Innovation Energy: Oilsands step up to take on clean tech challenge
The energy industry gets a bad rap when it comes to innovation, yet the oilpatch is by far the largest spender on clean tech in Canada, to the tune of $1.4 billion a year. As part of its continuing coverage of the innovation economy, the Financial Post reports on the intersection of technology and energy, from the oilpatch in Alberta, off the shores of Nova Scotia and in the plains in Saskatchewan.
Canadian oilsands companies have for years been besieged by environmentalists, pressured by governments and encouraged by institutional shareholders to reduce their emissions and the overall environmental impact of what one international researcher calls “the most scrutinized source of crude oil in the world.”
The incredible pressure has led to massive spending, to the tune of hundreds of millions of dollars each year, on new technologies to drive down carbon emissions, water use and land disturbances.
Indeed, the domestic oil patch is by far the largest spender on clean technology in Canada, accounting for 75 per cent of the $1.4 billion spent annually, according to a study that Global Advantage Consulting Group Inc. conducted for the Clean Resource Innovation Network.
“Anybody that doesn’t see us as clean-tech is sadly mistaken,” said Joy Romero, vice-president of technology and innovation at Canadian Natural Resources Ltd., the country’s largest upstream oil and gas producer.
After years of being pilloried as environmental laggards, oilsands companies are now openly boasting about the results they’ve had in implementing new technologies to clean up their act at public events and investor earnings calls. They’ve also put $1.4 billion into Canada’s Oil Sands Innovation Alliance, an organization that pools funding and research on environmental technologies.
But the general public, environmentalists and even governments continue to believe that the industry needs to do so much more, even while throwing up roadblocks to thwart any progress. The latest impediment is the Canada Revenue Agency, which industry executives and tax lawyers say has been increasingly hesitant to allow oilsands companies to claim Scientific Research and Experimental Development (SR&ED) tax credits
Like other industrial firms, oilsands companies claim SR&ED tax credits — commonly referred to as “shred credits” — when they test technologies at their massive operations.
But Romero, like others in the industry, has been frustrated by the inconsistent administration of the tax credits, since they are frequently awarded for small-scale emissions reduction technologies outside the energy sector, but oil and gas companies pilot these technologies on a much larger scale and have a more difficult time accessing the credits.
“The idea behind clean-tech and innovation credits is a great idea, but it has to be administered properly by people who understand what is happening in the industry,” said Joanne Vandale, a partner on the taxation team in the Calgary office of Osler, Hoskin & Harcourt LLP.
The total number and value of SR&ED tax claims fluctuate year to year as a result of a number of long-lead time processes such as audits, appeals and court judgements, said CRA spokesperson Etienne Biram in an email.
However, CRA data show a relatively stable number of appeals and claims during the past five years, with between 64 and 75 appeals made annually to the Tax Court of Canada during that period. In the 2018-2019 tax year, companies claimed $3.9 billion in SR&ED tax credits and $3.2 billion was allowed.
Part of the tension is because Canadian oilsands companies are piloting increasingly ambitious technologies on a larger and larger scale since they continue to face increasing pressure to reduce emissions.
“Often the CRA will confuse experimentation at a scaled-up level with commercial production,” Vandale said, adding this creates a disincentive for energy companies, already struggling with low prices for their products, to allocate additional funds to ambitious clean-tech projects.
“I’m not sure that it necessarily reduces the amount of work that resource companies try to do in the clean-tech area or in technological advances to reduce carbon footprint, but when you’re pricing out the cost of those pilot projects, the availability of the SR&ED credit often has a big question mark next to it,” she said, adding, “It’s less reliable than it should be.”
Indeed, CNRL’s Romero and other oilsands executive say the pressure is still on even though companies have recorded improvements in reducing carbon emissions, water use and land disturbances and are continuing to pilot new technologies.
The intensity of upstream emissions from the Canadian oilsands has declined by 20 per cent since 2012 “and could fall another approximately 20 per cent over the coming decade,” according to a September 2018 study by IHS Markit. “On a full life-cycle basis, this would bring the industry closer to the U.S. average.”
The study, which described oilsands crude as “perhaps the most scrutinized source of crude oil in the world,” noted that many oilsands plants are already emitting at or below the average intensity for oil pumped in the United States.
But the study also showed that, according to data from Environment and Climate Change Canada, total emissions from the oilsands have climbed steadily between 2005 and 2017 as the industry nearly doubled in size.
Oilsands production rose to 2.4 million barrels of oil per day in 2017 from 1.4 million in 2005, while total emissions have grown to 73 million tonnes of CO2 from 34 million tonnes.
In an email, Canadian Oil Sands Innovation Alliance spokesperson Rob Gray said external research has validated the industry’s forecast that it can reduce its emissions between 10 per cent and 30 per cent in the next five years.
“This is one of the areas where it’s going to take a lot of money,” said Gary Bunio, general manager of oilsands strategic technology at Suncor Energy Inc., of his company’s goal to reduce its emissions by 30 per cent by 2030.
In 2018, Suncor spent $635 million on research and development: $400 million of that was spent on “strategic” R&D and $200 million on “transformative digital technologies.” It is currently piloting a range of new technologies at its mining and steam-based oilsands facilities to cut emissions and is considering investing in a new cogeneration power plant in the oilsands to reduce emissions from its power usage.
One technology that Bunio said has the potential to reduce water usage in Suncor’s oilsands mining operation is called “non aqueous extraction” — extracting bitumen from oilsands ore without using water.
Bunio said the technology, currently in a “garage-scale pilot,” would reduce the physical footprint of the company’s mining operation by 50 per cent and also reduce emissions, though he didn’t have an estimate for emissions reduction yet.
Eliminating or reducing water use is a major focus of oilsands R&D efforts across the sector, including the three largest companies.
At Cenovus Energy Inc., chief technology officer Harbir Chhina said his teams have been testing ways to run its steam-based oilsands projects without water. The company has for years tested concoctions where “solvents” such as butane or propane are injected into oil wells to both boost oil output and reduce water use.
In the past, when Cenovous used 10-to-12-per-cent propane in the steam it was injecting into an oilsands well, it reduced the need for water in the well by up to 40 per cent. As a result, Chhina’s teams tested cutting the steam with up to 80 per cent propane and found similarly positive results.
At steam-based oilsands projects, any reduction in water usage leads directly to emissions reductions because less energy is spent turning water into steam.
“That has sparked a whole bunch of new ideas for me,” Chhina said, adding he intends to ask the company’s wider management team to green light pilot projects for “purely solvent-based” extraction later this year.
Over at CNRL, Romero said the company is in the second year of piloting its “in-pit extraction” method, which she said will result in dry oilsands tailings, described as a game-changing innovation because it would eliminate new tailings ponds, thereby allowing for faster remediation. She said the method will also massively reduce the size of the company’s mine mouth and has been shown to have a higher bitumen recovery rate than its current methods.
But despite spending hundreds of millions of dollars on mitigating environmental damage and even though managers, such as former Suncor chief executive Steve Williams, describe oilsands crude as “carbon competitive,” environmental activists have continued to tag oilsands crude with the “dirty oil” label.
“Canada’s oil is high cost and high carbon, and it is struggling to compete in a global market,” Stand.Earth’s international program director Tzeporah Berman said in a release when the federal government in mid-June approved the Trans Mountain pipeline expansion from Alberta to British Columbia.
Berman was a controversial member of former Alberta premier Rachel Notley’s oilsands advisory panel at a time when multiple oilsands producers — including Suncor, Cenovus and CNRL — agreed to support a provincial carbon tax and a cap on total emissions of 100 million tonnes of CO2 in exchange for less resistance to new pipelines.
Both globally and at home, Romero said the oilsands business has not received credit for the millions it spends reducing its emissions. She said CNRL’s Horizon oilsands mine has reduced its emissions by 37 per cent in the past six years.
“Our industry was painted as ‘dirty oil.’ We are not a dirty oil,” she said, adding that if the global oil industry were forced to produce its crude at Canadian standards, the world would see an immediate 23 per cent reduction in emissions from oil and gas activities.
“It’s not easy,” Romero said, adding that she understands there will always be critics and there will always be pressure on oilsands operators, even as they undertake increasingly large-scale projects to reduce emissions.
“This mis-linking between ‘clean’ and what we’re doing has to stop because we’re hurting the Canadian economy.”