There is a risk that there could be a “race to emit” in 2026

The RIAS states:

The proposed Regulations would set the emissions cap for each year of the first compliance period at 27% below emissions levels reported for 2026 (i.e. only emissions from operators that are required to report in 2027 for 2026)…The emissions cap would remain at this level for subsequent compliance periods until regulatory amendments are made. ^[96]

By way of explaining why ECCC decided to use 2026 as the base for the cap, they state:

The proposed Regulations are designed to account for changes in production and emissions in the near future by setting the emissions cap based on 2026 reported data, rather than relying on historic data and projections. This will provide sufficient time to set the actual emissions cap level and distribute allowances before the first compliance period begins in 2030.^[97]

ECCC is predicting that, without these Draft Regs, emissions from the upstream oil and gas sector will be 156.6 Mt in 2026.^[98]  They call this their “Baseline Scenario”^[99] and provide some explanation on how they arrive at that figure:

The analysis employs the Department’s multi-region, multi-sector, computable general equilibrium model (ECPro) of the Canadian economy to analyze the incremental impacts of the proposal relative to the baseline. This modelling framework differs from the energy systems model used to produce the departmental reference case. As a result of this difference in modelling frameworks, the projections in this analysis may vary slightly from the 2023 Departmental Reference Case (Ref23)…

The baseline scenario is a projection based on a modified Ref23. This includes federal, provincial, and territorial policies and measures that were in place as of August 2023, such as carbon pricing, the Clean Fuel Regulations, and investment tax credits. In addition, Ref23 was modified to include the proposed Methane Regulations which aim to achieve at least a 75% reduction in oil and gas sector methane emissions by 2030, relative to 2012 levels. The forecasts of oil and natural gas prices in Ref23 are taken from the Canada Energy Regulator’s 2023 Current Measures Scenario, as released in Canada’s Energy Future 2023. The model projects that under this scenario, Canadian oil and gas production will grow by 17% from 2019 to 2030, and that labour expenditure in the economy is estimated to grow by 18% and Canadian GDP is estimated to grow by 20% over this same time frame.^[100]

At the same time, ECCC acknowledges the uncertainty of 2026 emissions levels:

The emissions cap level set out in the proposed Regulations is fixed at 27% below 2026 reported emissions for covered subsectors. If 2026 emissions levels in the oil and gas industry are lower than estimated in the baseline, due to lower production or more carbon intensity improvements, then all else being equal, the resulting level of the emissions cap would be lower than estimated leading to higher impacts. Alternatively, if 2026 reported emissions are higher than estimated, then all else being equal, the emissions cap would be higher, and would have lower impacts than estimated.^[101]

Canada’s oil and gas producers have proven that they have little or no interest in reducing their emissions if they are not forced to do so.^[102]  It would seem obvious that they would be collectively motivated to produce as much oil and gas as possible, and make their emissions as high as possible, in 2026 in order to get the highest emissions cap possible.  It would also seem obvious that, individually, they would be motivated to produce as much oil and gas as possible in 2026 in order to obtain the greatest share of emissions allowances, based on whatever the cap is.

In discussions after the release of the Draft Regs to which some members of the Climate Messengers were privy, ECCC indicated that they do not view this as a significant risk, since operators will be limited by their production, storage, and transport capacities. Nevertheless, the risk appears to be real.

Indeed, there are indications that the risk is real.  In August of 2023, Suncor CEO Rich Kruger said that Suncor should return to its oil production roots and focus on the fundamentals that would make money for shareholders rather than on a clean energy transition:

Suncor Energy Inc… needs to return to its roots as an oil company and focus on the business of low-cost production and profits rather than the longer-term energy transition, says its new chief executive.

Rich Kruger said Suncor has a new goal: to concentrate on what he called “the fundamentals” – safety, operational integrity, reliability and profitability…

He told analysts on an earnings call Tuesday that he believes Suncor has been neglecting “the business drivers of today” in pursuit of future-focused, clean and low-carbon energy pursuits, with a “disproportionate emphasis on the longer-term energy transition.”

While these pursuits are important, he added, they won’t make money for shareholders today.

“Our current strategic framework is insufficient in terms of what it takes to win,” he said. “Today, we win by creating value through our large integrated asset base underpinned by oil sands.”…

Changes at the Calgary-based energy giant also include a rejig of the company’s top brass, with the retirement of three senior executives. That includes Suncor’s chief sustainability officer, Arlene Strom, who will leave her post near the end of the year.

Ms. Strom played a key role in Suncor’s work with the Pathways Alliance, a group of major oil-sands companies that have pledged to reach net-zero production by 2050.

Her job won’t be filled. Rather, sustainability will be rolled into the duties of a new senior vice-president, who will also be responsible for strategy and corporate development. Bruno Francoeur, vice-president of business and operations, and Paul Gardner, chief people officer, will both retire on Aug. 31.

“The changes are consistent with developing a simpler, more focused, high performing organization,” Mr. Kruger said.^[103]

Furthermore, there are indications that Canadian oil and gas producers are already taking steps to increase their production through 2026.  In Waiting To Launch: 2024 Mid-Year Update, the Pembina Institute discusses in considerable detail how the Canadian oil and gas producers are making very little investment in emissions reductions and are returning very large amounts of money to shareholders by way of dividends and share buy-backs.  However, in that paper, the Pembina Institute also discusses how recent corporate guidance from the Canadian oil and gas producers sets out how capital expenditures will be allocated to new production:

Corporate guidance in 2024 remained focused on maximizing value from existing assets, but also shifted to enable some investment in high-value growth opportunities. Oilsands capital expenditures are expected to increase in 2024 after rising an estimated 11% in 2023 from 2022.  Suncor intends to increase production 100,000 bpd between 2023 and 2026, congruent with an increase of free funds flow of $3.3 billion.  Imperial Oil is bringing on 15,000 bpd from its Grand Rapids project, which saw its first production in 2024. Additionally, Imperial’s Leming SAGD project is anticipated to increase production by 9,000 bpd in 2025. Cenovus anticipates an increase in production between 20,000 and 30,000 bpd in late 2025 by connecting its Narrow Lake project to the Christina Lake central processing facility. MEG Energy will begin a $300 million investment in 2024 that will last three years to add 15,000 bpd of new productive capacity at its existing facility.  CNRL will add 25,000 bpd production in 2027 from its thermal in situ Pike 1 Project that will begin development activity this year. Meanwhile, with its Horizon project, CNRL is targeting an increase in production of 28,000 bpd in 2025 and an incremental production increase of 6,300 bpd in 2027 from a $350 million investment in a naphtha recovery unit tailings treatment project.

Notably, ConocoPhillips acquired the remaining 50% interest in the Surmont asset from TotalEnergies EP Canada Ltd., becoming the sole owner in October 2023 for approximately $2.7 billion.  Following the acquisition, in December 2023 the Surmont asset achieved first production on its first new pad since 2016.^[104]  [Footnotes omitted.]

Recommendations:

Citing some of the facts and information above (and any other research you want to do), and using your own words, consider making submissions to the online public consultation similar to these:

• From recent actions and statements by corporate leaders, there is a real risk that the oil and gas companies will act in their own self-interest and try to increase their 2026 production (and emissions) as much as possible, to make the cap based on 2026 emissions as high as possible, and to obtain for themselves the largest possible share of emissions allowances.

• To mitigate against this risk, the final regulations should contain a clause to the effect that, if the Minister determines that the 2026 oil and gas production emissions are significantly higher that the current 2026 estimate of 156.6 Mt, the Minister may set a lower basis for the production emissions cap.