It was almost 50 years ago that Alberta decided to invest in the innovative technologies that would transform the oil sands into an economically viable global-scale resource – and into a Canadian success story. In the 1970s, Alberta Premier Peter Lougheed established the Alberta Oil Sands Technology and Research Authority (AOSTRA), which spent $1.4 billion (in today’s dollars) developing the breakthrough technology of in situ oil sands extraction. This helped unlock more than $313 billion of investments into the oil sands, which at their peak employed 400,000 people directly or indirectly and provided $8 billion in annual revenue to governments.
That very approach that helped unleash the economic potential of Alberta’s oil sands can now be reimagined to drive progress to the growth markets of the future. In the low carbon economic transformation, Canada is well equipped to lead the way and supply growing global markets with zero-carbon products and technologies.
There are three key ingredients from AOSTRA that should inform government support for decarbonizing and diversifying our economy:
- Right goal: Investment should avoid areas that involve incremental advances and focus instead on aspects that leverage innate competitive advantages, are disruptive and go beyond immediate commercial interests.
- Right structure: Full backing and long-term capital from government, but independently delivered.
- Right scale: Sufficient funding to realize the goal while taking into account available human and natural capital as well as industrial infrastructure.
If the federal government, working in partnership with provinces, takes this type of proactive approach now, it can help struggling regions thrive in the transition to a net-zero economy. Doing so will help to diversify Canada’s commodity risk, insulating us from the whims of a volatile global market that is vulnerable to structural disruption as the electrification of vehicles threatens up to one-third of the demand for crude oil.
The great strides made in the oil sands since 2000 in terms of GHG and cost reductions put the industry in good stead to supply global markets for some time to come, albeit with margins likely much slimmer than the industry used to enjoy. There now remains little doubt that disruptive large-scale growth opportunities are no longer centred on combustion of fossil fuels, but rather on what the Energy Futures Lab calls future-fit hydrocarbons, which include carbon fibres, activated carbon, hydrogen and sustainable aviation fuels.
The oil and gas extraction sector directly employs roughly 100,000 salaried and hourly people. It contributed 5.6% of our GDP in 2019 and provided $131 billion in annual export revenue last year, up 32% from 2015 (when oil prices hit a valley), but the value of exports is expected to drop significantly in 2020. Alberta Innovates estimates that oil sands revenue (which represents about two-thirds of Canada’s five million barrels per day of oil production) will dip to $27 billion in 2020.
The sector’s vulnerability to downturns in the global market puts Canadian workers and our economy at risk. During the most recent crash in oil prices, Rystad Energy said that “Canada leads the list of those in trouble” as Canadian oil companies plan to reduce production and capital expenditures to $14.5 billion – down 21% from the 2016 to 2018 average. Company restructuring plans are now emerging as investors seek greater returns in light of market volatility. Cost containment pressure and the move to automate the industry could lead to fewer, not more, jobs in Canadian oil- and gas-producing regions. An estimated 7,700 jobs were already lost in the Canadian oil and gas sector between March and April of this year.
As an illustration of the oil sector’s long-term decline, energy stocks’ share in the S&P 500 has fallen from a recent highpoint of 14% in 2009 to less than 3% today.
The opportunity
While the pandemic-induced market crash of the last few months was triggered by an unprecedented situation, the outlook for the sector was already troubled before COVID-19. The one-third drop in oil demand resulting from the temporary economic lockdown is a glimpse into a not-too-distant future where electrification could disrupt demand on a similar scale. According to BNP Parabas, “the economics of oil for gasoline and diesel vehicles versus wind- and solar-powered EVs are now in relentless and irreversible decline.” While the world will require tens of millions of barrels of oil per day for years to come, there is no avoiding the fact that we are living in an era of energy transformation.
Canada is home to a number of companies that already know the benefits of getting ahead of global market shifts. TransAlta Corp., a 109-year-old predominantly fossil-fuel power producer, ramped up its wind and hydro investments and spun these off into a separate company. TransAlta Renewables is now worth more than its parent.
Wind, solar and hydro aren’t the only options for diversifying. While still dwarfed by global crude markets, we know that there are potential multibillion-dollar markets close to the conventional energy industry that don’t involve combustion: bitumen-based carbon fibres and activated carbon, hydrogen, renewable jet-fuels and geothermal energy. On the broader natural resources front, Canada is a treasure trove of low carbon commodities the world needs to decarbonize, and we are producing those commodities in an increasingly low carbon manner. Notably, Canada is one the top-five producers of important minerals for rapidly expanding battery markets, including nickel, cobalt and graphite (and soon lithium from Alberta’s oilfield brines could be added to that list). We have the resources and industrial ecosystem to be a North American hub for battery production and zero emissions vehicles including freight trucks and buses.
These markets will grow quickly, driven by policy and economics – and Canada has all the ingredients to be a supplier of choice.
Carbon fibre, activated carbon and hydrogen potential
Carbon fibres (CFs) and activated carbon may be the least well understood of these opportunities for the oil sands and the ones with the most disruptive potential.
Activated carbon (AC) is a form of carbon with small, low-volume pores that increase the surface area available for adsorption or chemical reactions. Due to its high degree of microporosity, one gram of activated carbon can have a surface area of 3,000 square metres. The high surface area provides many useful applications. Further chemical treatment often enhances adsorption properties.
Commercial application of AC includes methane and hydrogen storage, air purification, solvent recovery, decaffeination, gold purification, metal extraction, water purification, medicine, sewage treatment, air filters in gas masks and respirators, filters in compressed air and teeth whitening. Alberta Innovates has done a preliminary market analysis and assessed the potential of using bitumen to make AC.
For the period of 2017 to 2023, global demand for AC is expected to be 1.3 million metric tonnes. If 15% of this demand could be satisfied by oil sands, it would represent asphaltene (the stuff that makes the oil sands so viscous) and bitumen demands of 316,000 metric tonnes (at US$2,500 per tonne) and 36,000 barrels per day, respectively. If oil-sands-derived AC could capture 15% of the total global AC market by 2030, it would create asphaltene and bitumen requirements of 1.4 million metric tonnes and 160,000 barrels per day, respectively, generating $21 billion in annual revenue.
Composed mostly of carbon atoms, CFs possess unparallelled strength and stiffness (carbon fibre is five to 10 times stronger than steel and twice as stiff) coupled with low density (making it lighter than aluminum) and high resistance to corrosion. This makes the material particularly well suited for use in electric vehicles and aviation, and commercial polymers.
Currently, most commercial CFs are made from polyacrylonitrile (PAN), and a small fraction of commercial CFs are made from petroleum pitch, mostly outside of Canada. The supply chain for making carbon fibre from PAN spans three continents, with production costs starting at about US$18/kilogram (kg) for PAN-derived CFs. Demand at the current cost is about 100,000 tonnes per year. If costs were halved to US$9/kg, some experts believe that demand would increase tenfold based solely on automobile sector uptake, with Alberta Innovates estimating a potential $44 billion in annual revenue from CFs by 2030. (Canadian CF production on this scale could help Ontario become the lowest-cost manufacturer of lightweight frames for aviation, freight and personal vehicles.)
Canadian-made CF using Alberta bitumen could be the solution for low-cost carbon fibres. Asphaltene, which makes up 15 to 20% of bitumen, is a promising feedstock for making CFs and AC. If we can crack the cost nut of extracting CFs and AC from bitumen, it has the potential to deliver four times the revenue from Alberta’s current bitumen output. By diverting 30% of current oil sands activity to high-value advanced materials such as carbon fibre, activated carbon and asphalt binder, Alberta Innovates estimates the added economic potential could be in the range of $84 billion annually (including $19 billion from asphalt binder), while reducing GHG emissions from combustion by over 120 MT CO2 per year.
Materials companies such as BASF, Zoltek, Lafarge and Mitsubishi Chemicals, not surprisingly, have their eyes on CFs as a future market. Alberta Innovates is engaged with the Oak Ridge National Laboratory and three private sector partners on scaling up CF production from Alberta bitumen. One potential first application: CF hydrogen storage tanks.
Globally, Bloomberg New Energy Finance (BNEF) recently characterized hydrogen as a clean-burning molecule that could become a zero-carbon substitute for fossil fuels in hard-to-abate sectors of the economy, including as feedstock for heavy industry. The cost of producing hydrogen from renewable sources will continue to fall, but we need to ramp up demand to drive down costs and build out the delivery infrastructure. BNEF argues that this will not happen without government targets and subsidies that BNEF pegs at US$150 billion of cumulative subsidies globally by 2030. The goal of these policy investments would drive the delivered cost of hydrogen down to $15 per million British thermal units (MMBtu) in many parts of the world by 2030 and to $7.4/MMBtu by 2050.
In Canada, an industry collaboration project is already underway in Alberta. The Alberta Zero Emissions Truck Electrification Collaboration (AZETEC) project, a $15-million, three-year joint venture between Emissions Reduction Alberta, AZETEC and the private sector, is focused on building out the infrastructure that’s needed for a wider network of hydrogen fuelling stations for long-haul transportation. Trucks are the dominant mode of moving freight in Canada, and while the largest long-haul rigs make up only 9% of the freight truck population, they account for 47% of commercial truck fuel consumption. The AZETEC project is focused on the largest vehicles on our roads. While it is uncertain whether hydrogen or electricity will power heavy freight vehicles of the future, there’s a strong consensus that both technologies will have a role to play.
The prospect of producing zero-carbon, “green” hydrogen from renewable electricity where oil and gas are produced today is within our grasp. In our Building Back Better Power scenario, we envisioned a 10-year program of wind and solar development in Alberta and Saskatchewan, complemented by energy storage and enhanced transmission capacity both within the provinces and with their hydro-rich neighbours. The investment in Alberta alone would top $50 billion over the 10-year period and create more than 50,000 full-time jobs for the rest of the decade. The $5 billion per year average capital expenditure is of the same order as recent capital investments in Alberta’s energy sector (15 to $20 billion per year in oil and gas, $3.5 billion per year in utilities). The Travers Solar Project in Vulcan County, Alberta, which has received $500 million from a Danish group, is an indicator of the growing investor interest in the solar-rich resources of southern Alberta and Saskatchewan.
Geothermal potential
Canadian resources of geothermal energy – the heat found deep underground in hot aquifers and rocks – are concentrated in western Canada and can be harnessed for both power and heat for buildings. Exploratory drilling costs usually represent a major component of the cost of developing geothermal energy, but western Canada’s geothermal energy resources have been largely located as the result of oil and gas exploration and drilling. The expertise and technical know-how required for geothermal energy development already exists in the Canadian oil and gas industry and constitutes another strategic advantage, with both the supply chains and skilled human resources readily available. In addition to their potential for baseload power production, the Energy Futures Lab suggests that geothermal resources could be used to create new district heating systems for pulp- and paper-making and agriculture.
Aviation fuel potential
A final example of a global market that may grow substantially is sustainable aviation fuel (SAF). The World Economic Forum’s report on the Net Zero Challenge puts the cost of abating a tonne of CO2 in the aviation industry at $200, compared to cement at $90 and steel at $130. Given that the COVID-19 pandemic has forced the global aviation industry to restructure at a unprecedented scale, it remains to be seen whether the industry will stick with carbon-reduction goals established under the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). It’s worth noting, though, that under the International Energy Agency’s Sustainable Development Scenario, SAF is projected to grow to 18 billion litres by 2025 and 37 billion litres by 2030. Companies such as Finland’s Neste have made bold moves to diversify into sustainable biofuels and have already developed profitable niches serving airports such as Bergen, Oslo and Stockholm, three of only five airports globally that offer regular SAF distribution. In the past five years following Neste's big bet on sustainable biofuels, its share price has more than tripled to bring its value up to C$40 billion, while the value of oil and gas peers has been cut in half.
Given the economic opportunity in moving beyond carbon and Canada’s commitment to reach net-zero by 2050, Building Back Better means that we need to harness the growing global markets for zero-carbon products and technologies as part of the transition away from producing oil and gas.
The proposal
In previous installments of this Building Back Better series, we have outlined the economic and job-creation potential in Canada from public and private sector investments in retrofitting buildings, decarbonizing the power grid, greening heavy industry, electrifying vehicles, promoting active transportation, and innovating nature-based climate mitigation solutions in forestry and agriculture. For the oil-producing provinces of Alberta, Saskatchewan and Newfoundland, these proposals include $200 billion in capital investments that generate 140,000 full-time jobs over the 10-year recovery program. All combined, the lion’s share of this activity would be in Alberta – $140 billion and 100,000 full-time jobs.
In addition, the federal government should create a $40 billion Natural Resources and EV Innovation Fund, which would be endowed through the issuance of sovereign green bonds, taking advantage of low borrowing rates.
Building on the lessons from AOSTRA, the Natural Resources and EV Innovation Fund would need:
1. Right goal: The goal of the fund should be rapid research, development and deployment to de-risk breakthrough technologies and to produce zero-carbon commodities, batteries and EVs on a commercial scale to sell into growing global markets where Canada has a competitive advantage. Opportunity areas include bitumen-based carbon fibre and activated carbon as well as green hydrogen, geothermal heat loops and sustainable aviation fuels. Assuming moderate levels of follow-on investment by the private sector to deploy the new technologies to produce the zero-carbon commodities (financed via debt capital markets for which the federal government could offer public incentives), it’s estimated that investment in these sectors on this scale would create up to 100,000 permanent high quality jobs over the next 10 years.
2. Right structure: The fund will be independently delivered by an organization with strong technical capacity, with government setting goals that prioritize public benefit over the long-term with two buckets: one for R&D and one for commercial deployment. As with AOSTRA, the ownership of intellectual property (IP) should remain in public hands so that it will be widely used for the benefit of all Canadians. Organizations with the technical expertise to deliver on this mandate include Alberta Innovates and Emissions Reduction Alberta. And unlike AOSTRA, which was strictly an R&D vehicle, the fund would have a mandate (in an expanded and revamped version of the Strategic Innovation Fund, or possibly as a new sleeve within the Canadian Infrastructure Bank) to make direct investments to deploy these commercial technologies and would take minority equity stakes in exchange for these direct investments. Two important things to note:
- AOSTRA made their investment over 30 years and then hit the exit after they had proven the viability of SAGD (steam-assisted gravity drainage) technology in extracting bitumen from underground oil sands deposits. Given the realities of today’s strained provincial and corporate balance sheets, the pace of change in global energy markets, and the scale of the incumbent industry (which makes the stakes higher for getting it right), we are looking at a compressed time scale that requires more investment in less time.
- It is important to get IP protection right. We can invest a lot of money and develop successful technologies, but we may lose out on benefits if we lose control of IP. The government will need to fund 100% cash for R&D up to the point of deployment in order to own IP for any research that involves non-Canadian entities. Industry co-investment may give partners usage rights but not IP ownership.
3. Right scale: A 10-year investment by the federal government of $40 billion ($5 billion for R&D and $35 billion to deploy and crowd in private sector investment), with the objective of securing triple that amount from the private sector and support from provinces as per their capacity. The fund would be fully endowed to insulate it from changing political priorities and to take advantage of low interest rates.
While drawing lessons from AOSTRA, we also need to be mindful that 2020 is not the 1970s in two important respects:
- The scale of human capital and infrastructure for Canadian innovation today is much greater than in 1974, when AOSTRA was established.
- In response to post-pandemic recovery needs, the federal government is poised to make large-scale (once-in-a-generation levels) public investment over the coming years to help Canada build back better.
We have a lot more to lose if we don’t invest wisely now to create an economic engine for the future. At the same time, the current moment offers an opportunity to act quickly and place Canada in a leadership position in fast-growing global markets.
We estimate that the prize for getting this right is being the supplier of choice for $125 billion zero-carbon commodities per year by 2030, while creating 1,000,000 person years of employment.
To paraphrase the philosopher George Santayana, those who learn from the past are empowered to win the future.
Ralph Torrie is senior associate with Sustainability Solutions Group and partner at Torrie Smith Associates.
Céline Bak is the founder and president of Analytica Advisors.
Toby Heaps is the CEO and co-founder of Corporate Knights.
With files from Aleena Naseem and Laura Väyrynen
Notice to reader: Please be aware some of the figures and other details in this white paper have been updated in the Final Report to reflect feedback.
