Balancing Emissions Reductions With Financial Performance A Long-Term Effort

Electrification at ARC's Sunrise facility. Image: ARC Resources Ltd.

Canada’s oil and gas producers are making progress reducing greenhouse gas emissions but reaching their net zero goals while maintaining financial stability is a long-term process that will require collaboration with technology developers, financial markets and governments, attendees at a Daily Oil Bulletin sponsored webinar heard.

Evaluate Energy recently completed an analysis of the emissions profiles of 19 Canadian operators (excluding oilsands) with total production averaging 1.8 million boe/d, comparing their 2019-2020 performance.

“The whole group reduced overall emissions and emissions intensity,” Mark Young, senior analyst for Evaluate Energy, told the Dollars and Sense: Balancing Financial and Emissions Performance webinar audience (click here to access a video of the event).

Absolute emissions were down about 15 per cent year-over-year. Emissions intensity for the 19 operators declined 22 per cent.

Young said operators used a variety of technologies and processes to lower emissions including: electrification; decommissioning older, less-efficient facilities; tighter well spacing; fuel switching; carbon capture; and other cleantech technologies.

Another tool available to help manage emissions is the M&A market. While Young said he isn’t currently seeing deals being made specifically to lower overall corporate emissions, what he is seeing is companies reporting when they buy assets with lower emissions.

All these efforts come with a cost, he added, before citing two examples. ARC Resources Ltd. spent $60 million electrifying its northeastern B.C. operations to reduce emissions from power generation. Baytex Energy Corp. identified venting at its oil facilities as a major emissions source, with the company investing $20 million in the Viking play to reduce vented methane.

With higher oil and gas prices resulting in growing discretionary cash flows, operators have an opportunity to drive down emissions further but it will require a balance of maintaining financial strength while meeting changing regulatory and market expectations.

“You could argue emissions targets don’t go hand-in-hand with financial targets,” said Young.

Spending on emissions reductions

Operators can start small and then build up their spending on emissions reductions over time to meet expanded regulatory or compliance demands, ESG requirements and public expectations, said Jackson Hegland, executive director of the Methane Emissions Leadership Alliance. “The environment is there to really push the dial on this.”

There has been large investment in developing methane emissions monitoring, measuring and reduction technologies, providing more certainty for operators, he added. Nearly $900 million has been invested in methane emissions in the upstream oil and gas industry alone by governments in the last two years. 

“Technologies have been around and continue to evolve,” he explained. “They are at a place now where we have more pilot projects implemented, more field deployment and better data. As we all know that data improves decision-making.

“That puts industry in a place where it is more able to act and, consequently, you have the investment community saying it is going to ask more from you,” he added. “They’re saying we’re going to ask for better data, better decisions and better performance.”

Capital market considerations

Oil and gas companies can face challenges in financing emissions reduction projects, said Lisa Mueller, president and chief executive officer at FutEra Energy and vice-president of New Ventures at Razor Energy Corp.

Razor, founded in 2017, uses enhanced recovery technologies including waterfloods to increase production in existing Alberta oil and gas fields. The company, from its beginnings, has been focused on cost improvements and managing ESG risks such as emissions, said Mueller. One action Razor took was to do a fuel switch at its main oil battery from Alberta’s coal-biased power grid to 100 per cent natural gas power as a win-win on both fronts.

“What it did for us was a couple of things. It allowed us to get our feet wet in the electrification of the energy complex and actually improved our costs by a significant margin,” said Mueller, adding the switch to using gas had a 3.5-year payout along with qualifying for payments through the Alberta energy efficiency program. 

The next step for the company is introducing geothermal generation to the mix. FutEra, a subsidiary of Razor Energy, is developing a $37 million hybrid natural gas/geothermal generating facility at Swan Hills that turns reservoir heat and waste heat from natural gas generation into power. The project improves financial and emissions performance, and the technology developed has the potential to be exported to other oil and gas operators around the world, said Mueller. However, accessing capital to build it was a challenge.

“What we found when we went to capital markets to actually finance the project is no one wanted to talk to oil and gas in 2019/2020,” said Mueller. Razor started FutEra as a stand-alone company as a result. “Part of that was the capital markets told us we had to. There are green funds. There are oil funds. And ne’er the twain shall meet.”

Carbon markets

Carbon markets can also play a significant role in reducing emissions while managing financial risk, said Chelsea Bryant, managing director of Global Markets & Strategy for Radicle.

But those investing in carbon markets first need to understand how they work, she said. “There is no standard form of agreement in carbon markets. What’s really unique is you will have different forms across market segments. Also, depending on the counterparties you work with there are different levels of sophistication.”

There are basically two types of carbon markets, said Bryant. Compliance markets are regulated by governments, and often require participation of large emitters and sometimes allow other organizations to opt in, as is the case of the Alberta system. Voluntary carbon markets, where companies enter deals to buy and sell emissions credits or offsets based on contractual arrangements, are also proliferating as companies set net zero goals. Prices vary across these markets, said Bryant.

“There is no single price for carbon,” she explained. “When looking at the voluntary market there is probably 50 different prices.”

Regardless of the type of carbon market, prices can be volatile over time and companies should have a hedging strategy in place, said Bryant. In compliance markets, governments can tighten regulations leading to higher costs or penalties for non-compliance. In cap and trade markets, caps can be lowered over time, limiting available credits.  Supply and demand of offsets or credits in voluntary markets can impact pricing. Companies need to look ahead when using markets to manage emissions, she said. They may also need to participate in multiple markets to achieve their goals.

Companies need to view carbon markets through a lens of risk mitigation, she added. They need to validate technologies or carbon offsets or credits to ensure they are as advertised, and seek out third-party validation. They also need to understand the default risk if counterparties fail. In addition, changing regulatory or policy risks need to be accounted for in the structure of commercial deals. 

Companies should also evaluate their own risk tolerance, said Bryant. “Do they want full exposure or partial exposure or a fixed price that completely de-risks market exposure?”

Government role

Governments also have a role in collaborating with other stakeholders in ensuring emission reduction targets are realistic and carbon is priced to encourage investment, said Hegland.

“Policy and regulations are a critical piece,” he said. “Governments can act based on idealism rather than reality and that affects policy.”

Carbon price certainty in regulated markets like Canada and Alberta is fundamental to modeling the economics of projects and accessing the capital to build projects, he added.   

Click here to access a video of the event.

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