Introduction

On 31 January and 2 February 2022, the House of Commons Standing Committee on Natural Resources (the Committee) studied the Onshore Program of the Emissions Reduction Fund (ERF), in accordance with the following motion:

That, pursuant to Standing Order 108(2), before February 15th, 2022, the committee undertake a two-meeting study concerning the development and implementation of the Emissions Reduction Fund—Onshore Program, with particular focus on the method of accounting for greenhouse gases; that the committee invite the Minister of Natural Resources, the Commissioner of the Environment and Sustainable Development, experts and stakeholders; that the committee make recommendations on the future of the program; and that the committee report its findings to the House.

During its study, the Committee heard testimony from various witnesses, including the Commissioner of the Environment and Sustainable Development and the Minister of Natural Resources. The Committee thanks all the witnesses for their contributions and is pleased to present its final report.

Methane Emissions

This study focused on a Government of Canada program, the ERF Onshore Program, that aims to reduce methane emissions in the oil and gas sector.^[1] Methane is a potent greenhouse gas (GHG).^[2] It persists in the atmosphere for less time than carbon dioxide (CO₂) but absorbs much more heat. This means that a given quantity of methane will contribute to more global warming than an equal quantity of CO₂.^[3]

The oil and gas sector is the single-largest source of methane emissions in Canada.^[4] Oil and gas operations emit methane in several ways:^[5]

• Through unintentional leaks. These leaks, sometimes called “fugitive emissions,”^[6] occur at different stages of oil and gas operations. Wellheads, equipment, pipelines and storage facilities can all produce these emissions.
• Through “venting.” Venting is the controlled release of unburned gas directly into the atmosphere. Operators vent gases at various stages, including when completing oil or gas wells and during well, equipment, or pipeline maintenance.
• Through burning, or “flaring,” of excess natural gas. Flaring turns most of the natural gas into other GHGs but still emits small amounts of methane.
• Through other kinds of fuel use, typically where natural gas is used to generate heat or electricity.

Methane emissions in Canada’s oil and gas sector fell by 4% between 1990 and 2020. However, data from 2020 do not necessarily represent the overall trend in oil and gas sector emissions. For instance, methane emissions rose by 42% between 1990 and 2019, before dropping in 2020. Canada’s oil and gas production also increased from 1990 to 2019 before falling in 2020, as described later in this report. As Environment and Climate Change Canada (ECCC) notes, 2020 coincided with the first year of the COVID-19 pandemic, “which strongly affected a wide range of economic sectors, including the energy and transport sectors.”

Methane emissions represent a declining, but significant, share of the sector’s total GHG emissions. As of 2020, methane accounted for approximately 20% of the sector’s emissions, down from 35% in 1990.^[7] Venting and leaks accounted for most of these methane emissions.

Figure 1 shows methane and GHG emissions in the oil and gas sector over time. Figure 2 shows a breakdown of the sector’s methane emissions in 2020. Note that these figures include the whole oil and gas sector, while the ERF Onshore Program only applies to the production and processing of conventional oil and gas. The program does not apply to “unconventional” operations like the oil sands.

Figure 1—Greenhouse Gas Emissions in Canada’s Oil and Gas Sector, 1990–2020 (Mt CO₂e)

Note:      “Mt CO₂e” stands for megatonnes of carbon dioxide equivalent. CO₂e is a measure that expresses the warming potential of different greenhouse gases in terms of carbon dioxide.

Source: Figure prepared by the Committee using data obtained from Environment and Climate Change Canada.

Figure 2—Methane Emissions in Canada’s Oil and Gas Sector, 2020

Note:      “Other” includes the following activities: arctic and offshore oil production, petroleum refining, and oil transmission.

Source: Figure prepared by the Committee using data obtained from Environment and Climate Change Canada.

During the period from 1990 to 2020, crude oil production rose by roughly 169% while natural gas production increased by approximately 58%. Figure 3 shows these increases. The figure also shows that oil and gas production declined between 2019 and 2020, mainly because of the effects of the COVID-19 pandemic.

Figure 3—Oil and Gas Production in Canada, 1990 to 2020

Source: Figure prepared by the Committee using data obtained from Environment and Climate Change Canada; Statistics Canada, Supply and disposition of crude oil and equivalent, Table 25‑10‑0063‑01, Database, consulted 25 May 2022; and Statistics Canada, Crude oil and equivalent, monthly supply and disposition (x 1,000), Table 25-10-0014-01, Database, consulted 25 May 2022.

At the same time, per barrel methane emissions in the sector have been evolving. Figure 4 shows this evolution. It indicates the methane emissions produced per barrel – or equivalent – of oil and gas, along with the overall emissions intensity of each product.

Figure 4—Emissions Intensity of Selected Oil and Gas Products in Canada, 1990 to 2020 (kg CO₂e/barrel of oil equivalent)

Notes:    The emissions intensity for light oil includes arctic and offshore oil.

The overall intensity of Canadian oil production has increased slightly mainly because of rising production in the oil sands.

Source: Figure prepared by the Committee using data obtained from Environment and Climate Change Canada.

The Federal Methane Regulations

The federal government’s principal tool for reducing methane emissions from the oil and gas sector consists of the Regulations Respecting Reduction in the Release of Methane and Certain Volatile Organic Compounds (Upstream Oil and Gas Sector) (the federal methane regulations). The regulations, which are overseen by ECCC, set operating and maintenance standards for upstream oil and gas facilities. They are mainly intended to reduce emissions from venting and leaks.

The first version of the federal methane regulations came into force on 1 January 2020; they are intended to fulfil Canada’s commitment to reduce methane emissions by 40–45% below 2012 levels by 2025. Stricter federal methane regulations will come into force on 1 January 2023. These updated regulations are intended to achieve a more ambitious target of reducing methane emissions by at least 75% below 2012 levels by 2030.^[8]

In 2020, the provincial governments of Alberta, British Columbia and Saskatchewan signed equivalency agreements with the federal government to replace the current version of the federal methane regulations with their own regulations to achieve equivalent reductions. These agreements allow the provincial regulations to replace the federal regulations for up to five years.^[9]

The Emissions Reduction Fund Onshore Program

The Program

The federal government launched the $750 million ERF in October 2020 as part of Canada’s COVID-19 Economic Response Plan. As the Hon. Jonathan Wilkinson, Minister of Natural Resources, explained:

In 2020, due to COVID, the oil and gas sector faced record-low prices that created significant financial strain and threatened tens of thousands of jobs. The Emissions Reduction Fund was designed as a targeted COVID emergency support program that had two key objectives: to maintain jobs for oil and gas workers in Canada at a time of record-low oil prices and to ensure that work continued on reducing methane emissions at a time when emissions reduction would not be high on the agenda of firms whose finances were being stretched.

Oil prices have changed over the course of the program, as shown in Figure 5.

Figure 5—Program Timeline and Benchmark Oil Prices, January 2020 to February 2022 (US$/barrel)

Note:      West Texas Intermediate is the main benchmark for crude oil in North America. Western Canadian Select is the main benchmark for Western Canadian crude oil.

Source: Figure prepared by the Committee using data obtained from Government of Alberta, Oil Prices.

Managed by Natural Resources Canada (NRCan), the program is divided into two streams: an onshore program and an offshore program. As originally conceived, the ERF Onshore Program provides up to $675 million in repayable or partly repayable interest-free loans to help land-based oil and gas companies^[10] with projects that reduce or eliminate the intentional venting of methane.

Design

The ERF Onshore Program had three intake periods for oil and gas companies to submit project proposals for funding. The first two intake periods had concluded at the time of the study. NRCan made several changes to the program for the third intake period, which was open from 19 January 2022 to 31 March 2022.

For the first two intake periods, the program funded projects that would eliminate or reduce routine venting. The projects designed to reduce routine venting could:^[11]

• incinerate or flare natural gas that was previously intentionally vented; or
• lower the volume of natural gas intentionally vented from pneumatic devices.

For the third intake period, the program funded only projects that would fully eliminate GHG emissions from specific sources such as wellheads, storage tanks and pneumatic devices. For example, projects could:^[12]

• conserve natural gas that had been vented and instead use the gas for fuel on site, or gather and process for use off site;
• develop new, or upgrade existing infrastructure that gathers and/or processes natural gas to conserve it for use off site; and/or
• install new infrastructure to eliminate the use and venting of compressed natural gas from pneumatic devices.

Outcomes

According to the most recent data from NRCan, during the first two intake periods, 28 companies representing 93 projects in Alberta, British Columbia, Manitoba and Saskatchewan received $143 million from the ERF Onshore Program. The department stated that these projects cut 4.7 megatonnes (Mt) of carbon dioxide equivalent (CO₂e) in the first year of the program. The Minister of Natural Resources said this reduction was “like taking a million cars off the road.”

Of these emissions reductions, the department reported that 98% came from projects that fully eliminate—rather than reduce—methane emissions from targeted sources. However, as described in the sections below, some witnesses, including the Commissioner of the Environment and Sustainable Development, questioned these figures.

Case Study: A Project Funded by the Emissions Reduction Fund Onshore Program

Source:  Table created by the Committee using testimony from House of Commons Standing Committee on Natural Resources, Evidence, 2 February 2022, 1645 (Patrick Kitchin, Director of Regulatory and Environmental Sustainability, Whitecap Resources Inc.).

Report of the Commissioner of the Environment and Sustainable Development

The Commissioner of the Environment and Sustainable Development (CESD or the Commissioner) audited the first intake of the ERF Onshore Program and published his findings in Report 4—Emissions Reduction Fund—Natural Resources Canada. In his testimony before the Committee, Jerry V. DeMarco, the CESD, noted that the audit focused on “whether Natural Resources Canada designed and implemented the onshore program to achieve value for money and to ensure that the anticipated reductions of greenhouse gas emissions after 2023 would be credible and sustainable.” Overall, the CESD said, the audit found that the department did not design the program to achieve these ends.

The CESD outlined some key findings behind the report’s conclusions, as described in the sections below. He noted that of the six recommendations made in his report, the department had agreed with four and partially agreed with two.

Mandate of the Commissioner of the Environment and Sustainable Development and Information about Performance Audits

Source:  Office of the Auditor General of Canada (OAG), “The Commissioner of the Environment and Sustainable Development,” Who We Are; and OAG, “1. Introducing Performance Audits,” What to Expect—An Auditee’s Guide to the Performance Audit Process.

Greenhouse Gas Accounting Principles

In his report, the Commissioner outlined certain concepts and accounting principles that, in his view, NRCan failed to apply when designing the ERF Onshore Program and that led the department to overestimate what the program could achieve. The Commissioner’s testimony to the Committee focused on three of these principles: additionality, completeness and using baseline scenarios to calculate emissions reductions.

Additionality means measuring only the effects that can be directly attributed to an intervention and excluding effects that are caused by other factors. The Commissioner argued that NRCan had credited the ERF Onshore Program for some emissions reductions that would have taken place even without the program. Specifically, he estimated that more than half the emissions reductions attributed to the ERF Onshore Program were already accounted for under the federal methane regulations. In short, the Commissioner said, “[i]f one funds the same activities that were going to happen anyway with the methane regulations, one cannot say that those emissions reductions were attributable to the program.”

The Commissioner also asserted that NRCan failed to apply the principle of completeness when measuring emissions. Completeness refers to measuring all GHG sources and sinks associated with an initiative. In the Commissioner’s words, applying this principle would mean looking at “the full picture, rather than…the equipment being installed at a given site. We wanted to see what the full effect of the fund was on, for example, continued production.”

Indeed, the CESD found that several projects supported by the ERF Onshore Program may have contributed to increased oil and gas production. Of the 40 projects that were funded in the program’s first intake, 27 came from companies that indicated they intended to increase production if they received funding. The Commissioner told the Committee that emissions from these production increases might have offset the reductions achieved by the program, and that NRCan should have accounted for these emissions.

The Minister of Natural Resources disagreed with this finding, saying that the department defined the boundary conditions of the program more narrowly than the Commissioner. He reasoned that if “for example, there was another project miles away that was started during the course of the program, it was not counted” because the department “[was] focused on reducing emissions at the source.” In the Minister’s view, the divergence between the department’s approach and the CESD’s reflects “a legitimate difference of opinion.”

Furthermore, the Commissioner expressed concern that the department had not developed a baseline scenario to calculate emissions reductions that were specifically attributable to the ERF Onshore Program. He added that the department had responded to the audit’s recommendations in a way that suggested that the department “did not seem to even understand the idea of baselining emissions reductions.”

To address these accounting issues, Sylvie Marchand, a Director at the Office of the Auditor General, recommended that the department measure GHGs using the international standard known as ISO 14064, or standards based on it, to “to ensure the consistency, reproducibility and additionality of estimated emissions reductions.” However, the Minister of Natural Resources explained that the department had in fact used a related standard, the World Resources Institute’s Greenhouse Gas Protocol, when developing the program.

Job Retention

As the Minister told the Committee, one of the key purposes of the ERF Onshore Program was to maintain jobs in the oil and gas sector at a time of record low oil prices. However, the Commissioner pointed out that the program did not list job retention as a condition for receiving funds, and that the department did not assess whether projects would maintain jobs. In his view, the lack of these criteria made it harder to assess the performance of the program.

Responding to these critiques, the Minister of Natural Resources emphasized that the program was “brought into place very rapidly in order to respond to what was an economic crisis in the sector.” He said that there was “no reasonable or credible way” to collect information about job retention “up front” but asserted that there was anecdotal evidence from various communities that the program had retained jobs. The Minister added that the department will require companies to report about job retention later and that those figures would be published when they are available.

Value for Money

The Commissioner found that the ERF Onshore Program was not designed to deliver value for money, that is, to use public funds in an optimal way. In his view, NRCan could not fully assess the program’s value for money because the department had not set targets for the cost of emission reductions or for job retention, and had no way of measuring whether these targets were being met. To ensure that emissions reduction projects are more cost effective, the CESD report recommended setting thresholds to assess whether projects delivered value for money.^[13]

Furthermore, the Commissioner noted that the ERF Onshore Program had been developed at a time of historically low commodity prices, but that these prices had “rebounded sharply since the onset of this program.” Given that NRCan had developed the program based on the existence of financial need in the sector, the Commissioner said there were now “questions” about whether the program was still relevant.

One witness echoed these questions. Pierre-Olivier Pineau, Professor at HEC Montreal, pointed out that global oil prices had now reached heights “not seen since 2015,” and that oil production in Alberta was at an all-time high. “Clearly,” he said, “the oil industry is no longer struggling” and “we should stop helping people who don’t need assistance.”

In contrast, Patrick Kitchin, speaking on behalf of Whitecap Resources Inc., claimed that the program remains relevant. He acknowledged that the oil and gas sector benefitted from a recovering economy and stronger commodity prices but emphasized that the ERF Onshore Program “can still provide a substantial benefit to Canadians by enabling even deeper emission reductions [than] would have been achieved otherwise.”

The Future of the Program

Changes to the Third Intake of the Program

On 19 January 2021, the government released its refocused third application intake of the ERF Onshore Program. The Minister of Natural Resources outlined the changes to the program, noting that the department had considered the CESD’s feedback. These changes included:

• requiring proposed projects to surpass the current methane regulations by fully eliminating the intentional venting or flaring of methane;^[14]
• establishing a maximum cost per tonne for emissions reductions of $250/tCO2e;^[15]
• requiring applicants to demonstrate that the project could not be implemented without the program’s funding;^[16] and
• requiring greater transparency on the amount of GHG emissions that were counted within the projects by having an ISO-certified contractor review and verify the program’s methodology.^[17]

The Committee heard diverging testimony about these changes. Some witnesses welcomed the modifications to the program. The International Institute for Sustainable Development (IISD) said it was “happy” with several of the improvements to the program, including the requirements that projects must eliminate sources of venting and flaring, exceed regulatory requirements and demonstrate financial need. The Pembina Institute told the committee that because of the changes to the third intake, it would be appropriate for the ERF Onshore Program to continue “for the next year." After that time, the Institute said, the federal government should focus on strengthening its regulations.

However, some witnesses opposed the program, even in its modified form. Pierre-Olivier Pineau and Environmental Defence Canada agreed that the third intake for the ERF Onshore Program should be deferred. On this point, the David Suzuki Foundation acknowledged that deferring the program would be “complicated,” and instead emphasized the importance of strong regulations to reduce methane emissions.

Witnesses also offered different interpretations of how the revisions to the third intake would affect the uptake of the program. The IISD predicted that the more stringent requirements for the third intake period would lead to fewer applicants, and therefore reduce fewer emissions. In contrast, Whitecap Resources expected more companies to apply for funding because the third intake had a longer application period than the first two intakes. The company noted that it intends to apply to the third intake of the ERF Onshore Program to fund gas conservation projects.

While witnesses had different perspectives on the changes to the third intake period, one witness agreed with the Commissioner’s view that the government should improve how it reports emissions reductions from the ERF Onshore Program. Jan Gorski, Director of Oil and Gas at the Pembina Institute, stressed the importance of demonstrating what portion of emission reductions go “above and beyond” the regulatory requirements. “What we need,” he continued, “is for the government to show how much of that was incremental to what the regulations would have achieved anyway.” Mr. Gorski noted that the data from the third intake will show how applicants have exceeded regulatory requirements, but he called for the government to release more detailed information about the results of the program.

Recommendation 1

That the Government of Canada publish additional data about the Emissions Reduction Fund Onshore Program, including:

• identifying what portion of emissions reductions achieved in the first two intakes of the program exceeded what would otherwise been required by regulations; and
• releasing more detailed information about the projects, costs and emissions reductions achieved by the program.

Future Initiatives to Reduce Methane Emissions

The ERF Onshore Program is only one of various measures intended to help Canada reach its methane emissions reduction targets. While evaluating this program, witnesses also commented on the role of other federal initiatives, particularly subsidies, regulations and data collection, in helping to reduce methane emissions from the oil and gas sector.

Subsidies

Given that Canada has committed to phase out “inefficient fossil fuel subsidies”^[18] by 2023, some of the discussion around the ERF Onshore Program focused on the role of subsidies. For his part, the Commissioner characterized the ERF Onshore Program as a subsidy, but emphasized that it was not his role to recommend what policies the government should adopt. The Commissioner’s report suggested that government programs might be considered “inefficient fossil fuel subsidies” if they are not effective at reducing emissions and do not represent value for money.^[19]

Patrick Kitchin’s testimony pointed to some of the potential benefits of financial support for the sector. Noting that the ERF was launched when the oil and gas sector was under “severe financial duress” and “struggling” due to low commodity prices, he explained that the program supported the sector at a time when many companies were cutting their capital development programs. In his view, the ERF Onshore Program enabled emissions reductions that would not otherwise have taken place and directly supported “service companies, contractors, communities and landowners” that would otherwise have been affected by the decline in spending in the sector.

As noted above, two witnesses disagreed with this point of view, arguing that the third intake of the ERF Onshore Program should be deferred. These witnesses claimed that the program represented an “inefficient fossil fuel subsidy,” with Environmental Defence describing the program as “just one of several new funding programs set up to provide fossil fuel subsidies under the guise of emissions reductions and job creation.”^[20]

In contrast, the IISD expressed general concerns about subsidies for the oil and gas sector but asserted that there was “a role” for programs like the ERF Onshore Program. Speaking on behalf of the organization, Senior Associate Aaron Cosbey said that subsidies for oil and gas can increase the viability of industries whose products exacerbate climate change, may blunt progress toward energy transition, and may violate the “polluter pays” principle. To reduce these risks, the IISD outlined principles for administering subsidies, including: not providing support that lowers the cost of production for oil and gas; supporting only applicants with credible net-zero plans; and not providing support for complying with existing or pending regulations.

Recommendation 2

That, as the Government of Canada works to identify and eliminate “inefficient fossil fuel subsidies” by 2023, it should phase out programs for the oil and gas sector that subsidize compliance with existing or pending regulations.

Regulations

Many witnesses commented on the central role of the methane regulations in reducing methane emissions in the oil and gas sector. In Patrick Kitchin’s words, regulations are “the minimum expectation of industry. It’s to set the bar of where every producer needs to get to if they aren’t there already.”

Some witnesses expressed concern that the current federal methane regulations are not sufficiently stringent to meet the country’s climate goals. The David Suzuki Foundation projected that Canada’s existing measures would only reduce methane emissions by 29% by 2025 compared to 2012 levels, short of the country’s goal to reduce these emissions by 40% to 45%.^[21] The Pembina Institute concurred that the regulations appeared to be “falling short” of achieving the 2025 target, and that “we are still in the dark” about the country’s overall progress toward its goals.

Accordingly, some witnesses contended that the federal government should strengthen its methane regulations.^[22] Tom L. Green, Senior Climate Policy Advisory at the David Suzuki Foundation, noted that the current regulations do not require the elimination of all continuous sources of intentional routine venting. He said the Foundation “would really like to see” the regulations changed but acknowledged that this process would “take time.” In the interim, he said, the third intake of the ERF Onshore Program could help to reduce emissions beyond current regulatory requirements. The Pembina Institute agreed that the program could provide an incentive that exceeds the current regulations, but that “beyond [the program], “we really need to lean on strong regulations to send a signal for companies to start addressing methane.”

Similarly, the IISD characterized programs like the ERF as a “second-best solution” compared to “strong, effective regulations that reduce methane emissions in the oil and gas sectors.” The organization echoed the call for stronger regulations, mentioning that pneumatic gas-activated controllers, which are the main source of intentional emissions, have inexpensive technological substitutes and “should be regulated out of existence.”

Data on Methane Emissions

The Government of Canada has acknowledged that it has underreported methane emissions from the oil and gas sector. It committed to release revised methane emissions data in its 2022 National Inventory Report to the United Nations Framework Convention on Climate Change, which was published in April 2022.^[23]

Witnesses outlined steps that the Government of Canada could take to improve its monitoring of methane emissions. As Aaron Cosbey—speaking for the IISD—put it, “we don’t know the scale of the [methane emissions] problem, so how can we address it?” The IISD recommended mandating more frequent surveys to find and fix leaks and metering all sources of known intentional emissions. Brent Lakeman, the Director of the Hydrogen Initiative at Edmonton Global, commented that there are many technologies to monitor fugitive emissions, including satellites and ground-based measuring tools. He suggested that governments should closely examine emerging technologies to identify lower-cost options that monitor large areas for fugitive emissions.

Recommendation 3

That the Government of Canada work with provinces and territories, and industry to improve the monitoring of emissions in the oil and gas sector, including by:

• expanding requirements that apply to the metering of intentional emissions; and
• mandating additional efforts to survey and fix unintentional emissions.

Conclusion

Methane emissions pose a grave risk to the global climate. This potent greenhouse gas can be produced in many ways, and in Canada the largest single source of methane emissions is the oil and gas sector. Fortunately, there are steps that the sector can take to reduce or eliminate methane emissions from oil and gas production. The ERF Onshore Program, first announced early in the COVID-19 pandemic, aimed to help oil and gas companies take these steps. Witnesses who appeared for this study held differing views on the program, but ultimately agreed that Canada should be working to reduce methane emissions as much as possible, as quickly as possible.

To that end, the committee has recommended that the Government of Canada publish more data about the ERF Onshore Program, phase out programs for the oil and gas sector that subsidize compliance with existing or pending regulations, and work to strengthen the monitoring of emissions in the sector. By improving the transparency and effectiveness of federal policies, Canada will be better positioned to cut its emissions of this harmful greenhouse gas.