The role for Canadian oil and natural gas in ‘peak’ oil scenarios

There’s still ample growth opportunity for Canada’s industry.

Over the past months, several organizations have issued projections for worldwide energy demand over the coming decades. For example, the International Energy Agency (IEA) recently released its annual World Energy Outlook 2020 (WEO). Under its Stated Policies Scenario, the IEA projects world oil demand will slow, increasing by five per cent by 2030 and six per cent by 2040. In contrast, natural gas demand will grow 15 per cent by 2030 and 30 per cent by 2040.

Several analyses forecast an end to continued growth in demand for oil, a scenario known as ‘peak’ oil. ‘Peak’ oil simply means oil demand attains a plateau and remains steady. ‘Plateau’ does not mean ‘cliff’ — it does not imply a sudden drop in the world’s need for oil but rather a flattening of the demand curve. While there are different scenarios for when this peak may occur, the one constant is the world continues to require significant amounts of energy to sustain and improve the quality of living for billions of people.

Most forecasts, including the IEA Stated Policy Scenario, anticipate a rebound in global oil demand in the short term post-COVID, leading to a plateau in the next decade with oil demand remaining at or near historical levels of around 100 million barrels per day (b/d) until at least 2040. While analysts generally agree there will be reduced demand for oil in established economies – largely due to widespread adoption of electric vehicles, plus wind and solar energy sources – this will be offset by strong demand in developing countries based on population growth, a growing middle class, and strong economic growth potential. The need for oil to support energy security means demand will remain at significant levels for decades to come, giving Canada an ongoing opportunity to be a global supplier of choice.

In contrast to projections for peak oil, demand for natural gas is projected to remain strong and growing. The IEA envisions global natural gas production will grow by 13 per cent by 2030 and 28 per cent by 2040; production in Canada is projected to grow 11 per cent by 2030 and 21 per cent by 2040. This sustained growth would be driven by growing demand for liquefied natural gas (LNG) especially in India, China and Southeast Asia. Canada has an enormous opportunity to help meet this demand by developing our extensive natural gas resources and exporting LNG.

Investment is crucial 

Capital investment will be crucial to ensure ongoing oil production is sufficient to meet demand, even if that demand reaches a plateau. In WEO 2020, the IEA notes, “Global crude oil inventories are high [as of October 2020] and markets are well supplied in the near term, but the prospects for continued ample supply to meet projected post-pandemic demand should not be taken for granted.”

Even under peak oil scenarios, annual investment in the order of US$390 billion is required to ensure upstream oil production from all worldwide sources can meet demand. This investment is necessary to sustain production from existing fields and to develop new fields to offset declines from current sources of production.

The combined global investment market to maintain oil supply and grow natural gas supply is projected to be $800 billion annually until 2040, far larger than the expected $366 billion in worldwide capital investment required to develop renewable energy sources — more than double the investment opportunity.

This is a huge potential for international investment in which Canada must participate. If Canada can capture just five per cent of that market, some $40 billion annually would flow into this country to facilitate growth in the industry, in turn generating jobs, government revenues, opportunities for Indigenous prosperity, and supporting advanced technologies that improve environmental performance. Perhaps more crucially in the near-term, capital investment that facilitates industry growth will help drive Canada’s post-pandemic economic recovery.

The need for supportive policy

Competition for investment is intense. Many countries are making policy decisions to help attract investment and Canada must do the same, including measures such as accelerated depreciation of capital costs (100 per cent immediate deductibility) and revisions to the proposed Clean Fuel Standard.

Within this ultra-competitive investment environment, Canada has a number of advantages: this country has vast and well-known reserves in the oil sands and offshore; Canada is a world leader in environment, social and governance (ESG) performance; Canada has emissions-reduction goals, such as carbon pricing and methane reduction targets, and regulations to ensure progress toward those goals; Canada’s industry has developed expertise in advanced technologies to further reduce emissions intensity, including some of the world’s largest carbon capture and storage projects and among the world’s lowest-emissions LNG projects.

As ESG performance and emissions reduction become ever more important to investors, Canada can have a competitive advantage but Canadian producers need government action and clear support to signal the international investment community that Canada is a worthy place to invest.

Offshore and oil sands projects are capital-intensive but have long production timelines that can offer long-term return on investment. Even under peak oil demand, Canada can supply oil to world markets for decades, while continuing to drive down emissions intensity and underpin this country’s economic recovery and resilience.