Varcoe: Investors try to decode message sent by Ottawa’s emissions cap on oil and gas


As the oilpatch tries to figure out how a new federal emissions cap on the industry will work in the years ahead, their eyes are turning to a more immediate matter: its effect on investment.

On Thursday, Ottawa unveiled the framework of its incoming limit on greenhouse gas emissions from the industry, adopting a cap-and-trade system to lower emissions by a target of 35 to 38 per cent (from 2019 levels) by the end of this decade.

With flexibility measures being put in place, such as allowing companies to buy offsets credits, the actual emissions reduction could end up being 20 to 23 per cent. Industry executives say they will need to see the final regulations to understand the effect on future production and compliance costs.

However, they are clear-eyed on the message it sends to investors in the Canadian oil and gas industry.

“It will make it harder to attract foreign investment to come into Canada and it will also serve to cap, or make it a hindrance, to try and grow production. And I’m asking, why would you do that? You can still be a world leader in climate change,” Surge Energy CEO Paul Colborne said Friday.

“You got your hands around my throat and now you’re squeezing even harder.”

The emissions cap is part of the federal climate strategy to lower overall emissions by up to 45 per cent by the end of this decade as Canada seeks to achieve net-zero emissions by 2050.

Draft regulations on the cap will be unveiled next year, with final regulations completed in 2025.

“We are doing something that has never been done in this country, and that no one else on the planet has done,” federal Environment Minister Steven Guilbeault told reporters Thursday. “So, we felt we needed to take the time to do it right.”

A cap-and-trade system will establish a total quota of allowable emissions in the upstream industry, which would fall over time. Companies can acquire offsets or put money into a new decarbonization fund if they exceed their allowances.

View of the Syncrude oilsands extraction facility near Fort McMurray on October 25, 2009. MARK RALSTON/AFP/Getty Images

Aside from the new policy, Canada has a national price on carbon and clean fuel regulations that affect downstream companies.

The province has an existing program for heavy emitters — the Alberta Innovation and Emissions Reduction (TIER) system — and a note from BMO Capital Markets on Friday said the cap adds “another layer in the Canadian policy pancake.”

A report by CIBC Capital Markets analysts on Friday noted the bulk of expected industry reductions will come from cutting methane emissions and from the oilsands, where a large carbon capture and storage network is being planned.

“We view the imposed reductions as largely feasible from a technological standpoint, but to us the timing of the cap remains unrealistically ambitious and hence would make it onerous if implemented,” the CIBC report states.

“At the end of the day, we doubt either investors or corporates will take much of this long-awaited policy to heart. Details remain scant, a federal election looms and a constitutional challenge from the provinces is almost certain.”

Indeed, some industry investors in Canada say they’re not fussed yet, given the lack of information available.

“I just don’t think we have enough details to form an educated opinion,” said Eric Nuttall, a senior portfolio manager with Ninepoint Partners.

“This is being put forth by a government that in all likelihood won’t exist in two years . . . I’m not losing sleep over this at all.”

Yet, there is concern the policy will effectively cap future production growth and make it harder to attract capital, as the industry needs to make significant investments in carbon capture, utilization and storage projects, and other decarbonization initiatives.

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Companies that operate on both sides of the Canada-United States border point out that while the Biden administration is putting methane rules in place, the U.S. doesn’t have the same array of climate policies directed squarely at the oil and gas sector.

“They don’t have a carbon price and they don’t have these emissions caps in place. So, the question is: Does Canada really want to give the United States that big of an advantage?” said Cole Smead, president and portfolio manager with Phoenix-based Smead Capital Management.

“Canada has great assets. (Do) you want to give your biggest neighbour to the south — where you sell more oil than anywhere else — a structural advantage in the regulatory framework? I don’t think I would.”

Smead, whose firm has investments in Canadian-based firms including MEG Energy and Cenovus Energy, said the emissions cap in Canada “just proves that there is an unlimited amount of human foolishness possible.”

He’s not sure if the new cap will send investors in Canadian energy to the exits, but it will add another external cost and make it much harder for new producers to start up or grow.

Data by Raymond James shows 49 per cent of publicly traded Canadian petroleum producers are held by U.S. investors, 46 per cent by domestic shareholders and the rest by international investors. While the U.S. presence has been growing in recent years, the emissions cap is a headwind for the sector, said Raymond James analyst Jeremy McCrea.

“It’s one thing to have a carbon tax where everybody’s impacted, but it’s another thing to target a specific industry,” he said.

“It feels very (much) in the crosshairs of the government. And that’s why some of the investors I’ve talked to have been wary here of how much capital they want to keep up in Canada.”

Chris Varcoe is a Calgary Herald columnist.


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