In that post I imagined how some environmental groups or First Nations may react to the Laxer plan. For this post I would like to explore some potential reactions from the fossil fuel industry, and the investment community specifically, to Laxer’s call to phase out oil sands production.
I would hazard to guess that most folks in these communities would laugh at the suggestion. At best, the oil sands could be phased out or rendered obsolete in 50 years, they would say.
Let’s dig a little deeper, beyond the initial derision, and imagine a world where this is possible.
When would an oil sands phase-out seem like a good idea for an oil executive or an investor? I would offer that this idea could be entertained when you have paid off your capital and earned a fair return on your investment, when you can make more money elsewhere, or when oil sands extraction is no longer socially or legally acceptable.
Some context is important. It is hard not to hear about the financial hardships of oil sands companies these days. In all likelihood, the impoverished climate for oil sands investment will continue. Global oil supply will continue to increase. This will happen with increased oil production from low-cost producers like Iran and the inability for OPEC and non-OPEC countries to limit production.
To add insult to injury, growth in global demand will likely be less than forecast. Just this past week, Bloomberg conducted an insightful analysis that posed the following question: If the current abysmal price for oil is caused by a global oversupply of 2 million barrels per day of oil, what would happen if electric vehicles reduced oil demand by the same amount? According to their analysis, this will likely happen by 2023. At minimum, you would expect production in high cost regions like Alberta’s oil sands to suffer even greater losses. The International Energy Agency predicted last week that growth in the oil sands will likely come to a “standstill” in the medium to long term, once near-term construction projects have been completed.
But fear not, the Alberta oil sands will not be the oil industry’s last stand. Given a sufficiently low oil price, some in the oil industry may cancel oil sands projects (e.g., Cenovus and Shell), sell devalued assets and shift capital to produce oil in lower cost jurisdictions. Some fossil fuel companies may even choose to shift into renewables. Companies like Enbridge are now starting to put some serious money into wind energy; they recently invested $750 million in an offshore wind energy project in the UK. Mind you, there is considerable diversity in Alberta’s oil patch. Companies like MEG Energy and Husky Energy are selling off more profitable conventional oil assets to cover losses from their oil sands operations.Many investors, once a fair return on investment is received or clear regulatory signals that the end of oil sands production is nigh are given, will shift their capital elsewhere. The capital flight from Alberta is already taking place. Capital expenditures in the oil sands have already dropped 35% from 2014 to $25 billion in 2015. The province is now entering its second year of recession.
So in this context, is Laxer still out of touch to call for an oil sands phase-out?
Some lessons can be learned about another phase-out in recent Alberta history: coal. Last September, Dawn Farrell, CEO of TransAlta, a major owner of coal power plants in the province, publicly mused about an end to coal power in Alberta. In November, Alberta Premier Notley announced an accelerated phase-out of coal power by 2030. Just five months later, Farrell told investors, “we’re transitioning TransAlta to a clean power company.” All this to say, several years ago most energy analysts would have called this coal phase-out announcement unfathomable. Not only is it now happening, but TransAlta is now a willing participant.
It took a contingent series of events—a perfect storm—for the Alberta coal phase-out to become government policy. This is where investors and oil companies should be taking notes. This phase-out was the result of years of campaigning by local environmental groups against coal, growing alliances between these green groups and health advocacy organizations, learning from the example of a successful coal phase-out in Ontario, depressed stock prices for thermal coal mining and coal power companies, the election of a social democratic party in Alberta, the election of a Liberal government in Ottawa, and development of increasingly cost-competitive renewable energy and storage technologies. This was the perfect storm that made a coal phase-out in Alberta happen—at least, on paper. We shall have to wait until 2030 to find out if it was successful.
To be certain, one can only take this comparison so far. Electricity and oil markets are very different. Far more people are employed in the oil sands, and far more money and power are at stake. That said many of the background conditions for the coal phase-out are now happening in the oil sands. The share price of many major oil sands producers like Suncor or CNRL have fallen around 30% to 40%, respectively over the past 18 months. There have been growing concerns by many civil society groups and Indigenous communities who have launched successful campaigns to stop oil sands pipeline development and keep oil sands in the ground. If the predictions about oil supply growth in Iran or a step-change electric vehicle technology are correct, then the odds of an oil sands phase-out would increase. Further, the new NDP government has created a 100 MT carbon emissions cap. While this cap still allows a 30% increase in carbon pollution, it effectively dashes the “limitless growth” narrative that dominated the discourse around oil sands in the 2000s.
Somewhat counter intuitively, it will be far easier for Alberta to phase out the oil sands when the provincial treasury is not awash in oil royalties. If this low oil price is sustained in the medium term, the province will be forced to raise revenue (and reduce dependence on oil royalties) in another manner. Capitalizing on the clean energy economy could begin to replace some of the lost revenues from either low oil prices or an intentional oil sands phase-out policy.
And so Gordon Laxer’s audacious After the Sands enters into a context that very few would have imagined possible five years ago. Laxer invites readers to contemplate a long list of seemingly radical ideas. To those who hold on to the operating assumptions of the past, these ideas are highly implausible. Yet a case can be made that the current confluence of political, economic, and social changes ought to cause those in the oil industry and the financial sector to revisit their assumptions and imagine a different future. If we are to address the challenges and opportunities of climate change, we will need audacious visions like this to recast our sense of the possible.