Canada eyes methane regulations for oil and gas sector as early as 2023

Canada is eyeing methane regulations for the oil and gas sector either through a trading program or through a change in its federal carbon pricing scheme, according to the country's environment and climate change department.

In a discussion paper released 18 July, Environment and Climate Change Canada (ECCC) outlined two main approaches as part of its national commitment under the Global Methane Pledge to reduce methane emissions 75% below 2012 levels by 2030. The methane pledge is designed to help countries reach their net-zero goals by midcentury.

"Core to either approach is the goal of lowering emissions at a pace and scale needed to achieve net-zero emissions by 2050 and make a meaningful contribution toward Canada's 2030 emission reduction target," the ECCC said in a release accompanying the paper's release.

Moreover, ECCC said the Canadian government "expects to outline the design of the oil and gas emissions cap early next year, ahead of the next steps to implement the cap."

A colorless, odorless flammable gas, methane is a hydrocarbon that is a potent GHG with a global warming potential that is more than 80 times greater than CO2 over a 20-year period, and more than 25 times greater over a 100-year period.

In 2020, methane accounted for 92 million mt CO2e of Canada's GHG emissions, which totaled 672 million mt, according to the country's 2022 annual GHG inventory report to the UN. Fugitive releases from oil and gas activities made up the lion's share with 35% of total methane emissions, followed by agriculture at 30%. Solid waste disposal, which includes municipal landfills and industrial wood waste sites, made up 27%.

To reach its 75% reduction goal, Canada is looking to supplement existing regulations at the national level and the provincial level including Alberta, Saskatchewan and British Columbia.

In April, ECCC announced it will write new guidance for developers of new oil and gas production. Under that guidance, such developers will be required to demonstrate that their production is resulting in "best in class" low-emissions performance.

Trading or Pricing

On July 18, ECCC said it is proposing to one of two approaches to achieve greater methane reductions from the sector: The first option is to alter its federal carbon price benchmarks, which first went into effect three years ago. The idea behind changing its carbon price benchmark is to create price-driven incentives to reduce emissions to levels corresponding to the cap, ECCC said.

Canada set a national minimum price on carbon pollution starting at C$20 ($15.52) per metric ton (mt) in 2019, increasing it at C$10/mt each year to C$50/mt in 2022. From 2023 to 2030, Canada has said the minimum carbon price will increase each year by C$15/mt, reaching C$170/mt.

The second option on the table is setting up a national cap and trade program, where facilities would be allocated one allowance for each metric ton they emit.

For either of the approaches to work though, Canada needs to set a cap on methane emissions.

Cap needed

"Establishing a cap on oil and gas emissions is one of the key commitments of our Government's Emissions Reduction Plan. Canada's oil and gas companies have proven repeatedly that they can innovate and develop new technologies and more competitive business models," Canadian Minister of Environment and Climate Change Steven Guilbeault said 18 July.

Setting a cap is not without its challenges as it depends on accurate measurement of both continuous and intermittent sources of methane leaks, with the latter being more challenging owing to the diffuse nature of the releases, ECCC said. "Recognizing that emissions have historically been underreported in the sector, the Government will also consider ways for the regulations to increase measuring and reporting to better inform decision making," it added.

ECCC said a key factor that will influence the design of the regulations is the availability of monitoring technologies and the ability to set standardized monitoring, measurement and reporting methodologies for some or all of the methane sources to be covered, including super-emitters.

Technologies available

A May 2021 global assessment of methane by the UN Environment Programme (UNEP) said currently available technologies can make a sizeable dent in emissions reductions from the fossil fuel sector.

The ECCC also identified new technologies that can reduce methane emissions through electrification, fuel switching, efficiency improvement, and mitigating fugitive emissions. For instance, it notes that vapor recovery units could be installed to capture gas that would otherwise be vented. Captured gas could then be diverted to sales or be used to meet energy needs at the facility, such as heating or electricity generation, which would reduce on-site facility costs.

Increasing stringency of regulations

However, it raised questions about how it should set a cap that would enable reaching the 75% methane reduction target by 2030. One possibility it said is to increase the stringency of methane reductions already in place for upstream oil and gas activities.

Although many oil and gas activities emit methane, including exploration, drilling, production, field processing, gas gathering, refining, transmission and distribution, ECCC noted that "most of the methane emissions from this sector are mostly from upstream activities: the production and field processing of light and heavy crude oils, bitumen, natural gas and natural gas liquids."

The Canadian Association of Petroleum Producers, which represents the country's upstream oil and gas industry, said it is willing to work with the government to find "sound solutions" to reach net-zero goals, which include reductions in methane.

CAPP said technology is critical to reducing methane emissions from natural gas and oil development. This includes using solar panels to power pumps to eliminate venting of emissions from traditional sources of power and capturing vented gas at natural gas facilities, and redirecting the gas to help fuel compressor engines.

Two-tier pricing system

Irrespective of which of the two policy proposals the Canadian government chooses, it could result in a two-tier pricing system for upstream versus other sectors, Kevin Birn, chief analyst for Canadian oil markets with S&P Global Commodity Insights, told Net-Zero Business Daily.

"The optics of the policies proposals, which have the potential to result in a separate and higher price on the upstream oil and gas segment as opposed to any other sector in Canada, will not be seen as investment friendly," Birn said.

The Canadian oil sands industry may have a head start in reducing methane emissions compared with other parts of the Canadian upstream, but they will have to play catch-up if they hope to meet the government's objectives, he added.

Moreover, he said, these new policies would be imposed in addition to existing policies. "Regardless, these new measures will likely be viewed as increasing uncertainty for future upstream investment in Canada," Birn said.

Posted 20 July 2022 by Amena Saiyid, Senior Climate and Energy Research Analyst

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.