The November 2022 COP27 climate summit seems old news as we enter the end of January 2023. This is primarily because this year’s climate summit, which was hosted by Egypt, did not produce any breakthrough. As previously anticipated the Climate Summit was more about procedural agreements than strategic decisions. However, the Climate summit was a success for Canada as the country brought to Egypt numerous members of both the Canadian public and private sectors with more robust decarbonization commitments. Among the private corporate leaders coming to Egypt we count several representatives from the Royal Bank of Canada, pipeline giant Enbridge Inc., oil majors Cenovus Energy Inc. and Imperial Oil Ltd. Other attendees included representatives from Suncor Energy Inc.
Among these Canadian private sector participants, Pathways Alliance, one of Canada’s largest oil sands producers showcased the sector’s plan to slash emissions through a $16.5-billion carbon-capture and storage network in northern Alberta. Other Canadian oil and gas producers rushed to Egypt to align their narrative and adjust their operations plans to the stricter decarbonization metrics, and the changing business landscape based on sustainability. While these commitments are promising and starting to show up in Canadian energy companies annual reports and websites, it is less clear how these decarbonization commitments will convert to new investments. On the public sector side, national and regional governments will have to deal with decarbonization choices without creating too much pain for the hydrocarbon industry, which contributed over $50 billion in taxes and royalties in 2022.
Part of the answer, say the Pathways Alliance and other heavy-emitting sectors of Canada’s economy, is making large investments in carbon-capture and storage projects and other clean technologies. This will happen with direct or indirect support from governments in the form of loans, tax credits and grants. These subsidies and tax credits are essential government interventions given the significant delay of Canada regulating the energy its markets. While these subsidies may be tough to swallow for the average Canadian, they may be needed to ensure Canada meets its decarbonization targets by 2030, innovate, and create new jobs without causing serious economic contractions.
The clean energy frontier
Natural Resources Minister Jonathan Wilkinson announced in November 2022 that the federal government will allocate $800 million to 60 “cutting edge” Canadian companies in the clean fuels space, which notably includes hydrogen, a key component of Canada national climate strategy, but also biodiesel, renewable natural gas, ethanol, and renewable aviation fuel. It represents the first tranche of funding allocated from the federal government’s $1.5 billion clean fuels fund, and Wilkinson said a second tranche of funding would be available in early 2023.
With that in mind, the recent Natural Resource Canada’s announcements in late November 2022, as well as the U.S. Inflation Reduction Act US$ 394 billion package, providing production tax credits of up to US$3 per kilogram, momentum will be shifting towards hydrogen. One way to look at these changes is that heavy duty trucks and buses, trains and marine vessels switch from polluting diesel to hydrogen. Canada can leverage its hydrocarbon sector and infrastructure to turbo-charge its hydrogen investment and could export hydrogen as a fuel as transition away from fossil fuels progresses. Germany, Holland, and the UK have already confirmed their interest to buy hydrogen from Canada. More specifically, Canada has signed the Hydrogen Alliance with Germany creating a “transatlantic Canada-Germany supply corridor” that could be operational for hydrogen export by 2025. This target could be reached sooner with the export of hydrogen from Western Canada. While a few regulatory barriers still need to be addressed, if hydrogen is converted into anhydrous ammonia, which liquefies at much lower pressures for shipping, the project will have negligible financial and market risk. This will imply that Canada will be selling Blue Hydrogen (produced from natural gas with complete removal of emission from methane), instead of the zero emission and more costly Green Hydrogen (produced from renewable energy). Blue Ammonia can be used directly as a fuel for ships or in power plants or it can be reconverted into hydrogen.
Going forward: The potential market for blue and green hydrogen is huge and the risks are relatively low. Additionally, given the energy market challenges and instability caused by the Russian invasion of Ukraine, more reliable suppliers like Canada could increase their market shares. Russia’s invasion of Ukraine has transformed the EU market forever, and the EU will never return to the pre-war over dependence on Russia oil and gas. Canada could fill the energy gap in Europe, while positioning itself as the clean energy supplier of choice. First by supplying blue hydrogen to Germany and the Netherlands, and progressively scaling up its green hydrogen infrastructure for cleaner energy offering. While Hydrogen will help Canada and other Europeans meet their 2050 decarbonization targets, it will create jobs in Canada and accelerate innovation across the nation’s energy industry. Time for Canada to act boldly and exploit the market instability and the sustainability regulatory changes.