Higher oil prices propel green initiatives in Canada’s oil sands

By Kevin Orland and Robert Tuttle on 11/18/2021

CALGARY (Bloomberg) - The global energy crisis that many blame on efforts to move away from fossil fuels is actually giving new momentum to the shift to renewables in Canada, according to some of the bankers helping oil-sands producers navigate that transition.

That’s because, for all the doubt that’s been cast on the reliability of solar and wind power, surging oil and gas prices are providing more cash for major energy companies such as Suncor Energy Inc. and Cenovus Energy Inc. to pursue their long-term targets to cut emissions.

The gas shortage that’s roiling Europe and Asia, and has even raised the specter of power outages in parts of the U.S., threatens to undermine policy makers’ resolve to expand renewable energy and weaken taxpayers’ support for subsidized projects as they brace for higher energy bills. But for Canadian energy companies -- who in the depths of the pandemic were mostly concerned with keeping their creditors at bay -- higher prices mean they can put long-term transition projects back on the agenda in response to growing pressure from investors to help slow global warming.

“In a strange way, these high prices have actually enabled a lot of our clients to pursue some of these transition-related issues more quickly than they otherwise would have,” Mike Freeborn, managing director and co-head of Canadian Imperial Bank of Commerce’s energy, infrastructure and transition group, said in an interview.

Benchmark U.S. oil futures are near their highest in seven years, while natural gas prices at the AECO hub in Alberta have more than doubled since August.

It’s a dramatic change of fortunes for Canadian oil companies. In early 2020, they were curtailing production and laying off workers as lockdowns hammered oil demand. Now, Cenovus is rapidly paying down debt following its acquisition of Husky Energy Inc., while Suncor recently doubled its dividend and increased its share buyback program.

Some of the cash can also go to projects to help Canada’s energy industry -- which accounts for 20% of the country’s exports and 10% of its economy -- reduce pollution. Already, Pembina Pipeline Corp. and TC Energy Corp. have announced plans to use their pipeline network to transport and store underground more than 20 million tons of carbon dioxide a year. Royal Dutch Shell Plc is looking to partner with indigenous communities to build a carbon storage hub in Alberta.

“A strong oil price enables investment in riskier and expensive green energy solutions, such as carbon capture, utilization, and storage,” Deloitte said in its recently released 2022 oil and gas industry outlook.

The largest initiative -- called the Oil Sands Pathways to Net Zero initiative -- is a partnership between Suncor, Canadian Natural Resources Ltd., Cenovus, Imperial Oil Ltd., MEG Energy Corp. and ConocoPhillips to use carbon capture and other technologies to nearly zero out emissions from oil-sands operations by 2050.

The project has an initial C$75 billion price tag, and as much as two-thirds of the capital may need to come from the government, Suncor Chief Executive Officer Mark Little said in July.

Producers are also likely to push ahead with long-term, energy transition-related projects such as liquefied natural gas export terminals, said Jonathan Hackett, co-head of Bank of Montreal’s energy-transition group.

“The transition to a low carbon economy is going to occur over decades, not months, and we’re going to need to build both solutions that fit that paradigm in 2050, but also that help us meet a growing demand for energy along the way,” he said

That multi-decade process has encouraged Canada’s banks, which count Calgary-based energy companies as a major client base, to start energy-transition groups to provide expertise on navigating those changes.

Toronto-Dominion Bank announced the formation of a sustainable finance and corporate transitions group in September 2020. CIBC announced its energy, infrastructure and transition group in April, and Bank of Montreal rolled out its transition group in June.

The groups pull expertise from various parts of the banks to help clients access sustainable financing and deal with the full range of environmental issues factoring into their projects. Toronto-Dominion has even staffed its transition group with employees from outside typical investment banking hiring pools, including climate policy experts and sustainability consultants.

That has allowed the bank to act as something of a SWAT team and approach transactions factoring in its staff’s “massively different viewpoints,” said Amy West, managing director and global head of sustainable finance and corporate transitions at TD Securities.

“We want to be able to have subject matter experts that span a lot of different areas as our clients are really seeking out distinct solutions to these challenges,” West said.

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