‘Greener oil’ or managed decline? A case study of the Alberta Climate Plan

Tzeporah Berman

The Alberta Climate Plan, introduced late in 2015, includes a complete phase-out of coal, a tripling of renewable energy production, methane reduction, an economy-wide carbon tax, and a limit on emissions from the oil sands. It has been lauded as historic and a breakthrough climate policy and attacked as both too strong by some and too weak by others. Many were surprised to see the plan supported by five of the largest oil companies in Canada and five environmental organizations. The remarkable support from unlikely allies reflects the strength of successful civil society campaigns against fossil fuel development and infrastructure and the impact of collaborative conversations about shared policy goals. However, underpinning the different sectoral support are very disparate visions of the future. The oil industry hopes to maintain and, in fact, increase production by reducing emissions and “decarbonizing oil”, while the environmental organizations believe that the climate plan is the first step towards planning for managed decline of oil. Both parties value a carbon price to stimulate innovations and reduce emissions and were willing to support an emissions limit to provide some planning certainty. Both parties agree on the need for Alberta and Canada to do their “fair share” in reducing emissions and meeting Canada’s climate targets. The case study begs the question: How to chart a policy pathway to transition off oil when national and regional governments in export economies are only responsible for production emissions? It also illuminates a post-denial narrative of the oil and gas sector that accepts climate science and supports climate pricing and decarbonization pathways, while arguing for the right to produce more oil regionally to capture a piece of global demand in a climate-constrained world.

Fossil fuel project approvals and climate commitments: Modelling tools for connecting the dots

Mark Jaccard

The governments of fossil fuel-endowed countries as they assess major fossil fuel production and transport investments. On one hand, it is argued that they should allow fossil fuel supply investments because (1) one jurisdiction’s curtailment of these will be offset by expansion elsewhere, and (2) some fossil fuel investments might still be justified, even under effective global action. The counter-argument is that (1) the only chance for effective global action is for some countries to show leadership in unilaterally curtailing their fossil fuel expansion while rallying (or pressuring) other countries to join them, and (2) countries should restrict all fossil fuel expansion that would be uneconomic under the 2°C global effort to which they have committed themselves. This paper reports on research designed to help governments to ascertain the likely economic rationale for fossil fuel supply expansion when the global energy system is subject to a constraint on CO2 emissions. It focuses on the assessment by the Canadian government of oil pipeline proposals that would facilitate expansion of oil sands production in Alberta. It describes a new model that uses output from global energy-economy-emissions models to estimate the likely implications of the 2°C constraint for the future price of oil and the future production costs of all sources of oil, including the oil sands. Those models provide estimates for a global carbon price trajectory, but because of their design, they do not generate a real-world market price trajectory for oil. The model used here estimates the real-world oil price by incorporating historical evidence on implicit output constraints for OPEC and various supply-demand feedback mechanisms. It shows that a declining demand for oil to the year 2050 implies a low price for oil throughout this period (excluding short-term supply disruptions that can increase prices), while the production costs of oil sands rise relative to other oil sources. Expansion of the oil sands is uneconomic even under a reasonable range of values for uncertain parameters, such as the global carbon price, the global demand for oil, the production costs of oil sands with cost-effective efforts to reduce emissions, and the global oil price. With this modelling tool, governments in Canada and elsewhere can connect their fossil fuel project assessments with their climate commitments.

The intertwining and disparities between the political economy of oil supply and climate change mitigation policies: The cases of Mexico and Colombia (2000–2015)

Katya Pérez Guzmán, Alicia Puyana Mutis, Sandra Guzmán Luna, Zuelclady Araujo Gutiérrez and Mayra Vega Campa

Fossil fuel and climate policy intertwine in a complex double discourse that most of the time runs on parallel, separate tracks. Colombia and Mexico are no exceptions to such ambivalence: some of their climate mitigation policies have been among the most progressive in Latin America, and they have made numerous enhancements in emission reductions on various sectors. Yet ambitious oil production programmes have also been implemented in both countries to put more fossil fuels and non-conventional resources into circulation. An explanation for such ambivalence rests in the political economy of fossil fuel management and climate policies. In particular, pervading conflicts may invariantly arise: On one hand there are oil related actors (both private and public) interested either in recovering their fossil fuel investments as quickly as possible, minimizing risks and gaining rents by volume, or those interested in gaining rents by the barrel and produce at a less accelerated rhythm that would guarantee a permanent fiscal income, with a sight to financing national development. On the other, there are many actors who relate to climate-friendly policies for various reasons. The final balance between these vested interests shapes the ultimate outcome in climate change mitigation, its advances and setbacks. This paper analyses the political economy of the oil and climate policies instrumented in Colombia and Mexico. An understanding of such actors, incentives and interests is key to advancing toward more synchronized action between them.     Download full paper PDF »

Investment and production dynamics of conventional and unconventional oil: Implications for climate strategies

Henrik Wachtmeister and Mikael Höök

Unconventional tight oil production has increased fast in recent years. This development can appear threatening to climate change mitigation efforts, as more available supply might lead to continuing or increasing consumption, contributing to “carbon lock-in” and possibly making a low-carbon energy transition more difficult. However, the investment and production cycles of tight oil are different than for conventional oil. This study investigates this difference and whether it has any implications for energy and climate strategy with regard to carbon lock-in effects. Production and capital investment data for conventional oil fields and unconventional tight oil wells are analysed, and standard production profiles are derived. Through a bottom-up approach, aggregate investment and production dynamics are then investigated. The analysis shows that in conventional production, once initial investments are made, decades of high production rates can follow. In contrast, tight oil production declines fast, with the dominant part of cumulative production occurring within the first few years. Both kinds of production are characterized by large initial capital costs and low operating costs. This cost structure incentivizes continued production once initial costs are spent, even if oil prices fall, but since tight oil wells decline faster, the amount of locked-in production is significantly lower than for conventional projects. The different dynamics of conventional oil and tight oil need to be considered when formulating energy and climate strategies. Since tight oil production entails lesser lock-in effects, it might provide a more flexible pathway in face of future uncertainty in development of substitute technology and in climate policy commitments.