by David Yager
The outlook for Alberta’s energy industries and the world’s fossil fuel producers have changed significantly in the past two years.
And it is very positive.
That’s because the energy transition has transitioned. Out of necessity, the world is realizing that this will take much longer than originally planned or hoped. Because “what” is proving much easier than “how.”
As a result, the focus is shifting from replacing fossil fuels to decarbonizing them.
For the longer term, there is growing public acceptance that hydrocarbons will be around in some form forever.
Energy security is back on society’s radar. Recent events have it very clear that the existing infrastructure for fossil fuel extraction, processing, distribution and consumption is of great value.
And the current suite of renewables have a long way to go to meet the fundamental criteria of reliability and affordability. Here’s a simple example.
During a cold weather energy shortage, diverted supplies of LNG, propane, gasoline or diesel fuel can save lives. The infrastructure for delivery and immediate consumption already exists.
During the same event, diverted supplies of solar panels or wind turbine parts won’t help.
Energy realists are no longer dismissed as climate change deniers.
Going back to the UN’s “Earth Summit” at Rio in 1992, reversing over thirty years of growing determination to replace fossil fuels as the world’s primary energy source as soon as possible cannot be undone in 24 months.
And many elements of the energy transition are now permanent.
But for Albertans, global energy forces are on our side for the first time in a long time.
And the changes have staying power.
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Four years ago I released my book From Miracle to Menace – Alberta, A Carbon Story. In the introduction I wrote that Alberta was a prime example of how the switch from fossil fuels to renewables like wind and solar would result in “massive economic dislocation and disruption.”
“My home province Alberta has become the ground zero for the Canadian version of the war on climate change. The third largest deposit of crude in the world – Alberta’s oil sands – has been singled out and vilified as a major contributor to the problem…By obstructing export pipelines required for market access and branding oil sands as public enemy number one for climate destruction, Alberta has gone from boom to bust in only four years.”
But this wasn’t happening globally. “World fossil fuel demand grows unchecked and not one other major oil and gas producing jurisdiction is enduring Alberta and Canada’s economic misery…Oil not supplied from Alberta will come from somewhere else unless demand declines.”
It ended, “What follows is a multitude of facts and statistics…that I hope will inspire the thoughtful and open minded to think differently about the climate change challenge, and ask all the stakeholders to do something materially different than what we’re doing today.”
The complete retooling of the US$7 trillion per year, fossil-fuel based global energy infrastructure that served 6.8 billion people was coined the “energy transition.”
Summarizing the most complex and expensive undertaking in human history in only two words masked the enormity of the challenge.
But as I researched how climate change became one of the western world’s major public policy issues, it became clear it had little to do with energy physics, nor did it include all the countries creating the fossil fuel emissions that were altering the chemical composition of the atmosphere.
In the wealthy west, climate change captivated the public because of comfort, prosperity, fear, the internet, the declining influence of conventional media, and 21st century politics.
And a generation of voters who had never experienced serious geopolitical disruptions like energy security or wars.
With an increasingly affluent society taking care of material needs like food, clothing, shelter, safety, education and health care, more people were able to spend more time worrying about their happiness than their longevity.
The continuous warnings of an impending climate disaster were unsettling.
Those claiming that something must and could be done attracted attention and support. “Fighting climate change” became a popular vote-getter at the ballot box. Elections incorporating anti-fossil fuel platforms were fought and won.
A common narrative was that the future cost of climate damage was far greater than whatever the energy transition might cost today.
This was accompanied by policies, promises, programs, subsidies and rebates from politicians who were able to demonstrate that saving the planet was well underway under their wise direction.
The combination of low energy costs after oil prices collapsed in late 2014, record low inflation and interest rates, and continued government fiscal stimulus, kept the economy rocking. Everything from stock values to house prices to disposable income was rising.
What a wonderful world.
The ESG investing and fossil fuel divestment movements were easy to support. Oil, gas and coal producers were dogs because of low commodity prices and collapsed cash flows.
Assisted by low interest rates and government-enhanced liquidity, companies in technology or alternative energy enjoyed rising valuations disconnected from their cash flow or earnings.
After examining all the information, I concluded that the energy transition as advertised was impossible.
And putting Alberta and Canada out of the fossil fuel business would make things worse, not better.
Until a truly competitive low-carbon replacement energy source emerged, the greatest contribution Alberta could make was to become a world leader in efficient, low-emission, fossil fuel production, consumption and transportation.
And use our strengths in energy as a catalyst to accelerate the commercialization of lower carbon alternatives.
This was the only conclusion available when it became clear that the foundations of the 2019 rendition of the energy transition were based more on emotions than science, physics, geopolitics, or the world’s continued population and income growth.
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The events of the past three years have changed the channel on what matters to many. In the second quarter of 2020, world governments introduced unprecedented controls and restrictions on the activities of almost everyone and everything.
As the economy began reopening in late 2020, a series of events transpired that would turn world energy markets upside down.
It started in Texas in February of 2021. That’s when one of the world’s energy giants ran out of electricity during a severe and extended cold snap. It would later be described as the worst energy infrastructure failure in Texas history.
Thanks to its deregulated electricity markets and lots of subsidies, Texas had become the American leader in installed renewable energy. While the problems weren’t entirely caused by the failure of wind and solar (lots of gas wells froze up), it certainly put energy security back in the minds of many.
Because when you flick the switch on the wall, the lights are supposed to turn on. This is much more important than where the electricity comes from.
Most consumers are ambivalent about the energy source if it is reliable and affordable.
In the summer of 2021, electricity shortages expanded across the Atlantic when the wind quit blowing in the UK and Europe. It was then discovered that low-cost natural gas was less available than it used to be.
The International Energy Agency had warned for years about significant underinvestment in new supplies of oil and gas relative to growing demand.
But most paid no attention. There were no obvious problems with energy or the economy. Shutting down development of new oil and gas supplies was a badge of honor. Full conversion to renewables would ultimately eliminate the need for natural gas.
European countries saw no need to lock in long-term gas supplies. There was lots of cheap gas available from Russia as long as it was needed.
One of the hallmark achievements of the COP 27 climate conference in November 2021 was when the ever-industrious Mark Carney unveiled the Glasgow Financial Alliance for New Zero (GFANZ). Here 450 financial firms representing US$130 trillion – including Canada’s big five banks – committed to accelerating the energy transition.
But countries were already getting nervous about energy supply and cost. COP 27 ended in disappointment as India and China refused to endorse hard commitments to quit using coal. They only agreed to “phase down” coal, not “phase out.”
The final event to upend global energy was the invasion of Ukraine by Russia in February of 2022. Crude quickly reached the highest prices since 2008. Gas and electricity in Europe rose to previously unimaginable prices. Coal prices exploded as power generators sought more of the long-established, high-energy source of heat to create electricity.
The commodity price spikes changed everything. Countries that could burn coal reactivated mothballed plants. Europe quickly built LNG floating import terminals to replace Russian supplies.
As the same time as energy costs rose, other financial impacts of the pandemic lockdown became apparent. Supply chain disruptions and high consumer money supply from pandemic fiscal stimulus caused prices and inflation to rise. In response, central banks raised interest rates. Massive public debt drove up government interest expenses. This limited the ability of central banks to continue stimulative borrowing.
Canada’s current inflation rate is the highest in over 25 years. In March, Canada’s overnight bank rate and prime lending rate were at levels not seen since 2000.
In response to increasingly challenging economic conditions, climate change is declining as a priority among ordinary citizens. Global public opinion researcher IPSOS published its report What Worries the World for 2022 in January. Looking back two years, inflation had replaced the pandemic as society’s most serious issue at 40%. The other top issues were poverty and social inequality (31%), crime and violence (28%), unemployment (26%) and economic and political corruption (24%).
Climate change was important to an average of 16% of respondents. It remains much more important in the wealthy west than in developing countries. Germany and Australia were the top two at 29%. Canada was sixth at 25%, the U.S. 12th at 21%.
Meanwhile, Israel was at 1%. Countries at 8% or less included Turkey, South Africa, Chile, Malaysia, Brazil, Hungary, Peru and Argentina.
Noteworthy is that in October 2019, climate change was important to only 15% of respondents globally. There has been no major change in three and one-half years.
But the shift among individual countries is remarkable. Pre-COVID, Canada ranked first at 34%. Japan was second at 31%. The U.S. was 7th at 24%.
Today Japan sits 14th at 17%.
The most likely reason climate concerns are sustained in Canada and U.S. is that these two countries are blessed with the lowest market-set energy prices in the world.
Japan, which lacks significant energy resources, is activating mothballed coal and nuclear generators. The Japanese president was recently in Canada pleading for LNG to replace Russian supplies.
The recent G7 meeting on the environment in Japan ended without commitments to hard deadlines for ending the use of coal or LNG. Because keeping the lights on and economy moving is the number one priority.
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An energy transition within the energy transition would have been unthinkable in the pre-COVID area.
But everything has changed.
The EU reversed an earlier decision that decided that natural gas and nuclear power should play no part in the decarbonization of energy.
The IEA reports that in 2022, world coal consumption for electricity generation reached an all-time high of 8 billion tonnes. It is expected to remain at that level through to 2025.
It its April world oil market report, the IEA warned again of possible shortages later this year under current conditions. If nothing changes, higher oil prices are assured.
Texas has re-regulated its power markets by committing to 10 GB of gas-fired backup power to support wind and solar. And consumers will pay for it whether or not it is required.
American President Joe Biden’s administration has approved the Willow oil development on Alaska’s North Slope. On March 29 a federal lease sale in the Gulf of Mexico was concluded. Both were widely criticized by environmentalists and applauded by American producers.
Shell and BP, which in 2020 had announced their intentions to slash emissions and embrace renewables, are reviewing earlier commitments as their legacy assets become very profitable again.
Insurance companies and investment bankers are pulling out of GFANZ. Since last summer high profile defections include Zurich Insurance, Munich Re and America’s Vanguard. The cited reason is violating combines legislation.
ESG investment funds are taking a bruising. Industry heavyweight Larry Fink of Blackrock is saying much different things about what constitutes appropriate ESG investment criteria. Several U.S. states have publicly stated they would avoid investing funds under their control with ESG-focused money managers.
Last fall the EU agreed that all new light vehicles must be electric by 2035. The U.S. and Canada are pushing for similar targets.
But the carbon footprint and mineral supply issues for EV batteries and wind power generators are finally gaining the attention they deserve.
An article by career environmental journalist Andrew Nikiforuk in the April 7 edition of The Tyee speaks volumes.
In 2008 Nikiforuk joined the anti-oil sands crusade with a book titled Tar Sands – Dirty Oil and the Future of a Continent. The back cover read, “…this out-of-control megaproject is polluting the air, poisoning the water, and destroying boreal forest at rate almost too rapid to be imagined.”
Now he’s writing the same things about mineral extraction for renewable energy. In The Tyee Nikiforuk wrote, “We are going to have to dramatically downsize the dream of a future in which we replace a 150-year-old fossil fuel infrastructure with ‘clean energy’ by 2050.” He cites a number of reports which highlight “…the problems with the renewables illusion, including the complexity of the task, the toxicity of rare earth mining and the scarcity of critical minerals…The world needs a better plan to avoid collapse than replacing one unsustainable fossil fuel with another intensive mining system powered by even more extreme energies.”
Even professional climate alarmists are finally becoming alarmed about the alternatives to fossil fuels. The result is a level of honesty that has long been lacking in the oversold simplicity of a global energy transition.
Alberta’s greatest blessing compared to prior years is its growing anonymity. The dreaded oil sands are increasingly recognized as long term cash flow machines with owners that are committed to making their product more acceptable by decarbonizing through CCUS.
Canada’s federal government emerged from the pandemic with massive public debt. A major contributor to controlling the deficit as program spending grows has been the recovery in oil and gas which is again generating big taxes at all levels.
Today the federal government is more concerned about tax incentives for producers to invest in decarbonization than putting the industry out of business.
While LNG exports from the east coast are stalled, recent announcements on the west coast and the pending completion of a major new gas pipeline to Kitimat have finally made the short, medium and long-term outlook for growth in natural gas production and LNG exports a reality.
There still exists stubborn policy determination for emission caps, electric vehicles mandates, and the decarbonization of the electricity grid. Which is fine.
But the original energy transition of replacing fossil fuels with interruptible renewables as quickly as possible is finally being acknowledged as unworkable for obvious reasons.
No energy, unreliable energy or unaffordable energy are not acceptable replacements for carbon-based energy.
Until technology catches up, the most achievable way to move the energy transition forward will be to reduce the carbon footprint of incumbent carbon-based sources that deliver 24/7/365.
And engage the proven energy experts to play a greater role in the lower carbon future of all energy sources.
That can be done by improving Alberta’s oil and gas industry, not getting rid of it.
Hallelujah.
David Yager is a Calgary oil service executive, energy analyst, and oil writer. He is author of From Miracle to Menace – Alberta, A Carbon Story. More at www.miracletomenace.ca
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