Innovate to Survive and Thrive
Canada's Energy Industry
For many years, the energy industry has played a significant role in Canada. Several years of low oil prices have emphasized how important that role has been, while leaving many to wonder what the future holds. Especially to Western Canadians, the extractive energy industry is seen as a quintessential part of Canada's well-being.
The energy industry has brought many benefits to Canadians. It has provided jobs, royalty income, and significant direct and indirect tax revenues to both provincial and federal governments. The Canadian Association of Petroleum Procedures points out that benefits from the energy industry flow to all Canadians. Ontario Premier Kathleen Wynn has recognized that "oil and gas are clearly fundamental to Alberta's economy and to Canada's, but also to Ontario's". Albertans have directly experienced considerable benefits from the energy industry during boom years.
At the same time, the energy industry is not without critics. Environmental advocates question the impact of energy industry activity, and particularly oil sands development. Protesters and interest groups oppose new pipeline construction, citing not only the risk of spills, but also the encouragement of additional carbon-intensive oil sands exploitation. Taxpayers question whether we are selling our valuable resources for too little return to the public purse.
Against these competing demands, and in a world of potentially long term low oil prices, we are left with the question: what is in store for Canada's energy industry?
I diverge for a moment. A decision whether to go ahead with any initiative is made after weighing the benefits of an activity against its costs. If the benefits outweigh the costs, then the activity goes ahead. If the costs of an activity outweigh its benefits, it would be foolish to go ahead with the activity. Of course, the best analysis looks to the future, and so the benefits and costs are really the expected benefits and expected costs. The assessment of benefits and costs will also incorporate value judgments, especially as they exist for factors which are not certainties, but are risks (such as the risk of an oil spill).
This basic analysis exists at all levels of society. From personal decisions, private sector decisions, and public sector decisions, any organized group will go ahead with a course of action only if it determines that, for it, the benefits of that course outweigh the costs. Society, through its institutions including government, have an effective veto over decisions to exploit oil and gas resources. Development will be allowed to proceed only if society deems that it will likely get more than it loses.
Historically, Canadian and Albertan society has implicitly accepted that the benefits of energy development outweigh its costs. However, as the world comes to grips with the prominence of shale oil, the equation is changing. The benefits of resource exploitation – which are predominately economic – have dramatically decreased, while changing social preferences affect the assessment of costs, particularly environmental costs, associated with extractive industries. This is particularly so for oil sands development.
Shale wells aren't cheap, but they can be spudded with reasonable performance certainty in a short period of time and at predictable cost. Recent evidence suggests that shale producers drill when expected oil prices are above approximately 40 USD per WTI barrel. Of course, as prices increase so does oilfield activity. This supports an argument that long term prices may be bound in the approximate 40-60 USD per WTI barrel range.
Over the past three years, with oil prices settling into this postulated range, Albertans have very well felt the pinch. Decreased oil prices have slashed government revenues, while jobs have been cut. From 2013/14 to 2015/16, Alberta government royalties on oil sands dropped from $5.2 to 1.2 billion, and on all non-renewable resources from $9.6 to 2.8 billion. The highly contractor-driven service industry has been hit hard as producers have sought to reduce expenses. Companies and workers pay tax on income, and when less money flows, every government collects less tax.
On the cost side, there is increasing public cognizance of the environmental impact of resource development, with particular focus on oil sands development. Opponents say, with ever increasing public traction, that the ecological and human impacts of oil sands development cannot be overlooked. They cite carbon intensity and large tailings ponds for which economic solutions have not yet been implemented. Researchers have begun to study whether pollution from the oil sands and cancer rates in northern communities are linked.
Against this background, the outcome of the cost/benefit analysis may, in the long term, change. Proponents of resource development, including oil and gas producers, should consider not only how this social license equation looks today, but how it will look in the future. We cannot gaze into a crystal ball, but if current trends continue, the future will bring with it even greater concern for the environment. If the extractive energy industry is to continue and grow, it must determine how it will obtain social license to do so.
The simple answer involves making sure that all interests in the social license equation are, to the best of each industry player's ability, addressed. Strong profit is not only good for shareholders, but propagates the sharing of wealth through society. Reduced social costs can be achieved by improving operations so they have fewer downsides and externalities: reducing carbon intensity, tailings, fugitive emissions, habitat destruction.
How can the Canadian energy industry improve both sides of the social license equation at the same time? Innovate. Innovation – through improved physical or business processes – is key to achieving more with the same or lower cost. As competing suppliers – with lower costs – ramp up production, our energy industry must be willing to adapt and innovate. It must do so not only to survive, but to succeed and thrive. Stay tuned for ideas on how the Canadian energy industry and its stakeholders can encourage effective innovation.