Albertans, the constitutional owners of the province’s oil and gas resources, may want a word with the CEOs (like shareholders did with VW and Toyota) before it’s too late
Toyota recently announced a “variety of new technologies that will support its transformation into a mobility company.” The world’s second biggest automaker has been criticized for dragging its feet on switching to electric. A classic incumbent response to disruptive change. Sometimes incumbents catch up, but sometimes they don’t. There’s a lesson here for Alberta’s oil and gas CEOs if they care to listen.
A few months ago, a battery expert told me in an interview that Tesla had a two-year technology advantage over its competitors. In the electric vehicle space, that’s an almost insurmountable lead. Some automaker incumbents have stumbled badly trying to scale up to catch Tesla.
Take Volkswagen, for example. The world’s biggest automaker can’t seem to get the bugs out of its EV software. Since EVs are basically electronic devices on wheels, this is a huge issue for the German company. Software and electrical problems cause doors to randomly open or lock, brakes to decelerate but not stop, and batteries to fail. Over 21,000 of its popular ID.4 electric SUV were recalled earlier this year.
The company’s CEO Herbert Diess was fired last year in part because VW’s software unit Cariad that was “set up on his watch but far exceeding its budget and years behind on goals to launch a new software platform,” according to Reuters.
Toyota’s reluctance to embrace full electric was more strategic. Only a month ago the Japanese automaker’s chief scientist was telling reporters that battery materials shortages and dirty power grids meant that hybrids were the best bet to fight climate change for the foreseeable future. As everyone knows, Toyota’s Prius has led hybrid sales since first introduced in Japan in 1997.
Another classic case of an incumbent trying to maximize returns on an existing investment before reluctantly acknowledging that consumers want the new products.
But both VW and Toyota are car manufacturers. While switching to battery electric only is a huge shift for them, they’re still making cars.
As the hydrocarbon-based fuels market begins to decline in a few years, can Alberta oil and gas companies pivot like VW and Toyota?
Natural gas might have a shot.
Alberta is chasing hard after hydrogen made from gas. The best guess is that methane steam reforming technology can turn gas into “blue hydrogen” for about $2 per kilogram, significantly lower than the $6 to $8 it costs to make “green hydrogen” There is a significant hydrogen cluster forming around the Edmonton Industrial Heartland. The Province has created a hydrogen roadmap and will soon build fueling infrastructure, which is critical for scaling up demand.
This strategy is vulnerable to the rapidly falling costs of electrolyzers (used to make green hydrogen from water and clean electricity), which are on a learning curve to lower costs that is similar to wind, solar, and battery storage. But as many experts I’ve interviewed argue, Alberta needs to first get in the game and blue hydrogen is an excellent place to start.
And Alberta has a few innovative hydrogen startups of its own. Innova is working on a methane pyrolysis technology that knocks the carbon atom off the methane molecule, leaving hydrogen and carbon black, a marketable product.
But there is no roadmap for oil. One of the few low-carbon market options is selling the oil sands’ ultra heavy crude to new petrochemical complexes in Asia.
Alberta oil producers are falling back on another classic incumbent strategy: driving down costs. If they’re stuck in a declining fuels market, then by gosh they’ll compete harder to be the supplier of that last drop of crude oil. As Alberta premiers and CEOs are fond of saying, the world will always need oil.
But will it need Alberta oil? Alberta light sweet production is about 500,000 barrels per day and faces stiff competition in the North American market, the only one it supplies. Oil sands heavy crude is more competitive in the United States, exporting roughly three million barrels per day into a 5.5 million barrels per day market. Today it’s a low cost, reliable supplier and can more than hold its own against Latin American competitors from Mexico, Venezuela, Brazil, and Colombia.
But it’s also a long way from markets, one of the most carbon-intense crudes on the planet, and production and shipping costs will always be much higher than light crude suppliers.
That said, the oil sands has an option: transitioning from supplying feedstock for refineries to supplying feedstock to an Alberta advanced materials manufacturing industry. Energi Media has reported extensively about this nascent industry (examples here, here, and here). The Alberta government is financing provincial agency Alberta’s Innovate’s bitumen beyond combustion program. A commercial process for turning bitumen into carbon fibre precursor is only two to three years away, according to Dr. Paolo Bomben.
Alberta oil sands CEOs are only mildly interested in helping to build domestic markets for their oil. Instead, their focus is on hydrogen to help decarbonize operations in anticipation of strict new federal emissions regulations. Management thinks the most immediate threat is decarbonization when in fact it is global demand destruction for their product.
CNRL, Suncor, Cenovus, and Imperial Oil are not even the VW or Toyota of their industry. They misunderstand the existential threat to their business models. They have nowhere to pivot. The only strategy left is to cut costs and ride shrinking markets to whatever fate befalls them, almost certainly failure, another classic incumbent strategy.
Albertans, the constitutional owners of the province’s oil and gas resources, may want a word with the CEOs (like shareholders did with VW and Toyota) before it’s too late.