When asked to describe the competitive pressures facing Canada’s oil and natural gas industry right now, Dinara Millington vice-president of research at the Canadian Energy Research Institute (CERI) sums it up in one word: “transformational”. And she’s right.
An Energy Revolution
During the Obama years, innovation and technology helped American oil production jump by 4.4 million barrels a day. That increase is more than all the oil produced in Canada. At the same time, U.S. natural gas production has ramped up with the development of shale plays.
An energy revolution is in full swing south of the border, and Canada is feeling the impact.
A major impact is the flow of investment dollars from capital-intensive oil sands projects to shale oil and natural gas plays in the U.S., because of shorter capital requirements there and quicker returns. In oil plays like the Texas Permian Basin, the state government is offering tax breaks and other incentives to draw in even more producers. And abundant U.S. gas supply is encroaching not only on traditional American markets Canada is used to serving, but also in our own backyard in Eastern Canada.
“We’re seeing serious competition for capital from the United States. Governments south of the border are doing what they can to encourage oil and gas investment—proposing to lower corporate income taxes and they have been much slower at adopting climate policies such as carbon taxes,” says Jonathan Stringham. Stringham is the manager of fiscal and economic policy at the Canadian Association of Petroleum Producers (CAPP).
Outside North America, global oil and gas competition for markets has been intense, causing imbalances in supply and demand and keeping prices low. Up until early this year, OPEC and Russia were pumping petroleum at full tilt. Last year, sanctions on Iran were lifted, adding millions of new barrels of oil onto the market. And Mexico has opened up its oil sector to private investment in an effort to sell more oil to the U.S.
Amid the challenges of growing competition, Canada is moving toward a lower-carbon future. The Alberta government has increased its carbon levy, and last fall the federal government announced a national carbon price scheme.
These forces are putting the squeeze on Canada’s oil and natural gas industry.
How the industry steers through this situation will take careful, strategic navigation and will shape industry’s future competitiveness. Companies must be prepared to operate longer under lower prices. They must deal with cost concerns to attract investment, while responding to greater environmental expectations.
“This time, the change for the industry will be transformational,” says Millington. “Companies in the oil sands, for instance, need to find out how to extract the resource more efficiently and with less carbon footprint. They can’t afford to sit and wait for change to happen.”
Cost Cutting, Optimization and Innovation
Within the industry, a sense of urgency is compelling companies to get costs in line and find new efficiencies. Companies have cut capital and operating budgets, with some reducing workforces or deferring growth plans. But some of the biggest efficiencies are resulting from attention to technological innovation and project redesign.
In the oil sands in situ business, for example, companies are applying new steam generation technologies that reduce steam-to-oil ratios. They’re using fewer wells and surface facilities to recover the same volumes. They’re exploring longer, extended-reach horizontal drilling that delivers more production for less cost from a single well pad. And they’re concentrating on “brownfield” projects, growing production at existing sites where less upfront capital is required.
“Companies are focused on optimizing their facilities and maximizing reservoir production so they can get as much value as possible out of existing investments,” says Ben Brunnen, CAPP’s vice-president of oil sands. He estimates the oil sands sector has reduced operating costs per barrel by 10 per cent in the last two years through these kinds of efforts.
Natural gas producers are placing a similar emphasis on finding improvements — for example, using larger, mobile rigs that can move quickly from site to site, or operating multi-well pads with faster drilling and completion times.
“We’ve seen dramatic reductions in production costs in shale gas plays in Canada as we incorporate new multi-well initiatives and fine-tune production techniques,” says Mark Pinney, CAPP’s manager of markets and transportation.
Adding urgency to this efficiency drive are timelines to meet new environmental targets. Last year, for example, the Alberta government implemented a maximum GHG emissions limit on the oil sands of 100 megatonnes a year. According to a 2017 CERI report on processes and technologies in the oil sands, the industry has about a decade before it will reach this emissions cap.
“Our study shows that the costs and emissions challenges facing the oil sands industry are real and serious, and, if not urgently addressed, may stunt the growth of the industry,” Millington says.
She points out that industry is already heavily invested in the pursuit for innovative, long-term solutions. Companies have identified numerous technologies that can reduce GHG emissions while also bringing down costs: everything from solvent-assisted gravity drainage processes to more efficient steam boilers and partial upgraders. If carried through to commercialization, these technologies could do the trick. The CERI study suggests these technological improvements have the potential to reduce bitumen supply costs by up to 40 per cent, lower fuel-related emissions from in situ operations by more than 80 per cent, delaying the time the emissions cap is reached by decades. Millington notes that industry’s focus on innovation could prove to be a major competitive advantage for Canada in a low-carbon future.
A Team Canada Approach
While progress is being made along the innovation front, industry experts say the oil and natural gas industry can’t do it alone. More action is needed from governments at all levels to support measures that foster growth and ensure Canada remains an attractive place for business and investment.
At the national level, industry has maintained a persistent call for access to new markets. The timely expansion of Canada’s pipeline and marine shipping networks, along with the development of liquefied natural gas (LNG) export facilities, would create more customers willing to pay higher world market prices for Canadian oil and natural gas.
Last fall the federal government approved two pipeline projects and also granted environmental regulatory permits to four LNG developments on the West Coast.
“With the recent approvals, the federal government is signaling their interest in the value of market access and getting the highest value for our oil and natural gas products. These are balanced announcements that recognize the need for growing our sector in a responsible way,” Brunnen says.
Building on this effort, industry is also pursuing collaborative action with governments to address other competitive issues facing the industry.
“We need a Team Canada approach — of industry and all levels of governments — to advance balanced fiscal policies that re-establish the industry’s competitive edge,” Stringham says.
In Alberta, one initiative has been to push for changes to property taxes. In many cases, existing taxes put oil and gas companies at a competitive disadvantage. According to a 2015 Calgary Chamber policy paper, the industry faces the highest average property taxes in the province, with oil companies’ taxes nearly 2.5 times that of forestry and 14 times that of agriculture. The industry is also taxed more heavily in the province than in British Columbia and Saskatchewan.
“We know that investment capital is mobile, and these kinds of imbalances over time discourage investment,” Brunnen says.
A Team Canada approach based on strategic collaboration is also needed to promote government-industry partnerships that can create new growth opportunities. A potential example is the Alberta government’s economic diversification committee. The committee is seeking input from different groups, including CAPP, on how to diversify the natural gas industry. Topics on the table include promoting increased petrochemical opportunities in the province while encouraging LNG export development in western Canada.
“The government has opened the door and said we need to diversify the industry, and asked what needs to be done. They’re listening, and hopefully that will translate to more competitive policies,” Pinney says.
Brunnen adds that we can also build on successful historic partnership models such as the National Oil Sands Task Force established in the 1990s, at a time of weak economic growth. Under the task force, a collective of government and industry representatives worked to create a long-term oil sands strategy that offered fiscal incentives encouraging producers to invest the significant upfront capital needed to get these projects off the ground. This strategy unleashed an unprecedented wave of oil sands development and economic growth.
“The task force was created because governments and industry came together to look at how to unlock the potential of the oil sands for the country. And it has delivered in spades. We need to look at similar industry-government models to support the industry’s future competitiveness,” Brunnen says.
What’s Next? Risk and Opportunity
The industry’s competitiveness concerns are made all the more poignant by uncertainties over whether Canada’s oil and gas sector might soon be caught up in a trade battle with the Trump administration. Brunnen says that Canadians must encourage government leaders in Ottawa and the provinces to be ready to actively support Canadian energy interests in the face of the ongoing renegotiation of the North American Free Trade Act (NAFTA).
“We need to ensure there’s a strong Team Canada approach that stands up for Canadian economic and energy interests with our largest trading partner,” Brunnen says.
While the competitive pressures and uncertainties are building, industry experts like Brunnen, Stringham, Pinney and Millington believe the solutions are there: through optimization, innovation and collaboration, Canada’s oil and natural gas industry can emerge stronger and more competitive than ever.
“We have world-class resources, technology and expertise,” says Brunnen. “We’ve proven in the past that we’re a resilient industry that doesn’t shy away from competition. I’m confident that by working together across companies, industries and governments, we’ll emerge as a key supplier in meeting the world’s long-term energy needs.”
Keeping the oil sands competitive: Q&A with Dinara Millington of CERI