TRANSCRIPT: Canadian oil & gas should be on the global market, because greenhouse gas emissions will go down when Canadian products replace competing fuels from any other source in the world. Steve Laut of Canadian Natural Resources explained this trend.
Below is a transcript of a July 2019 ARC Energy Ideas podcast where Peter Tertzakian and Jackie Forrest explore trends that influence the energy business. Their guest for this episode is Steve Laut (pictured), executive vice chair of Canadian Natural Resources. He shows why the Canadian oil sands are no longer high cost or high carbon, and how technology is making the dream of Net Zero emissions a reality.
Jackie: Welcome to the ARC Energy Ideas podcast, this is the podcast for July 10th, I'm Jackie Forrest.
Peter: And I'm Peter Tertzakian, and once again we have a very special guest, Jackie, we have with us and I think we're really fortunate to have - Steve Laut. He's the executive vice chairman of Canadian Natural Resources otherwise known as CNRL. And I think it's such an incredible story for the Canadian oil and gas industry, I mean, I'm old enough to remember in this business when CNRL was first formed in the late 80s. And Steve, I think you joined in 1991, and have driven the company with your peers to be the largest in Canada with the recent acquisitions, we'll talk about them. You acquired Shell Canada, Devon’s oil sands production most recently, and decidedly as I said, the number one producer of oil and gas in Canada. Steve Laut, thank you very much for joining us.
Steve: Well, thanks Peter and Jackie, thanks for having me on here. I'm looking forward to an interesting discussion.
Jackie: Great, so what we're going to talk about today is we're going to talk about the many changes at CNRL over the past few years as well as some general perceptions around oil sands and misconceptions that we want to get straight on.
We're going to talk specifically about CNRL's GHG emission reductions including their aspirational Net Zero goal, which I don't think a lot of people know about so we want to get that news out there.
And then finish with some Western Canadian oil and gas macro, including some headlines this week on curtailment and CNRL's interest in getting into the crude by rail business.
Peter: Well, so it's a great agenda.
Why don't we just start with those perceptions about oil sands first? The perception, Steve, I had it again, I was giving a speech a couple weeks ago in Toronto and the preceding presenter was talking about renewable energy and all the cost reductions and solar and wind, and effectively made the accusation that oil and gas are high cost producers, Canada's the highest cost producer, and oh, by the way oil sands is the highest cost of the highest cost producer in the world.
And basically, you know, I had to debate him and said, "Okay, yeah, if you're using 2009 data, maybe that's true," but talk about these perceptions and the challenges we face.
Steve: Yeah, I know I think it's like you say, it's a legacy perception. Capital cost to bring on oil sands is high up front. But once you're on, say the mining at Horizon or at Albian, you have like 50, 60 years of no decline in production. It's essentially a manufacturing operation. And you're able to use all kinds of continuous improvement techniques, you're able to leverage technology, you're able to do innovation because you got that massive reserve base behind you that you know is there every day, there's no declines, there's no risk. So you're really focusing on how to be effective and efficient and drive down not only your costs, but drive down your emissions, and we can talk about that here.
Peter: Yeah, we're going to talk about that, but this is something that as you said it's a lost, is that, okay, we spent probably 10, 20 years up to circa 2014/15, really making the upfront investment. I mean, the industry as a whole I think spent 200 billion dollars; CNRL was a big part of that.
Now we're entering the phase of optimization, learning curve effects, manufacturing. And once you get into that manufacturing mentality you start introducing higher quality controls, progressively lower costs. I mean, how much lower can it go?
Steve: I think it can go quite a bit lower, like we started out back in 2009, our operating costs, just on the operating costs were like $42 to $44 US a barrel. Today we're about 15.
Peter: Oh!
Jackie: Is that on the mining projects or ...
Steve: That's the mining - extraction - upgrade.
Jackie: Upgrading, okay, so the more expensive that happens.
Steve: So you get from the mine right to light sweet oil. And that's a massive drop. We still think we can do more, there's still just massive amount to continuous improvement opportunities. Just little things that add 5, 10 cents a barrel, and you just do hundreds of these things every year, and the more you do it the more you find. It's really being more effective, more efficient, getting better reliability, better utilization. So those things all drive cost down, and they drive greenhouse gases down, and your capital costs go down because you learn how to maintain the plant much more effectively.
Peter: Right, you just create that base, that foundation of expansion. It's interesting that I remember back, again, around 2000, where I think it was one of your competitors in the oil sands that their mantra was $10 by 2010 or something like that, right? That was the goal before we had the massive inflationary period and sort of wiped out all theses out.
Steve: Right.
Peter: But it seems to me now, you're at 15 bucks, you're headed for 10.
Steve: You know, we're going to try and do that, and it's going to be tough sledding because you get the easy stuff first. But I think it's possible.
If you look at the oil sands from the mining operations and even to a certain extent, the SAGD [steam-assisted gravity drainage], there's a big curve there that comes down as well. At Horizon, Albian, $25 oil, we're still making cash flow and we're still doing okay. You can't say that for many other projects because they decline, and you have to have the cash flow to reinvest to keep it top shelf. And that's the beauty of oil sands, and that's why it makes it very competitive in the world.
Jackie: And it's really what investors want now, investors are saying, "Hey, don't keep ... the cash that comes out, don't put that all back in the ground, we want to see some of that in the forms of dividends and buybacks." And we have a macro model, the Canadian industry, and for the last several years the oil sands industry as a whole has been generating about 30 billion dollars of cash flow, and only putting about $12 billion back, and they've been growing still.
So that's very unique. If you look at the conventional side of your business, you don't have that ability to take out that much cash flow because you do have declines that you need to offset. And so I think it actually is well-suited to what investors are looking for today.
Steve: Yeah, I think it's one of the advantages you have in the oil sands. I will say on our conventional business we free cash flow there too, but not to the same degree, and then there's a lot more risk in that, free cash flow, because you got to reinvest to keep the production flat. But on Horizon or Albian you have no risk, it's all about manufacturing and getting your costs down.
Peter: Manufacturing. Just for our listeners, so to just put everything into context, so Canada's largest oil and gas producer, you're, what, 7 or 800,000 barrels equivalent. No, you're over a million.
Jackie: Yeah, 1.1 million barrels [a day].
Peter: Right, yeah, with the Devon acquisition, so 1.1 million barrels.
Steve: Yeah.
Peter: What fraction of that is oil sands and what fraction is not?
Steve: We're about I would say 450,000 of mining oil sands, now about 200,000 of thermal/SGD/cyclic.
Steve: Cyclic, and then the rest is conventional light oil, oversea – Africa – and Wembley [Montney gas in western Canada], those kinds of things. So we have that plus some heavy oil, primary heavy oil production. And then we got about ... I'd say about 200,000 BOEs equivalent of natural gas as well.
Peter: Yeah, yeah, so something ... I mean, just mental math, it's about two-thirds ...
Steve: Yeah.
Peter: One-third in terms of oil sands versus conventional.
Jackie: Maybe we should talk a little bit about greenhouse gas emissions, because another perception is that oil sands are some of the highest GHG intensity crudes in the world, but that's changing too. I'm going to highlight a recent presentation that shows your oil sands' well-to-combustion emissions relative to other crudes around the world, and you're showing that your operations are actually close to the average of crude oil that's consumed in the United States right now, not actually the high emissions that oil sands is perceived to have.
Steve: That's true, Jackie, and I think the world has changed dramatically in the last 10 years. And I think to me this is a real true Canadian success story, and people don't really know about it. But if you look at Canadian oil and gas industry, we recognized that we need to do something about our greenhouse gas intensity, and we work together, and Canadian Natural's done a great job here, but we reduced our emissions significantly. We got carbon capture. But now we're close to the average, and in some cases we're below the average, and we're not done yet. And I think, and we talk with the net aspirational goal, our goal is to get to zero.
Peter: Net Zero.
...greenhouse gas emissions will go down if you have Canadian oil from oil sands or any source or Canadian gas...that's why you need market access.
Steve: And I think it's doable. That's what Canadians should be proud of, especially for Canadian oil and gas business, to be able to leverage technology, to be innovative and use that Canadian ingenuity to reduce that emissions intensity, it is truly remarkable… So if you look at the world today, if you really believed you got to do some of greenhouse gases, you had to take action, which I think most people do - then you should say: Canadian oil, Canadian gas should be on the global market, because greenhouse gas emissions will go down if you have Canadian oil from oil sands or any source or Canadian gas, replacing production from any other source in the world. So that's why you need market access.
And we’ve got to flip that story, because it's really important for Canadians. If they really want to take action, because you're not going to get rid of oil and gas right away, you should have Canadian oil and gas on there...
Jackie: Yeah, and the perception has been in the past, you know, oil sands are so high emission, that's the source of supply that shouldn't be there, we should use the lower carbon sources. But what you're saying is very quickly here we're becoming average or better than average, we're going to continue to accelerate our innovation so that by using a barrel of oil from Canada you're actually producing less emissions than using other alternative sources of supply. And so from a global perspective we're better off.
Steve: We are better off. There was an interesting study done just on flaring regulations and venting in Canada. If the whole world had the same high standards that we have here in Canada, it'd take basically 110 million cars off the road, which is three times what we'd have in Canada. Just by switching out, by burning Canadian oil and Canadian gas, and just on the flaring part of it, not just the emission reduction. So it's massive change on greenhouse gas impact if you use Canadian products.
Peter: Yeah, and for our audience and our listeners, I want to talk about the range of upstream emissions, not the entire well to wheels, because 80 per cent of the emissions are burnt in the vehicle. Where the real differentiation happens is in that upstream part, so it can range anywhere from ... I think it's 20 or 30 kilograms per barrel of oil to ...
Jackie: Kilograms of CO2 per barrel oil produced on the upstream side.
Peter: CO2 on the upstream side, all the way to over a hundred. The US average is about 60. And I know that if you use the 2009 data, as I said, some of the people continued to use old data to categorize oil sands as being 100+, but you've brought it down below that US average of 60 on certainly new projects, and that's a really remarkable achievement on a percentage basis. It's almost been cut in half.
...this is a high-tech business and people don't think that, but there's a huge amount of technology being done here.
Steve: I'm speaking for Canadian Natural, but it's the whole industry, all other players. So this is a remarkable story that we've done great things, but everybody's done similar great things. And so as a Canadian, as an Albertan, and if you're working in oil and gas business, you should be really proud of this, like this is leveraging ... like this is a high-tech business and people don't think that, but there's a huge amount of technology being done here.
Peter: Well, let's take it further, Net Zero.
Jackie: Yeah, let's describe what Net Zero is for our audience.
Peter: Sure, go ahead.
Jackie: Maybe now it's somewhere closer to the average, near 60 kilograms of CO2. But when you say you want to drive all the way to Net Zero, does that mean you want to have zero emissions on your upstream oil and gas production?
Steve: That's what we're trying to do; we're trying to take it from 100 to 60 to 0. And I think we can do it, and we're not that far away. We haven't put a deadline on ourselves, but we're not that far away. Technology can make it happen.
Jackie: And would you see that happening through using offsets? So for instance, Shell has talked about planting trees to offset some of the CO2 emissions.
Steve: You can do that, but we're trying to do it just ourselves.
Jackie: Not with offsets.
Steve: Not with offsets. Just trying to make it happen. And we got carbon capture and storage. The other thing that's coming, I think is close, in some cases there is carbon capture and conversion. So when you think about it, CO2 is carbon and oxygen, these are not scary molecules, Peter, we breathe it every day. So it's not like you got some kind of radioactive material here. You can use that and make other products.
And I'll give you a story. There's a little company out there called Clean O2, maybe a little advertising for them, but they are in hotels in Vancouver, Calgary, and Edmonton. And they capture the CO2 from the flue gas and the boilers in the hotel; they convert that CO2 into soap. And that soap is used by the hotel to do the laundry. So that's just one little ... there's many products that can be made, like carbon nanotubes, methanol, all kinds of products can come off of CO2 if you do it right. So it's a chemistry problem that can be solved.
Peter: Yeah, it's interesting if we reframe our vernacular around this problem, and emissions are considered to be negative, wastes, pollutant, etcetera. But if you actually think of CO2 as a side stream of something that has value, that can be converted into other higher value products.
Steve: It can be a revenue stream.
Peter: And I think this is the way the industry is starting to think, and it's something that should be encouraged. As I said it's not only a different way of thinking about the business, but also an attitudinal change about waste versus useful.
CO2 is carbon and oxygen, these are not scary molecules
Jackie: Well, and I wanted to talk a little bit of a carbon capture and storage, because I don't know that all Canadians, our listeners know that you're actually actively operating a carbon capture and storage, and what do you think of that technology?
Steve: So we have carbon capture at Horizon, we have it Scotford through Quest, and we're going to have it at Northwest [refinery] when we get fully running. Each one of those captures the CO2, it is essentially the same, we take it off the hydrogen plant because it's a pure stream of CO2, it's easy to capture. At Horizon we use it in our tailings, so we mix the CO2 with our silts and clays … the water's still hot or warm when it's coming out through, you mix it. The CO2 chemically reacts ... I'll try not to be too chemistry here, but it reacts with the clays and it squeezes out the water, so the clay's particles are actually sort of squeezed together. The water comes out warm, then the tailings pumped out are basically sort of like a paste.
So what happens? A bunch of things happen, one is you get your water back warm so you don't have to heat up as much, less greenhouse gases. You put a paste out there, there's no water out there, so tailings ponds get smaller, you heat the water back sooner so you're recycling with less water, so you're less fresh water usage. And our operating costs go down. So all kinds of good things happen with that CO2.
At Quest they take the CO2, same thing off the hydrogen plant, and they inject it in deep water, salt water aquifers, way down and just it's there for good. And at Northwest, the refinery there, that's what we're getting going here, it's a trunk line that's going to go in your big old pools, big old oil pools, they're sitting there, it fills up with CO2 but you also cycle ... it'll change the viscosity of the oil and you get more oil out. So it's a win-win-win everywhere around.
Jackie: And that project with the Redwater refinery at the Alberta trunk line is not well known in Alberta, so we're actually going to talk more about it on the podcast in the fall, because it's some 15 million tons of potential ability to move CO2. They still have to get more sources and more places to put the CO2, but it can have real potential to reduce our greenhouse gas emissions here in Alberta.
Steve: Yeah, to make a big difference, yeah.
Peter: Can I ask you another question about the tailings? I mean, it's been mentioned that the tailings may be materially rich in the metals like vanadium and others for batteries, was that true?
Steve: It is true. We're working on a pilot and we're working with titanium, a corporation together, and we got a pilot going here where you try to extract vanadium and titanium, and you're trying to get all those minerals that are used for batteries for solar panels.
Peter: Right.
Steve: And we actually reduce our greenhouse gases because of that, because your ... well, the other things we get is a little bit of oil and it's for the tailings, you get the oil out too, so there's all kinds of positive benefits that can come from these things.
And these are all technologies, Peter, that people never thought about before, because we're just so focused ... in the last 20 years it was all about how do you get the thing built on cost, on time, and get it up and running. And now they were there like you say, you got 50-year reserve life. You can think about putting up a plant on there to capture titanium.
Peter: So how does your ... let's just talk a little bit about the organization at CNRL, I mean, you're thinking very strategically with your management team and everything else. So is this culturally now dispersing into the organization to think differently?
Steve: You know, it's interesting. Canadian Natural has a unique culture, and it's not a top-down, like theirs top-down stuff but in reality we're very frontline-driven. So we have these goals to get to Net Zero, and everybody has great ideas at Canadian Natural. So there's no filter, it doesn't have to come from the VP of technology or VP of production, it can come from anywhere. And if you look at the cost reductions we've had at Horizon and CO2 or GHG emissions reductions, a lot of it comes from the operators in the field going like, "Why are we doing it this way?" And then you go, "Yeah, I don't know why we're doing that." And that creates the idea and lots of things can happen out of that. So it's bottoms up everywhere.
Peter: Yeah.
Jackie: Yeah, and you need that I guess to surface every good idea, right?
Steve: There's thousands of great ideas out there.
Jackie: I wanted just before we leave GHG, a lot of discussion goes on in Canada about our Paris target, and how can we increase our oil and gas production, and especially we talk about LNG exports and still meet our Paris target of a reduction of 30% by 2030. How do you look at that problem?
Steve: To me I look at it as an opportunity, not a problem. And so people they want to constrain it to just Canada. And greenhouse gas emissions, climate change, it's not a Canadian problem, it's a global problem. So you should think globally. If you think globally then you should be building as many LNG plants as you can get built, because that’ll replace coal, it's just as cheap as coal. And that's the thing people got to realize, I'm going down a sidetrack here, but people need energy and they need affordable energy. If you're out in poverty and trying to get out, you don't really care so much about greenhouse gas emissions, you care about feeding your family. So if you can get cheap gas there, that's what we should be doing.
Peter: And cheaper than coal actually.
Steve: Yeah, it is. So you should be thinking ... Canadians should be thinking globally. How do we get down to the one and a half or two degrees? Let's get more gas on the water, let's get more Canadian oil on the water to the people that need it, and that will reduce greenhouse gas emissions.
Peter: I think LNG's been at the forefront of starting to create that narrative and understanding about Canada's role in the world. I mean, there's ... to this point, our podcasts here, you've discussed about all these great things. Can you talk a little bit about getting the word out a little bit more and how CNRL's thinking about ... As Jackie said earlier, I mean, I don't think it's well-known at all that you are ... I mean, your organization driving towards zero emission kind of target.
Steve: We're starting to talk about it more, and that's part of the culture of the company, Peter and Jackie. We're not ... I don't like to be in the news that much, so which I try to fly it on the radar. We know that we can't do that as much now, so we're talking, that's probably why I'm here today, because it's a good message.
Peter: Thank you.
Steve: It's a good message, and you guys have some scope that people listen to and it's important that they hear all the great things that the oil and gas industry is doing.
Jackie: Right, and that our production is actually lower carbon than others, so why would we shut in our production, right? We should grow it.
Steve: We should grow it.
Jackie: To displace other suppliers that are higher carbon.
Peter: Yeah, I mean, I don't want to ... It's just like you have the team and you're wanting to cut the best players off the team, it doesn't make any sense.
Steve: Yeah, it's tough.
Peter: When you think about the team being the global set of oil and gas producers and you want to cut the ones that are innovating the most and the fastest and have these targets that most of the other ones don't have, like why on earth would you want to divest and cut those? That's a whole separate topic, but I mean, it's just ... it's just ... we've got to get the word out of what you're doing I guess.
Steve: Yeah.
Jackie: It's really fantastic.
Steve: And I'll have to say, you got to give credit to the other side, the detractors, the opponents. They have been very, very effective, and they used that 2009 data even now when you come out, we talk about these things, I remember when we first started talking about it, they interviewed somebody from one of the detractors. Hell, yeah, but that's ... It doesn't matter, because that's just the new stuff, it's old stuff that's really bad. I'm talking the whole global thing here, but it's very selective on how they do it.
And, you know, to me it's ... It's really difficult, it's almost like trying to get a Leafs fan to decide they should be a Boston Bruins fans or try to get an Oilers fan to say should be a Flames fan. Maybe, but you don't really want to do it, right?
Peter: No.
Steve: No one's out of the facts, all right? It's just ... It's tough to do. So if you're really entrenched that oil and gas is bad, it's a difficult leap to say Canadian oil and gas is actually better than the rest. And we're still going to need oil and gas, so let's get our product on everything and not use just some of this more polluting type stuff that comes from the rest of the world.
Peter: You're absolutely right, and I think we do have to break this 2009 data myth. That's just 10 years ago, your company and the companies in the oil sands, and oil and gas in general space, have come so far even in the last three, four years.
For more ideas and insights, visit arcenergyinstitute.com.
Canadian Natural Resources slides are drawn from this 2019 presentation.