen. Extracting or producing bitumen and converting it to usable crude requires more energy and releases more carbon than traditional oil reserves. Climate policies that limit CO₂ emissions might put Canada in a more constrained position than other nations with conventional reserves.

The study modeled the Canadian oil sands industry under four different climate policy scenarios, using a computable general-equilibrium (CGE) model of the world economy. The CGE model was designed to investigate the various carbon footprints of different bitumen production scenarios, including distinguishing between the processes of producing and upgrading of bitumen. The specificity of the CGE model was such that the projections would be likely to change if even small changes in policies or productions processes are introduced or amended in the future.

In the first scenario, which considers a future in which no climate policies are introduced, the study found that Canadian oil production increases almost fourfold from 2010 to 2050. In addition, Canadian CO₂ emissions increase to 750mtC per year by 2050, which would represent a threefold increase from 2010 levels. This scenario allows for emissions at a significantly higher level than the once-proposed Canadian emission mitigation strategy, which stipulated emissions not exceed 125mtC per year by 2050.

By contrast, under a world climate policy modeled after the Kyoto Protocol, the CGE model predicted that Canadian oil sands production “essentially disappears” by 2050. Under this scenario, developing countries cut global crude oil demand enough to affect even conventional crude production – leaving no demand for Canada’s higher-cost oil sands production.

The researchers also modeled a scenario in which climate policies are introduced only in developed countries. This model led to some continued Canadian oil sands production but also a steep decline in the broader Canadian oil sands industry. Under this scenario, climate policies would be adopted in Canada, forcing crude oil upgrading capacity to move abroad to areas without climate policies, increasing emissions in these regions. This type of offshoring is often referred to as “carbon leakage.” The authors estimated that in certain scenarios up to 70 percent of upgrading emissions could be “leaked” to other regions.

Carbon, capture, and storage (CCS) technologies were also considered in a fourth model. Under this scenario, producers implement CCS technology to circumvent the carbon constraints of Canadian climate policies. The study predicts that approximately 90 percent of CO₂ emissions could be captured with advances in CCS technology, although at a substantially higher economic cost. CCS still put the oil sands industry at a disadvantage compared to other energy producers, as the cost of utilizing CCS raised the break-even point for producers operating in the oil sands.

The study ultimately concludes that given the cost of CCS technology today, the introduction of any potential climate policies are all likely to have a significant, negative impact on the viability of the Canadian oil sands industry. The findings provide a dim outlook for the future of the Canadian oil sands industry if carbon emissions are restricted, and discouraging news for U.S. policymakers hoping that Canadian oil imports could break US reliance on other foreign sources.

Feature photo: cc/Travis S.