Energy vs Oilsands: How did we get to 3.5m bbl/day and what do we need to do about it?

Co-hosts David, Sara, Ed, and energy/environmental economist Dr. Andrew Leach of the University of Alberta unpack the past, present and future of Canada's oilsands.

About Our Guest:
Andrew Leach is an energy and environmental economist and is Professor at the University of Alberta, with a joint appointment in the Department of Economics (Arts) and the Faculty of Law. His research spans energy and environmental economics. His most recent book is Between Doom and Denial: Facing facts about climate change.

Show Notes:

(00:46) – Oil Market Report - November 2023

(01:57) – A Matter of Fact: How the oil sands benefits Canadians

(05:06) – Canada’s oil and gas sector, the road to net zero and regional fairness

(06:16) – Making progress on Canadian oil sands CO2 emissions intensity

(06:36) – This oil sands crude has lower GHG emissions intensity than the U.S. average

(12:45) – Crude Oil Forecast Markets & Transportation

(16:16) – Refinery Economics

(25:30) – What's in store for 2024 — Part 3: Growth Plans at Alberta's largest in-situ producers

(28:19) – Not Fit for Purpose: Oil Sands Mines and Alberta’s Mine Financial Security Program 

(29:53) – Fiscal Plan A Responsible Plan for a Growing Province 2024-27

(38:02) – CCS Won’t Happen in Oilsands Without Bigger Subsidies, Cenovus Exec Warns

(43:15) – The Role of Critical Minerals in Clean Energy Transitions

(46:39) – Whose jobs face transition risk in Alberta? Understanding sectoral employment precarity in an oil-rich Canadian province 

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Energy vs Climate
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Transcript

EvC S5E9 Energy vs Oilsands Podcast

[00:00:00] Ed: Hi, I'm Ed Whittingham, and you're listening to Energy vs. Climate, the show where my co host David Keith, Sarah Hastings Simon, and I debate today's energy challenges, highlighting the Canadian context. Despite intense public scrutiny and opposition from many in civil society and several First Nations, Output from the Canadian oil sands has grown to roughly three and a half million barrels per day, and the oil sands are not done growing.

They are expected to account for the majority of the 500, 000 barrels per day of Canadian oil production growth by end of this year. What does a world using less oil, if that indeed happens, mean for the oil sands? In November 2023, the International Energy Agency said, and I quote, Many producers say they will be the ones to keep producing throughout transitions and beyond.

They cannot all be right. Well, we've heard exactly that from top executives of oil sands producing companies, that their barrels should be, and will [00:01:00] be, the last ones ever consumed as the world transitions away from oil. Are they right? And are the reports of the death of the oil sands greatly exaggerated?

To help us explore that question and others, we invited Dr. Andrew Leach to join us on the show. Andrew is an economist with  the University of Alberta's Department of Economics and its Faculty of Law. His research spans energy and environmental economics with a particular interest in climate change policies.

His most recent book is Between Doom and Denial, Facing Facts About Climate Change. In 2015, Andrew served as the chair of the Government of Alberta's Climate Leadership Panel. I personally got to know Andrew when he invited me to give a talk to his business school class in 2011, after which we in the class went to the pub to have a discussion not unlike the one we had on the pod.

Here's the show. So, Andrew, can we put the present role today of the oil sands into context? Just how important are the oil [00:02:00] sands to the Albertan and Canadian economies in terms of jobs, GDP, taxes, royalty, lease payments, uh, all of those goodies? 

[00:02:08] Andrew: Yeah, so oil sands, as you said in the opener, they're the lion's share of Canadian oil and gas production in terms of whether it's GDP, exports, resource revenues, et cetera, they're all the vast majority of any of those categories.

And if you add all of that together, it's about 10 percent of Canadian GDP, depending on how you. Calculate it, what you put in the bucket, what you don't split that out across the provinces. It doesn't spread evenly Alberta and Saskatchewan and B. C. have a much larger share of Newfoundland. Labrador.

Alberta share among those is probably 5 to 10 times as high as any other province and, you know, 10 times higher than any of the non energy producing provinces should be kind of obvious, but, uh, jobs wise, it's, you know, 300, 000 ish workers, depending again on who you count as an oil and gas worker and who you don't.

If you use the same definition you use [00:03:00] for green jobs attached to solar, then we're probably adding, you know, four to 600, 000 indirect and induced jobs on top of that. So it's a massive sector and a massive impact on the economy. A 3rd of our exports right now, or our energy, 30 percent oil and gas. So it's, it's a massive part of our economy, no matter how you qualify it.

And then, you know, we just came out of Alberta budget week where we saw, you know, 13 ish, billion dollars a year and oil sands royalties and then layer on another. 5 billion years. That's sort of a more than a quarter of of the Alberta budget. So when you narrow it down to a little closer to home for us, it is just a massive, massive impact.

[00:03:43] Ed: Yeah. And just to be clear. So the impact on the Alberta economy is clear. What does the federal government get in terms of its take? 

[00:03:50] Andrew: Well, there's, there's a couple things directly. They're benefiting from the corporate taxes associated with the revenue from the oil and gas companies. Since so far as they report [00:04:00] in Canada and pay taxes in Canada, the larger oil sands companies will be a big, big share of that.

And then, uh, you're also looking at all of, when we mentioned the jobs and the exports and everything associated with that, all of that personal income tax revenue flows in part of the federal, well, most of it flows to the federal government and. A large part of it is held by the federal government. You definitely have a big impact there on on the Ottawa calculus as well.

And then, you know, there are some other impacts that maybe run the opposite direction. Of course, the greenhouse gas inventory, which I'm sure we'll talk about, but also affects on the Canadian dollar. The fact that that oil and gas. Exports are such a big part of our economy and that we rely on foreign direct investment.

Both of those things tend to, uh, tend to affect our exchange rate a little bit. And, you know, we're not talking about the Dutch disease anymore like we used to, but, uh, but that, that plays into the macro side of the Canadian economy as 

[00:04:56] Ed: well. Yeah, that's disease. I'm going there's a whole [00:05:00] roster of terms that have been associated with the oil sands that have been in vogue and out of the low, but maybe maybe we'll come back to that 1 and that we are energy versus climate.

So, let's talk about the versus climate part. There's no free emissions lunch when it comes to producing a lot of oil. And as you said, it's a massive sector and has a massive impact on the economy. What is the impact of the oil sands to on Canada's overall emissions? 

[00:05:23] Andrew: I mean, oil and gas total your 189 right in the last available inventory.

So probably today, if we carry those numbers forward, somewhere around 200 megatons at a 700 or 650 for the national economy. Emissions are so hard because our data are lagged a couple of years. So a lot of that production growth that you mentioned in the record levels we're at right now, aren't in the new emissions data.

And then you look closer to home, Alberta, uh, You know, 260 megatons issue to that national total. So, you know, well, better than a 3rd of the national emissions here. And a lot of that coming from those large industrial facilities. So, oil sands, the [00:06:00] refining, the petrochem that all runs from that oil and gas economy.

So, huge impact on our national emissions inventory. 

[00:06:08] Ed: Sure. And of course, every time you add a project or add production, then we get a commensurate, uh, increase in, in overall emissions. But talking about intensity, the oil sands had a big drop in emissions intensity per barrel produced years ago when some producers replaced burning Pet Coke with natural gas.

But last time I looked at it, it had flatlined that emissions intensity drop and flatline. Has it stayed flat or has intensity dropped again, frankly, have not paid attention to it. Recently 

[00:06:36] Andrew: on the oil sand side is still coming down a little bit. In the individual sectors, but the big changes that you have is more of our oil, more of our Canadian oil production is oil sands now.

So you're sort of taking out the low emissions barrels and increasing the share of, uh, of high emissions barrels. And then within the oil sands, we fluctuated a little bit between. Uh, mining and in situ growth. So when we had 2 new [00:07:00] big minds come in curl and Fort Hills, they're relatively low emissions intensity compared to other oil sand sources.

Lately. We've had 2 big effects happening. 1 is again that growth coming back in the in situ side, which is a little more a little higher emissions intensity and some of the big. Big legacy in situ projects, so well based oil sands production, injecting steam into, uh, into wells to produce bitumen. Some of those older sites are becoming dramatically more emissions intensive over time as they get older and as they're sort of cycling down the end of life of many wells.

They get really emissions intensive. So it's a mixed story. Um, you know, we'll have another change coming up as Suncor. You mentioned the non burning of pet coke. So Suncor has their new, what is it? 800 megawatt, uh, cogeneration plant coming online that will take some emissions out of their plants by burning natural gas instead of petroleum coke.

So it's, it's changing all along, but there's no dramatic level shift. You listen to the headlines. It sounds like, wow, that's [00:08:00] They've really driven this down over the last couple of years, you know, your summary of flat, really slow decline. There hasn't been a big level shift as those ones we had earlier on.

Yeah, 

[00:08:12] Ed: and just noting when we talk about the future of the oil sands, it would be great to spend a bit of time, certainly in the in situ projects, how reservoir characteristics really dictate your overall carbon intensity, and perhaps we'll have a bearing on which projects thrive and which projects struggle.

But growth. Three and a half million barrels per day seems like a lot, but that number is half of what it We thought it might be back in the early 2010s based on growth trends and projects that were in application or announced by companies. I used to get presentations included a graph of oil sands expansion plans.

And back then, let's say, when I talked to your business class, operating was below 2M barrels per day. Construction would bring it over to over 2M. Approved was up to 4M barrels per day. At [00:09:00] what had been in the application queue with 6M barrels per day, what had been announced was 8 and I'd use that slide to show the staggering pace and scale of development and to talk about any intensity improvement being overwhelmed by absolute increases.

But maybe you could tell us before we bring Sarah and David in. How did we get to that 3. 5 million barrels per day number from when I was talking to your class and it was under two in terms of, you know, economics and technology and policy factors, but also why is it only 3. 5 million barrels per day?

And why did it not get up to 7 million barrels per day? 

[00:09:37] Andrew: Yeah, there's a number of stories over time that have that have driven that. So the big changes that we saw in oil sands that that allowed the growth. I mean, certainly the development of in situ and steam assisted gravity drainage technology.

That's back 20 years now that we really saw those come online. But that ability to not have to build a giant mine site number 1, so much less [00:10:00] capital intensive projects, shorter lifespan projects. And opened up a whole lot of the resource to production. So that was sort of the early 2000s to mid 2000s story.

Then the next phase in the expansion that made things possible was all mines used to require an upgrader. You couldn't meet pipeline spec for heavy oil shipment out of an oil sands mine. So essentially it was like a tied cell. Hey, you want an oil sands mine, you can produce some bitumen, but you can't ship it anywhere unless you've built.

So you've got to build your own refinery up in Fort McMurray as well. And so that's a really big kind of add on kicker to the investment. Newer mines, you know, late 20, well, 2010s into, uh, into now, uh, particular Curl, Fort Hills, some of the legacy shell projects were able to get bitumen produced without, that they could market directly without having an upgrader.

So that made Um, and that's why mining sort of, I would say, still feasible, even as costs increased and that cost [00:11:00] increase would be the, you know, the 1st of my answers to your question about why hasn't it gotten, why hasn't it grown as much as, as it might have cost inflation is the big reason, you know, you go back and look a little bit before you would have spoken in my class, but, you know, we were talking about oil sands break evens at 8 to 12 a barrel for an upgraded project.

And now we're talking about, you know, the costs of those projects went. So high is to see you need a hundred ish dollar a barrel, WTI, to make some of these projects work. And that was, you know, when oil recovered from the global financial crisis and there was, uh, a real push through the 2010s. Uh, that was really the story in Alberta was everyone's trying to build an oil sands project and costs are going through the roof and we just can't, uh, contain this.

Of course, the greenhouse gas emissions pressures, the pipeline wars, can you guarantee. Egress for your project product out of Western Canada. Now, more recently, I think you see finance and insurance pressures and the uncertainty over global oil markets that it's not [00:12:00] just oil sands that, you know, you look globally across the oil sector that willingness to invest in a project.

That has its first oil 3 to 7 years from now, and then it's going to produce for another 30 years. Beyond that, you're making a really big bet on the long term oil market and the U. S. light, tight oil gives you a great alternative to that. You can do something that pays itself off in 3 years. So your risk is much, much lower with some of the newer.

Light tight oil fracking, et cetera, and that's been driving the investment and the production growth, et cetera, in North America. And, you know, that's had an impact on the value of our product as well. So I think a variety of factors pushing and pulling on both sides. I pulled up. I've got in front of me.

The caps 2014 forecast. Well, 2013 and 14 that has a 7M barrels a day of Canadian production. But I also pulled up there earlier, like 2011, and they're almost bang on to [00:13:00] where we are in 2025. So you had all of these factors changing and all of this disruption and upset in the sector in various ways, and you end up basically at what we were forecasting in 2011.

Yeah. 

[00:13:13] Ed: And you and I were joking the other day. How different parties can take the same set of facts and spin them for their own purposes. And that growth you had cap trying back in the day to excite capital and labor. And using an analogy like it's the size of Florida. Come on, everyone. There's room for you and Greenpeace and others using that same comparator.

It's the size of Florida. My gosh, they're going to undermine the whole thing. We need to stop it. So let's get straight to the, are the reports of the death of the US and is greatly exaggerated question. And it is, what, what does the world using less oil? And that's, let's say it's going to use less oil, regardless of additional actions that nations take on climate, what does it mean for Canadian oil, but specifically the oil sands?

And are those top executives right in saying that the [00:14:00] oil sands is well positioned to keep producing during the global energy transition and turning now, David or Sarah, which of you wants to weigh in? 

[00:14:09] David: I'll jump in kind of casting my mind back to when I was in Alberta and in the kind of the middle of this stuff more before the oh, eight crash.

I want to talk a little bit about did people really expected to get to seven or 8 million barrels a day? That's certainly what the projections were. My sense of talking to people, my recollection of what I thought and I thought is that felt unlikely. I think there were two things. One was this What I call the derivative constraint that basically you're trying to build a lot of capital in a relatively small place and the cost of labor and the cost of the supply chains to build things go up the faster you're building things.

That's not the production rate. That's the build of new facilities rate. And I think there was an inherent constraint there. Whereas you tried to build faster prices went up. And so then you were prices of the construction went up. So we're less likely to build. And the other thing is, I think. Maybe that period kind of in the early 2000s was maybe the last ever [00:15:00] of this real, I think, deeply naive and wrongheaded view that there was a kind of fundamental oil scarcity.

You really heard people kind of thinking that, that the oil age would have to go to these unconventionals because there just wasn't enough conventional oil. And I think anybody who's thought hard about the, both the, the economic geology and the record since the 1850s should know that that's not the way the oil business has worked.

And it feels even less likely to be true now where they're clear climate related forces that will push us off oil. But I think that sense that there was kind of no alternative, that we had this giant reserve, uh, was part of what drove that unrealism. But the flip side, I think is my view is that climate did not play much role.

In what happened that fundamentally the dynamics that got us to three and a half were driven largely by oil market and not directly by climate. 

[00:15:48] Ed: Yeah, and will climate play a role in the oil sands going forward? I I do remember, you know back then and I get the name of the books But there's actually a huge industry around promoting the feel of oil scarcity [00:16:00] And then some authors who I shall remain nameless for this podcast did a whole book on oil scarcity What does it mean for the world?

And then Few years later, did absolute energy abundance, a book on that. What does it mean for the world shamelessly? But, uh, Sarah, what, what do you think? 

[00:16:16] Sara: I mean, two thoughts on sort of this, you know, what the, what the future looks like, if I bring out my crystal ball, you know, I think one is we have to be really careful about sort of what timelines we're talking about and what depth of change in the global, uh, oil markets we're thinking about.

Right. And I think sometimes we mix up what happens in the short term with what happens in the medium to long term. And so, you know, short term changes, I think there is a lot of credence to the idea that, you know, many of these projects will be able to continue to produce at, you know, somewhat lower oil prices, profits will be lower, you know, there'll be less, you know, revenue and, and all of, of all the ways that, that Andrew mentioned in the opening.

Um, but I think where, where we sometimes extend that short term picture out too far [00:17:00] is an arguments that I've heard that like, Well, it doesn't matter if the heavy oil is more expensive than the light oil, because that's what the refineries need, right? And so we're not competing against the broader light oil market.

We're not competing against the Saudis. We're just competing against Venezuela and crude because that's, um, you know, the refineries need, need that input slate. And I think that really misses the point that this is. As we talk about over and over, this is not a, this is not changes around the edges. This is a fundamentally a transition.

And so once you get into that transition phase, then you start opening up. Well, okay. If we're actually going to be using much less oil in the world, then we're going to have to have some major changes to our set of refineries. And, you know, in particular, if What we already, I think I would argue are very much in the midst of, and it's hard to see how it doesn't happen.

If we see demand for gasoline dropping while other oil products are still remaining, um, relatively higher. Well, what does that mean? That means refineries actually have to make some [00:18:00] pretty major adjustments to start to adjust the output slate of their products and not being a chemical engineer, but having lots of great chemical engineer friends at the

I've learned that, you know, once they get to that point, they can also make adjustments to the input slate. There's a fundamental reason that heavy oil needs to be part of the mix of what refineries are taking. It just has been because that's, you know, sort of what was around when they designed them. And so once you get into this point where you say, well, now I'm going to have to make some pretty major investments in my refineries.

To produce the right kind of output slate. It's a very natural time to look around the world and go, well, what would be a good input slate to define for where can I, you know, get cheap, low carbon oil. And I think that is the moment where Canadian oil sands start to become really challenged because you are no longer just competing against that specific heavy crude, but you actually do have to compete directly with these sources that are either.

You know, large and cheap to get out of the ground. If we think about, you know, places [00:19:00] like Saudi or to, to the point that was made earlier, uh, against things like, like shale oil, where, you know, you, you can have these much shorter timeframes. And so it makes more sense as an investment point. 

[00:19:11] David: I hope you didn't take my statements to mean that the climate won't have an impact in the future.

No, no, not at all, yeah. And I really agree with you. This business of shifting market that is electric vehicles really move, the demand for gasoline will go down, but the demand for aviation kerosene and residuals will go down more slowly, or will go up for quite a while still. I think that is really important.

Is an important shake up, but, but I think that, that many people really underestimated that the extent to which battery electric vehicles would go quickly. This, this idea that just the last few years, we've innovated pretty fast away from eating cobalt, for example, as much as we did. And there's the.

Press is filled with reports of how electric vehicle sales are slowing a little bit. I, as somebody who was quite skeptical it would go this fast and now really quite optimistic that, that electric vehicles are going to [00:20:00] go, uh, to be clear, it'll be an S curve. And I think there's going to be some, uh, use of oil products in even light duty transportation for a long, long time.

But I think the middle part of that S curve is really going to go. And the big point is with the global oil markets, you don't have to pull demand down much. And remember, it's both this and also demographic transitions as fertility rates go down and population flattens, you don't have to bring a demand down much to really have prices get lower.

And then that really makes it tough for oil sands. 

[00:20:30] Sara: I also find it interesting, this pace of development, you know, Andrew just went through this whole story of what is arguably an amazingly fast pace of development, where we went from, you know, basically inventing sag D and proving it out, that it worked at all.

To massive growth over, you know, a period of just a couple, a couple of decades. And the idea that we, we somehow then though still believe that that's not going to be possible in other resources from the ground. So, you know, I think, I think taking some lessons from the history of the pace [00:21:00] of the development of the oil sands really shows us how quickly things can change.

[00:21:05] Ed: Yeah, I remember a story I maybe I've told on the EBC in the past is a task force on oil sands in the mid nineties eventually appointed said a big hairy audacious target for oil sands production and thought maybe we'll get up to a million barrels of production a day by 2020 well the oil sands actually hit that in 2004.

And one could argue that environmental management systems have been playing catch up ever since. And actually just a plug, so our next show is with Climate Brief's Simon Evans, and we're going to unpack this rash of, of information on EVs that's been coming out of late and a lot of it bad. Why is it coming out now?

You wrote in your book, Andrew, global action on climate will mean less demand for oil and gas, but that does not necessarily imply lower prices. nor that the value of Canada's oil and gas production will be compromised. And you make the point that oil and gas consumption prices do not [00:22:00] necessarily move in the same direction.

Can you expand upon that? 

[00:22:02] Andrew: Yeah, I think, well, David kind of got to it in his comments to say, fundamentally, what we care about is the price of oil, right? And that sounds trite, but we tend to forget about that. And we tend to also see people make an immediate jump from, well, hey, if global demand drops. Some amount or is lower, lower growth and expectations that automatically translates to dramatically lower prices.

And it only does so if people aren't expecting it to happen. And, you know, go back to, for, you know, an Alberta audience, right? 2015, 16, 17 was a pretty awful time because oil prices collapsed from, you know, the hundreds of per 110, 120 a barrel. Down into the high 20s, and they did that in an environment where oil demand was growing, but it was just the production was growing more quickly than than consumption.

So this immediate math right below, well, you're an economist, you know, we know which way the curve slopes. Well, there's two curves on that graph, right? There's [00:23:00] a demand curve and a supply curve. And the question is, how does supply respond? So David's absolutely right on on that. You know, the world oil market is very sensitive, but it's sensitive to both.

So world oil investment right now is not actually matching what, you know, sort of the rhetoric about demand growth, right? The oil companies are not putting their money where their sort of forecasts are, but they're also putting more money into the into the system right now than. You know, an IEA style net zero, or even near net zero scenario, they're investing way more in oil and gas production that would be associated generally with those scenarios.

So we're somewhere in the middle where we're, you know, depending on how aggressive policies get and how close people get to meeting those goals in the near term, you know, you could have either outcome, you could have a relatively high oil price world with Declining demand and declining production.

Don't think that's particularly the most likely, but it's there as a plausible scenario. You could also have a world where everybody keeps betting [00:24:00] on, you know, we're going to keep using oil. We're going to be, you know, the last barrel standing and everyone thinks they're going to be the last barrel standing.

And we end up with a market. That's, you know, 2015 style over 2016 style oversupplied dramatically with oil. 

[00:24:14] David: In principle, you can have declining supply and prices could be either way. I do think there's kind of kind of this dynamic that at both country and business level about who gets to extract those last rents.

And I think there's a way in which some places that are sitting on oil, that's pretty cheap to produce and, uh, uh, and, and has limited quantity are going to want to extract those oil rents hard. I'm looking at you middle East. 

[00:24:37] Andrew: Yeah, I mean, that's certainly, you know, I have a paper on this from way back when on, uh, with the, the sort of uninformative title of what hotel and kill the electric car.

But thinking of how, you know, uh, traditional economic models of resource extraction, what happens in a world where you suddenly think, wow, the, the alternatives are going to get dramatically better in a really rapid manner. [00:25:00] And essentially there's the, there's 1 outcome where it says, we call it the make hay while the sun shines strategy to say, there's 20 years left in this resource.

I might as well do it now. And the other 1 is just, okay, there's 20 years left to make rents. How do I make rents? I pull back on production and so the Saudis decide, you know what, I'd rather produce less at 150 a barrel than flood the market and try to live on 30. And that math is, is not clear. It could go either way.

So you 

[00:25:31] Ed: talked about the bets that the oil and gas industry is making. Globally, but what bets are they making in the oil sands specifically and the banks that stand behind them? I think it's been six years since the project an oil sands project has achieved FID. 

[00:25:45] Andrew: Yeah, certainly we're still seeing very limited new project investment.

That doesn't mean You know, limited capital investment. We're seeing some of that rebound, but it's nowhere near where it was, uh, you know, in the, in the heyday of 2013, [00:26:00] 14, et cetera. We're still well below that peak in terms of people putting money into, um, into new production and new projects. You're seeing synovus, for example, and they just announced yesterday.

25, 000 barrels a day incremental at Foster Creek and 30, 000 at Christina Lake or the reverse of that or vice versa. But so you're seeing a lot of those what would historically have been a new big project. That's just incremental at existing projects. So there's, there's some of that. But since really 2016, you've seen a couple of things.

You've seen companies. Pull back, uh, the, you've seen a big consolidation, so Shell pulled out, you know, Canadian Natural now owns probably 3x the oil sands resource that it did, uh, when, uh, you were on the stage with Murray Edwards in, in 2015, uh, at Notley's Climate Announcement, so they're much more, so they bought essentially cheap existing resource, Suncor has bought out a whole bunch of their partners in different [00:27:00] projects, they've bought resource, the existing players Are flush with existing projects that have expansion opportunities.

So there is, there is still capital flowing in. It's nowhere near what it was in, in 2014. And most of it is just flowing to the existing projects and expanding production in those existing projects. Yeah. And I 

[00:27:21] Ed: get the sense that oil sands observers, unless you're a close observer, you haven't seen that degree of consolidation.

And, and it's astounding when you look at the cost of production and, you know, uh, capital costs being entirely paid off of the existing producers that they can up there, continue to operate, find efficiencies and produce a very cheap barrel of oil. 

[00:27:41] Andrew: Whether you look at profits or costs, right, you see the royalties included, operating costs included, et cetera, that sort of operating profit number, these facilities are making in some cases, 40 or 50 a barrel, you know, pre tax operating profit right now.

So they're, they're cash generating machines at this point. 

[00:27:58] David: Yeah, it really is important to, [00:28:00] to say that as much as I think this is socially really bad for Alberta to be so oil dependent and I've worked on client my whole life, I think it's terrible. You got to say the innovation, the business and technical innovation has just been stunning to be able to really make that much money and drive down operating costs this far.

It's extremely impressive. 

[00:28:19] Sara: Of course, there's also the ability to offload some of those costs potentially onto future Albertans and Canadians as a whole. When we talk about things like liabilities, I don't think the oil industry is unique in this. I think this is common across extractive industries, right?

We see this happening, uh, in the coal sector in the U S where it feels like every day, there's another story about, uh, you know, how this unfunded liability is actually worse than anybody thought. Um, but I think that also, you know, Should be considered in the mix in terms of, and I think it was Andrew, I think you wrote that paper with some, some colleagues that you have seen that, you know, focus on the idea that out of probably conservative estimate of 46 billion of outstanding, uh, closure liabilities in the oil sands, there's something like 1 [00:29:00] billion, uh, that's actually been put down in securities too.

So we're sort of, there's a bit of borrowing from the future of who's actually going to be around to, to clean that up. 

[00:29:08] Andrew: Yeah, and I mean, what's, what's amazing, right? Is, is when you see how lucrative these facilities are, there is still a disconnect if you're not close to it. The, the idea that these things are just like a sneeze away from shutting down, packing things up and going away.

And so we can't do anything, you know, we can't change the rules. We can't, you know, require reclamation, you know, we can't do that. Because the investment will go on, and so you got to pick a lane here. These are either. These are incredibly lucrative cash generating machines that are the foundation of our national economy and our export sector, or they're a marginal, very barely profitable industry that could go away tomorrow and sort of pick 1 side of that.

You can't have both. 

[00:29:53] Ed: And part of that is, you know, with a big hand extended out toward the federal government asking for, you know, massive help and [00:30:00] building out, um, CCS technology in the oil sands. But before we go there, well, so let's, let's talk a little bit about government's perspectives on the growth of the oil sands.

And let's start with Alberta, because it's topical. We've just recently, uh, last week had our, our, the Alberta government released its latest budget. And it did two things. I mean, the budget. Doubles down on royalties and its contribution to Alberta coffers and its prospects or its confidence in the growth of oil as Premier Smith has been very clear and open about for forever, but it's also the government of Alberta is dropping money into its heritage fund in a way that a bunch of recent previous governments haven't and almost like it's hedging and signaling that perhaps there could be a transition.

And this will actually be. Have serious implications for the government of Alberta and its budget. Andrew, what is your thought? 

[00:30:52] Andrew: Well, that's another place where it's sort of a pick a lane story, right? Where if you look at the budget, yeah, we, we threw some money into the heritage [00:31:00] fund, uh, based on last year's sort of unspent dollars, which is kind of the, the reality of the heritage fund for most of the last 20 years.

When we suddenly have an influx of royalties so large and so unexpected that we don't know what to do with it, we end up contributing the heritage fund. Yeah. But given a little bit of time, we can find ways to spend it, which is kind of despite the premier's, uh, address to the province on on on television.

That's kind of what you see in the budget. There isn't as much going into the heritage fund over the balance of the budget as there is going in this year. And so now we're in all of a sudden, a situation where if the premier on 1 hand saying, get off the resource roller coaster. On the other hand, we've now basically set our provincial budget up to depend on 16 or 17 billion a year in resource royalties.

[00:31:48] David: This barrels a day per person to me is a good way to illustrate how really unusual Alberta is in the rich world and how kind of frightening the oil dependent is. I mean, Many listeners will have heard of Texas and think of it as being a pretty big [00:32:00] oil producer, but it's actually a little less than Alberta in production of 3.

6 million barrels a day and 27 million people. Norway, which was a million a barrel day per person is now 2 million barrels a day and over 5 million people. So Alberta is really a very unusually oil dependent place. And I think it's just hard to understand how central it is to the politics and how hard it is to imagine change.

Sadly. 

[00:32:21] Andrew: Yeah. And well, and just how much we've internalized that into the way we think about the way we mythologize Alberta, right? It's, it's the Alberta advantage. This is all happened solely because we had slightly lower corporate income taxes than the rest of the country. Not of course, because there's like a trillion barrels of oil buried under our province and not buried under others, you know, but for.

These few small changes, this thing never would have happened. But, you know, you talked about savings and all of this, you know, I don't think about it like Norway has been a point of frustration for me for a long time. People look at Alberta and say, you know, why aren't we [00:33:00] like Norway? And so, well, fundamentally, our oil industry has never since the 70s been like Norway's.

We've always had, as you said in the opener, this idea that 10 years from now, we're going to be producing twice as much oil as we twice as valuable. And so, you know, I, I liken it even now to saying, like, I walk into my undergrad class and say, you know what, you guys should really be putting some money aside because in like 10 years from now, you're going to be raking it in and you're going to wish you to save more money today.

When you were a student, it makes no sense. And so if you're the premier of Alberta and you're saying. You know, the world's always going to use oil is going to be huge demand for oil. We're going to double our oil production. And we should really sock some money aside for that future right now. That doesn't make any sense.

Norway did it because they thought they had 15 years of oil long. He did it because he thought we had 15 years of oil. If you were in the space of we have 20 years of oil left, then yeah, you might want to start, you know, not spending 17 billion a year in royalties, but maybe saving it and smooth [00:34:00] things out a bit.

But that's not consistent with a the world's always going to use more oil every year forever, and they're going to pay more for it. We're going to produce double what we do now. Um, that's not a proposition for saving today. 

[00:34:12] David: And this is where the political moment is so pivotal because not that there's some perfect combine our climate policy globally, but it really does feel like the world is going to move to restrict carbon emissions.

I'm really quite. Confident about that. And electric vehicles are happening. And so that outlook just feels different. However much you think about particular projections. 

[00:34:31] Andrew: I mean, I, you know, I obviously can't go back into, into history. I don't have a time machine yet. Um, David, you could make one for me potentially.

Uh, we're going to get this direct air capture thing sorted. Just 

[00:34:42] David: turn 60. You need to do that. If 

[00:34:44] Andrew: you went back to the, you know, the, um, The Jevons era and thinking about oil taking over from coal. And at that point, you know, it must have looked like, you know, Jevons said, Oh no, oil is a poor substitute for coal is naysayer on.

You go a little further forward. It's like, wow, [00:35:00] the world is not going to be using a lot of coal for very long into the future because we have oil. We got natural gas. We got this massive change in, and lo and behold, It still turns out that, you know, for 100 years, we use essentially uninterrupted all year over year over year.

And so, you know, I think you're absolutely right that the electric vehicle changes the, the landscape tremendously. But what does it do to the rest of the energy system? I still think you need that climate coordination to say. We want the emissions out of the system and that's your, you know, the, the combustion side of that barrel of oil that is, you know, 80 percent of the world's oil use today is combustion in one way or another.

And are we going to get away from that? Or are we just going to do, you know, more cheap air travel and, you know, Okay. Less, uh, combustion driven personal transportation 

[00:35:57] Ed: and Sarah, let's let's talk about the federal government's [00:36:00] efforts to get the emissions out of the system because, uh, it's come out with great fanfare, but also great criticism coming from Alberta.

The federal cap on oil and gas emissions, Andrew and I will remember the Alberta climate leadership days and the difficult conversations, but ultimately successful around the oil sands emissions cap. Thank you. Which was design. Never, uh, regulated, never enforced, but I still think it's a good idea and, uh, not on a podcast.

I can tell stories about how the came, we came up with the a hundred mega ton number and we being the, uh, the environmental groups and companies working quietly together. But Sarah, you've written just recently, I think he just published it yesterday. Uh, an op-ed with Martin Ol Sinski. talking about the impact of the the federal oil and gas emissions cap.

What kind of bet is the federal government making with regards to the oil sands with on one hand handing out lots of money or setting aside lots of money for an investment tax credit for CCS on the other hand moving on a cap [00:37:00] that while not perfect will still you know really have a a strong bearing on the oil sands and growth.

[00:37:06] Sara: Yeah, that was an unintentionally, but turned out well timed with our episode op ed, uh, in the Globe with, with Martin Olchinsky. And really we're sort of making a point similar to Andrew, you said earlier, you know, you can't have it both ways. And I think that that's sort of the central point of the op ed, which is to say, so the federal government for those who aren't aware has proposed a cap on emissions from the oil and gas sector as a whole.

And they break down sort of how they got to that cap. by, um, sector type. And so they have a sort of effective cap on emissions from the oil sands of a reduction of 20 megatons, um, from a baseline level by, by baseline 2030 levels out to 2030. And, you know, this, this cap was announced and there was, you know, sort of endless, uh, comments made about how this is totally unfair.

And, um, I think there's room for debate about, you know, The policy and, and I've had interesting conversations with, with the Trevor, uh, [00:38:00] tomb about, you know, where, whether it makes sense or not, but, but what we really wanted to focus on was a central point, which is you've heard from industry and its surrogates that this cap is effectively a production cap.

Basically we can't, you know, continue to, to do, uh, and to produce the oil sands while meeting, uh, this emissions reductions. And so what we point out in the, in the op ed is that. This cap, this reduction of 20 megatons, um, is actually slightly less ambitious than what the Pathways, um, Industry Alliance has said that they intend to do, which is 22 megatons by 2030.

And so, you know, you have sort of on the one hand industry through pathways going around. You know, repeating this idea that this is what the industry is committing to do. They, uh, you know, as recently as, as earlier, 2023, they said that this was an ambitious, but achievable cap. Um, you know, they talked about it a lot at COP as a big part of the solution.

And yet back here in Canada, they say. Uh, [00:39:00] you know, we can't do this. And so the question is, you know, which is it you got again to use Andrew's phrase, you've got to pick a lane. And I think that that really brings a reason and, and where regulations become important because we've seen already when it comes to liability, say in the conventional oil and gas sector, a lot of promises being made about plans and then not, and them not coming through.

And so I think what's interesting about what the federal have Government has done with this cap, different from say the clean electricity regulations, where they're sort of pushing more than industry says that they want to go here. They've really set something up that is even slightly less ambitious.

And so it's a little bit in my mind, it's really a test of like, are you serious? You know, pathways are, are you really ready to put your money where your mouth is, that this is what you're going to do. Or is this just a, just a PR stunt? And it's very hard to sort of know which is, which is the case until we get to 2030.

Other than that, if you actually regulate the cap, then, you know, they, they are basically really promising to do it, not just, you know, saying that they're going to do it. And [00:40:00] so I'm still sort of waiting. I mean, Pathways themselves, uh, I think it was in December said that, you know, we're studying the cap to understand it.

And I don't think that they've made a public comment on it since then. Um, but I think it is a moment. to really say, is there a seriousness about what industry says that they're going to do under the Pathways Alliance? Or is that, you know, not something they're ready to commit to? And so I find that to be a very helpful legislation that really forces that conversation to today.

And frankly, I think also, you know, Would really force if I was an oil sands CEO, I think you have a really hard time explaining to your investors why you would invest in CCS unless you were forced to do 

so. 

[00:40:40] Ed: Yeah. And why would shareholders make that investment? They would make the investment if you've got a government of Canada, basically writing a check for the lion's share of the costs, or if you really thought that the world was seriously going to get really serious on climate change and you think your technology pathways are Will, you know, help you avert this existential [00:41:00] crisis and talking to the cap talking about that necessarily begs the question of C.

C. S. or C. C. U. S. and to pull back the curtain for the audience, David had said when we were planning out this, the show that, uh, let's keep the conversation on C. C. S. and the oil sands brief. And now I turn to you, David, as to. Why? Why do you think it's a quick discussion? 

[00:41:20] David: I just don't see any sensible prospect of OilSan CCS.

And just for full disclosure, I was the only non CEO, as I recall, on this big federal panel of five people or so that recommended some of the original money and stuff for this decade and a half ago. I think There are two kinds of reasons why I think it's implausible. One is it turns out that the oil sands are actually kind of far away from good reservoirs and expensive places to do things and just overall not a great place for CCS.

Not impossible, but not great. And two, there's this basic fact that it's not clear. It makes sense. To scrub the CO2 from that basically declining resource. So Ed, I think you [00:42:00] just said, maybe I didn't get quite this right, you know, or it would happen in a world where suddenly we see climate as an existential crisis and we have to act fast.

But I think the point is in that world, which I don't think we're quite in, I wish we were a little more in, I do think we do CCS on some things. But not on the oil sands because in a world where we're really acting fast on climate what we're doing at the oil sands is just gradually closing them down.

We'll do CCS on other things like cement plants where we're going to keep needing cement and we need a way to do it or maybe natural gas electricity where we need a way to manage intermittency or some other steel for example. So I think there's places where CCS has a sensible role in a rapidly decarbonizing economy but I don't think oil sands is it.

[00:42:41] Ed: Let's actually bring in some audience questions. So I'm going to start, uh, And where is Paul La Ponce's question? Also pulling back the curtain. In the same way that we over predicted oil sands development in the early 2010s, even in the clear face of pipeline and upgraded limitations and of competition from [00:43:00] fact tracking, are we currently equally over predicting the pace of electrification in the clear face of limitations and green electricity production, transmission, and recharging infrastructure networks, as well as the huge extraction refining requirement of key minerals.

[00:43:15] Sara: I would say yes, I think it's always very interesting to have conversations with people in the oil and gas sector, where they assert very strongly that there's no way that we can get more of these minerals and metals out of the ground, while, you know, having themselves been part of an industry that, you know, has made really incredible progress and what they're able to produce out of the ground.

And so there seems to be this, this disconnect between the 2. Um, I think the other piece that we risk underestimating the pace of, of change on is also how. Um, much more efficient we can become with some of these metals and minerals as our technologies improve. So David mentioned the point of, you know, engineering the need for cobalt out of the batteries.

I mean, certainly we, we are going to need certain metals and minerals, but there is more sort of [00:44:00] shiftability and replaceability than, than maybe we always appreciate. Um, and then overall, you know, part of the way that we. bring costs down of technologies as we, um, produce more of them. Part of that is actually that they, we get more efficient and we, we need less of the inputs to make those products as well, too.

So I think there's a lot of ways where we sort of miss those, uh, those points. 

[00:44:19] Andrew: You know, we tend to approach any new resource or any new development as how can we do this? While not changing anything else about how, like, how can we make this new thing look exactly like the thing I have right now. And, you know, in that, in that piece, David, I think you pick on, like, why on earth are we worried about how can we store electricity to run a desalination plant 24, 7, 365?

Why aren't we thinking about how cheap it is to store water? And I think there are a lot of thought processes like that that are still to come on the electricity side. Right? You saw even a hint of that with our. Our blackout in Alberta or near blackouts in Alberta a while ago, [00:45:00] where the, you know, the government saying, hey, stop doing all these things like stop, you know, charging your electric vehicle.

But 10 years from now, the call won't be stop charging your electric vehicle. It'll be please discharge your electric vehicle. Of course, it won't be done by a message to your cell phone. It'll just be done on an automated basis. And, you know, we need to get people to that point. I think we are probably overestimating some things, but then we're also really underestimating what we'll be able to do with some of the technological changes that are coming our way that we, you know, that we're not even internalizing into how we integrate this electrified world into our, into our lives.

[00:45:38] David: I think you're right, but it's a great question because it's basically saying, you know, how, what do you, how do you guys know what you know? And I think the answer is we don't, and of course it's possible we're wrong. I, I say, and I typed this in the answer. I think if you'd asked me four or five years ago, I would have focused more on this supply chain for batteries, both the battery manufacturer and the mineral supply chain.

[00:46:00] I don't see that as a likely bottleneck now for the reason Sarah gave, um, but I can easily imagine that there's a real bottleneck in just developed countries just being slow for all sorts of reasons of government dysfunction and NIMBYism and the fact that it's actually difficult to, uh, get electric power systems able to, uh, handle it.

So, yeah, I agree with Andrew that in principle, we should use electric vehicles, uh, reverse charging to manage grid instability. But I've been hearing that for a long time. It's not actually easy to do. Not that it's technically so hard, but it's hard in a regulatory and social sense. So there could be ways in which we just can't reform grids and get stuff built and developed world fast enough to do that.

I can easily imagine that being a limit. 

[00:46:39] Ed: Got a productivity question here from McVin Wheatlegan, who many people know from ARC Resources and ARC Financial. He says, and this one's for you, Andrew, many experts argue that Canada is in a form of a long term productivity crisis. Based on stats, non conventional oil is 1, 000 per hour.

Compared to all [00:47:00] industries being roughly 60 per hour on a productivity level, perhaps this is another perspective on what Andrew said that the oil sands sector has had a massive economic input impact when we gradually in quotation, Mac, when we gradually closed down the oil sands, uh, end quote, we are gradually closing down the highest value creator in Canada comments.

[00:47:20] Andrew: Yeah, I think that's. Partly exactly the right way to have the conversation. So don't forget that the oil in the ground has huge value. And I know Max is not going to forget that his, his business is tied to it, but, you know, you can't just kind of say, well, you know, compare somebody producing another good or service from scratch versus somebody extracting oil and, and, you know, Fail to value the the oil in that in that equation.

It's important, but that's a piece I pick up on my book when I talk about the just transition policies of the transition away from oil and even how we talk about moving away from oil and gas in Canada as though, you know, we can sort of offhand this. Oh, yeah, we'll just shut it down. [00:48:00] And, you know, we'll just find these workers new jobs, and we'll just work this out.

And I'm going to draw on one example I use in the book, which is the Newfoundland cod fishery compared to the oil and gas sector in Canada, which is, you know, when the Newfoundland cod fishery shut down, of course, it was a regional calamity and, you know, had some national spillovers. Yes, it is. But if you look at where the wages were and where the government income situation was and where the Draw on government money was this was a sector that was quite heavily subsidized labor.

That was quite heavily subsidized workers that made far below the provincial and national average, as opposed to oil and gas, where you're looking at workers that are currently making 2 to 3 X, the national average in, depending on which part of the sector they're in. And it's a sector that produces massive, not just revenue for people, but revenue for government.

So when we offhand, oh, yeah, you know, Matt putting quotes, oh, yeah, we'll just, you know, gradually close this down. That's a very different decision than we've made about coal [00:49:00] power than we've made about cod than we've made about asbestos than we've made about any of these other things where we sort of had these similar conversations, and it's on a much larger scale.

[00:49:09] David: I'm really glad this conversation came up. I am just personally really worried for the future of the country and of Alberta and my friends in Alberta. I think that the, that this underlying reality, and it was great to see these actual productivity numbers, thousand dollars an hour productivity compared to 60, these are huge.

So as much as we have to transition away from oil, it is going to be really painful. And I think the thing. That I most worry about I'm even panicked about is the sense that people in the Alberta and Canadian garments just are blind to that reality. They're just not thinking seriously about the challenge they face and you can't govern well if you're blinding yourself to reality.

[00:49:48] Sara: Two thoughts on that. So one is, you know, gradually closing down the oil sands. Part of that is, is it a choice or is it a response to global markets, right? So how much is it something that we're choosing to do versus something that we [00:50:00] have to respond to? And I think we've, we've talked about that already earlier, but, but I'll fight that.

Then I think the other, the other point to me around the productivity is like, So, so what do you do if you, if you do see a future where there is external pressure such that we have less demand for, for oil here, what, what is the best use of the public funds that come from the oil sector, um, in the meantime?

You know, I share David's concerns, but I also think that it's not too late in that I think we are going to have, you know, at least a decade probably of, of a lot of volatility in oil prices, and there will still be money coming into public coffers that. That stuff can be done with that. And that's where then I really question, you know, the, the business case or the wiseness of the public investing that in decarbonizing the oil sands versus other things that we could be doing with that, that we know are needed to sort of.

Build up and make a, uh, an economy more productive. And that goes back to, you know, investing in our, [00:51:00] uh, in our infrastructure and our broader infrastructure, investing in, uh, education and, and in kind of all of these systems that support sort of development of new, uh, new economic opportunities, you know, and we look often at.

Uh, longingly, I guess, at the U S at their, at their sort of productivity levels, and we are not doing the same things that we're not sort of investing in, in innovation in the same sort of open way that the U S is versus having it more tied to sort of the industries that we, that we have today. So I think that, you know, I definitely take the point and I agree that it is going to be a, a.

Challenge, I think it's not something that we really can completely control within Canada. You know, I think we can't, for all the reasons that we've talked about, just decide, well, let's not close down the oil sands and let's just keep them, you know, running at this level of productivity for the next 40 years.

But it should give us, you know, really then very careful consideration of what's the best way to prepare for that. And I take Andrew's point that, you know, and you should read the book where he goes into it in more detail about, it's not that we can [00:52:00] as a government or, or, you know, any government could really.

Sort of plan out that future and, and really smoothly make it all happen, but governments can do things like making investments in, uh, in infrastructure and infrastructure writ large, including, you know, education, all these pieces that really create the, the ingredients that are necessary to have, uh, productivity growth within an economy.

[00:52:23] Ed: Yeah, if you're a policymaker in Canada, you could make a valid argument, say, listen, you know, and this is what we're trying to do with EBC is have these honest conversations around trade offs between economic outputs and climate, say, all right, well, climate is going to suffer. And what we're going to do is let these operations operate as they will.

And know that there will be a time where global market forces, Canadian policy will have actually really a smaller effect will dictate whether they're around or not. But in the meantime, we're going to capture as much wealth as possible. And Andrew, I think, to give another shout out to your book, I think, use the analogy of if [00:53:00] you're a policymaker in 2030, and the oil sands continues because oil supply is tight, prices are high, it's kicking off jobs, it's kicking off taxes and royalties.

so much. That's really then difficult to go in and say, all right, we're gradually now going to let the air out of that balloon. And it's not like, as you say, the cod fishery, it's not like coal, because as you said, right at the top, the number of jobs that unfortunately, well, not sorry, I'll take that back.

The number of jobs that the sector produces is astounding. It's a huge number. And I say only unfortunately, because. Then, if you're talking about transition to policymaker, you're affecting such a huge part of the Canadian population and output, it makes it very, very challenging. 

[00:53:42] Andrew: Yeah, one of the stagos I tried to look at in there was, was how we dealt with asbestos.

Right. And you think about, like, we were mining asbestos in Quebec, a lot of local jobs, local impact, etc. It wasn't a national scope and scale, really. But, you know, even up to the point where the world had [00:54:00] identified asbestos as all the terrible things that it does, we were still, at least from Ottawa, trying to provide loans to get the Jeffrey mines started back up in Quebec.

Right. We were that desperate for that economic development in that particular region. And then to flip that conversation on its head and think about to some degree, how we talk about, and, you know, to David's point, like how we talk about real people in Alberta, right? These are not abstract numbers in a spreadsheet.

This is like, A person to whom I'm saying, you know, nice job you had there, but sorry, and it's easy to do in some ways. If that industry is non viable, if there's an easy alternative that there's a better job down the road with higher pay, it's much, much harder to do when the global market is saying.

Please give me this stuff and we're willing to pay a lot for it and you're trying to tell someone to take a worse job so that we can avoid meeting that global demand. 

[00:54:56] Ed: Big thank you, Andrew, for joining us on the show. It was [00:55:00] great to have you and, and your extensive knowledge and experience with the oil sands sector.

That was a lot of fun. Thank you. 

Thanks for listening to 

[00:55:07] Ed: Energy Versus Climate. The show is created by David Keith, Sir Hastings Simon and me, Ed Whittingham. And produced by Amit Tandon, with help from Crystal Hickey, Serena Gibson, and Talia Grunau. Our title and show music is The Wind Up by Brian Lips.

This season of Energy vs. Climate is produced with support from the University of Calgary's Office of the Vice President of Research and the University's Global Research Initiative. Further support comes from the Troche Family Foundation, the North Family Foundation, Sign up for updates and exclusive webinar access at energy versus climate.

com and review and rate us on your favorite podcast platform. This helps new listeners to find the show. We'll be back in late March with a show looking at fact versus myth when it comes to electric vehicles with special guest Dr. Simon Evans of Carbon Brief. See you [00:56:00] then.