Energy Innovation: Oilsands Becoming Leaner and Greener

The author of a recent New York Times article is reveling in his scathing indictment of the Canadian oil sands – describing them as “the world’s […] dirtiest oil reserves,” and it isn’t hard to see why. As one of the largest oil reserves in the world, Canada’s oil sands have an image problem. Open pit mining, tailings ponds, and trucks the size of houses are not very appealing to look at, which makes the oil sands an easy target for the current wave of energy activism. Growing concerns relating to climate change, biodiversity, and marine health have spurred a ferocious appetite for more robust and stringent environment, social, & governance (ESG) standards – and rightly so. Climate change is a paramount concern that needs to be addressed with innovation and collaboration. These evolving standards are providing Canadian producers with the opportunity to adapt to a new world order and be leaders in an industry often criticized for being resistant to change.

Some of Canada’s largest energy producers have responded with extraordinary achievements in greenhouse gas (GHG) reductions. Canadian Natural Resources Limited (CNRL) has invested more than C$3.4 billion since 2009 in research and development to reduce its carbon footprint. Canadian Natural is a leader in carbon capture and sequestration (CCS), removing approximately 2.7 million metric tonnes per year through its Quest, Horizon, and NWR facilities. CNRL is continually making improvements to lower its carbon intensity, and has successfully reduced GHG emissions from its Horizon Oil Sands mine by 27 percent between 2012 – 2018. Furthermore, CNRL has committed to reduce its oil sands GHG emissions intensity by an additional 25 percent through 2025. To achieve these ambitious targets, CNRL is trialing new cutting-edge technologies such as molten carbonate fuel cells (MCFC), solvent enhanced oil recovery, and In-Pit Extraction Processes (IPEP) for tailings ponds.

In response to growing climate change concerns, Canadian producers have stepped up in a big way. The carbon intensity of upstream resource extraction in the oil sands is at an all-time low. GHG emissions for barrels sourced from the Canadian oil sands are increasingly comparable with major energy producers across the globe (See Figure 1.1). The magnitude of this accomplishment is even more impressive when viewed with the lens of a total energy mix. Many of the world’s largest energy companies produce large amounts of natural gas, and light oil which typically have lower emissions than heavy crude. However, despite the recent successes of Canadian producers, challenges remain. As the molecule moves down the supply chain from transportation to refining these processes can contribute significantly to a barrel’s total lifecycle GHG emissions. Unfortunately, this can largely be out of a producer’s control, and for many producers without integrated downstream facilities, the primary focus must be on reducing emissions during extraction.

Figure 1.1 – Source: Peters & Co (2019), Global Integrated E&P Carbon Emissions.

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The industry is rife with innovative collaboration and partnerships. Virtually all oil sands producers (90 percent) are contributing members to the Canadian Oil Sands Innovation Alliance (COSIA). COSIA functions as a research collective that brings companies together to share game changing technologies, intellectual property, and expertise. COSIA was formed to elevate the status quo and challenge its members to pursue operational excellence in the areas of GHG reduction, land reclamation, tailings ponds, and water management. Industry collectives are the new normal in Canadian energy and have extended beyond hydrocarbons to help facilitate the global energy transition. Nearly all of Canada’s top energy producers are among the 456 active members in the Clean Resource Innovation Network (CRIN) – which aims to share resource and expertise to accelerate and commercialize revolutionary energy technologies.

Canadian energy companies are the most active clean tech investors in Canada. According to Natural Resources Canada, the industry accounts for two thirds of the C$2.4 billion spent annually to fund cleantech research and development. New partnerships between energy companies and clean tech investment funds are helping to fuel the growth of energy innovation in Canada. Suncor and Cenovus have partnered with the BC Cleantech CEO Alliance and committed C$100 million to form Evok Innovations – a clean tech fund created to develop technologies aimed at addressing the world’s most pressing environmental and economic challenges. Canadian energy producers have been carefully listening to the concerns of stakeholders calling for greater environmental stewardship. Through innovative partnerships, cutting edge technologies, and capital investment, the industry is setting the template for responsible resource development.    

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Author

Michael Hebert, Viewpoint Research Team

What on Earth is Happening? Energy Emissions are Falling in Advanced Economies

In 2019 something incredible happened – the International Energy Administration (IEA) reported that energy related CO2 emissions in advanced economies fell to 11.3 gigatonnes (See Figure 1.1). This is significant for a variety of reasons, but most notably because the countries with the capabilities to act on emissions reductions are doing so, and with encouraging results. Energy related CO2 emissions in advanced economies haven’t been this low since 1990. The gradual decline of CO2 emissions has largely been underpinned by efficiencies and fuel substitutions in the power sector, which contributed to 85% of the reduction in emissions in advanced economies from 2018 to 2019. While renewables continue to play an ever-expanding role in the global power mix, the most significant reductions in carbon emissions were achieved through the substitution of coal-fired power stations for natural gas and nuclear power options.Several countries including the United Kingdom – the birthplace of the industrial revolution – are set to completely phase out coal-fired power stations in favor of more environmentally-friendly options by mid 2020.

Figure 1.1 – Energy Related CO2 Emissions, 1990 – 2019(1)(2)

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Source: IEA Global CO2 Emissions in 2019, IEA CO2 Emissions from Fuel Combustion by Country.

1. Advanced economies: Australia, Chile, European Union, Iceland, Israel, Japan, Korea, Mexico, Norway, New Zealand, Switzerland, Turkey, and United States.

2. Canadian emission data 1990 – 2017

While emissions reductions in advanced economies are encouraging, it is hard to ignore the proverbial elephant in the room – the fact that global emissions have steadily crept up over the same period, largely due to rapid industrialization in developing economies. In 2015, Bill Gates aptly stated that we need an energy miracle in order to see global emissions fall; “[Most problems can be solved locally – but this one is a world problem. … [I]t doesn’t really matter whether it’s a coal plant in China or a coal plant in the U.S. – the heating effect for the entire globe is the same.”

Many advanced economies enjoy the luxury of choice while grappling with the pragmatism of climate change. It is undeniable that cheap and abundant energy played a major part in industrializing economies at the turn of the 19th century, and many developing countries desire the same access to low-cost energy that allowed advanced economies to flourish.

Natural gas can offer a viable bridge between heavy-emitting carbon pollution, and sustainable renewable resources. However, natural gas is often priced out of consideration for many developing countries without the domestic infrastructure necessary for extraction and transportation. Therefore, advanced, energy producing economies like Canada, have an opportunity to continue to provide clean and affordable sources of energy to developing economies so these countries can continue to advance, and we can all benefit from a more sustainable future.

Canada’s Contribution to Global Emissions

While emissions in advanced economies have fallen to a level not seen since the launch of the Hubble Space Telescope (1990), Canada has struggled to reduce emissions at the same pace. Canada agreed to cut its GHG emissions by 30 per cent under the Paris Agreement (from a 2005 baseline) but the Country faces a tough set of obstacles to achieve this end. While many advanced economies are reducing emissions by transitioning away from coal, Canada’s electricity mix was largely already free of heavy GHG emitting sources.  Approximately 82% of Canada’s electricity is supplied by non-GHG emitting sources such as hydroelectric and nuclear power, which leaves little room for reductions compared to the peer group of advanced economies. As Jackie Forrest notes, “If the U.S. could transform their power system to match Canada’s current electricity mix, this alone would achieve most of their Paris target.”  

Figure 1.2 – Change in Emissions from Fuel Combustion, Canada, 1990 – 2017.

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Source: IEA CO2 Emissions from Fuel Combustion by Country.

Despite Canada’s high baseline for non-GHG emitting power generation, the Country has made significant improvements elsewhere to reduce CO2 emissions from fuel combustion since 1990, particularly in the residential housing sector (-7.3%), and in industrial applications (-11.8%) (See Figure 1.2). Canada experienced an immigration boom between 1990 and 2018, which resulted in a net population increase of more than 33%. The increase in Canada’s population coincided with the rapid development of carbon intensive industries, which contributed to large gains in emissions from transportation (37.6%), commercial buildings (21.9%), agriculture (157.1%), and the energy industry (192.7%). Canada is a major exporter of both energy and agricultural products, which disproportionately elevates Canada’s overall carbon footprint. Between 1990 and 2017, Canada’s overall net carbon footprint increased by 31.0% (130 Mt CO2). It is important to recognize that without Canadian supply, countries with less stringent environmental standards would be required to produce these goods, and the impressive reduction in advanced economy emissions (Figure 1.1) would likely be diminished.

To augment the Country’s role as a resource supplier, Canada is implementing trailblazing technologies and processes to reduce its GHG emissions. The C$1.2 billion Alberta Carbon Trunk Line (ACTL) opened on June 3rd, 2020, and is the world’s newest integrated, large-scale carbon capture, utilization, and storage system. The ACTL will transport captured CO2 from the Agrium fertilizer plant and the NWR Sturgeon Refinery to be injected underground as part of an enhanced oil recovery process. The ACTL is capable of sequestering 14.6 Mt CO2 per year at full capacity, which represents a 20% reduction in all oil sands emissions, or the rough equivalent of taking 2.6 million cars off the road.

Canada set the standard for low-carbon electricity generation 20 years ago with a steadfast commitment to non-GHG emitting sources. This model is now being adopted across the globe, and Canada is again at the forefront of new carbon reduction technologies. With the appropriate support, investment climate, and global exposure, Canada’s practical applications of carbon technologies will hopefully again, provide a model for developing economies seeking to navigate towards a low-carbon future.

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Author

Michael Hebert, Viewpoint Research Team

Share Price Performance and Value Destruction in the Canadian Oil & Gas Sector

SUMMARY POINTS

- Of the 128 Canadian independent companies listed in 2014, almost half have gone through an insolvency event, been delisted or sold.

- Of the 66 remaining companies, 49 have lost 90% or more of their total equity value. It is extremely difficult to re-capitalize these businesses.

- Approximately 13% of the original 128 companies are alive, and the other 87% have been essentially wiped out.

Some will struggle through this and survive, and new businesses will ultimately surface, but the existing reality for Canadian independent producers and service companies is unspeakably grim.

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Author

Mac Van Wielingen

What the Teck? Another Project Withdrawal for Canada’s Beleaguered Energy Industry

On February 24th, Vancouver-based Teck Resources Ltd. (“Teck”) delivered an all too familiar message to Canadians. The Company announced that it had withdrawn its application for the C$20.6 billion, 260,000 barrel-per-day Frontier mine. In a letter to the Minster, Environment and Climate Change, Teck cited a lack of investor confidence and a need for “jurisdictions to have a framework in place that reconciles resource development and climate change…This does not yet exist here (in Canada)…”

The Frontier project first applied for regulatory approval back in 2011, and now joins a long list of casualties in the Canadian energy graveyard that spans from project delays to outright cancellations, including MEG’s Christina Lake Expansion, Imperial’s Aspen Project, Petronas’ Pacific NorthWest LNG facility, TC Energy’s Energy East pipeline, and Enbridge’s Northern Gateway pipeline, among numerous others. It shouldn’t come as a surprise that ESG considerations are paramount in regulatory decisions. However, it is important to note that, while our National unity falls further into disarray over resource development, the ravenous thirst for energy globally will continue to be satisfied - with or without Canadian energy. The pendulum has swung too far in the opposing direction and created an opening where high-emission producers can capture increasing market share, while disregarding the environmental standards that Canadians are so proud of.

While Teck acknowledged a deep need to address climate change and, Canada’s role to play in their decision, skeptics of the project suggest that doubts about the Frontier project’s economic viability were the primary catalyst for the decision. In January 2020, the Institute for Energy Economics and Financial Analysis released a report questioning Teck’s financial assumptions for the project which were highly dependent on oil prices in excess of US$95/bbl Brent for prolonged periods of the project (2026-2066). While there are inherent uncertainties in forecasting oil prices, average estimates from the National Energy Board of Canada and the World Bank Commodity Outlook were more bearish on Brent prices through 2030, with an average Brent price of US$72.50/bbl. A more conservative oil price outlook was further compounded by the quality and distance differentials that heavy crude producers in Canada must endure to competitively price their barrels with counter-parties in the United States.

While Canada continues to flounder with project approvals, depressed prices, and fleeting investor confidence, capital is being mobilized. From LNG projects in Mozambique to deep sea pipelines in the North Sea capital is flowing to increase energy security and prosperity in oil producing regions around the globe. Nowhere is this more prevalent than in the prolific Permian basin in west Texas, which has spurred a flurry of new pipelines to bring crude to Houston and multiple locations along the Texas Gulf Coast (See Figure 1.1). According to Bloomberg News, more than ten pipelines are slated to start-up in 2020/21, providing additional takeaway capacity of ~5.6MM boe/d.

Figure 1.1 – Permian Basin Pipeline Projects.

Midstream investment isn’t the only thing booming in the U.S. energy sector. According to the Gulf Coast Energy Outlook, new capital investment in downstream facilities in Louisiana, Texas, Alabama, and Mississippi is anticipated to reach up to US$308 billion by 2030 (See Figure 1.2). The gargantuan capital program dwarfs any such development in Canada, and will be allocated towards new LNG export terminals, petrochemical facilities, and refineries.

Figure 1.2 – Gulf Coast Energy Infrastructure Investment 2011 – 2030.

While resource development is thriving in the U.S. Lower 48, Teck’s decision to withdraw its application for the Frontier mine continues to cast doubt and uncertainty over resource development in Canada. Not only is Teck burdened with a C$1.1 billion write-down on the project, but the opportunity for prosperity for all Canadians has been damaged. The project was expected to create approximately 7,000 construction jobs, 2,500 permanent operating jobs, and generate C$54.0 billion in royalties and taxes, C$11.8 billion in federal corporate taxes, and C$68.0 million in local property taxes over the life of the project. Additionally, the financial ramifications echo throughout the Indigenous communities in northern Alberta. Fourteen Indigenous communities bordering the project site had signed agreements with Teck to participate in the economic benefits of the project. Due to Teck’s decision to withdraw its applications, the Indigenous communities that are in favour of the project are losing out on prosperity that is desired by many, if not all, of the constituents in the community.

Ron Quintal, President of the Fort McKay Métis, accurately summarized the decision as a black eye for Canada, and rightly so, as this is yet another blow to an industry trying to shake off its multi-year hangover.

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Author

Michael Hebert, Viewpoint Research Team