7.1 Primary energy production


Figure 7.1 shows the predicted evolution of Canadian primary energy production as a function of the various scenarios. As mentioned earlier, these scenarios assume that the rest of the world will move at its own pace, irrespective of Canada’s GHG targets. Oil and gas prices on the global market are therefore the same for all scenarios. This hypothesis is of course a simplification, as it is likely that Canada will act on its targets only if the rest of the world shows clear leadership, directly affecting energy prices on the global market.

Figure 7.1 – Primary energy production #

Results show a sharp distinction between the NZ scenarios and both REF and CP30. In these latter scenarios, oil production increases by 50% by 2030, reaching a maximum in 2040 before returning to 2016 levels by 2060. For REF, natural gas production shrinks by 4% in 2030 and then slowly increases by 22% over the following 20 years, reaching a nadir in 2050, before returning to 2016 production levels in 2060. While both REF and CP30 project similar energy production levels, CP30 results in 40% less natural gas produced compared with REF starting in 2030. Oil production, however, remains practically unaffected by carbon pricing. As discussed in the next section, the evolution respecting REF and CP30 is essentially controlled by projected foreign demand.

Due to the schedule necessary to reach net-zero on the longer term, NZ60, NZ50 and NZ45 all require significantly smaller total energy production in 2030, the result of significantly reduced oil and natural gas production—respectively 61%, 59% and 58% less compared with REF. Unsurprisingly, this reduction is steeper with tighter net-zero schedules (NZ45 compared with NZ50, for instance). 

This rapid decrease in oil and gas production over the next decade in the modelling, followed by a slower but continuous reduction on the longer term, is a result not only of the large quantity of emissions produced by the sector, but also of the lower direct cost for eliminating them in the short term, compared with decarbonization elsewhere. However, given the substantial indirect costs of such transformations, alternative scenarios were explored to look at the implications of a slower and less substantial reduction in this production (see section 7.1.1 below).

Biomass expands in all scenarios, particularly taking up a sizeable share in net-zero scenarios. The result is a 250% increase by the time net-zero is reached, an increase beyond this point being problematic given availability constraints. In terms of energy content, biomass production becomes more important than oil and gas combined in 2050, with a slightly larger share in NZ45. Renewables also increase in these scenarios in order to provide the necessary changes to electricity generation (see below).

In all scenarios, coal production is expected to fall to very low levels by 2030, becoming even more marginal. This includes a 95% reduction even in REF. As for uranium, which primarily targets export markets at the moment, if CP30 sees a small increase of 4% in production by 2030, all other scenarios anticipate an almost constant production level at first. By 2050, CP30 project an 18% growth as NZ scenarios see a 5% to 7% increase in production by 2050 to account for nuclear’s expansion in electricity production. Since NATEM does not model the evolution of external demand, the quantity mined for exports remains the same across scenarios and over time and any growth is associated with larger internal consumption.

General observations:

  • While oil and natural gas production dominate energy production in Canada today, all NZ scenarios show them decreasing by more than half within the next decade, suggesting a lower direct cost per tonne compared with many other areas throughout the economy.
  • CP30 limits natural gas production in comparison with REF, suggesting that this production is more sensitive to carbon pricing.
  • Based on projected energy prices discussed in Chapter 1, oil production increases by 60% in REF by 2040; current projections have it stagnating and decreasing sharply after 2050, returning to current levels. This is, of course, highly dependent on the evolution of  world prices that will largely determine future Canadian production in the REF scenario.

7.1.1 The pace of oil and gas production changes

The rapid and substantial decrease of oil and gas production in NZ scenarios merits some discussion. 

This decline stems from the generation of cost-optimal GHG-reduction pathways for Canada within the constraint of some external conditions. Three of these conditions particularly affect the evolution of Canada’s oil and gas production sector. The first is that the oil and gas production is decoupled from domestic demand, which can be fulfilled by imports, if necessary, given that oil and gas prices are exogeneous to the model. In addition, following international agreements, only GHG emissions produced in the country are added to the balance; emissions generated abroad to satisfy internal services are not included, while emissions generated for the production of goods and services intended for export are fully allocated to Canada. Given that most of the oil and gas is exported, this accounting puts pressure mainly on energy production rather than on consumption. As international customers turn to other sources of supply, the net GHG decrease worldwide is therefore less than the decrease computed here and would then depend on the difference in production-related emissions between Canada’s oil production and these suppliers.

Finally, only direct costs are taken into account since economic growth is exogenous to the model. However, given the oil and gas sector’s share of the Canadian economy, a rapid decrease in these activities is bound to have an impact on this economic growth, unless policies are rapidly put in place to help manage this transition. We should note that if the rest of the planet, and the US in particular, moves as planned along a more aggressive GHG-reduction pathway, Canada will see its export market shrink rapidly, which would have an impact of a scale similar to what is projected here.

7.1.2 Sensitivity analysis: Effects of minimum oil and gas production levels 

To help assess the effect of alternative pathways for the oil and gas sector, a sensitivity analysis was conducted where the reduction in energy production is externally controlled, using the following two additional scenarios to compare with NZ50:

  • OilExpA: NZ50 targets but both oil production and natural gas production are maintained at a minimum of 25% of the reference scenario levels at all times
  • OilExpB: NZ50 targets but both oil production and natural gas production are maintained at a minimum of 50% of the reference scenario levels at all times 

In the main results for NZ50, oil and natural gas production decrease by 52% and 59% before 2030 with respect to 2016 (Figure 7.2). By 2050, these reductions reach 94% and 90% in comparison to the starting point. OilExpA sees oil production decrease by 46% (2030) and 55% (2050), while OilExpB maintains higher levels of production with reductions of only 16% (2030) and 10% (2050). These reductions for natural gas are 55% and 66% in OilExpA, and 48% and 33% in OilExpB. Production cuts are more substantial for natural gas than for oil in OilExpB, given the much larger expected increase in oil production in REF. While both OilExpA and OilExpB reach net-zero by 2050, it is interesting to note that the oil and gas production in neither scenario is limited by their respective imposed production floor.

Figure 7.2 – Primary energy production with alternative oil & gas production constraints #

While total oil and gas production is maintained at higher levels for OilExpA and OilExpB than in the less constrained NZ50, the impact of these two alternative scenarios on final consumption is notable but much less significant. 

A second result from alternative scenarios is that final consumption of oil products and natural gas, excluding energy consumption for oil and gas production, is additionally reduced in both OilExpA and OilExpB, compared to NZ50 (Figure 7.3). In 2030, all fossil fuel consumption is significantly reduced: by 5% and 13% for natural gas and by 2% and 5% for oil in OilExpA and OilExpB respectively, as compared with NZ50. To compensate, all other sectors must therefore increase their electricity, biomass and hydrogen consumption by up to 2%, 6% and 8% in OilExpB, resulting, with the higher productivity of electricity, in an overall reduction of 2.5% in total energy demand. 

In 2050, oil products are down by 8% (OilExpA) and 19% (OilExpB) compared with NZ50, but natural gas consumption is almost identical to NZ50. The main change in natural gas consumption therefore occurs in the shorter term, whereas oil products are affected in both the short and the longer term. Clearly, maintaining a higher level of oil and gas production, without full internal compensation in GHG means that, to achieve overall GHG reduction goals, all other economic sectors in Canada will have to transform much faster and more deeply. Thus, most of the additional production allowed in these scenarios will heighten dependence on export markets, if they still can absorb it, as internal consumption is more quickly moved to low-carbon energy sources.

Figure 7.3 – Final consumption by source with alternative oil & gas production constraints #

To compensate for the lost emission cuts in OilExpA and OilExpB, other sectors must therefore decarbonize their activities more rapidly (see Appendix C for details on sectorial GHG emission reductions under those alternative scenarios). One example is the building sector, which is projected to lower its natural gas consumption by an additional 6% and 16% in OilExpA and OilExpB compared with NZ50 by 2030. This demand for buildings is met by a larger share of electricity (+10% and +14% in the two scenarios compared with NZ50), accelerating the electrification of the sector. Similar results are noted in the electricity sector, which must become net-negative by 2030 for OilExpB, and in the industrial sector, where natural gas consumption decreases by 11% and oil products by 10% in OilExpB compared with NZ50 by 2030. This demand is chiefly met by 4% more electricity.

Protecting oil and gas production mainly means accelerating the transformation of other sectors and, by 2050, there is relatively little difference in the energy basket for these sectors (Figure 7.3): oil products, although remaining only in very small quantity, are smaller in similar proportions than for 2030 (compared with NZ50), but natural gas consumption is identical to NZ50 in OilExpA and 10% higher in OilExpB.  

Not surprisingly, even with the additional pressure of OilExpA and OilExpB, a more rapid transformation before 2030 remains too costly for the transport sector. Changes are thus modest: electricity, which represents only 2.5% of energy use in this sector by 2030 for NZ50, increases by 5% and 10% only in OilExpA and OilExpB by 2030, to match similar decreases (in relative size) in diesel and gasoline use. 

The sum of these drivers—higher production levels for oil and gas and different sectoral consumption profiles—allows emissions to be reduced to the same extent but in different ways than in NZ50. When comparing alternative scenarios OilExpA and OilExpB with NZ50, the (direct) costs of reducing emissions increase more rapidly than for NZ50, as they are transferred from the oil and gas production sector to other parts of the economy, including other industries, buildings and transport, but also by a larger use of direct air capture (DAC) to compensate for the higher GHG emission left from economic activities. By 2050, DAC is expected to almost triple, from 15 (NZ50) to 41 MtCO2e (OilExpB) captured annually.

General observations:

  • Constraining a minimal level of production for oil and gas to slow its decrease helps maintain a strong export market (as long as external demand is there). 
  • However, this protection of oil and gas exports imposes more rapid and deeper reductions in Canada’s consumption of oil and gas products in almost all sectors to reach the same GHG reduction targets 
  • This consumption evolves in each sector with more rapid electrification in the buildings sector, non-transport agriculture, transport and industry to meet energy demand with the smaller quantity of oil and gas, while exports of these fuels are increased