Unique advantages benefit Canadian oil sector through energy transition

Geography, geology and a shared commitment to achieving net-zero emissions make Canada’s energy industry unique, says Zeba Mirza, vice president and senior research analyst at Foyston, Gordon & Payne.

Mirza said the industry’s ambitious Pathways Alliance goes far beyond the climate-change responses of other major oil-producing countries.

“Canada is unique in that we actually came together in the only industry-wide alliance to reduce emissions,” she said. “The six major oil-sands companies — representing 95% of our production — have jointly come up with a plan to get to net zero by 2050. [W]e haven’t seen that anywhere else.”

She said each of the plan’s three stages aims to reduce carbon emissions by a third, and the key strategy will involve carbon capture and underground storage at a planned $16.5-billion facility near Cold Lake, Alta.

“There’s going to be common infrastructure,” she said, “and infrastructure can be really expensive. And, the fact that there’s going to be this common infrastructure, it’s possible only because of the nature of the oil sands.”

She said the sources of emissions are very concentrated as a function of geography. And the geology in Canada has great potential to store the carbon dioxide.

“So, Canada actually has some unique advantages,” she said.

Mirza said while there is a long way to go, Canada has been pulling its weight when it comes to fighting climate change.

“Climate change is global issue. So, we have to think in terms of global solutions,” she said. “Canada [contributes] less than 2% of global greenhouse gas emissions, and our electric grid is already among the cleanest in the world.”

She said 80%–85% of the country’s power generation is from emission-free sources because of its unique hydro and nuclear assets. Furthermore, the Canadian government has been a leader in penalizing carbon emissions.

“I cannot stress this enough: we are among the very few hydrocarbon-producing jurisdictions globally which has a tax on carbon emissions,” she said. “The U.S., Saudi Arabia, Russia — not a single one of those has a tax on carbon emissions.”

She also pointed out that despite the hype around the U.S. Inflation Reduction Act of 2022, which promotes the use of clean energy, it doesn’t include a carbon tax.

Furthermore, Canada leads the way on energy-industry safety standards and regulatory scrutiny, she said.

“For example, when it comes to flaring, we’ve had rules on that forever. They just imposed rules on that in the U.S. two or three years ago,” she said.

Government support is critical, she said, because unlike previous energy transitions —for example, from wood to oil to coal to natural gas — this one is being undertaken out of necessity rather than opportunity.

“All of those transitions were very gradual. And the reason was, we waited for efficiency and technology to make the case, right? This time, what’s happening is we’re trying to force the transition to happen at a faster pace than it otherwise would have happened. And that is why the industry needs support.”

Mirza said the current transition from molecules to electrons is occurring at “an unprecedented kind of speed” and is complicated by the fact that not all economies are at the same point in the switchover. She believes the most privileged economies could help developing economies.

“If you want a global solution, maybe we help them to switch from coal to gas. Gas actually has two times the energy density of coal and half its emissions,” she said. “That is a global solution, right?”

Mirza said the intense scrutiny of the energy transition holds great implications for energy providers.

“What it really means is we’re going to see management teams that are a lot more disciplined on capital allocation,” she said. “If you are in a sector which has ESG headwinds, you want your balance sheet to be pristine, which means you want to live within your cash flows.”

For the energy industry, which routinely outspent their cash flows to grow production, she said this will involve another kind of transition: a management style with greater transparency and scrutiny.

“So, for investors, we’re going to see a more disciplined sector,” she said, “with restrained capital allocation and a focus on returns.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.