April 11, 2024

A CTV television interview released on March 31, 2024, with Canadian Energy and Natural Resources Minister Jonathan Wilkinson displays the disconnect between the current global and Canadian Greenhouse Gas (GHG) emissions framework, and LNG development in Canada:

“We support the work that can be done to displace heavier hydrocarbons, but it’s got to be within a frame that fits with respect to the commitments we and others have made,” Wilkinson said.

And specifically with respect to New Brunswick, home to undeveloped shale gas resources and a functioning LNG Regasification terminal, that could be converted to liquefaction for export (plans on hold….):

“Certainly Premier Higgs, who has gas resources in New Brunswick, if he chooses to develop them, could look to actually develop a project that could ship LNG to Europe, but obviously that would need to be done in a manner that’s consistent with New Brunswick’s climate plan,” said Wilkinson.

When asked by CTV’s Vassy Kapelos whether he is ideologically opposed to exporting LNG as a resource, Wilkinson pointed to projects moving forward in Western Canada, but reiterated the importance of projects meeting climate commitments.

Minister Wilkinson’s comments are timely. The only large-scale Canadian LNG Project (LNG Canada) is currently under construction in British Columbia, with operations scheduled to begin in 2025.

Canadian LNG: A Solution to Lower Global CO2 Emissions

Natural gas power generation has a significantly lower CO2 emissions intensity than coal-fired power. Further, Canada also has lower ambient temperatures than most other LNG producing jurisdictions resulting in much lower CO2 emissions intensity than competing LNG projects in Australia, the US Gulf Coast (USGC) and Qatar.

Incorrys analyzed LNG Canada’s 3.2 Bcf/d of gas exports, and their net impact on global GHG emissions, if used to displace coal-fired power generation in Asia (“displacing heavier hydrocarbons” as Minister Wilkinson suggests).

For the LNG Canada project alone, which is due to come online in 2025, Incorrys forecasts a minimum* net reduction in global GHG emissions of 75 mtpa of CO2e (see chart below).

  • LNG Canada upstream gas production, transportation and liquefaction raises BC/AB CO2 emissions by 13.7 mtpa (Scope 1 & 2 emissions)
  • This volume of gas used in Asia to produce power will emit 63 mtpa (Scope 3 emissions)
  • This gas-fired power displaces Asian equivalent coal-fired generation emissions of 152 mtpa (Scope 3 emissions* only)

* Scope 1 and 2 (upstream of the burner tip) emissions for coal-fired power generation are not included in this analysis. If included, the global CO2 emissions reduction would be greater than 75 mtpa.

Canada’s world class and low-cost Montney, Liard and Horn River shale plays can support several more Canadian LNG export projects which could ultimately offset most of Canada’s total CO2 emissions, and certainly all of Canada’s total emissions from the oil and gas sector.

With the obvious global GHG emissions reduction potential of Canadian LNG, why are policy makers in Canada not pushing for more?

Minister Wilkinson’s comments provide a clue. It’s all about the Paris Agreement and national and provincial emissions reduction targets flowing from Paris and other international treaties which have been legislated into national law in signatory nations, including Canada.

The Paris Agreement Framework

The Paris Agreement has a cap on a global temperature increase underpinned by country-specific emissions reduction targets. Article 6 of the Paris Agreement provides a mechanism for nations to trade emissions credits, which would seemingly be available to Canada should LNG be produced here, to displace higher emitting power in a host country.

Article 6 addresses cooperative approaches in implementing and achieving the carbon reduction goals set out in the agreement. It specifically focuses on market and non-market mechanisms that can facilitate the mitigation of greenhouse gas emissions and support sustainable development.

However, significant issues revolve around the negotiation and agreement between countries regarding the implementation of cooperative approaches, particularly in the context of internationally transferred mitigation outcomes (ITMO).

The ‘Bust’ In the Article 6 Framework

For Canada to benefit, it must negotiate bilateral or multilateral agreements on the transfer and acquisition of ITMOs. This involves determining the terms, conditions, and modalities of such transfers, including the quantity, quality, and timing of mitigation outcomes exchanged.

There is no global cooperative framework that is automatic, all emissions targets flowing from the Paris Agreement are on a national basis. Countries jealously guard their own emissions reductions.  This therefore leads to LNG producing countries’ reluctance to approve or encourage LNG liquefaction projects, as they will see an increase in local emissions (see Minister Wilkinson’s comments).

The current framework is a great deal for host nations, and a rotten one for source nations such as Canada.

An LNG exporting country should be incented to reduce global emissions and partially meet their Paris Agreement commitments by displacing coal-fired power in another country with natural gas.

However, the host country displacing GHG intensive generation (coal) with cleaner generation (natural gas) is not incented to transfer credits to the source country which necessarily emits more carbon in upstream extraction, processing, and liquefaction. Canadian LNG, an effective and essential global CO2 reduction tool is therefore stopped in its tracks.

Commercial LNG developers require flexibility in market destinations to maximise overall returns, especially considering the billions of dollars of capital expenditure that are at risk. There is a disconnect between the commercial requirements considering a range of global market destinations, and the shortcomings with Article 6 which are voluntary and do not compel bilateral country-to-country negotiation.

Moreover, the Canadian Government has not been actively encouraging or promoting Article 6 carbon credit transfer(s), which could increase investment in Canadian LNG, as a tool to lower global emissions. This is clearly a policy oversight, as Incorrys has shown that Canadian LNG is a viable tool to lower global CO2 emissions, even as Canadian emissions would increase marginally.

Are There Solutions?

The explicit goal of the Paris Agreement is to lower global greenhouse gas emissions in order to regulate global temperatures.

Incorrys’ analysis shows that Canadian LNG can have an outsized impact on global GHG emissions, therefore parties should be encouraged to increase LNG development.

Incorrys believes there are a couple of achievable solutions to overcome the policy bust without penalizing extracting and processing nations, including Canada, that currently incur an increase in local emissions, which then count against their own (national) CO2 reduction targets.

Solution 1

Article 6 must be strengthened to ensure that credits are transferred automatically from nations utilizing lower CO2 intensive forms of energy produced elsewhere to replace more CO2 intensive energy sources at the burner tip, essentially by replacing coal with natural gas in the production of electricity.

The mechanism should be explicitly laid out in Article 6 so there is no confusion, and no reliance on voluntary agreement and negotiation between the parties. Quite clearly, the voluntary transfer is not working, otherwise more Canadian LNG Projects would be proceeding to development with Provincial and Federal Government support and encouragement. Additionally, energy importing countries would have more low carbon LNG options to promote a switch from high emitting coal-fired power.

Solution 2

Incorrys believes the Canadian Federal Government should allow firms that can show verified emission offsets via trade to claim those offsets, including against the proposed CO2 emissions cap for the oil and gas industry, or a percentage of the offsets, within Canada and trade them on carbon credit markets. Although such a policy would not result in credits counting directly to Canadian Paris Agreement goals due to the clearly flawed Article 6 framework – it would contribute to the ultimate goal of global emissions reduction and allow (carbon) markets to drive the switch from high emitting coal to lower emitting natural gas.

What is the Roadblock?

Both solutions would require a willingness of the Canadian Government to lobby and push for change, internationally with respect to Solution 1, and nationally for Solution 2.

This will require political will and a recognition that Canadian natural gas and LNG have an achievable and feasible role in driving global GHG emissions reductions, using existing technologies, Canadian expertise, and underpinned by a resource endowment that is underutilized due to current international treaties and national policy frameworks, including the Paris Agreement.

Developing low-cost Canadian unconventional natural gas, primarily from the Montney, should be encouraged, as this is Canada’s unfair economic advantage over consuming jurisdictions, driving GDP growth, and national prosperity and employment, all of which are necessary to fund social programs.

The benefits are obvious, both for the Paris Agreement climate policy goals, and for Canada.