OPINION | We could be witnessing a turning point in the oilsands industry

This column is an opinion from Sara Hastings-Simon, a senior researcher at the Payne Institute for Public Policy at the Colorado School of Mines, and a research fellow at the School of Public Policy at the University of Calgary.

Recently, the CEO of Suncor, Mark Little, along with Alberta Innovates CEO Laura Killcrease wrote a call to action for oil companies in Canada.

The piece was notable compared with previous statements for two reasons: both its acknowledgement of the potential for significant disruption to the energy system in a timeline that is "not-too distant," as well as putting forward a proposal for the future that is fundamentally different from the goal to produce oil with a net zero upstream footprint. 

Their goal is diversification.

This statement, along with the recent investment by Suncor into a company that is working to produce jet fuel from captured greenhouse gas emissions (GHGs), could prove to be an important turning point in the future of the industry.

It sets out a path that is fundamentally different from the recent rash of net zero commitments from oilsands players. 

Underlying these commitments is the assumption that Canada can save the industry by achieving net zero emissions from production. But the reduction of emissions from oilsands production can be the solution only if there is a long-term growing demand for oil, and Alberta is able to compete on both price and emissions with other sources.

This is unlikely to be sufficient in a world increasingly focused on an economy-wide net zero goal.  

As the industry often reminded us in the early part of the past decade, only 20-30 per cent of emissions come from the producers upstream. The majority of emissions are the result of the combustion of the product itself. So addressing emissions from the upstream will be insufficient on its own.

Moreover, with increasing alternatives for a large fraction of the combustion use of oil — for example, electric vehicles in transportation — an increasing number of analysts see a future where oil demand begins to decline.

This doesn't preclude Alberta from continuing to sell into this market, but it can't continue to support the same level of growth and economic prosperity seen to date.

Underlying the acknowledgement from Killcrease and Little of the coming disruption to the energy system are two ideas that can be simultaneously true but are rarely spoken together: Canada will likely continue to produce oil and gas for some time, and the change in trajectory for oil demand will be disruptive.

Barrels will continue to flow, but the value of those barrels in terms of royalties will be significantly lower, and the number of jobs will decline rapidly as demand flattens and then decreases. The job declines will result from slowing growth and increased pressure to reduce costs to preserve profits, leading to more lean corporate operations as well as automation in the field.

A fundamentally different path

The recent actions signal interest in a fundamentally different pathway, one where the strategy for oil companies in the province moves from a focus on reduction of emissions to a broader diversification of their businesses. 

There have been some nods in this direction previously — in particular, commitments around renewable energy production. But those have been more limited in scope, focused on supplying local electricity needs, as opposed to a product that can be exported at scale.

It is a path that has been proposed by those both from within Canada and beyond: using the cash generated from the existing oil business, which will continue to produce for some time, even without growth, or in the face of contraction, to fund something new. 

The move would put Suncor on a different path from the rest of the Canadian oilpatch and the U.S. majors, like Chevron and Exxon. It's more in line with what some European oil majors are attempting. 

Real commitment or empty promises?

Grand pronouncements and high-profile investments are only a beginning — and history gives us plenty of reason to be skeptical.

The recent history of global oil companies making bold promises about their clean futures is littered with "Beyond Petroleum" stories, where bold claims went nowhere in practice. We've heard about acquisitions with sinister objectives, such as efforts to delay or derail competing technology. Moreover, there has been a cutback in efforts from industry to reduce production emissions.

Even leaders with the best of intentions, who support their commitments with real action, can stumble in the face of investors and boards.

Overcoming the intense focus on quarterly earning statements, explaining and communicating the transformation, and convincing the market that your organization has the competitive advantage to lead the change can prove an insurmountable task.

David Krane's ousting from NRG after his efforts to transform the company serves as a cautionary tale for would-be reformer CEOs, who might instead be tempted into the relative safety that sticking with the pack can bring. 

But there are examples of success, perhaps none more impressive than the successful transformation of DONG into Ørsted. The past decade has seen the Danish Oil and Natural Gas company, spurred by a crisis in profitability, exit from the oil and gas business and become a global leader in offshore wind, with a corresponding more than doubling of its share price. 

Results will take some time, but there are leading indicators to watch for in the near term. Are the statements backed with significant investments into new areas, as compared with legacy business? Are there incentives within the organization that hold leaders responsible for progress? And how do investors act in response? Do they judge the path being charted as credible, and respond by giving organizations the resources to pursue these goals?

It is much too early to know how things will turn out, but it's certainly worth watching.

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