Giant Wildfire Is No Longer the Canadian Oil Industry's Biggest Problemby
Technology breakthrough needed to compete in $50-oil world
GE, Cenovus join research effort but funding may fall short
Harbir Chhina helped develop the game-changing steam technology that allowed companies to tap the world’s third-largest reserves in Canada’s oil sands. It was a moonshot that paid off.
Now the oil-sands industry, still recovering from last month’s wildfires, needs another one. Without a technological breakthrough like steam injection three decades ago, the flows that have transformed the country’s economy could slow to a trickle. In a world that has plenty of cheap crude, and increasingly demands cleaner energy, the oil sands look dirty, as well as expensive.
“We didn’t use that word moonshot,” but that’s what it was, says Chhina, now a top exec at Cenovus Energy Inc.
The search for cleaner and cheaper techniques may be less urgent than fighting the blaze, which knocked out more than 1 million barrels of daily output and forced the evacuation of an entire city. But in the long run it’s a bigger threat.
Will it prove to be a terminal one? Not according to Chhina, who says he’s as optimistic as he was in the 1980s when the oil-sands began to take off, triggering hundreds of billions of dollars of investment. Former premier Stephen Harper likened the feat to the building of the Great Wall of China and Egypt’s pyramids.
But investment today is on a much smaller scale. Canada’s spending on research and development has been declining since 2001, and is only about two-thirds of the OECD average. And since the oil price slumped in 2014, the whole economy has slowed sharply, after years of outperforming industrial peers. No other G7 country is so dependent on commodities and their fickle prices.
Harper’s successor, Justin Trudeau, wants to change that, nudging the world’s 11th-largest economy toward services and knowledge-based business. He’s promised not to abandon the oil industry, but to repair its reputation as a climate villain.
That’s also the declared goal of companies like Cenovus, whose Chief Executive Officer Brian Ferguson says he aspires to eliminate the carbon from producing a barrel of oil.
Chhina and colleagues are making a start, experimenting with simpler ways of melting the nearly solid bitumen buried under the boreal forest. Solvents like butanes are currently the likeliest candidates, though microwaves are an intriguing alternative. Researchers are testing a technology that would fire the waves into horizontal bore-holes so that they’d heat the bitumen, like food, without affecting the surrounding container of rock and sand.
Another oil-sands giant, Canadian Natural Resources Ltd., is looking at ways of harnessing the carbon dioxide and heat from its operations. They’re channeled into large tanks of treated waste water, where they help grow algae under LED lights. The goal is a bio-refinery whose output could have various uses, from diluent to animal feed.
Such techniques may have promise, but the challenge is to replicate them on a commercial scale.
The oil industry has a faulty memory of how long game-changing technology development takes, said Tim Marchant, a professor at the University of Calgary’s business school and former head of BP Plc’s operations in Kuwait.
“People forget how long it takes, the decade or more, to get to that tipping point,” Marchant said. “In higher priced environments there’s more scope for experimentation, but at lower costs, it becomes harder because innovation costs a lot of money.”
It’s not just research that is expensive. Workers at Canada’s multi-billion dollar plants, in their isolated locations, earned an average of almost $130,000 a year, 40 percent more than the global oil-industry average, according to a 2014 study by Hays Plc.
All told, it costs about $55 to get a barrel out of existing oil-sands operations, and that will rise to almost $70 for future fields, according to Norwegian research firm Rystad Energy. By comparison, some shale producers in the U.S. have whittled their costs down to $30 -- and Saudi Arabia, Kuwait and Iraq can produce a barrel of oil for about $10.
That’s why the speech by former Saudi Oil Minister Ali Al-Naimi to the energy industry’s Davos-type gathering in Houston earlier this year sounded ominous in Alberta. Producers like Canada “must find a way to lower their costs, borrow cash, or liquidate,” he said.
Luckily for the oil-sands industry, some savings are relatively easy, according to Mark Oberstoetter, an analyst at WoodMac in Calgary. “There’s Star Trek technology and then there’s the low hanging fruit,” he said.
Those are what attracted General Electric Co. to Calgary, the industry’s de facto headquarters. The corporate calm of GE’s innovation center there, on the 34th floor of a glittering office tower with views of the Rocky Mountains, feels far removed from steam and smoke of the oil sands.
Gandeephan Ganeshalingam, leader of the GE team, says producers can get started on shaving off costs and emissions by focusing on data. “This is an industry that is known to adopt technology at a slower pace than others,” he said.
One of GE’s projects will help companies integrate data from their oil-sands operations, to allow timely prediction of the need for inputs, shut-downs and maintenance. Ganeshalingam said there’s more interest from clients now than when oil was $100, declining to name any.
GE’s brains trust is just one of many efforts, often uncoordinated, across Alberta. Companies and universities are involved, and so are government researchers -- just as they were in the 1980s, when Chhina was working at the taxpayer-funded Alberta Oil Sands Technology and Research Authority.
Larger private-sector ventures include a clean-tech fund co-founded by Cenovus and Suncor Energy Inc., which has set up a clean-tech fund based in Vancouver. Wal van Lierop of Chrysalix Venture Partners was involved in that project. He says there’s no need for the industry in Canada to despair, because fossil fuels won’t disappear overnight: “There’s not just a magical switch and then we are in the hydrocarbon world we desire. There will be a transition period of several decades.”
But he says only technology that’s profitable in an oil-price range of $50 to $65 a barrel is worth pursuing -- and Canada’s not even close to the kind of mobilization that would require.
“The big players in Alberta have to at least triple their efforts in supporting innovation,” he said. “With all due respect, I see a little bit, but it’s incomparable to other industries that went through major transformations.”