A critical juncture for Canada’s energy transition

April 2024 — Conversations about the energy transition in Canada have been highly polarized for some time now and have often ignored the real challenges of rapidly transforming the way we produce and consume energy. With global competition for decarbonization dollars already well underway, the window of opportunity for Canadians to have a more productive conversation about the future of energy is growing short, and the stakes are high. As a nation, we have the resources, the expertise and the vision to become real beneficiaries of the global transition to a lower-carbon economy, but only if we’re willing to get out of our own way.

Alex Pourbaix, Executive Chair of the Board of Directors

This isn’t an issue for the oil and gas industry alone. It should concern every industry in the country and all Canadians. Oil has been a major driver of our economy and high standard of living for the better part of Canada’s existence. Wishing it away is not the answer. Making it more sustainable is. But we need to be clear about what sustainability means. Decarbonization is not sustainable if it undermines our economy and long-term access to secure supplies of affordable energy. If that’s the tradeoff, it just won’t get done. As always, a balanced approach is the best way forward.

For Canadian companies and their executives and boards of directors, this presents real challenges. How do you manage the risks and opportunities associated with the energy transition in a politically charged environment, to act in the best interests of shareholders, employees and stakeholders? These are important questions for any business in Canada today, and for the Canadian oil and natural gas sector, they are critical.

At Cenovus, we believe there is tremendous opportunity for Canadian oil and gas to play a pivotal role in the transition to a lower-carbon economy in Canada and in helping ensure secure access to responsibly produced energy for the world. We share Canadians’ concerns about climate change, and we’ve set ambitious targets to reduce emissions from Cenovus’s operations by 2035, working towards our ambition of net zero emissions from operations by 2050. And we’re co-founders of the Pathways Alliance, a collaboration between Canada’s largest oil sands companies to reach net zero from oil sands operations by 2050.

We know renewables will play an increasingly important role in the global energy mix in the decades ahead. That’s as it should be. But it’s simply not reasonable to believe oil and gas will disappear. There are massive challenges to completely transforming the global energy system away from fossil fuels. For example, with today’s storage technology, renewables alone cannot deliver the reliability and affordability society has come to expect from fossil fuels over the last century. These are challenges that must be acknowledged and addressed as part of any realistic national dialogue on energy.

Today, even as renewable energy continues to grow, global oil demand remains as strong as ever. In fact, after a brief dip during COVID-19, oil demand is trending up. Over the longer term, oil scenarios from credible organizations vary. Some show a rapid decline while others show demand eventually peaking and remaining steady for the next few decades. But they all agree that global oil demand at some level will continue through 2050 and beyond – at a minimum, for “difficult to replace” transportation fuels and other products made from oil that will become increasingly sought after as more middle-income earners emerge around the world. These include plastics for computers, phones and medical devices, asphalt for roads, carbon-fibre components for lightweight vehicles and aircraft, and a lot more.

We strongly believe Canada should be the global provider of choice for that oil for decades to come. We have the fourth-largest oil resource in the world. We have world-leading sustainability practices for biodiversity, water use, human rights and Indigenous partnerships. We have transparent environmental reporting.

 
As a country, we need to confront some uncomfortable realities and make tradeoffs along the way. But that’s okay. The opportunity is too significant for Canada’s economy and energy security for us to stay quiet anymore.
Alex Pourbaix
Executive Chair of the Board of Directors

And while Canadians care about the impacts of climate change, poll after poll shows they also overwhelmingly understand the importance of the oil and gas sector and the benefits it brings to Canada’s economy - nearly 120,000 direct jobs, more than 400,000 indirect jobs, $40 billion in royalties and taxes paid to governments last year and about $50 billion the previous year. Oil is also Canada’s largest export. Without it, the country would have run huge trade deficits over the last several years and very likely had a much weaker dollar.

We also know Canadians are concerned about our greenhouse gas emissions, and they want us to take action. And we are. Last year, about 28% of Canada's total GHG emissions came from producing oil and gas. That means decarbonizing our industry’s production presents the single largest opportunity for Canada to make progress on its 2050 net zero goal.

But making the massive long-term investments required for industry to meet our ambitious emissions reduction goals will require significant government fiscal and regulatory support – the kind of government support currently incentivizing large emissions reduction projects in other oil-producing countries around the world.

Addressing climate change is a must. But so is doing it in a way that preserves the strength of our economy and Canadians’ long-term access to secure supplies of affordable energy. That requires an honest and grounded conversation about what it takes to have a thriving energy sector in Canada, including capital investment and shareholders.

When critics accuse industry of prioritizing shareholders over the environment, they’re misleading the public. It’s a false dichotomy. Our shareholders want us to decarbonize too, but if they get no return on the dollars they invest in our companies or in our country, they WILL go elsewhere. Today, billions of dollars in global capital are waiting to be invested in decarbonization projects like carbon capture and storage (CCS) or possibly small modular nuclear reactors down the road. If government incentives and regulations for these kinds of projects are more attractive and less complex in the U.S., for example, (and they are for CCS), then that’s where decarbonization capital will flow. It’s that simple. And if Canada’s oil and gas industry is burdened with more decarbonization-related costs than global competitors, it will not thrive. Capital will flow to other markets, Canadian oil and gas production will decrease or be shut in, and Canada will suffer. In fact, if Canada’s oil and gas industry shut down tomorrow, it would have no effect on global emissions. We’d just export our jobs and prosperity to other oil-producing nations that will step in to meet demand without worrying about decarbonizing their production.

Our challenge right now, and the challenge for corporate boards across the country, is to determine what the right balance is. Like any company, we have to reinvest in our business. We have overhead and operating costs. We often have debt to pay off from years when there were no revenues in our highly cyclical business. We have salaries, taxes and royalties to pay. And our shareholders, including average Canadians trying to build their retirement savings, expect a return on their investments. There’s only so much money to go around, and no responsible board of directors or management team is going to make massive multi-decade commitments to costly decarbonization projects without a clear policy environment and significant co-investment from the government that supports global competitiveness for Canadian oil and gas.

Today, Canada is headed in the wrong direction. Our industry faces growing uncertainty created by an increasingly complex layer cake of proposed policies that will deter competitiveness and decarbonization. We have an unnecessary federal oil and gas emissions cap, a clean fuel standard, an unachievable clean electricity regulation and inefficient methane regulations, stacked on top of each other and existing provincial carbon levies. Some of the proposed federal policies could face multi-year constitutional challenges. Even supportive government programs, such as the federal investment tax credit (ITC) for CCS projects, remain complex and uncertain, to the point that industry can’t reliably model what support we’ll actually get for decarbonization projects. All we know today is it’s not an environment that enables our industry to invest in decarbonization and stay competitive.

Governments want shovels in the ground, and we do too. Individually and through Pathways, Canada’s largest oil sand producers have made significant progress in advancing decarbonization plans, including a proposed CCS project that would be one of the largest in the world. We’re at the point where we could soon be ordering pipe and securing labour for the Pathways CCS project. But we need certainty, and we don’t have it.

So, what can we do about this? We all want the same thing. A strong economy that supports jobs, a great quality of life for Canadians, and progress on climate change. I see tremendous potential for Canada and our industry to play an important and constructive role in the energy transition and for companies like Cenovus to support Canadian security and prosperity for a long time. And I get it. We’re Canadians. We don’t like to rock the boat. But it’s time for all of us to start speaking up. We have to work together – and with governments – on a more realistic plan to achieve our shared goals.

We need to be able to talk openly about what is technically possible to achieve and in what time period. There needs to be a serious discussion about the costs and funding partnerships required. As a country, we need to confront some uncomfortable realities and make tradeoffs along the way. But that’s okay. The opportunity is too significant for Canada’s economy and energy security for us to stay quiet anymore. And time is running short. We can have a strong oil and gas sector that continues to support our economy. We can export the technology we use to decarbonize to other jurisdictions around the world. Canada has all the elements to be hugely successful at this. Other countries are already doing it. So, let’s stop messing around and get going.

Alex Pourbaix
Executive Chair of the Board of Directors,
Cenovus Energy

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