Yahoo Finance Record oil output to make Ottawa's emissions cap 'more daunting': DBRS
Canada’s oil sector could be on a collision course, with production forecast to rise as the federal government lays out a plan to clamp down on emissions, according to DBRS Morningstar.
Ottawa unveiled a draft regulation last Thursday aimed at cutting the greenhouse gas emissions of producers by up to 38 per cent by 2030 versus 2019 levels. Last March, the government proposed a 42 per cent drop in that time.
The latest plan was unveiled by federal ministers via webcast from Ottawa and Dubai, where Canada is participating in the annual UN climate summit. The government says the regulations have yet to be finalized, and could go into effect in 2026.
The plan was quickly dubbed a de-facto cap on production by the industry’s main lobby group. On Bay Street, CIBC Capital Markets called the timeframe “simply unrealistic.” The premier of Canada’s main oil and gas-producing province has said the federal government has no constitutional right to enforce the plan.
On Tuesday, U.S.-based credit ratings agency DBRS Morningstar weighed in, calling the regulations “very ambitious, with only seven years left to meet the targets.”
Adding to the challenge, analysts predict Canada’s oil output will climb by 15 per cent over 2019 levels, once two major projects are operational.
“[It’s] more daunting given that oil production will likely grow over the next few years. The offshore Newfoundland Bay du Nord light crude oil project is projected to come onstream in the middle of this decade, targeting international crude markets. In addition, the completion of the Trans Mountain Expansion Project, expected in 2024, will provide another outlet for oil and gas companies in Western Canada to export more oil,” analysts led by Ravikanth Rai wrote in research published Tuesday.
Canadian oil production is set to climb to an all-time high next year of about 5.3 million bpd by the end of 2024, according to S&P Global Commodity Insights. The agency says that amounts to a roughly 10 per cent increase, or about half a million barrels.
“Half a million is a lot," said Kevin Birn, S&P's chief analyst for Canadian oil markets. “It's bigger than what a lot of countries produce in the world.”
Canadian Association of Petroleum Producers president and CEO Lisa Baiton says the industry has “proven it can increase production, and take the carbon out.”
“We’ve done that in the absence of having our feet held to the fire,” she added at an event in Toronto last month.
Mounting skepticism
DBRS says carbon capture and storage technology will have to play a major role if the industry is to come “even remotely close” to the new federal framework’s targets.
“However, CCUS projects are untested at the scale required to meet the targets, and none of the proposed projects are close to being finalized for development,” the analysts wrote, adding to recent skepticism about the technology.
DBRS adds that the announcement of the federal emissions cap framework has no immediate impact on the credit ratings of Canadian oil and gas producers.
"Investment-grade Canadian oil and gas companies rated by DBRS Morningstar have significantly strengthened their balance sheets over the last two years, and will be addressing the emission reduction challenge from a position of financial strength," the analysts wrote.
"Smaller oil and gas companies, which lack the economies of scale to make large decarbonization initiatives feasible, may find it more challenging, and we could see additional consolidation in the industry as a consequence."
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.
Download the Yahoo Finance app, available for Apple and Android.
