By Robert Tuttle | Bloomberg

Canada’s oil sands companies will need a massive amount of capital spending over several years to simultaneously meet domestic emissions targets while continuing to supply oil to a world looking for alternatives to Russian crude, according to Royal Bank of Canada economists.

Oil sands producers will have to invest between C$45 billion ($35.1 billion) and C$65 billion between 2024 and 2030 to deploy a sufficient amount of carbon capture technology to meet climate goals, RBC economists Colin Guldimann and Yadullah Hussain wrote in a report on Tuesday. That technology is necessary to reduce emissions by the 22-million-ton target established by the Oil Sands Pathways Initiative, an alliance of the largest oil sands producers that seeks to zero out emissions from operations by 2050, the bank said.

This big increases would amount to a reversal in recent capital expenditure, which fell to C$21 billion in 2020 from C$78 billion six years earlier. As much as half of the surge in spending could be funded by Canadian taxpayers after the government rolled out carbon capture tax credits earlier this month that will cover about 50% of the costs. 

The planned investments come as Russia’s invasion of Ukraine prompts countries to look for alternatives to Russian oil. Canada, the world’s fourth-largest producer, could boost domestic production by 500,000 barrels a day over the next year, RBC said, which would increase greenhouse gas emissions by 9 million tons annually unless Canadian crude displaced oil from other producers. 

Both decarbonization and boosting Canada’s oil production are goals that are “within reach,” the RBC analysts said in the report. “But it’s turning out to be a highly disruptive economic and political event.”

Canada’s oil patch will face the challenge of decarbonizing while ensuring the oil sands are still economic to extract. Reaching net zero in the oil sands will add between $6 and $23 dollars to production costs, requiring U.S. benchmark oil to average $50 a barrel. 

While crude prices have surged to above $100 a barrel this year, a downturn will make investors reluctant to fund large-scale carbon removal projects. As such, the report recommends governments use windfall revenues during high price periods to sustain investment and suggests companies must also commit to fund decarbonization when oil is cheap.