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Navigating the energy transition

As peak energy supply worries wane, Canadian producers face an era of low-cost abundant energy

Remember peak oil? In the decade since our first Energy Visions report, the world has transitioned from an expectation that oil and gas supply would chase demand—with high commodity prices fuelling exploration and development—to a world of energy abundance, characterized by heightened price competitiveness. Overlaying this change in supply-demand is a greater global desire for clean, low-carbon fuel sources. Can Canadian resources compete?

How we got here

“Global economic and energy market dynamics have significantly changed the landscape over the last 12 months, and we recognize the need to watch what our global counterparts are doing to enhance their own competitiveness.”

—Energy Visions 2014

A changing narrative

A decade ago, the prevailing narrative in the oil industry was one of scarcity—or peak supply: oil supplies were dwindling, and demand would soon go unmet. Oil prices reflected this worldview, with prices reaching US$150 per barrel in 2008 before the global financial collapse. On the natural gas front, the United States was looking at building liquefied natural gas (LNG) import terminals to meet demand, as North American supply began what was believed to be a long decline. Again, prices reflected this sentiment, reaching highs of more than US$10 per thousand cubic feet prior to the financial collapse.

The conversation has been flipped on its back, switching to concerns about peak oil demand, as the cost of renewable energy drops and questions emerge about the future of oil consumption in an increasingly carbon-constrained world. The United States is now building LNG export terminals to export a torrent of new unconventional supply. Canada is also looking to export more natural gas for the same reasons.

Industry at a turning point

Growing demand and investment for all energy sources

Demand for oil and gas is expected to stay strong, according to the International Energy Agency’s (IEA) 2018 World Energy Outlook. Global oil demand is forecasted to grow to 106 million barrels per day by 2040—an increase of more than five million barrels per day—driven largely by the petrochemical sector. Global gas demand is forecasted to increase by 45%, again driven by industrial demand.

Despite growing demand, the abundance of energy resources is expected to create competition for market share and keep prices from spiking. The rapid increase in US oil and gas production, propelled by technological advances, has upset energy markets. This supply growth is forecasted to continue through to the middle of the next decade, causing concerns about oversupplied markets.

At the same time, geopolitical events are blurring market fundamentals. This is evident in current US sanctions policies that have taken both Iranian and Venezuelan barrels out of the market. “Now that the market is more balanced, we’re likely moving to a period where geopolitics will exercise more influence on price and the effects of political instability will be more pronounced,” says Meghan O’Sullivan, professor at the Harvard Kennedy School. Organization of the Petroleum Exporting Countries (OPEC) and its partners’ longer-term upstream and downstream strategies are also important factors, as they inform OPEC’s market managing outlook.

Meanwhile, as populations and economies grow, we need to keep up with the ever-expanding energy demand at a reasonable price while trying to reduce greenhouse gas emissions. Although technology plays a critical role in improving energy efficiency, is that enough to offset rising demand? Most forecasts show that so far, it’s not, but that could change.

All eyes on renewables

Declines in the cost of renewable energy are also driving greater consumption. Utility-scale solar costs have dropped by 72% in the past decade, and wind energy has seen a 47% cost decline. Costs have dropped to the point that larger oil and gas companies are upping investment in renewables to diversify supply and revenue streams.

American geologist, educator and energy expert Dr. Scott W. Tinker says any focus on being “100% emissions free” is disingenuous. “That would require not driving a car, eating, having clothes, using electronics, living in a home, etc.,” he says. “If industry can reduce or lower emissions from carbon-based fuels and provide baseload, affordable fuels for power generation and transportation, is this not good? Technically, yes; politically, no.”

Some Canadian energy producers are also moving downstream in the energy ecosystem. Renewables and storage are being brought together to power field operations. Oil-sands operators and smaller conventional producers are working with “petro-lithium” start-ups to capture lithium from wastewater for use in battery storage. A few companies are also piloting hydrogen fuel cell technologies that convert natural gas to hydrogen and water while producing electricity.

These investments in renewable energy reflect growing demand for low-carbon energy. Electrification in emerging economies is also driving demand, as an expanding middle class seeks the kind of convenience available within fully developed economies.

Looking ahead

Competing in an era of energy abundance

While the IEA says meeting demand will require around US$2 trillion annually to be invested in developing new energy supply, there will be intense competition to attract investment. In our 2014 Energy Visions report, we recognized that increased energy supply would create a world of choice for investors. And industry leaders said competition for capital had intensified in the post-peak global petroleum economy. But the industry needs certainty. The more certainty governments can give, the greater the opportunity for all industries to attract both local and international investors.

O’Sullivan says the ability of Canada’s oil and gas industry to prosper in this world of energy abundance depends a great deal on two things: “The first is technology, which can help bring down the costs of developing Canada’s resources. The second is policy, particularly the ability to build infrastructure to move Canada’s oil and gas to where it can be exported to non-US markets.”

National and international energy companies have several choices. They can invest in oil plays in the United States, the Canadian oil sands, global offshore opportunities or conventional plays within their own borders. They can also invest in LNG or petrochemical projects or in renewable projects almost anywhere in the world.

To win the competition for capital, Canadian oil and gas producers have a number of options to consider:

Focus on lowering costs

Focus on being the lowest-cost supplier of energy to export markets, delivering oil and gas more cheaply than competing countries and other energy sources. In the past, investors rewarded growth. But a growing trend now exists to reward profitability in oil and gas investment markets.

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Focus on adding value

Focus on adding value to low-cost oil and gas in Canada before exporting. Upgrading or partially upgrading bitumen from the oil sands could create new product streams, letting producers diversify markets to refineries that lack the complex configurations needed to process raw bitumen.

Natural gas producers can add value to gas streams by stripping out more natural gas liquids, either for export or for further processing into petrochemicals, which are in demand in Asian markets.

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Differentiate Canadian oil and gas

Differentiate Canadian oil and gas by improving our carbon productivity to help capture future investment. Opportunity exists to invest in carbon capture and use technologies and low-emissions power generation to reduce the carbon footprint of fuels.

In the short term, this means capturing carbon emissions from large emitters and using it in enhanced oil-recovery schemes to produce more oil while storing the carbon dioxide underground. In the longer term, it means turning the captured carbon dioxide and using it to create products like aggregate and cement for concrete production.

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Increase carbon productivity with a hybrid approach

Use hydroelectricity or renewables to reduce the carbon footprint of conventional oil and gas, similar to what British Columbia is asking of potential LNG exporters. In this case, the province is asking exporters to use hydropower for the transmission and compression of the natural gas. The end product becomes a hybrid of natural gas and, in their case, hydropower.

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Use existing processes to create other energy commodities

Take advantage of existing production systems to produce energy commodities. In Alberta, a number of large operators have reported they’re investing in the production of lithium and other elements used in renewable energy technologies. They’re sourcing these elements from produced water from wells and oil-sands.

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