Alberta's energy industry: A roadmap for the future

'Here in a province which prides itself on innovation and risk taking, now is the time for a fresh approach and positive action.' Harrie Vredenburg and Tim Marchant on our relationship with OPEC, tax changes and tasking our best and brightest with creating new technology.

'We have to clean up our oil. And then we have to rebrand it.'

A haul truck carrying a full load drives away from a mining shovel at an oilsands mine near Fort McMurray, Alta. (Jeff McIntosh/Canadian Press)

What can Alberta do about the oil price meltdown?

In late 2014, the Organization of Petroleum Exporting Countries (OPEC) decided to end their policy of cutting oil production to support the world oil price. The result was that more oil flowed onto the world market than consumers needed.

The basic supply-demand rule of economics reasserted itself and the price of oil plummeted 70 per cent — a low point from which it now appears to be tentatively recovering.

At the same time, Iran has re-emerged from years of international economic sanctions and is ramping up its oil exports into this over-supplied market. The potential that demand from emerging economies like India and sub-Saharan Africa will absorb these new supplies of oil will take time to affect global oil markets.

In the meantime, as oil is a globally traded commodity, there is little a producer like Alberta can do. We have to be a price-taker.

Alberta companies, therefore, are focusing on driving their costs down to compete in the new market reality. This cost-cutting is happening rapidly, in part, because the premium from the inflationary boom times has come off everything from labor costs to office rents.

But aside from cutting costs, is there something else Alberta and Canada can do to better position itself for the new oil market of the years ahead?

What then, is to be done?

Option 1: Join The Club

Canada is a major player in world oil markets.  We are the fourth-largest oil exporter, after Saudi Arabia, Russia and the United Arab Emirates.

But other than politicians proclaiming that we are an "energy power," we have not politically leveraged our world oil position because of our decentralized private sector oil industry.

Unlike Saudi Arabia, we do not have one oil minister who calls the national oil production shots to which a national oil company responds. Instead, we have hundreds of companies making individual production decisions in response to market price signals.

That makes it difficult for Canada to throw its weight around in global oil markets.

Saudi Arabian oil minister Ali al-Naimi talks to journalists during a meeting of OPEC oil ministers in Vienna, on Dec. 4, 2015. (Heinz-Peter Bader/Reuters)

In a recent paper, our University of Calgary colleague, Robert Skinner, argued that Alberta and Ottawa should forge closer ties to OPEC and its member countries. 

While he stops short of advocating that Canada should establish a formal relationship with OPEC, he does argue that Canada should monitor OPEC much more closely. He hints also that perhaps Canada, like Russia, might occasionally reduce its oil exports and coordinate with OPEC to support higher prices.

Saudi oil minister Ali Al Naimi has recently been soliciting cuts from all major oil-producing countries. 

Although the suggestion that we cooperate with OPEC seems at odds with Canada's free-market approach to oil production, it's not the first time the topic has been broached. 

Skinner points out that during the oil-price rout of 1986, Alberta premier Don Getty called Saudi oil minister Sheikh Zaki Yamani and offered to make a cut in production.

The Saudis liked the idea and, three weeks later, Yamani asked Canadian foreign minister Joe Clark to come through on Getty's offer. 

But he declined.

Former Alberta premier Don Getty tried to broker a deal with Saudi Arabia to cut oil production but the federal government refused to go along. (Ray Giguere/Canadian Press)

Canada's formal response to Yamani's request was to say that only the market would set Canada's production levels — a policy that Canada has retained since. Still, Canada has nevertheless had good relations with Saudi Arabia over the years.

So, how might coordinating with OPEC work?

Getting closer to OPEC would entail increased diplomatic relations — activities that are not outside the current roles of the Canadian foreign service.  But setting national oil-production levels in Canada would require complex political, business and legal negotiations, given our existing market-based system.

If such agreements could be reached, and such negotiations came to pass, Canada, as a major oil exporter, would be in a position to boost global oil prices through coordinated production cuts.

Still, there are other options.

Option 2: Clean up and rebrand our oil

For more than 25 years, the UN Intergovernmental Panel on Climate Change (IPCC) has documented the growing scientific, peer-reviewed evidence for the existence of human-induced climate change.

There are increasingly clear signs that oil consumers are recognizing the extent to which greenhouse gas emissions (GHGs) are associated with oil production and consumption. 

Canada can leverage this awareness and concern to its economic benefit, but we have to clean up our oil.

And then we have to rebrand it.

Harrie Vredenburg and Tim Marchant say Canada needs to produce 'cleaner' oil that comes with fewer greenhouse gas emissions and then rebrand it as such in order to reach more environmentally conscious buyers in the future. (Jason Franson/Canadian Press)

The carbon content of oil from different producers may become a differentiator for customers in future oil markets. In other words, lower the carbon production around your oil and customers may be more likely to buy your product because it's "cleaner."

They may also be more willing to allow it to be pipelined to new markets.

While producing "cleaner" oil would increase costs on energy companies, as they would have to create new production methods, there's already historical precedent that shows many are willing.

Innovation history

The 1992 UN Rio de Janeiro Conference on Environment and Development (led by Canadian Maurice Strong) and the subsequent 1997 Kyoto Protocol set the standard for global reductions in GHG emissions.

In the early 1990s, Canadian energy industry leaders like Shell Canada's Jack McLeod and TransAlta's Ken McCready were already considering the effects energy production had on climate change. They were prepared to make new capital investments in power plants and renewable energy sources to reduce emissions from their operations.

In the late 1990s and early 2000s, Suncor's Rick George and TransAlta's Steve Snyder made important Kyoto-inspired, emission-reducing investments.

There were incentives under the Kyoto protocol for energy companies to build new plants here in Canada with the lowest carbon footprint and earn carbon credits.

There were also unusual opportunities.

TransAlta invested in the Uganda cattle feed project — a feed supplement to reduce methane emissions from cattle, which would earn TransAlta carbon credits.

TransAlta invested in a feed supplement designed to reduce methane emissions from cattle in one of the more unusual climate-change fighting innovations of the late 1990s and early 2000s. (Darko vojinovic/Associated Press)

Additionally, in the early 2000s, Petrobank's John Wright invested in radically new production technology that promised to reduce carbon emissions from oilsands and heavy oil production by 50 per cent, as well as reduce costs.

But these innovations stalled.

While Canada signed the Kyoto Protocol, we didn't enforce it.

This left Calgary's energy-industry innovators holding the bag with their Kyoto-inspired investment commitments.

The emissions reductions resulting from the innovation investments were not recognized or credited by government, and thus did not result in any benefit to the companies.

Rival companies that did not make these investments — and were not penalized by government for this failure — had lower production costs and were therefore more profitable than the innovators.

The failure to honour its Kyoto commitments earned Canada a black eye at international climate change policy meetings. Canadian oil and pipelines became, and continue to be, a target for well-financed international environmental activists.

Now, new governments in Ottawa and in Alberta are seeking to restore Canada's reputation as a leader in tackling climate change. Last November Prime Minister Justin Trudeau and Alberta Premier Rachel Notley traveled to the Paris UN meeting to tell the world that "Canada is back."

Good words, but now we need to make it happen. 

A new path to cleaner oil

How do we get to being a world leader in cleaner oil?

Last November, Alberta announced a carbon tax of $20 per tonne by January 2017, rising to $30 in January 2018 and growing with inflation. This will level the playing field for energy companies.

Initially, this will hurt the consumer. The $30 per tonne carbon tax is estimated, based on British Columbia's eight-year experience with carbon taxes, to result in a rise in gasoline prices of about 6.7 cents per litre.

Premier Rachel Notley unveils Alberta's climate strategy, which will include a carbon tax and a cap on oilsands emissions among other strategies. (Amber Bracken/Canadian Press)

But the tax would create a monetary incentive for the oil industry to engage in technological innovations to create cleaner energy. And if they emit less, they'll be taxed less, and thus should be able to sell to us, the consumers, for a cheaper price.

As well, the proceeds of the government carbon tax can be reinvested in research and development by industry and universities in order to accelerate the reduction of carbon emissions from Alberta's oil production.

This can also create spin-off benefits. Investment in research and development leads to creation of new high-tech Canadian jobs, and the technology and expertise created could be exported to other oil-producing countries.

The heads of oilsands companies Canadian Natural Resources, Suncor, Cenovus and Shell Canada stood with Notley as she announced Alberta's climate change strategy in late 2015.

Murray Edwards, the sometimes outspoken chairman of Canadian Natural Resources Ltd, has voiced his support for a Canadian "clean oil" strategy premised on the new carbon-pricing scheme.

But once our oil is cleaner, we have to rebrand it and sell it as such.

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The rebranding

By being a first mover to develop innovative technologies that reduce carbon emissions from oil production, Canada could create a new category of crude oil in the global marketplace — "Canadian oil."

The post-Paris world seems to be serious about addressing climate change, and carbon content may increasingly figure in oil-buying decisions, along with price.

Countries with a low cost-production advantage may suffer from higher carbon emissions due to inefficiencies, associated or waste gas flaring and long distances to markets.

This makes that oil "dirtier" with significant carbon emissions, and that could give Canadian oil a consumer market advantage over other crude oil producers, like say, Venezuela.

But, for an Alberta clean-oil strategy to work, markets like California and the European Union would have to be prepared to buy and pay a premium for cleaner oil, or at least prefer it over other oil.

A protester carries a sign during the "People's Climate March" in the Manhattan borough of New York on Sept. 21, 2014. The international day of action on climate change brought hundreds of thousands of people onto the streets of New York City on Sunday, easily exceeding organizers' hopes for what marked the largest protest on the issue in history. (Carlo Allegri/Reuters)

Also, as growth markets like China and India catch up and try to conform with the Paris Agreement, those markets may favour Canadian oil for its lower carbon footprint.

That's a proactive gamble that Canada should take.

But pipeline opponents would also need to be convinced that pipelines carrying this lower-carbon oil can contribute to reducing carbon emissions.

The most vocal of pipeline opponents will likely continue to oppose all new hydrocarbon pipelines based on their principle that all new production and transport infrastructure development must be stopped.

These well meaning activists ignore the unintentional consequence of their pipeline-blocking strategy.

Global oil demand will simply be supplied by higher-carbon oil produced in less regulated markets and transported greater distances to customers.

The result is more global GHG emissions instead of less.

But more moderate environmentalists that have the ear of governments may be won over to the concept of lighter-carbon oil as an idea worth supporting.

Worth the risk

While there are political and economic risks to these actions, the alternative is inaction — a future in which Canada attempts to wait out low oil prices in the hopes that other nations will lower their oil production, or global geopolitical events will result in higher prices.

While Canada has ridden out other downturns in oil prices, this passive strategy may have serious consequences, including continued layoffs and cost-cutting in the energy sector and persistent budget deficits for provinces like Alberta.

Here in a province that prides itself on innovation and risk taking, now is the time for a fresh approach and positive action.

About the authors:

Harrie Vredenburg is founder/Academic Director of the Global Energy Executive MBA, Professor and Suncor Energy Chair in Strategy and Sustainability at the University of Calgary's Haskayne School of Business. He is also International Research Fellow at Oxford University. Tim Marchant is Adjunct Professor-Strategy and Geopolitics with the Global Energy Executive MBA at the University of Calgary's Haskayne School of Business. He worked for 30 years in the oil industry including 10 as executive in the Middle East. (University of Calgary)

Calgary at a Crossroads is CBC Calgary's special focus on life in our city during the downturn. A look at Calgary's culture, identity and what it means to be Calgarian. Read more stories from the series at Calgary at a Crossroads.


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