A transition in petroleum’s future?

A transition in petroleum’s future?

As U.S. President Barack Obama moves closer to a decision on the Keystone XL pipeline, the dire warnings about the future of Canada’s petroleum resources are reaching a fever pitch.

But alongside the familiar arguments about buying oil from friends instead of enemies (for the U.S.) and sustaining a cornerstone of the national economy (for Canada), there’s a new line of attack that almost sounds perverse.

When Calgary Mayor Naheed Nenshi spoke up for Keystone [download podcast] on CBC’s The House a couple of weeks ago, one of his more memorable arguments was that Canada has only a small window of opportunity to fully develop the Alberta oil sands before a decarbonizing energy system forces us to leave a great economic opportunity forever untapped.

At first, I thought Nenshi was offering up a soft toss for green-energy advocates to hit out of the ballpark. Think about it: If Henry Ford is laying waste to your established business in horse-drawn carriages, do you try for another record sales year for horseshoes, or bow to the inevitable and begin converting your stock? (Horseshoes, eh? How lucky do you feel?)

As our managing director, Ralph Torrie, points out, this isn’t the first time we’ve heard a use-it-or-lose-it argument for a specific energy megaproject. For example, liquefied natural gas (LNG) proponents might warn that an export terminal has to be approved and built immediately, before other sources outbid Canadian suppliers in Asian markets. But if the market is that volatile, a quick decision may lead to a different kind of risk if it misses factors that will make the contract uncompetitive within the amortized life of the project.

But the other flaw in Nenshi’s argument is the assumption that a low-carbon future will mean the end of the fossil fuel industry.

In the Trottier Project’s modelling and analysis so far, oil and gas production doesn’t disappear. Without major advances in carbon capture and storage technology, an 80 per cent reduction in greenhouse gas emissions would mean cutting fossil fuel production and consumption to a fraction of today’s levels. But that fraction would still be a part of the energy mix, and there would still be money to be made serving specialty markets that represented the highest and best uses for a complex, irreplaceable resource.

So the industry as we know it would be transformed, just as our civilization has shifted its relationship with another well-known natural resource. The way we buy, sell and value gold has changed fundamentally since the days when the Egyptians and Incas used it as an everyday decoration: Today’s gold traders can make a good living because they’ve adopted a business model based on scarcity, in which their product is measured by the ounce and assigned a market value that matches its limited availability.

Considering the series of once-in-a-civilization coincidences that made the petroleum era possible, it might not be a bad idea to cultivate a similar attitude toward our remaining fossil resources.

In a business frame in which the hydrocarbon industry is expected to grow or die, investors are beginning to fret that “oil and gas multinationals could lose up to 60% of their market value if the world cuts its carbon emissions to limit climate change,” according to a February 3 report on the Responding to Climate Change (RTCC) blog.

Citing a report by HSBC Global Research, a top-five global bank with more than $2.5 trillion in assets, RTCC listed Statoil, BP, Total and Shell as oil giants that would be left with unburnable assets in a low-carbon future. But “a bigger risk is that reduced demand for fossil fuels could force down oil and gas prices, meaning that between 40 and 60 per cent of leading fossil fuel firms’ current market capitalization—essentially their net worth—could be at risk.”

If HSBC is right, and if the current momentum for climate change action translates into real results, the fossil fuel industry is in for major shifts in its business model—but the industry has a future. Between now and 2050, the Trottier Project’s time horizon, the sustainable prosperity of Naheed Nenshi’s city and province may well depend on whether the industry gets out in front of the transition ahead, or continues fighting tooth and nail for today’s energy economy.

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