Transcript: Unique advantages benefit Canadian oil sector through energy transition

Zeba Mirza (ZM): Canada’s unique in that we actually came together in the only industry-wide alliance to reduce emissions, and that is in the shape of Pathways Alliance. And the plan, the way it’s conceived, it’s three stages. Each stage is aiming to reduce emissions by a third, and the way to get there will be carbon capture and underground storage. And there’s going to be common infrastructure, so a central pipeline, which is going to capture emissions and bring them all the way down through Fort MacMurray to Cold Lake, which is the storage area. And you know, industry is fully committed to the objectives. And what is the hold up right now? It’s that we actually don’t have enough regulatory clarity from the province and from the feds. Because when I talk to the companies, I get the sense that they’re all ready to actually put shovels into the ground. So, that’s the only thing holding up the process.

Progress reporting.

ZM: I tell you, there’s still a lot of variability. And that can often make comparing one company to another extremely hard. The good thing is we are seeing some standardization emerge. We’ve seen this whole new taxonomy be developed. We’ve seen new disclosure frameworks be developed by the Sustainability Accounting Standards Board, and by the Task Force on Climate-related Financial Disclosures. So, on scope one and scope two emissions, we are starting to see standardization emerge. When it comes to reporting emissions for maybe the methane or scope three, that is still a work in progress.

Global differences in emission mandates.

ZM: Climate change is global issue, right? So, we have to think in terms of global solutions. Canada is less than 2% of global greenhouse gas emissions. The grid we have in Canada is already among the cleanest in the world. About 80 to 85% of power generation is from emission-free resources. And that’s because of the very unique hydro assets and the nuclear assets we have. When we look at the energy sector — and I cannot stress this enough — we are among the very few hydrocarbon-producing jurisdictions globally which has a tax on carbon emissions. And Canada is different in other ways. We actually have higher safety standards, and our energy sector is subject to a lot more regulatory scrutiny. And — this is more financial — the business models we have in Canada generally tend to be more profitable on a full-cycle basis than the energy assets in the U.S. and in the EU. And the reason is these are low-decline assets. So, these are among the differences.

Why the transition to clean energy is proving to be so difficult?

ZM: So, this transition, we want to go from molecules to electrons, right? That’s the transition we’re trying to get to. But this is not the first transition we’ve seen in energy history. At some point, we bought wood, we bought oil, we bought coal, we bought gas. Like, all these transitions have happened, and they all were very gradual. And the reason was, it waited for efficiency and technology to make the case, right? So, 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 probably why the industry needs support in the shape of the U.S. Inflation Reduction Act, or with the investment tax credits which we’ve announced in Canada. Because we’re trying to force the transition at an unprecedented kind of speed.

And finally, what all this means for investors.

ZM: What it really means is we’re going to see management teams which are a lot more disciplined on capital allocation. And I would not be surprised if energy takes a look at what’s happened to the coal industry. Like, 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. Remember this is an industry which routinely outspent their cash flows to grow production, right? For investors, we’re going to see a more disciplined sector, with restrained capital allocation and a focus on returns.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Zeba Mirza of Foyston, Gordon & Payne.

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