2022 Top Operators Report: Agenda 2030
Editor’s note: The last five years have been a hard ride for Canadian oil and gas producers.
Wild price volatility, a pandemic-induced price crash, ongoing market access issues, oil production curtailment, the rise of the ESG movement, and finally a geopolitical crisis are just some of the challenges industry faced.
The end result of this period of instability is a reinvigorated industry ready to take on the world as the commodity cycle turns once again.
The 2022 Top Operators Report examines the 2017-2021 timeframe, identifying key trends that shaped the present energy landscape and what lies ahead for the 62 Canadian headquartered public operators tracked this year.
To sort through these challenges we are once again leveraging the experience of professional services firm KPMG in Canada to provide insight into the last five years of change and what strategies operators could pursue to thrive in the inevitable turbulence ahead.
Data analysts from Evaluate Energy are providing context to the stream of information coming from corporate financial reporting and other relevant documents. Analysts from geoLOGIC systems ltd. offer context into trends in activity and technology to manage costs.
We’re also tapping into a broad swath of the insights and opinions from industry leaders gleaned from Daily Oil Bulletin coverage.
To download the 2022 Top Operators Report, click here.
Oil and gas companies are shifting from identifying and reporting material environmental, social and governance (ESG) risks to mitigating those risks in their day-to-day operations.
The current focus is on limiting environmental risks, particularly reducing greenhouse gas emissions. Industry has made progress on cutting GHG intensity as it works towards meeting Canada’s 2030 emission reduction goals and ultimately towards net zero in 2050.
The big challenge ahead is dealing with combustion related emissions. Both industry and government are betting heavily on carbon capture and sequestration (CCS). The federal government recently announced tax credits for CCS development, including a 60 per cent credit for direct air capture projects, a 50 per cent for other capture projects, and a 37.5 per cent credit for investment in equipment for transportation, storage and use. However, it only applies to storage in saline and not hydrocarbon formations. The Alberta government is working with industry on six carbon hubs across the province to store carbon dioxide from all industries.
The Pathways Alliance, an initiative bringing together six large operators representing 95 per cent of oilsands production, is an example of an industry-led initiative. Its target is to cut 22 megatonnes of emissions by 2030, and then progress to net zero emissions by 2050. The initial Pathways CCS project consists of a carbon trunk line running from northeast Alberta to Cold Lake where carbon will be stored underground. Operators will be responsible for their own carbon capture development.
But it’s not just integrated oilsands giants that are interested in CCS.
Conventional oil producer Whitecap Resources Inc. now has five memorandums of understanding from industrial parties for a hub in Saskatchewan and has been selected by government to pursue development of a hub in northern Alberta.
“We buy into the fact that energy transformation is underway and should be underway,” said Grant Fagerheim, Whitecap’s president and chief executive officer. “It is our primary goal to provide a reliable service for companies looking to capture their emissions and decarbonize their respective businesses while generating incremental returns and profits for our shareholders.”
Success in developing the hubs could lead to opportunities outside Canada, he added. “Our objective here is to get commercial projects up and operational in Canada as quickly as we possible. Those projects are in Alberta and Saskatchewan. But we are looking to export our technology into other areas whether that’s in Canada, into the U.S. or Europe as we advance forward.”
Montney gas producer Advantage Energy Ltd., through its Entropy subsidiary, is also pursuing CCS, with the goal of being the world leader in post-combustion CCS development. The company is capitalizing on leading Canadian research and development, and benefitting from a massive energy transition fund, said Michael Belenkie, president and chief executive officer of Advantage Energy.
Entropy’s CCS technology is modular and can be retrofitted to most point-source industrial emissions, including difficult-to-decarbonize areas such as power generation, blue hydrogen, liquefied natural gas (LNG), oil and gas processing, as well as cement and steel production, said Belenkie. The modular technology is scalable to projects as small as 8,000 tonnes of CO2e per year, which allows for decarbonization to occur in increments. There is no upper limit to the scalability for larger projects, and it recovers roughly 90 per cent of carbon emissions.
“Early on, the fastest uptake of the technology for us has been within the energy industry, because we’re known within the energy industry, as are our engineering teams. And so, we made fast partnerships based on trust and familiarity with how we work. However, now we’re seeing tremendous interest within the chemicals business, in things like cement, power generation, and the list goes on,” he said.
Entropy announced a $300 million strategic investment agreement with Brookfield Renewable to scale up its deployment of CCS technology globally, with the investment funding near-term projects such as the first and second phases of Advantage’s Glacier CCS project. There is also potential for significant follow-on capital that enhances Entropy’s access to global markets. “The additional projects we expect to work with Brookfield, those are very exciting, and they tend to be very large. If you look at Brookfield’s strategy, at least as we understand it, the investment strategy is to invest in the energy space in assets that are large and can be decarbonized.”
There is an increasing focus on asset retirement obligations (ARO) as landowners and the public express concern over who will ultimately be responsible for increasing liabilities. Recent government funding has helped operators reclaim exhausted wells and other facilities at the end of their life, while providing much needed work for oilfield service companies. Governments are also increasing regulations to drive further asset reclamation.
Obsidian Energy Ltd. has responded to the carrot and stick approach taken by governments. From 2019 to 2022, Obsidian abandoned 1,033 wells, discontinued and abandoned 2,650 km of pipelines, abandoned 60 facilities and received 287 reclamation certificates, said Cliff Swadling, vice-president of operations.
In total, this has reduced the company’s decommissioning liability by $90 million and leaves 97 per cent of its inactive legacy wellbores fully abandoned.
“We have essentially concentrated any of the inactive assets into our core operating areas, where it’s much easier to address,” he said. “We’ll continue to follow along with the liability management framework and just make this a normal part of our business.”
Asset retirement is part of Obsidian’s responsible, full-cycle development strategy, he said. In 2018, the company entered Alberta’s area-based closure program as an early participant, which in 2019 led to the firm’s first large-scale program.
Obsidian participated in Alberta’s Site Rehabilitation Program (SRP), receiving around $34 million in grants and allocations that management expects to use by year-end 2022.
In late June, the Alberta Energy Regulator (AER) increased the industry-wide closure spend target for 2023 to $700 million from $422 million and released forecasted targets through 2027, which are anticipated to increase annually by nine per cent. The announcement came as no surprise, said Bill Whitelaw, managing director of Sustainability and Strategy at geoLOGIC systems ltd.
“The regulator has been signaling this for some time. The increase is part of a battery of regulatory tools being used so we don’t have a historical repeat of what got us here in the first place,” he said, adding from an ESG perspective operators should account for ARO upfront when planning developments. “ESG is not just about the front end. Companies need to be good stewards of assets throughout their lifecycle.”
Adding complexity to the ARO challenge is the potential to use some surface leases and the subsurface pore space below for helium, lithium or geothermal development. Many of these same assets could be used for carbon dioxide storage, and that could lead to conflicts, said Whitelaw. “This is an illustration of how transitioning energy systems are co-dependent on each other. From a policy perspective a lot needs to be sorted out.”
Industry water usage is an emerging issue. The International Sustainability Standards Board (ISSB) is updating its water standards and has identified water use as an area of future conflict.
“It’s warning of future conflict in high-stress water areas,” said Whitelaw. “The Duvernay is a great example of this where oil and gas are competing for water with farmers. In a climate change context, this is going to get worse before it gets better.”
While operating teams focus on managing environmental risks in the field, corporate leaders are working to integrate ESG into strategy and financial reporting to better account for material issues that could impact future performance. The IFRS, which sets international accounting standards, is working to align sustainability reporting with traditional financial reporting through the ISSB.
“They want to apply the same rigour to sustainability as financial reporting, “ added Whitelaw. “Twenty years from now they will be seen as opposite sides of the same coin. They’re saying we can’t let these things run decoupled from each other in the future.”
Sustainable finance including green bonds and other sustainability performance-linked debt instruments are helping drive this alignment.
In 2021, Canadian oil infrastructure operator Gibson Energy Inc. became the first public energy company in North America to fully transition its principal syndicated revolving credit facility into a $750 million sustainability-linked revolving credit facility. It includes terms that reduce or increase borrowing costs as sustainability and ESG targets are met or missed by a 2025 deadline.
The performance determinants include:
- Reducing Scope 1 and Scope 2 GHG emissions intensity by 15 per cent;
- Increasing the representation of women in the workforce to 40-42 per cent, and racial and ethnic minority representation to 21-23 per cent; and
- Increasing the representation of women at board level to at least 40 per cent, with at least one member identifying as a racial or ethnic minority and/or Indigenous.
The credit facility is part of Gibson’s effort to embed sustainability and ESG principles into all aspects of its business, said Sean Brown, chief financial officer. “Key targets from each of the three pillars of ESG will now also directly impact our financing costs.”
“The intent is to put all kinds of clean and green hooks into money to help progress things forward,” added Whitelaw. “If you add green hooks into money the reporting follows.”
It is also driving a shift in corporate purpose as organizations add stakeholder concerns to shareholder concerns when formulating their business objectives, said Whitelaw. “There is this idea of double materiality where companies not only report on how external factors could impact enterprise value but also report on how company activities could impact internal and external stakeholders. It is already happening in the EU. It’s coming to North America.”
To download the 2022 Top Operators Report, click here.