Howestreet.com - the source for market opinions

ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

March 11, 2019 | The Path to Canadian Energy 2.0

Stewart Muir is founder and executive director of the Resource Works Society, a Vancouver-based group open to participation by British Columbians from all walks of life who are concerned about their future economic opportunities. He is an author, journalist and historian with experience on three continents including a financial editor of The Vancouver Sun responsible for mining and markets coverage. Since Resource Works was established in 2014, the group has gained international recognition for its practical approach to the public challenges of responsible natural resource development and use.

POLICY NOTE: The business of energy is facing a crisis of perception around the world, causing energy exporters to become increasingly strategic in how they approach climate risk, economic growth, and politics. Canada is going to have to sharpen its elbows to reclaim its rightful place as an energy leader. Stewart Muir weighs in.

post-image_horiz.jpgThe nearly universal challenge in public leadership today is how to articulate a future that acknowledges society’s expectations and confirms a willingness to embrace transparency, change and lower emissions – and do so without abandoning the imperative of economic stability.

Canada has its own particular formulation of this problem. Its manufacturing industries are under siege because of globalization. The country’s hydrocarbon export sector – oil, natural gas, and, yes, coal too – is largely responsible for national prosperity and there is no reason to believe this will change in the forseeable future. Crude oil, in particular, remains the mainstay of our national economy.

This chart tracking our largest two export categories tells the story:

Motor_vehicles_-oil_-_3.png

Since 2012, crude oil has been pulling away steadily from flatlining automotive. This fact set will mean different things to different people. The growth of the upper line, crude oil, is worth commenting on. Despite ceaseless American-funded efforts to stifle Canadian resource development, our oil producers have found a simple way to fight market access blockages and low prices: by producing more. That is how we have managed to increase the value of our oil exports, while at the same time the struggling motor vehicle and parts sector languishes. Boosting sales using a high volume, low margin approach is a risky strategy if you are a relatively small player like Canada up against energy Wal-Marts like Saudi Arabia and, increasingly, the United States. We’ll never win the volume game against those guys. What we want to do now is, having elevated the volume of production, ensure that it begins to receive a proper price. This is why it’s so important that we resolve the pipeline morass and get our products out into the global marketplace.

It’s also important to filter out the noise from some of the signals we are hearing. Looking to broaden my horizons and get away from a strictly North American perspective on energy, I recently attended a gathering across the Atlantic that brought together oil and gas players from Europe, the Middle East, Africa and Asia. A couple of emerging trends have me thinking that Canada’s approach to energy borders on the naive.

When Norway’s Sovereign Wealth Fund recently announced its intent to divest itself of energy companies that are strictly in the oil and gas industry, U.S. climate crusader Bill McKibben was quick to declare that the move would “send shockwaves through the energy sector”. A Greenpeace UK campaigner took it as a signal that “betting on the expansion of their oil and gas businesses present an unacceptable risk, not only to the climate but also to investors.”

The only people who are shocked are Greenpeace – shocked that anyone is still buying their propaganda. The reality is that Norway, while rightly earning plaudits for pursuing energy diversity, is doing anything but getting out of the petroleum business.

Whenever you hear a provincial or local official stating confidently that “meeting Paris commitments means no new fossil fuel infrastructure”, you are listening to a carefully constructed fiction. No credible authority is even saying that investment in fossil fuel infrastructure needs to stop. It’s often claimed that the International Panel on Climate Change said so, but the fact is that this is nowhere to be found in IPCC statements.

Even in the most severe decarbonization scenarios, trillions of dollars of oil and gas infrastructure will be needed globally in coming decades simply to maintain production. The oil and gas industry will need to invest more than $20 trillion over the next 25 years to meet expected growth in demand and compensate for the natural decline in developed fields, according to Saudi Aramco CEO Amin Nasser. Everyone in the petroleum business understands this, even as they struggle with the crisis of perception that has allowed divestment campaigns to flourish.

The world is faced with a social chasm between the energy rich and the energy poor. Despite the buzz around solar and wind, this gap cannot be closed by renewables alone. For one thing, non-traditional energy investments aren’t very profitable. They produce a 1.9 per cent lower return than petroleum investments for Norway’s sovereign fund, according to Charlotte Wolffe-Bye of Equinor (formerly Statoil). Oil and gas companies deliver twice the dividends of tech stocks, a recognition that energy is fundamental to the global economy. Innovation that survives in the marketplace will be that which is affordable, reliable and clean (and in most jurisdictions, consumers will demand that it be in that order).

According to the recently released BP Energy Outlook 2019, around 80 per cent of the world’s population lives in countries where average energy consumption is less than 100 GJ per head. Above this level we see substantial increases in human development and well-being. For the world to have only one-third of the population below that line in 2040, there will have to be 65 per cent more energy than is produced today. (Canadians used 302 GJ in 2013, 9th from the top of the list.) It’s a monumental challenge. Notwithstanding this reality, energy companies continue to depart Canada’s oil sands despite our enlightened approaches to innovation, transparency, social equality (including on indigenous matters), and environmental standards. This is because European companies like BP, Equinor and Statoil are exquisitely sensitive to negative marketing campaigns that focus on boy scout countries like Canada simply because we are a soft target. When it comes to defending their investments in Alberta, they’d rather switch than fight. The question is, what are they switching to?

It turns out that investors are moving their focus to where they discern the greatest opportunity with the least friction. One such locale is sub-Saharan Africa, and this is where we can glimpse the future. There is a flood of interest based on large hydrocarbon discoveries in Ghana, Kenya, Mozambique, Sengal, Tanzania and Uganda. Nobody can fault these nations for trying to move above the 100 GJ line.

The conference I attended in London was the annual International Petroleum Week, where one afternoon the main scheduled event in the largest hall was entitled “Actions to tackle climate change”. Despite a full room and attentive audience for the early part of this program, I soon noticed the audience had thinned out. It turned out that organizers had not anticipated the high level of interest in a parallel event placed in a much smaller room, where I found a jammed space with the audience intently listening to speakers on the topic of “The new frontier for Africa’s oil and gas”. As one African delegate stated: “If my village wants electricity, I don’t care where it comes from.”

Despite the retreat from Canada, those big international companies still require the very thing that brought them into our oil sands in the first place: heavy oil. Ignore the fairytale that the world isn’t interested in bitumen, the fact is that refineries built for this type of feedstock have to get it from somewhere. In the case of Africa, if international energy companies feel pressured to avoid direct investments in petroleum development there, it’s easy to guess what will happen next: state-owned Chinese companies and opaque private equity will fill the gap. That already seems to be happening.

It’s a vexing problem. One way or the other, petroleum resources will be developed. The way things are going, they will be developed in low-transparency regimes that are not strongly committed to the environmental agenda, while the most technologically advanced operating jurisdictions sit idle because of de-marketing campaigns that make pragmatic decision-making impossible.

What kind of transparency can we hope for from this outcome? None at all, of course. In the absence of accountability, climate goals will surely suffer as ordinary Africans fulfil, however they can, their quest to attain the standard of living that citizens of developed countries take for granted.

Is it best that low-transparency regimes to develop fossil fuels hand in hand with low-accountability investors? Nobody I’m aware of is trying to advance this argument, yet it is the direct corollary of efforts to shut in Canada’s oil sands. It’s plain to see that the big international companies are wringing their hands trying to figure out if they will be excoriated for crossing the “red line” of investing in places such as Africa, because it places them at risk of incurring the wrath of the climate zealots and those bankers who are under the thumb of the big anti-fossil-fuel campaigns.

Talk about unintended consequences if climate activists turn out to be moving us backward on the very issues they insist are life-threatening.

It’s time for a more creative approach. How about this instead: nations that embrace vanguard practices, including financial transparency, should be able to maintain an exemplary position in the global hydrocarbon supply chain. This is an idea that should resonate with anyone who authentically cares about the environment.

Canada is the jurisdiction par excellence of these values, where numerous companies have been built on sustainable development of the oil sands, and on natural gas and shale liquids. Our environmental and climate policies are both aggressive and pervasive. Yet those most likely to benefit from Canada’s setbacks are regimes not strongly committed to the environmental agenda.

We Canadians already know that having these conditions in place has not made one iota of difference. Something has to change. Thanks to credulous politicians who are light on information and jump at their own shadows, the climate extremists have played Canada for a fool. We are no longer a place for serious investors. The bruising treatment that Canada has received as the bitter reward for its enlightened approach to oil and gas is hardly likely to be rewarded by imitation. What rational country would be following our example now? Nice guys truly do finish last.

Now here’s where it gets really interesting. Think back to those “diversifying” European oil giants – companies who have showily snubbed our oil sands for no rational reason except PR. The ones who rhapsodize about their decarbonization and diversification strategies. All of these companies have decided that it is time to invest heavily in an intensive strategy to remove carbon from the atmosphere: carbon capture, utilization and storage (CCUS). They have realized that it is only with CCUS that the aims of the Paris climate agreement can be reached.

And where does this amazing technology come from?

Would you believe that Saskatchewan is often cited as an inspiration?

It’s true. SaskPower’s $1.4bn Boundary Dam plant is the example that six global giants have in mind now as they build northwest England’s Teeside carbon capture project that is helping to lower the emissions of North Sea oil. One company executive I spoke to in London was quick to credit Canada for having taken the early lead in this space. The project traps about 90 per cent of its emissions and was hailed when it opened in 2014 as a turning point in emissions management. “Carbon capture and storage is the only known technology that will enable us to continue to use fossil fuels and also decarbonize the energy sector,” executive director of the International Energy Agency Maria van der Hoeven said at the time.

Yet, instead of celebrating carbon capture at home, we seem reluctant to embrace leading-edge projects by SaskPower, Alberta’s NWR Sturgeon Refinery, and the breakthrough Quest project by Shell near Edmonton. It’s true that these early scaled examples were very costly to build. Now it’s starting to pay off. Canada was one of just five countries rated in the highest category of the 2018 CCS Readiness Index. We are also regarded internationally as being more ready than any other country to take full advantage of capture technology:

CCS-2018.png

Here’s a diagram from BP’s energy outlook, confirming that carbon capture is not a nice-to-have outlier technology, but rather the foundational element of long-term sustainable prosperity for the world:

BP-emissions.jpg

There’s no way to make the decarbonization agenda work without carbon capture, and all major companies in the world are incorporating this fact into their plans. Therefore, the sensible path for the Canadian government and provincial governments is to be loud and proud about what we have accomplished, not just with carbon capture, but with oil sands and natural gas as well.

The all-or-nothing approach of climate zealots is not producing benefits for Canada or the environment. It will surely lead to diminished, not strengthened, global climate performance. Foreign-funded activist groups have shown us time and again that they are operating continuous anti-Canada campaigns with no endpoint, because no country in the world is as easy to influence. Hence these groups will continue to exploit Canada in whichever ways their marketing and fundraising needs of the moment dictate. This includes continuing with the polarization and fear tactics, including through election meddling.

Firm leadership is needed to reject these strategies, and stay in the collaboration zone where real change happens. To convincingly accomplish this, we must ensure that our reputation for transparency and rule of law is not impaired by political interests, even if that involves SNC Lavalin taking full responsibility for its regrettable past actions.

Right now one of the most divisive political discussions in the country is the carbon tax. A deep misunderstanding of western Canadian priorities is at the heart of this dispute and I’ll explain why. The decisions to cancel the Energy East and Northern Gateway pipelines were experienced differently in the West than in Ottawa. A great many western Canadians see those incredibly costly decisions as not only unexpected and capricious, but as a breach of trust. When elected in 2015, the federal Liberals had promised to deliver a grand pact to strike an environment-economy balance, in which carbon pricing was the medicine that industry would swallow in exchange for getting its projects built. After quickly ditching those two pipeline projects that were the hardest parts of delivering on their promise, the government proceeded to deliver only the carbon pricing. That’s why westerners – globally recognized innovators in carbon capture technology – find it very hard to take seriously any eastern politician nagging them about not going along with what is seen as a half-baked carbon deal. Opposition to carbon pricing has much more to do with this sense of betrayal than with actual resistance to a carbon tax, although of course there are those who will resist a new tax no matter what.

It will be impossible to finalize necessary climate policies until western Canadians are confident that the carbon tax is not just another collaboration with foreign environmental lobbyists to deprive the Canadian economy of its lifeblood. We need to get back to basics, and recognize the importance of turning natural resources into energy resulting in progress for society.

The versatile hydrocarbon molecule will remain at the heart of human life for the forseeable future, even as exciting and welcome development occurs in other energy sources. There is hope yet for a Canadian energy industry 2.0, one that innovates through carbon capture, natural gas and LNG, and is capable of holding an honest and reality-based conversation about how to meet the expectation that energy be affordable, reliable and clean.

Stewart Muir is lead editor and author of the Resource Works Citizen’s Guide series on energy and natural resource issues.

STAY INFORMED! Receive our Weekly Recap of thought provoking articles, podcasts, and radio delivered to your inbox for FREE! Sign up here for the HoweStreet.com Weekly Recap.

March 11th, 2019

Posted In: Resource Works

Post a Comment:

Your email address will not be published. Required fields are marked *

All Comments are moderated before appearing on the site

*
*

This site uses Akismet to reduce spam. Learn how your comment data is processed.