When Joe Biden scrapped a permit for the huge Keystone XL pipeline just hours after entering the White House last year, a death knell seemed to be ringing for Canada’s oil sands, by far the largest supplier of foreign oil to the US.
The project, which would have carried Alberta’s heavy, bituminous crude oil to Gulf Coast refineries in Texas, had been opposed for years by environmentalists, owing to the oil sands’ associated ecological impact and high emissions (greater than those of many European countries).
Even before the cancellation, big European oil companies, insurers and some Wall Street investors had started fleeing a sector that was becoming a villain of the environmental, social and governance investing movement. Then, the Covid-19 pandemic triggered an oil crash that deepened the damage, forcing operators to sack thousands of workers, throttle production and slash capital spending.
In Alberta, a province where just about everyone is related to someone who works in the oilfield, the new US president’s decision deepened the gloom.
Yet, 18 months later, the mood is brightening as surging oil prices start to revive the economy. Alberta’s producers — forced to contend with sub-zero oil prices just a couple of years ago — are using the windfall from $100 a barrel crude to repair their balance sheets and beef up dividends. Production is rising again. So is export capacity: a pipeline system to the Midwest has been expanded and another to the west coast is due online next year. Across the province’s oil patch, business is suddenly brisk.
“Everything’s just totally switched,” says Tim Valleau, owner of 1441 Energy Services, an oilfield maintenance company in Wainwright, a town close to the Saskatchewan border. When the pandemic hit in 2020, he dismissed the 11 men who worked for him. Now he is struggling to find enough workers. “Folks are punching wells all over the place. It’s right back to where it was in 2014 — and in 2014 it was nuts,” he says, referring to the last time oil topped $100 a barrel, before prices crashed.
Alberta’s premier, Jason Kenney, says Russia’s invasion of Ukraine has triggered a new anxiety about energy security that offers “perverse vindication” for the province and its controversial oil sands sector. Political hostility is beginning to soften as leaders are “mugged by reality”, he says. “We’ve been saying all along — we cannot allow some of the world’s worst regimes to have a dominant role in global energy markets.”
Last month, Kenney testified to a US Senate committee hearing about closer co-operation on energy between Canada and its southern neighbour. “Senators, Calgary is a lot closer to Washington than Riyadh,” Kenney told the committee. “And you don’t need the US Navy’s Fifth Fleet to patrol the Great Lakes.”
Yet, even if the political winds are changing, there is a bigger test facing the oil sands: whether its operations can be greened sufficiently to remain viable in a future that may demand much less oil, and certainly a lot less carbon.
Producers say they can, and have outlined ambitious carbon capture plans to do so, with an aggressive timeline that will deliver results (or not) within the decade. Analysts are also hopeful, saying the projects, which currently produce some of the world’s dirtiest oil with a per-barrel carbon content higher than other forms of crude, could soon offer much cleaner supplies. Environmentalists remain sceptical.
The outcome will matter outside Canada too, revealing whether or not one of the world’s biggest fossil fuel producers, sitting on the planet’s third-largest trove of oil, can help soothe immediate anxieties about energy security without worsening its long-term climate problem.
Alberta should get squarely behind the effort to make its industry more sustainable, says Samir Kayande, a former energy consultant now running for the provincial assembly as a candidate for the progressive New Democratic Party: “As long as the world is using oil, I want them to be using our oil, because that’s better for the world — and it’s definitely better for us.”
Life on the oil sands
A red-tailed hawk circles above the white oil storage tanks on the south-east bank of the Battle River. Lorries cruise down Highway 13, their juddering retarder brakes piercing the calm of a prairie spring day. “You dream it, we’ll create it,” reads the sign at the florist on 51st avenue.
Until Biden cancelled the US leg of KXL’s permit last year, Hardisty, Alberta — population 456 — was where 830,000 barrels of oil a day would have entered the C$8bn ($6.3bn) pipeline for shipment to American Gulf Coast refineries with the coking facilities to handle the heavy crude. The town had expected a construction boom.
The loss of the permit was a blow to the whole province. Kenney had ploughed more than C$1bn into KXL — a move many said was a failed gamble on the re-election of Donald Trump, who had pledged to get the project built. Lobbyists said the pipeline was essential to underpin oil sands growth. Environmental campaigners wanted to stop it for the precisely the same reason.
Both sides may be wrong. Oil sands production is rising again even without KXL, as other pipeline routes are expanded to provide export capacity. One of them, the federally owned Trans Mountain expansion to Canada’s Pacific coast, is due by next year after a surge in construction costs. A project adding capacity to Enbridge’s network to the US Midwest is already complete.
Alex Pourbaix, chief executive of Cenovus Energy, one of the oil sands’ largest operators, said the new pipeline capacity had “put the industry in pretty good shape for a number of years”.
Biden’s opponents at home cite the scrapping of the KXL permit when they blame him for soaring fuel prices. Yet the oil industry itself is not clamouring to revive it. Producers are hardly rushing to plough more money into exploration and production, and investors want their companies to use this year’s oil-price windfall for beefier dividends, not more production. The era when developers plotted huge new projects seems to be over.
Even Canadian Natural Resources, the sector’s most aggressive producer, which raised its planned capital expenditure for 2022 by almost 25 per cent, is committing to invest much less than in the earlier boom years. Spending commitments from other operators are also well shy of peak years. Oil sands capex ran at about C$30bn annually before 2014, according to Alberta’s energy regulator. It was a period of high crude prices and a rush of inward investment. By 2021, though, the figure was less than C$9bn. It is not expected to rise above C$15bn a year in the next decade.
Kevin Birn, head of emissions co-ordination and chief analyst of Canadian oil markets at S&P Global Commodity Insights, reckons that existing projects, currently producing about 3.1mn barrels a day, can add about another 500,000 b/d by 2030 — a rate of growth well below that seen in the US shale sector in recent years.
“I do think we’re going to see more growth,” says Jackie Forrest, executive director at Calgary’s Arc Energy Research Institute. “But I don’t think you’re going to see another big oil sands mine.”
The industry’s critics, meanwhile, sense a deeper change afoot in the mentality of the developers — or at least their shareholders — as they begin to contend with the implications of a global energy transition.
Alberta’s government does not like to talk about the possibility that demand for the province’s oil may fall — Kenney insists oil and gas will remain the mainstay of Alberta’s economy “possibly for the next 30 or 40 years”. But Canada’s Liberal government is taking a different tack under the leadership of prime minister Justin Trudeau.
The government will be “very active in looking to drive down demand for oil in the world”, said Jonathan Wilkinson, Canada’s natural resources minister, in a recent interview. It is a stance that hews closer to that of the International Energy Agency, which has said global oil consumption must drop 75 per cent, to just 24mn barrels a day, if the world is to hit its climate goals.
That may not leave much room for Canada’s higher-cost, higher-emissions oil. While oil sands producers aren’t on the same path as European supermajors such as BP, which has talked of reducing output and forecasts sharp falls in global fossil fuel demand, their investment stance may reflect that reality, argues Jan Gorski, a director at the Pembina Institute, a clean energy think-tank in Alberta. “Nobody is going to be building new pipelines, new projects,” he says. “The future is bleak for the product.”
Greener horizons
If oil sands operators are to protect themselves and avert that bleak future, their effort will start in places like Christina Lake.
Deep in Alberta’s northern muskeg wilderness, pipes snake through groves of aspen and tamarack, carrying steam in one direction and bituminous emulsion, extracted through wellheads on drilling pads scattered through the forest, in the other. Black bears roam around the worker camps nearby.
The Christina Lake project can pump about 250,000 b/d of oil — more than the entire output of some Opec countries. It is one of several “in situ” oil sands operations, a method of production involving the injection of steam deep underground to help coax the heavy oil away from the packed pay dirt. From the surface, this looks like conventional drilling — and it is a lot easier on the eye than the huge open-pit mines around Fort McMurray, a couple of hours’ drive further north, whose scale and ecological impact have blackened the oil sands’ reputation.
But even Christina Lake, one of Alberta’s most efficient projects, needs two barrels of steam for each barrel of oil it produces. Burning the natural gas to make that steam, across the oil sands’ in situ projects, emits a lot of CO₂. Total greenhouse gas emissions from the oil sands projects are running at about 80mn tonnes a year, according to the federal government — more than Austria’s annual emissions. As production rises over the next few years, so will the pollution.
The Canadian government is cracking down on emissions as part of its pledges towards international climate goals. For the country’s oil and gas sector, it is calling for a 42 per cent emissions cut from 2019 levels by 2030. An escalating carbon tax is already in place, priced at C$50 per tonne now and due to rise to C$170 by 2030.
Ottawa is also planning to establish a total emissions cap on the sector, although the constitution grants the provinces control over the resource, which may make any enforcement tricky. And oil sands producers say the federal targets are not feasible.
“We made it very clear,” says Martha Hall Findlay, a former federal Liberal party politician who is now Suncor Energy’s chief climate officer, “those numbers for our industry by 2030 — there’s no way that we’re going to make them.”
Instead, the oil sands producers have set their own targets. Last year, several of the biggest operators formed the Oil Sands Pathways to Net Zero initiative, pledging to reach neutral emissions from their operations (though not those from the combustion of the oil they sell, which amounts to a far bigger source of CO₂) by 2050 with an initial goal of cutting 22mn tonnes a year by 2030. This target is more modest than the government’s, but meeting it would still be a significant climate breakthrough. It is a recognition that they must cut pollution quickly or lose their market, their shareholders and their social licence to operate, say analysts.
Cash in the coffers
Decarbonising Alberta’s oil industry will take some doing — and a lot of money. The first phase of the producers’ plan involves building the world’s most ambitious carbon capture and storage facility.
There are three main sources of CO₂ emissions from the oil sands — those from the production, those from upgrading the heavy sludge into synthetic crude oil, and those created from refining the crude oil into fuels. The carbon from these processes would be captured at each facility, they say, and sent through a new trunk line to be stored under Cold Lake in east-central Alberta.
But despite years of industry talk, environmentalists say carbon capture and storage is unproven and not feasible at scale and that oil companies are touting it as a way to keep pumping more fossil fuels, whether the technology works or not.
It is still expensive to install and operate. Hall Findlay says the carbon capture element of the project could cost C$14bn in capital and operating costs. Pourbaix, at Cenovus, estimates the entire plan out to 2050 will run at a cost of C$2.5bn per year.
The federal government has offered an investment tax credit worth up to 50 per cent of the capital costs for the project. But companies also want Alberta’s provincial government to help out. “This industry is in the process of putting a whack of cash into the Alberta coffers,” says Hall Findlay, “and what we’re doing here is ensuring the longer term viability of this industry, which is really important to Alberta.”
Indeed, says Arc’s Forrest, carbon capture could “extend the runway” for the oil sands, which are entering a lucrative royalty payout phase for the Alberta government. It would be of “huge economic value to the citizens of Alberta to get those royalties for longer”, she says.
But the timeline is tight — and political uncertainties make the way ahead uncertain. Regulatory approval for the carbon capture proposals could take a couple of years, says Hall Findlay. And a different future government could scrap the carbon tax. In Alberta, Kenney recently resigned after a revolt in his Conservative party against his leadership, though he remains in power for the time being, creating new doubts about future provincial energy policy.
The companies have yet to take the plunge. But if they are to meet their own 2030 target, operators need to take decisions now, says Chris Severson-Baker, a senior director at Pembina. “Every day that they don’t . . . makes it seem that they aren’t genuine,” he says.
But Pourbaix is adamant. “We’re absolutely going to do everything in our power to decarbonise,” he says, and, in doing so, to try to win back US favour.
There are signs that those efforts are not in vain. At the Senate committee hearing last month Alaska’s Republican senator Lisa Murkowski echoed the oil producers’ rationale: “Sometimes our solutions are right in our back yard. Look to your neighbours first. For some strange reason, we have not done that,” she said.
Copyright The Financial Times Limited 2022
