Canada in a great position to supply “friendly oil” to the world
Canada has an unparalleled position to supply “friendly oil” to a world increasingly focused on reducing emissions and improving environmental, social and governance (ESG) performance, says a new report by BMO Capital Markets.
A unique combination of characteristics from geology and production processes to innovation capacity, Indigenous engagement and regulatory practices sets Canada apart.
“Not all barrels are created equal in terms of their ability to adapt to a transition environment. The oil sands is a completely different business,” says analyst and lead author Jared Dziuba.
“Canadian energy companies are ahead of the curve because of the scrutiny they’ve faced historically relative to the rest of the energy sector. We like to say they’ve been practicing ESG since before it was a thing,” he says. “Canada is known to have a huge lead in terms of governance and social practices. To us, that’s the root enabler of better environmental performance.”
Even with accelerated action to reduce greenhouse gas emissions, BMO analysts estimate that as much as 350 billion barrels of new oil investment will be required between now and 2040 globally to offset steep production declines from existing fields.
Canada is well positioned to meet that demand, particularly given the oil sands sector’s ESG leadership.
Accelerating ESG success
BMO‘s new report highlights numerous oil sands achievements across the ESG spectrum including reducing greenhouse gas emissions intensity by 27 per cent since 2013; reducing fresh water use per barrel at in situ “SAGD” projects by 40 per cent since 2014; reducing injury frequency by 60 per cent since 2013; and year-on-year increases in spending with Indigenous businesses, to a record $2.6 billion in 2019.
The trend of improving performance, particularly the application of new technology to reduce environmental impacts, is expected to accelerate as a result of surging oil prices, Dziuba says.
Promising innovation projects that were put on hold to preserve cash during last year’s oil price war and pandemic are on standby and ready to go.
“We’re looking at the prospect of $100 oil prices, probably sometime soon. The free cash flow generating capabilities of these companies is next to none in terms of the global industry, partly due to the impressive decreases in costs that we’ve seen. We think that’s only going to accelerate the deployment of capital for R&D again,” Dziuba says. “Because of their momentum in research and development for the last decade or so, these companies have built up quite a pipeline of technologies that are still waiting to be deployed.”
Technology and process improvements are proving successful to reduce emissions per barrel, BMO reports. Several projects – such as Suncor Energy Fort Hills, Imperial Oil Kearl, Cenovus Energy Christina Lake and MEG Energy Christina Lake – now have an emissions footprint that is below the global average.
Setting up for carbon intensity game changers
Further reductions are expected with broader application of new technologies delayed over the last year like solvent co-injection at in situ, or drilling projects.
“We think we could see another 20 to 30 per cent improvement in carbon intensity over the next decade just from technologies that exist today and what the companies’ plans are with them,” Dziuba says. “And then there’s upside from there in terms of breakthrough technologies, a couple of which are fairly late stage and could really be game changers.”
One of these is Canadian Natural Resources’ in-pit extraction process, which could reduce emissions from future mining phases by 40 per cent, while eliminating the need for new tailings ponds.
“Really big, game changer technologies can come back in the forefront once these companies start spending a little bit more money on the R&D again,” Dziuba says.
A better foundation for the future
Because of geology, oil sands producers have something that most don’t – the ability to consider options for optimization production that has minimal decline over decades.
“You could argue it’s a manufacturing business versus a resource extraction business,” Dziuba says. “Once you spend the capital to build the facility you have anywhere from 20 to 50 years worth of production with very low cost to extract it. That leads to considerable differences all the way down the ESG path in terms of how you can improve environmental performance.”
The factory-style production offers unique opportunities to decrease emissions, Dziuba says. Oil sands emissions sources are largely concentrated at individual locations and good candidates for carbon capture and storage or use in industrial and consumer products.
“You don’t have thousands of individual wells spread out with individual processing facilities and gathering lines. A good 90 per cent of the emissions from the oil sands business are very centralized and are very amenable to using CCS,” he says.
There’s also the opportunity for oil sands bitumen to be used in products beyond conventional fuels, like asphalt, carbon fiber and vanadium flow batteries.
“Those are products that are expected to grow significantly. They’re not affected by the transition; in fact, they’re probably driven by it,” Dziuba says.
“This is an opportunity for bitumen specifically because of its makeup that isn’t going to be afforded to other sources of oil out there globally.”