Rating: High school and post-secondary
Summary: Markham interviews economist Kevin Birn of IHS MarkIt about the Oil Sands Pathways to Net Zero initiative launched on June 9.
2. Why should govts pay for oil sands net-zero plan when companies are flush with cash? – video interview with Eric Denhoff, former Alberta deputy minister
3. Net-zero oil sands set up to compete long past 2050, says business group – video interview with Scott Crockatt, Business Council of Alberta
4. CAPP excluded again by oil sands CEOs from critical climate, emissions deal – video interview with Prof. Keith Brownsey, Mount Royal University
5. Canadian energy narrative headed in new direction thanks to oil sands Net-zero by 2050 plan – video interview with Prof. Monica Gattinger, University of Ottawa
6. Oil sands net-zero by 2050 plan doesn’t address tail pipe emissions – video interview with Dr. Keith Stewart, Greenpeace Canada
This interview has been lightly edited for clarity.
Markham Hislop: Welcome to another episode of Energi Talks, the podcast where we discuss global energy issues and trends with experts from around the world. I’m energy and climate journalist, Markham Hislop. On this episode, I’ll be talking to economist, Kevin Byrne of IHS market about the recently announced Oil Sands Pathways to Net Zero initiative alliance of the major Canadian oil sands companies intended to decarbonize among the most emissions intensive crude oils in the world.
So you and I have talked many times over the last five or six years about the oil sands and about emissions. And we’ve talked about how they, these companies, have invested hundreds of millions of dollars in various technologies trying to bring down emissions. They, in fact, have done a good job on emissions intensity per barrel.
They were, as I recall, in your 2020 study, they were up around 86 to 90 kilograms of CO2 equivalent per barrel not that long ago. The average now is 70 per barrel, according to your study. I have been a bit of a critic publicly calling on the oil sands to decarbonize more quickly than that, because that oil is that still fairly carbon-intense compared to other crude oils.
So today we have this new initiative and it is the bigger companies. We’ve got Suncor, Cenovus, CNRL Imperial Oil and Meg Energy. I think they produce about 95 per cent of the of the oil sands crude, and they’ve all come together on this initiative. They’re going to invest in technologies. They want government at the table to help out.
What’s your general take on the announcement?
Kevin Birn: I think what you’ve seen over the last 12 to 18 months globally is an acceleration in the interest, motivation and pressure to decarbonize our economies. And I think the oil sands announcement here is part of that response of industries trying to adapt, trying to find how much and when to pivot into what.
And when you look at upstream oil and gas, generally there are in a very simplistic framework, really a handful of options facing them.
One is to decarbonize the assets that they own. Two, is to divest or invest in alternative oil and gas assets that could be lower carbon and dilute your mission intensity in the sense of a portfolio approach. Three, invest in forms of lower carbon energy, you know, renewables, wind power, like, like Suncor is doing.
The last two options don’t actually decarbonize the assets, right? The first one is the fix it. And that actually starts to you know, reduce emissions because you could sell an asset and someone just continues to operate it.
And so this, these oil sands companies see themselves having a strategic advantage operating oil sands, and the pressures from investors are return more cash to me and reduce the intensity of your operations. So they’re pivoting their focus towards value returning more value than growth strategies that were focused on revenues and growing production.
Markham Hislop: So the takeaway for me from that is essentially that investors think that decarbonization actually will put more money in their pocket.
Kevin Birn: I think it’s two-fold.
One is if you, you know, there’s this pressure to return cash to shareholders means there’s less capital to do things with, but also they see a greater uncertainty in the future of oil demand. And so they see interest in making these companies more resilient.
And the reality is when we look at the competitive forces for oil and gas, greenhouse gas emissions, greenhouse gas, emission intensity is a new competitive dynamic. So these companies are going to compete on their emission-intensity. And so you see the oil sands companies pivoting towards that with, with an announcement like this,
Markham Hislop: Right? And the mantra for this industry, as I described in my 2019 book, The New Alberta Advantage Technology Policy and the Future of the Oil Sands, that mantra is cost and carbon competitive. They see those two things as going together.
To address one thing that you raised, which is this idea that de-carbonization could reduce the amount of money that available to for other things, and Suncor in particular in its investor presentation that it released last week, showed that even though they intend to reduce emissions by 35 per cent, by 2030, over the next four years to 2025, they actually intend to bring their breakeven down from $35 US to $27US. That makes them a competitive barrel and that’s really a significant drop, but it also increases quite significantly the amount of free cashflow available to them.
Kevin Birn:I think that’s right. I’m sorry if my comment was confusing, I was more referring to the desire to return cash to shareholders. That’s what the investors are asking for. So if you’re going to have to pay more money to them, you’re going to have less capital as a whole to do that with, but that’s why you see them focusing on the cost reductions to grow the margin, generate that more free cashflow, make them a more attractive investment.
And then the other thing they’re doing with that is spending more of it on decarbonization as a whole as well. I think, you know, the economics of oil sands are, and we’ve talked about this many times in previous interviews, are not well understood, you know, in, in terms of what the margin looks like.
Most oil sands assets that are existing and operating have cash costs, break evens of $30 West Texas Intermediate or beneath, which means that the prices we’re experiencing now, they’re, they’re doing quite well. And that’s going to give them the cash to do these kinds of things, as well as return or increase those dividends or share buy backs, or create more value for shareholders as well.
Markham Hislop: Well, let’s talk about some of the specific initiatives that would likely be included in this. And one of them is major carbon capture utilization and storage trunk line. Now Alberta already has a CO2 pipeline. That was a fairly significant investment. And it’s also true that Alberta has very good geology in its old oil and gas reservoirs to store CO2 safely.
So what do you make of this idea that they want to build a pipeline down from the Fort McMurray area that all of the oil producers, oil sands producers can tie into, then send it down south? And I would assume it would either then be sequestered in reservoirs or it would be used by companies that can take CO2 and make products out of it.
Kevin Birn: Maybe, maybe we’ll just step one back there. Cause there’s a lot of pieces in that to unpack.
I think the first one is when we look at oil sands emission intensity performance, you’ve seen the studies, we’ve measured them falling about 20 per cent over the last decade. And the last time we did a projection in 2018, we saw another 20 per cent.
And I think we talked a few weeks ago about the what the oil sands needs to do to really accelerate that as do more step out technologies, you know, accelerate the deployment of solvents potentially explore Carbon Capture and Storage and then, cause it can take out large chunks in much more material ways of their emissions. Now, when you look at the oil sands they’re unique compared to other oil and gas activities. And they’re not alone in the oil and gas space and what they do.
But I think you have to think about these large facilities, they’re more akin to industrial plants. You can think of like a power plant, whereas most oil and gas or most conventional and unconventional oil and gas activities about a number of wells being drilled and there’s emissions associated with the drilling and then the operation of those wells.
So you have a numerous amounts of emission sources occurring and they’re occurring sporadically. And the oil sands, they’re are these large industrial facility with some concentrated streams of CO2, but there is consolidation of those emissions. And so they lend themselves attract more attractively to CCS, which requires scale to take an advantage of that.
Now there’s different cost advantages of CCS, but one of the challenges of carbon capture and storage is, you know, filling the pipe. The economics of building a large transportation system for CO2, it’s very difficult to make work with one or two tenants.
You know, you can think about the pipelines we have leaving Western Canada crude oil. They work because there’s multiple people using them rather than one user of them. And so to build this kind of infrastructure, they’re talking about coordinating on that infrastructure so we can have coordination of the capture, you know, the timing of the capture technology. We can coordinate the completion of the pipeline that’s going to be required. So you can get assurances over the use of the pipeline, which is what the pipeline operator needs to have – long-term contracts.
And then, so it’s a way to bring down the cost and potentially accelerate the timing of CCS. And they talking about building a backbone kind of system, potentially plugging into the existing system in my mind, that would make sense that connects Fort McMurray through the core oil sands regions, which is Fort McMurray, kind of the Christina Lake area and further south potentially doing a leg towards some of the activity in the cold Lake region as well, which is kind of the core oil sands regions.
So I think that’s what they’re getting at is that need to coordinate. And we’ve seen the federal government announced policies. They’re interested in trying to accelerate CCS in general there’s tax credits, they’re in discussions about rolling forward. And this is an opportunity to get together and coordinate on something that probably benefits from coordination.
Markham Hislop: I remember correctly, it was only a month or two ago that the Alberta and federal governments came together and announced a CCUS task force something like that, where it would coordinate the governments and industry efforts to further this technology.
Kevin, do you have any sense of where CCUS technology is in the oil sands? Are, is it early days are, or has this been research and development we’ve been going on for a while?
Kevin Birn: CCUS is not a new technology and I may want to be very clear. It’s not a technology, it’s a suite of technologies and you know, and the best way to think about it for your listeners is it’s three pieces, right? It’s carbon capture and storage, but you know, it kind of skips over the transport too, right? And so you have to capture it.
And there’s different costs associated with capturing CO2 and it’s really associated with what’s the period of the stream, right. Would be relatively easy if you just got pure CO2 out of the back end of something.
But often when it combusts, there’s a lot of incomplete combustion, there’s other molecules in there. So they have to isolate and separate that CO2, concentrate down to make the transportation of it economic.
Then they transport it, that has a cost. And then they have to apply a facility to sequester it or use, you know, in the use of cement or the use of enhanced oil recovery as an example as well. And so it’s these three components and the best way to think about it, there’s a lot of costs associated, depending on how pure that stream you’re capturing off. Obviously higher concentrations are lower costs.
Now in the oil sands, it’s not new to the oil sands. There’s been a CCS facility operating at the the Scotford refinery facility, which is integrated with the Albion oil sands mine for a number of years. It’s one of the test facilities. If people are curious, you can download, they put out annualized reports, the government makes available on the operations. It’s a good example of CCS.
So it’s not novel. Large scale expansion still is going to be capital intensive. These are projects that take time to be built as well. They’re not things that are going to turn on overnight, but they will be a capital intensive project being brought online. And the scale of being considered here, it means there could be a sizeable CCS industry in development rather quickly.
Now the benefits will take multiple years before these facilities would be turned online. So you talking about pipelines,multiple capture facilities, multiple locations. And then I could see one or two sequestration opportunities and you’re right, Alberta has tremendous geological potential to store CCS. And so, and the advantage of CCS rural sands is it’s lock step large-scale reductions.
So it’s not intensity – you know, you think about intensity reductions, a few percentage points a year, maybe more aggressively with deployment of solvents. We’re talking about taking out offline out of, out of the system mega time in kind of scale drops as these plants would come online. And in the oil sands, there’s various capture opportunities.
In the mines, they have what they call steam methane reformers. They use hydrogen in their upgrading process that generates a fairly high concentration steam stream of CO2, which is arguably a lower capture opportunity in terms of costs. And, and then you get into more diffused sources like the co-generation plants that would be higher cost.
Markham Hislop: Let’s talk about hydrogen because I know I’m not sure this is well understood, but the oil sands plants do create hydrogen. And if I understand this correctly, it’s considered grey hydrogen. Could you tell us a little bit more about how that might fit into this new initiative?
Kevin Birn: Well, that’s what I was talking about. I was talking about a steam methane reforming where they, they take basically natural gas and, and create steam. And then they use the natural gas to convert it and to produce hydrogen that’s used in the production, on the upgrading of the bitumen, into synthetic crude oil. It generates multiple streams of emissions. There’s a high purity stream CO2 that comes off when the natural gas is converted into, or split into hydrogen.
There’s low purity from the combustion of the energy required to hit the temperature required for that process to occur. And then there’s the hydrogen itself that comes out of it.
Markham Hislop: Let’s talk about process improvements. This was mentioned in the press release. What is a process improvement and how might that play out in the oil sands?
Kevin Birn: In my mind, there’s multiple ways to interpret what a process improvement could mean. But way I think of it, I think about an operational improvements.
If you, if you look at some of the papers we’ve done, operational improvements amount to efficiency improvements from an emission standpoint. So they, they reduce the intensity of production. And if you get enough of them, you will pull down absolute emissions. You know, if you hold your volume constant, and you create an intensity improvement, you you’ll pull down and absolute emission reduction.
But alternatively, if you’re growing output and driving much larger intensity improvements, it will pull it down more aggressively. So you, you think about these pancake-ing, CCS and then on top of it, these intensity improvements, they’re going to get more efficient on the process.
You can think of these things – an example could be the deployment of solvents, right? So it takes less energy to produce a barrel of oil, but they also improve the productivity of their plants. So the same scale plant can produce more oil from it. And that means that the energy required to produce that barrel of oil from that plant is going to be less, but so will the cost.
These are things that usually work hand in hand and driving cost costs down. And that’s what we’ve seen over the last half decade, but also emissions intensity down as well.
Markham Hislop: Let’s talk about electrification and small modular nuclear reactors, which got mentioned in the press release as well. SMRs are a pet project of both the Alberta government and the Canadian government. There was an agreement signed between Alberta, Saskatchewan and a couple of other provinces to advance SMR technology.
And how much opportunity is there for electrification of oil sands processes?
Kevin Birn: Well, it depends on where, you know, when most of the thermal operations is about the conversion of natural gas to generate steam and combustion is very efficient at that compared to electric, electric thermal generation. And so that’s probably what they’re looking at CCS for to capture that stream off the other side.
Small modular nuclear reactors are an alternative form of internal alternative source of steam generation with low emission, very low emission profiles associated with them. So in that creation of the steam component – I’m going to use SMR again, but in this case, it’s not a steam methane reformer. It’s a small modular nuclear reactor as an opportunity to pull off some of those boiler units and replace them with these units that would have much more dramatic impact on emissions.
Now, let me give you an example. If you look at thermal oil sands extraction, you know, 85, 90 plus percent of the emissions is from the combustion, natural gas to generate steam. So it’s a very large source of emission. So if you can replace that steam generation component with something else, you can get very sizeable reductions from those plants.
Markham Hislop: I suppose if you’ve got SMRs and, and we don’t know what that electricity will cost, but there are technologies that are still not commercially deployable, but I’m thinking of down-hole electric heaters for the steam assisted gravity drainage operators, the SAGD that makes up so much of Cenovus’ production, where you, instead of using steam, you use these big microwaves that you stick down into the, into the reservoir. And is there any chance that those technologies will be part of this initiative? Because I didn’t see the mentioned in here.
Kevin Birn: Well, there’s a whole, you know, when we say technologies, there’s actually a lot of different technologies and development. That’s one of them that they’re looking at or have looked at. I’m not sure what the differentiation is, what got in the release, isn’t in the release.
I think, you know, the potential is a release is targeting some very specific things they have in mind that may be more near commercial in their head than other things. You know, so CCS is a proven technology. It has been deployed as being deployed, you know, the oil sands, isn’t the only oil sector in the world doing and looking at investing in CCS, we’re seeing it crop up at an increasing rate all around the world.
I think that that might be the focus is what are the things that are commercially available that they could advance on in the terms of the, the release they put out in advance on, in collaboration with the governments of Alberta and Canada to accelerate decarbonization of the oil sands and made more meaningful contributions to Canada’s ambition targets in 2030, and then net zero.
Markham Hislop: Now there’s a fair emphasis in the announcement on the federal and provincial regulatory and policy framework, including emissions, reductions credits, ongoing investment tax credits, those sorts of things. Do you have a, a take on what that policy framework where it is now, I guess, and where it might have to go to enable all of these technologies technology development and implementation.
Kevin Birn: I am not privy to the policy development framework. I’m not, I’m not party to that. And if I were, I couldn’t comment on it anyways. I would say, I think they’re suggesting that there’s, the tax credit is still… I think the budget 2021, the federal government put out, I didn’t identify the tax credit, but it also identified the need to negotiate the details of how it function.
There are ways to get bigger bangs for your dollars from the federal government in terms of incentivizing decarbonization. How that tax credit is structured – can it provide assurance to the financial community in terms of the value of the CO2, that’s going to be captured down the road and in the future. Can the government’s involvement in the sector lower the cost of capital for these projects?
Which means the money that’s coming from these and these initiatives from the federal government can be more effective because, you know, the amount you pay for the, to borrow the money, to build these things is going to be less, that’s a very simple, simplistic, and crude way to think about it.
There’s other things associated with – there’s, there’s probably regulatory process and lead time to develop the permits to build some of this infrastructure they’re probably targeting as well. You know, cause if you think about CCS projects and specifically, and I don’t mean to go back on it, but just done more work than on hydrogen specifically, you’re looking at lead times in terms of design construction and on in the terms of over half a decade.
And so if you, and I count on our fingers between where we’re standing today and where we need to get by 2030, we’re, you know, it would be lightspeed to have a sizable CCS plant online in less than seven or eight years. And so, you know, if they get hung up in a regulatory process, that takes two to three years, we’re in 2024, and they’re not going to make it by 2030.
There’s things that can happen in unison, but the need is to go faster. I think that’s what you’re seeing here and the languages they want to partner with the governments. At least that’s my interpretation, to try to go faster. And there’s things that the both parties are gonna need to move faster on. And there’s also some nuances in some of the regulations about where you can sequester, how you monitor, how you get permits.
Then there’s some very interesting questions about who owns the poor space when you sequester, who should have the rights to it. Those are all questions that are, you know, some of them are answered and some of them are not answered.
Markham Hislop: I want to wrap up our conversation today, Kevin, with an issue that is near and dear to my heart. In fact, I wrote an article about it in the March issue of Alberta Views magazine, and that is the post future for the Alberta oil sands. Cause this doesn’t get a lot of attention and I think it deserves more.
And in fact found its way, albeit not very prominently, into the announcement. And you basically, where the parties are talking about a diversified energy mix that includes feedstock for carbon fibers, asphalt plastics, and other products. And I think out of those, carbon fiber is probably the most advanced. Alberta Innovates, the agency has been actively researching this since 2018. It looks like there’s a very good chance that five to seven years from now, there will be a commercially competitive process. Alberta Innovates in fact thinks that it will be able to produce carbon fiber for half the current rate of current costs, which would be a significant advancement.
There’s a huge market, of course, in the automotive industry, but also in some, you mentioned like con concrete. And so, what do you make of this downplaying, but it, they’re flagging it here as something that they want to work towards, which is using it as feedstock for materials instead of feedstock for fuels.
Kevin Birn: If you think of what they’re producing now, a good, the majority of it, not all of it, but the majority of it ends up in the products you and I used to get around. Heating homes, running cars, those sorts of things. Over time, now we can have different debates about the rate of transition to the pace of transition. And it’s certainly accelerated, but I think they’re pointing to the need to diversify into alternative markets for the product. And a good place to diversify is petrochemical integration.
And that’s kind of how I’d read this know, it’s taking more of your barrel of oil to things that are not combusted. So if you look at a barrel of oil, the majority of it ends up in transportation fuels there’s other fuels, home heating fuels.
And then the last, the smaller share of it actually ends up in petrochemical processes. You know, you think about it lubes and waxes plastic and polymers ultimately is where a lot of it goes. Taking a bigger wedge of that barrel into petrochemicals, provide you a lower emission profile. And if you look at lifecycle emissions of crude oil, for example, most of your emissions come from combustion, the big way to decarbonize that is to combust less of it. And so if you land more of your product into non combustibles, it makes the product more resilient, but it also decarbonizes the value chain of that product as well.
Markham Hislop: Just as a final aside, Kevin, a couple of years ago, I interviewed your IHS market colleague, Dr. RJ Chang about the new one step petrochemical process for making plastics that the Chinese are beginning to implement in their big refinery combination, petrochemical complexes. Whereas it used to take two steps to turn oil into plastic precursors. Now they can do it in one step, which makes it as economical, it’s competitive with natural gas as a, as a feed stock. And they can use, in fact, it’s kind of designed for, heavy crude oil like bitumen, and do just any thoughts on whether or not we might see some of that technology finding its way into Canada as part of this integrated approach that you referred to.
Kevin Birn: I don’t know, to be honest, to answer that question, we are seeing this crude to chemicals is not an isolated interest globally. You know, there’s other technologies, there’s a technology in the middle East that does a higher share of the barrel straight through. So yeah, you can do it in one step, but now there’s technologies that would take a bigger chunk of the barrel through the chemicals is advantage of integrating, you know, key integration, bunch of other things, but integrating chemical facilities and refinery facilities. You know, so it becomes more of a multi hub kind of system when you think about that. And ultimately, you know, the owners of those assets, what they’re seeking to do is diversify the product mix. So, depending on how fast or what’s the stability of longterm demand, taking that crude into a non combusted material outside of the transportation fuel market is a way to secure that asset or that product through, through true transition.
Markham Hislop: Kevin fascinating insight into where the oil sands is going with decarbonization and where it might go in the future. The announcement we have today, essentially, I think starts the process of a net zero by 2050 in a much more structured way than we have seen before. I think this is good news. Now, of course, the proof of the pudding will be in the tasting and we’ll be watching this process with great interest. Thank you very much for your insights. Always appreciate it.
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