Canada’s oil and gas industry is likely to cut production under the federal government’s latest draft regulations for curbing emissions from the country’s highest-polluting sector, according to new research.

Ottawa sees capping emissions of greenhouse gases from the oil and gas sector at 35 per cent below 2019 levels by 2030 as motivation for producers to spend record profits on decarbonization. Oil and gas executives say the proposed rules would effectively force them to shrink their company’s production.

“The cap being announced today is a cap on emissions, not on production,” Natural Resources Minister Jonathan Wilkinson told a news conference on Parliament Hill last week, where he and Environment Minister Steven Guilbeault announced the government’s update to a framework published last December.

“We expect production levels of both oil and gas to grow over the next few years, until global demand declines,” Wilkinson added.

A consultation period is underway until Jan. 8. A final version of the cap-and-trade-based system is due in 2025. Under the latest draft, the first reporting obligations from oil and gas producers are due in 2026. The government will set the eventual cap 27 per cent below 2026 levels, which it estimates will be roughly 35 per cent below 2019 levels.

Echoing concerns from Canada’s oil and gas industry, international credit ratings agency Morningstar DBRS says the government is overly optimistic about the pace of decarbonizing in the sector prior to the compliance period beginning in 2030. At the same time, its analysts are skeptical about producers deploying large-scale carbon capture, utilization and storage (CCUS) infrastructure in time.

“The timing seems very, very aggressive,” Morningstar DBRS senior vice-president Ravikanth Rai told Yahoo Finance Canada. “The assumption they're making is that emissions will come down in the sector without any additional regulations between now and 2030.”

If the federal government is firm on its timeline, Morningstar DBRS says the most likely result will be lower Canadian oil and gas production. Rai says the amount of shut-in production will depend on how quickly the industry can take advantage of CCUS.

The Pathways Alliance, a group of Canada’s largest oilsands producers, is backing a $16 billion carbon capture network in Alberta that will be one of the world’s largest, if completed. However, a final investment decision has not been made for the project as Pathways lobbies for additional financial support from the government.

Speaking at last week’s press conference, Wilkinson said the advancement of smaller government-backed CCUS projects in Alberta by Shell Canada and Strathcona Resources suggests the technology is “now ready for prime time.”