What’s the future of Canadian energy in a low-carbon world? There’s a strong business case for Canadian oil and gas, if we can get the word out on environmental improvements and innovations, and if we can get to new, growing markets.
Self-confessed energy nerd, Jackie Forrest of ARC Energy Research Institute explains the risks and opportunities for a Canadian oil and natural gas sector that’s making great strides in improving environmental performance even as it continues to battle misinformation over its place in terms of cost and carbon footprint.
Full transcript of podcast:
Energy Examined Podcast – Jackie Forrest, senior director of research, ARC Energy Research Institute
Tonya: Welcome listeners to another edition of Energy Examined, where we talk about the biggest issues facing Canada’s oil and natural gas industry with industry insiders in the know. Today I’m joined by Jackie Forrest, senior director of research at ARC Energy Research Institute. Thank you so much for joining me here today, Jackie.
Jackie: Thank you for the invitation.
Tonya: So, you describe yourself as an “energy nerd,” which I kinda love, I have to admit. With that being said, can you provide some perspective on where you see our industry going today, in 10 years, what’s our reputation looking like?
Jackie: Yeah, I’m an energy nerd because I’m in the perfect job because I love research and learning about all this, and I’ve been doing it for quite a long time, and so let’s use 10 years’ perspective on where we are versus 10 years ago. That’s a good timeframe. And it’s an interesting timeframe for me personally because in 2009, 10 years ago, I started working at IHS CERA, which is an energy research group that’s based out of Washington, D.C., but we started the Calgary office here.
Tonya: And I actually saw you speak several times when you were with IHS actually.
Jackie: Okay, yeah, so I’ve been five years with ARC Energy Institute, but in 2009, I’d worked with IHS CERA for a while actually, but at that time we started to notice there was a lot of misinformation around the oil sands and we put together a group of companies here to fund some work around understanding what those criticisms were, researching them and putting some facts on the table that hopefully everyone could agree on. And in many cases at that time, there weren’t a lot of facts. This is when we started to hear stuff like, ‘a quarter of Alberta is being strip-mined’ and ‘the greenhouse gas emissions are ten times higher than other sources of crude oil’ and stuff that just didn’t seem right.
Tonya: Really bold statements, it sounds like.
Jackie: Yeah, and going back in time, this was when the Keystone XL was starting to meet some headwinds in terms of opposition and the groups down in the U.S. that were starting to talk about the oil sands and put some of these “facts” out there. And so we did a lot of work at that time. In some areas we were able to add some data and in some areas we found there were issues like the tailing pond accumulations at the time had continued to grow, so we put that forward. At that time, there was no plan to actually reduce them. Since then, there have been a lot of changes and now there are plans to reduce tailing accumulations and requirements to. At that time, the policy in the oil sands had been mostly focused on growth. And so we were hitting – in 2009 – a time where the growth was getting a little unsustainable and that it wasn’t certain that there was enough water, for instance, in the Athabasca River, to support all of the developments that had been approved or even in the SAG-D areas. So, since that time, there have been these cumulative requirements. So they look at the cumulative requirement of the region for things like water or air sheds and try to understand what are the thresholds we want to meet cumulatively, not just on a project level. I guess what I would say is, 10 years ago there was some misinformation, there were also some issues, but over the past 10 years, a lot of changes have happened around the cumulative requirement, around more sustainable development, around dealing with the tailing ponds, and also, the greenhouse gas emissions have come down significantly since that time. In fact, IHS just did a study this year and they said that the intensity of the oil sands for the upstream emissions is down about 20 per cent since that time. And I actually think the next 10 years, emissions reduction is probably going to accelerate because there’s such a focus on it now.
Tonya: So, you bring up a really good point that there’s been a lot of changes in the last decade, but it doesn’t seem to be making a difference in some cases when it comes to public perception here. With that said, it’s expected that production will still increase over the next 10 years, but at a much slower rate than we had originally predicted. The Canadian Association of Petroleum Producers just released its forecast and it indicated that yeah sure, we’re going to see increases, but not to the extent we could have seen maybe even five years ago. Do you think that’s a result of factors like commodity pricing? Is it due to a transition to renewables? Is it decreased investment? Or is it just maybe some misinformation that’s gotten out into the public’s view?
Jackie: I definitely agree that there have been improvements in the oil sands. It’s not what it was 10 years ago and that branding still exists from 10 years ago, and there’s a lot of work to be done to get that message out and I think the industry is starting to do that, but we need to do a lot more of it in terms of communicating how improved the environmental footprint is. When it comes to the growth projections, you’re right, the growth for the next 10 years using the CAPP forecast, is about half of what the past 10 years has been and why is that? Number one is the lack of takeaway capacity for sure. We’ve already seen a project like the Imperial Aspen Project that was going to go forward got cancelled specifically – or no – delayed specifically because of the lack of takeaway capacity. Why would you add capacity to add more oil supply when we have uncertainty in terms of our ability to get the crude oil to market? So I think that’s number one. Number two is the price. Prices have fallen substantially since 2014. They’re about half of what they were back then from $100 to closer to $50 now. And initially, that’s why we saw a pull-back in investment, but actually, oil sands has been innovating significantly on the cost front and by many estimates, including this recent IHS study, the break-even cost associated with going forward with new oil sands project and SAG-D is as low as $40 per barrel WTI. It used to be $80 per barrel and so I actually think the economics and the current price level isn’t the problem. I think we do have projects that would make sense at these price levels. It’s really the lack of takeaway capacity that creates that uncertainty. In terms of, is it the worry about long-term oil demand? I don’t know that that’s an issue today that’s stopping investment because there is still growth and demand right now and a need to offset declines in the rest of the world, so the oil wells today are going to actually decline at a faster rate than any projection for demand decline, so I don’t think that’s really a big factor at this point for the investment we’re seeing in Western Canada.
Tonya: I’m trailing off a little bit here, but you mentioned lack of takeaway capacity. We recently did see a decision from the government about the Trans Mountain pipeline – or Trans Mountain Expansion [Project] I should say. Do you think that will make a difference when it comes to seeing projects go forward or more investment in Canada?
Jackie: First of all, I think Trans Mountain is a great project. I hope it gets built. I think it probably will get built. I don’t know the timing exactly. So, I think that will be very important. Also, we’ll need other takeaway capacity because actually, we’re producing quite a bit more oil today than I think just Trans Mountain would be able to move. So, we’ll probably need advancement in crude by rail, potentially some expansions on the Enbridge system like the Line 3 Replacement Project. But, you know, if you could get a structural rail, a couple new pipeline projects, I think that would do a lot in terms of creating that spare capacity that we need in terms of knowing our products can get to market. I think that would be positive for investment.
Tonya: It’s more than just one pipeline that’s going to solve this problem for us at this point.
Jackie: Yeah, and you know, I think we need to start thinking out of the pipeline as an industry. We need diversity in our market access. And it has to be – yes, pipelines are important – why don’t we look at structural rail? And what that means is rail that we could actually have over the long-term. And rail can actually be pretty competitive with pipe, especially for heavy oil if we take the diluent out. By removing the diluent, we have to move a lot less crude oil. There’s partial upgrading. There’s this CanaPux that CN is talking about, which is basically putting the bitumen in like, little yogurt containers and shipping it to Asia that way. We have to be open to diversity and optionality. And I expect over the next three, four years we will see advancement in pipelines, but I hope we’ll see advancement in some of these other ways of getting our crude oil to market.
Tonya: Well that’s a great way to segue to innovation here. Do you think that it is worthwhile for industry to be investing in innovation? Is it doing it already?
Jackie: Yes, for sure. Innovation is the history of the Alberta oil industry. On the oil sands side, we spent actually the first decade of oil sands development probably from 1999 to 2009 innovating to make it work economically because it didn’t work economically for a long time. And the last decade I think has been focused around reducing the environmental footprint and that’s accelerated. On the non-oil sands side of the industry, which I think we often forget about, by the way, but the non-oil sands side of the industry invests today almost three times more than the oil sands in new capex projects, and produces a significant amount of oil as well. And that side, there’s been a lot of innovation because this technology that’s been developed in the United States, the horizontal drilling and fracking has been taking off here as well. First with our shale gas developments we have a lot of gas and now with the oil development. So there’s been a ton of innovation on the non-oil sands side as well. And you have to innovate to survive. I don’t think things are going to get easier in the oil and gas industry. Prices are probably going to remain low. There’s a lot of supply out there. You’re going to have to continue to innovate on two fronts now: reduce your costs as much as you can going forward – use new technologies to do that – but also reduce your environmental footprint because the crude supply of the future is going to be lower carbon is going to be an advantage. So if you can be cost-advantaged and carbon-advantaged, I think you have a long-term future.
Tonya: That’s not a story that is often really told about the oil and natural gas industry. I mean, everyone knows about the innovation, but the stories of innovation seem to be the thing that we’re not really hearing about in the public sphere. So, do you think that coupled with – you mentioned our branding before in terms of our environmental footprint, our lack of takeaway capacity – are all of these affecting our global reputation? Are they the things that are perhaps, either encouraging investment or chasing it away? How do you see this?
Jackie: There is a real belief that investment in Canada, especially around the oil sands is the highest cost and the highest carbon. First of all, there are other sources of supply that are similar to Canada in terms of the carbon intensity. And as you know, some of the more leading projects are reducing their emissions even on the oil sands side, it’s closer to the average barrel consumed in the United States. So I think on the carbon front and the cost front on oil sands, perception isn’t reality. Things have changed a lot and we need to do more to communicate, ‘hey, we’re not actually that high of cost, we’re maybe competitive with U.S. tidal and on top of that, our carbon footprint is improving significantly to the point where some of the newest projects are equal or better than the average crude consumed in the United States.’ So, there is no environmental negative for consuming more oil sands because it’s the same as any other source of supply. That isn’t well understood. On the non- oil sands side, this is the shale gas and the light, tight oil developments that we have going on here in Western Canada, they also are very low carbon. With our shale gas, we have these methane reduction rules that I think will make our natural gas some of the lowest carbon in the world. We don’t really have academic studies to back that up. I hope that we get on that soon. And on the light, tight oil, well, that’s some of the lowest carbon oil supply in the world, especially if you can reduce your flaring and methane leaking associated with it, which we have rules in place to do that.
Tonya: Why doesn’t anyone know this then? Why are we being dubbed – what began as the oil sands and has been a brush that has swept across the country with all of our natural resources – as “dirty oil”? Why isn’t this something that more people are aware of?
Jackie: I think there’s a lot of dated information out there and that’s been one of my frustrations. A great example is – and I’ve talked about this before – there’s a greenhouse gas emissions estimator that is a tool that Stanford University publishes and it puts out numbers associated with the greenhouse gas emissions for various sources of crude oil around the world, and it uses data that’s quite dated for the oil sands, showing it’s some of the highest carbon crude oils in the world. But luckily, after a few years of lobbying here, we are actually on a project to improve the data in that model to better represent the new types of oil sands projects that are being built. So I think we’ve really got to look around at where people are getting their data from. And when it’s dated, understand what’s the source of that information and what can we do to improve that data so that it’s more accurate with today’s operations not a decade ago.
Tonya: Is there anything nefarious to that in the sense that some newer data exists, but older data is being used specifically or is it simply that the data was not available?
Jackie: I think it’s just that, when you think about the University of Stanford, they’ve got so many grad students – only so many – and only so much funding, nobody had really spent time and given some money to fund them to improve their oil sands models, so it wasn’t made a priority just because of funding, so we have to understand that. The other thing we need is way better data on how our shale gas compares to other sources in the world, how our light, tight oil is. I guess, we have to fund the academic research to update those models so that they reflect the most recent thing because these grad students only exist if there’s funding.
Tonya: Fair enough. So, it sounds like lately there has been a lot of talk about environmental, social governance – ESG. How important a role do you think that’s going to play in Canada’s energy future?
Jackie: It’s really, really important. We have a podcast as well, Peter Tertzakian and I have an ARC Energy Ideas podcast that we do weekly. And June 14, 2019, if you’re interested in ESG, we have a whole podcast on that where we talk to Scotiabank – Pat Bryden – about the work they’ve done to start to rank companies by their ESG. And Scotiabank is not alone. Most banks are doing this now. And there’s also some very large organizations – data aggregators – that will give you a credit score as a company, but it’s an ESG score. And you may not know what it is, but if you don’t have a good ESG score, most institutional investors won’t be investing in you. So you’ve got to get on this bandwagon. It’s not a fad. It’s materially changing how investors look at your company. And just to give people some background, the “e” is for environment, the “s” is for social and the “g” is for governance. In Canada, we have regulations in place that make our “g” pretty good and not really questioned by most investors. On the “e” as we just talked about, there are some perceptions that are not reality here, so we have to focus on where our environmental footprint is today and how it’s improving. But the other thing institutional investors are really starting to focus on is the “s,” the social. It includes thigs like safety, but it’s also being part of the community, giving long-term benefits to the community, including employment, Indigenous involvement in your project – not just when you get approval, but ongoing – as well as providing economic benefits. And so, I think, up until now it’s been a real focus on the environmental piece, but the social is growing in terms of how institutional investors are factoring that into their decisions. And I did want to make one point to your listeners: ESG – there are risks associated with not managing your environmental footprint, your social interactions in your community, and your “g,” your governance. And so, when investors are doing this, it’s because they believe these are risks to your business and if you’re a company that’s managing those well, then you’re a more safe investment. So, it’s not just “greenwashing.” Companies that reduce their ESG risk actually do perform better and there’s academic research to support that.
Tonya: Well that then, in turn, could that lead to global attractiveness when it comes to investment?
Jackie: I believe so. I’d like to see Canadian companies be recognized as leaders in ESG. Now, as we were talking about our reputation today, it seems like a big jump, but I actually think with the kind of innovation – if we set our minds to being leaders I ESG – I really think we can. Now unfortunately, the Scotiabank report, which you can get the link to their report actually on our podcast, they were generous enough to make it public, it ranks Canadian companies in every sector on the Toronto Stock Exchange, so not just oil and gas. But when you go to the oil and gas page, you’ll see that about half of companies don’t even report enough to be ranked. So, we’re not leaders today. We have a long ways to go. I would love to see every company in Canada reporting and also scoring well. And for those companies that say, ‘oh, I’m not going to report because someone might misunderstand my information,’ you know what? Not reporting is basically assumed that it’s bad news. So, you have to get involved. You have to start reporting.
Tonya: So, there’s a real opportunity here for Canada to get on board and become that leaders as you said.
Jackie: Well, and investors believe that if you manage this stuff, you are going to be a more successful company and it’s not just a belief. There’s tons of academic research that supports this. And so, we’re going to be an investment that provides better returns because of it.
Tonya: Interesting. So, one other thing that is interesting is, we hear a lot about a transition to renewables, but there seems to be a misperception that this can happen overnight. That transition can’t occur overnight. There’s still a place for oil and natural gas in our energy future, is that correct?
Jackie: I mean, that’s what we believe. And I think if you look at any credible prediction, even scenarios that consider needing a two-degree scenario or less — for your listeners, so two degrees or less is basically the amount of warming we want to keep the amount of warming long-term, less than that — so there are scenarios like the IEA Sustainable Development Scenario, the Shell Sky Scenario, that look at how could we meet that target? And all of them have a role for oil and gas into the 2040s and beyond. And so, there is still a role for oil and gas companies for years to come. And, as I said before, even when you look at the decline rates in those scenarios, like for oil, we decline about 20 per cent between now and 2040. If we didn’t invest at all going forward in oil and gas wells around the world, we would decline at probably six per cent or greater. So even in those scenarios of your topline demand declining by two per cent you actually still need to invest because if you don’t invest, you’re actually going to see oil supply drop faster than that. So, my point is —
Tonya: It’s like a vicious circle, it sounds like. You need to have the investment for the innovation to see the declines, but if you can’t get the investment, you can’t put in the innovation, you can’t see the declines.
Jackie: Well, I guess my point is just that the declines of the oil wells are fairly significant and so, even in those scenarios of topline demand decline in that range, we still need investment in oil and gas for years to come. And we believe that those sources of oil that are the lowest carbon, the lowest cost, are going to do well over the next 20 years.
Tonya: So, what is that disconnect, though? If we see that there is still a place for oil and natural gas in the near-term at least and through to 2040, how is it that it seems that there is this call to eliminate fossil fuels: ‘Get rid of them. We don’t wat them anymore. We’re going to switch to renewables today.’ Is it that it’s just not being properly explained to the public or is it being misrepresented? How is it that we’re not making this connection?
Jackie: Well, and by the way, natural gas – I was talking about oil – natural gas, actually, in these types of scenarios generally grows between now and 2040, so it’s a growth commodity even in a low-carbon world. So, what is the problem? Well, basically, there is a plan out there and I think a lot of people have bought into this plan that we just basically transition from fossil fuels to renewables and don’t want to have any fossil fuels because they continue to create carbon emissions. I think people are starting to see this plan is completely unrealistic. Peter Tertzakian for the ARC Energy Research Institute wrote an article called Mind the Gap and we had a podcast on June 28 on this exact topic because the IEA came out with their annual thing about the level of investment and said we are woefully underinvesting in renewables. So here we are, year after year, investing actually very little in renewables. We’ve actually got about the same amount of investment in renewables as we’ve had in 2011. And in fact, the overall trajectory is declining in terms of the investment in renewables. Meanwhile, oil demand still grows more than a per cent, natural gas grows by three per cent and greenhouse gas emissions are growing at a faster rate than they have in seven years. So, it’s not working. And so, what we are talking about is we need a realistic plan that involves may sources of energy, including fossil fuels that continue to become more efficient. We’re not going to transition off fossil fuels in the next few decades and beyond, but we can make them way lower carbon than they are today. So, for example, substituting out coal for natural gas: for every electron that’s generated, that’s half the emissions. Doing things to reduce the methane that leaks out of natural gas and oil wells can make a huge change to the amount of greenhouse gas emissions associated with using these fuels. And so, there are some huge opportunities – and even going farther, carbon capture and storage can actually make oil and gas almost net neutral in terms of GHG emissions associated with it. There are technologies being advanced right now where we would be injecting as much CO2 in producing the oil and gas for advanced oil recovery as we would be generating or creating when we use the fuels.
Tonya: Interesting. Well, Jackie, I won’t keep you any longer. Thank you so much for joining us here today on Energy Examined. We appreciate you being part of now, our podcast family. We’re still relatively new, so it means a lot to have you. Thank you.
Jackie: Thank you very much and good luck with your podcast.