Why Canada Should Follow in Norway's 'Energy' Footsteps: REPORT

Should Canada Follow in Norway's Energy Footsteps - REPORT NBF cover

Should Canada follow Norway's model for the green transition?

Despite both countries taking significant actions towards a greener future while also being major oil and natural gas exporters, a new report by the National Bank of Canada sheds some light on their differences and the challenges we face following in the European country's footsteps.

The report concludes that, unlike Canada, Norwegians of all stripes – citizens and the political class – support using oil and natural gas to finance the shift towards more sustainable energy sources. Moreover, Norway has widely accepted this model to ensure the transition is successful and beneficial for its people.

The National Bank of Canada agrees that we should follow Norway and push to gain the political and social support needed for a similar strategy. However, it is also critical to consider Canada's unique economy while implementing a 'green' strategy, particularly regarding its other resource sectors such as mining and agriculture. Despite a relatively deep carbon footprint, these sectors are also critical to worldwide food security and any future energy transformation.

When evaluating Canada's ESG (Environmental, Social, and Governance) performance, the bank stresses that it is essential not to overlook the "G" factor. Canada has a favourable governance rating which strengthens the credibility of its ESG initiatives and indicates the country's institutional capacity for improvement in sustainable practices.

With that said, below are several highlights from the report in note form supporting the idea that Canada should follow in Norway's footsteps and position itself as a global oil and natural gas supplier of choice. Also see:

Report Summary & Highlights

ESG Governance Scores for Norway, Canada, China, USA, India, OPEC Plus 2021

Norway is a Global Leader

> In many ways, Norway has made substantial progress in moving towards a greener economy. For example, about 95% of Norway's power comes from hydroelectricity and the rest from other renewables, while the country also leads in electric vehicle (EV) sales.

> To further reduce greenhouse gas (GHG) emissions, Norway has begun replacing gas and diesel with electricity to power its industrial and oil/gas production.

> Norway has committed to reducing its GHG emissions to 55% below its 1990 level by 2030. The ultimate goal is for a 90%-95% reduction from its 1990 level.

> Norway is the world's seventh-largest natural gas producer, meeting 3% of the global demand for gas. It also supplies about 2% of the oil consumed globally, producing nearly 2 million barrels per day. Since the start of the war in Ukraine, Norway has displaced Russia as Europe's leading gas source, accounting for one-third of supply. Close to 90% of its oil and gas production is sent abroad. Oil and gas account for over half of the value of Norway's exports.

> In January 2023, the country offered a record-high 92 new oil and gas offshore exploration blocks to energy producers, a substantial increase from 28 in 2022. Norway argues this investment is needed to offset declining production from older fields.

> In 2021, the European Union criticized Norway for declining to support its push to implement a moratorium on Arctic fossil fuel extraction. Today, the EU is dependent on gas from this region.

> In 2022, Norway earned about a third of its income from oil and gas production, an increase of 150% over 2021.

> Norway's government argues that reducing its own oil and gas production would cede market share to countries with a much deeper carbon footprint. The country also points out that, unlike many other countries, it is a democracy with deep respect for human rights.

> Oil and gas revenues have also allowed Norway's sovereign wealth fund to grow to US$1.3 trillion, a staggering amount for a nation with only 5 million inhabitants. The government draws on the fund's annual earnings to finance about 20% of the state budget.

Lessons for Canada from Norway

> Canada is the world's fourth-largest producer of oil (4.6 million bbl/d), and sixth-largest producer of natural gas. Hydroelectricity, nuclear and wind account for 61%, 12% and 6% of its power, respectively. In 2021, oil and natural gas accounted for about 20% of Canada's exports.

> Canada's federal government should follow Norway's lead and make it a priority to support oil
and gas production, using the highest possible environmental standards, in order to finance the decades-long transition to green energy.

> Just as Norway is doing, this would allow Canadian oil and gas to partially replace the oil and gas produced by countries with little to no regulatory oversight on environmental standards, and/or a dismal human rights record. Norway also takes credit for reducing emissions when it sells its oil and natural gas to countries that would have otherwise used dirtier fossil fuel sources, such as coal. Canada should do the same.

> IHS Markit estimates that if just 20% of Asia's coal-fired power plants were converted to natural gas, global emissions would be reduced by more than Canada's annual emissions.

> Canada is among the world's lowest-emission producers of natural gas. Reasons for this include the geological location of its reserves, relatively modern and efficient facilities and a significant reduction in methane emissions.

> The volume of global gas flared in petroleum operations worldwide is equivalent to 75%-80% of Canada's natural gas production. Since 2015, Canadian natural gas production has risen 14% while flared volumes have fallen by 50%.

> The World Bank estimated in 2022 that gas flaring was responsible for as much as 12% of the greenhouse gas emissions released by the global energy sector.

> Given the current global geopolitical landscape, western policymakers must also analyze the risk of oil production being increasingly concentrated in OPEC+ countries. During the transition period away from oil, increasing reliance on allied countries like Norway and Canada may be beneficial.

Canada's Mining Sector Can Help Drive Transition

> One way Canada stands apart from Norway in that it possesses significantly larger reserves of minerals, including cobalt, nickel, and other valuable commodities. This leaves Canada well-positioned to play a key role in meeting the global demand for minerals essential to making the shift to green energy possible. Mining is already a crucial part of Canada's economy. It accounted for 14% of total exports in 2021.

> For Canada to take on this role, it will be necessary for mining and green-energy-related projects to come online much sooner than is currently the case.

> Throwing billions in subsidies at the industry will do little if it continues to take many years for projects to get the green light. This entails changing not only regulations, but public opinion as well.

> Changing public opinion would require the support of policymakers at the federal, provincial, and municipal levels, as well as influential figures in the business, environmental, and Indigenous communities, to publicly endorse this strategy. It would also be important to emphasize that mining in Canada is done under much stricter environmental standards than in most other regions of the world. This would translate into a net benefit for the environment.

Canadian Food and Global Food Security

> Canada's much larger agriculture sector is another differentiating factor between the two countries. In 2021, Canada was the world's fifth-largest exporter of agricultural products, while Norway did not even rank in the top 20.

> Canada's importance in this sector is highlighted by its position as the world's third-
largest exporter of fertilizer. This ranking also factors in Canada being the top exporter of potash, which is used primarily in fertilizers (approximately 95%) to increase crop yields. In 2021, Canada accounted for 38% of the world's potash exports.

> Given Russia's dominant position in this industry, Canada's role as a key global supplier of fertilizer and related inputs has become even more essential to ensuring food security.

Not Overlooking Governance in ESG

> Governance, as the World Bank defines it, encompasses the many traditions and institutions that allow a country's leaders to exercise authority. How governments are selected, how they are monitored, and how they are replaced are some key elements. Other essential factors used to assess the quality of governance include the ability of a country's leadership to formulate and implement sound policies and the respect of citizens for the country's institutions.

> In a world where political tensions require companies to establish supply chains in stable, dependable locations, the importance of good governance credentials will continue to grow. Effective governance will also have an increasingly significant role in helping investors and regulatory bodies to assess the accuracy of a country's data in various sectors ranging from carbon footprints to economic indicators. Countries with reputations for good governance, like Canada and Norway, will stand to benefit.

Canada's GHG Emissions & the World

> While Canada appears a long way from hitting its 2030 targets (we're only 8.4% lower than 2005 levels in 2021), this is in the context of global GHG emissions have surged to a record high in 2021 on the back of greater coal usage. In contrast, Canada's share of global emissions, at 1.47%, is the lowest since 1906.

> If Canada ceases oil sand production, its emissions would decrease by about 13%. But in the context of global emissions, the change would not even amount to a rounding error.

> Canada's greatest opportunity to make a substantial contribution to reducing global
emissions lie in assisting emerging countries with their transition to cleaner energy, which includes offering alternatives to coal usage.

> Canada has made significant strides in advancing its climate targets and should continue to do so. Emissions in the electricity and heating sectors have already fallen by 31% between 2015 and 2021 primarily due to a reduction in the use of coal. Alberta, in particular, has experienced a substantial decline of 45% in emissions from these sectors during the same period.


Norway energy minister says they will continue to explore for oil and natural gas to supply the world

Like Norway, Canada is ideally positioned to utilize its existing energy resources to finance the transition to lower-emission energy systems while benefitting from both an economic and environmental standpoint.

However, this will require Canadian governments to invest significant political capital to move this agenda forward. Helping developing market economies transition away from fossil fuels will be a major challenge for the world as it seeks to take climate action. Canada's low-emission LNG facilities, for example, can help significantly by displacing more GHG-intensive coal-fired power plants across Asia.

Additionally, Canada's environmental performance must be assessed in consideration of its significant mining and agricultural sectors, while play a crucial role in providing global food security while providing the world with the critical minerals and metals it needs for any energy transformation to come. Despite having a deep carbon footprint, these sectors should have their environmental impacts compared to other countries with similar industries to gain a better understanding of Canada's environmental performance relative to other energy producers.

Canada's governance rating should also not be overlooked when evaluating its ESG performance. A high "G" rating bolsters confidence in the credibility of Canada's ESG reporting, while also signalling the country's high capacity for continued improvement in sustainable practices.

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