Andre Hardy:
Welcome to the Industries in Motion podcast from RBC Capital Markets, where we'll be exploring what's new, and what's next in today's fast moving markets and industries. My name is Andre Hardy, and I'm Head of Canadian and Asia-Pacific Research. Please listen to the end of this podcast for important disclaimers.
Now let's get into today's episode. I'm very happy to introduce our guest, Greg Pardy. Greg is a Managing Director and Head of Global Energy Research at RBC Capital Markets. He helps lead a team of more than 30 professionals in Canada, the United States, Europe, and Australia, who cover energy and utilities companies. He is also directly responsible for research coverage of Canada's senior oil companies. Greg joined RBC Capital Markets in 2009, and has about 30 years of equity research experience. He consistently ranks as a top Canadian energy analyst in independent investor surveys.
Today we'll be discussing initiatives in Canada to decarbonize the oil sands, as featured in the recent RBC ESG Stratify™ report entitled “Pathways Alliance: Steering the Future”. We'll explore Canada's Pathways Alliance collaboration between leading energy producers, how it will work, and why it is unique globally. So Greg, to start, walk us through why RBC's Global Energy team is focused on the Pathways Alliance. Why is this important? And what led you to write our recent ESG Stratify report on the subject?
Greg Pardy:
Great. Great question. Fundamentally, we believe the global energy transition to a low-carbon state over the coming decades is going to require multiple pathways to get there. So what's going on in the oil stands is, is really quite exciting. Here you have a half dozen energy producers that have chosen to work collaboratively with Canada's federal and provincial governments, really aimed at reducing scope one and two GHG emissions by about a third by 2030, and then ultimately achieve net-zero by 2050. We know of no other jurisdiction worldwide where something like this is occurring and we think it's important to raise awareness on this initiative.
Andre Hardy:
So, who is behind the Pathways Alliance?
Greg Pardy:
The Pathways group consists of... It's a half dozen producers who collectively operate about 95% or about 3 million barrels a day of oil sands production. So those companies are Canadian Natural Resources, Suncor Energy, Cenovus Energy, Imperial Oil, ConocoPhillips Canada, and MEG Energy.
Andre Hardy:
Before we go on further, why is it called Pathways?
Greg Pardy:
Because no single solution will achieve net-zero in the oil sands, and so multiple parallel pathways are needed.
Andre Hardy:
There's a lot of talk around cleaning up energy production around the world. What's different about pathways versus other decarbonization initiatives?
Greg Pardy:
I think it really has to do with engagement amongst the senior leadership of the six member companies. So those six CEOs connect every Friday morning, which has kept the initiative on course, and I'd be remiss not to mention Pathways President, Kendall Dilling, who was appointed to that post last year, succeeding Al Reid, who was then Director of Pathways.
Andre Hardy:
Those companies are competitors to each other. What motivated them to join forces?
Greg Pardy:
That's another good question. So let's put oil sands GHG emissions into context. So at about 81 Megatons per annum, the oil sands are the equivalent of about 12% of Canada's national emissions. And if you look at upstream GHG emissions intensity of the leading oil sands producers, they are more than double that of the global majors. So there was broad recognition that this needed to change. But also the collaboration would trump solo efforts. And so when you roll it all up, you have three pieces, maintaining a social license to operate and thrive, reducing their cost of capital, and then finally helping Canada meet its national emissions reduction targets.
Andre Hardy:
There's a lot in there to unpack. Taking a step back, how does Pathways work?
Greg Pardy:
Yeah, there are indeed a lot of moving pieces right now. But I'll give you the broad framework and then focus in a bit. So under a three-phase approach, pathways is aimed at reducing GHG emissions, as I mentioned before by about a third or 22 megatons or so by 2030, and then net-zero by 2050. Carbon Capture Utilization & Storage or CCUS accounts for up to 60% of the total reduction. We explored CCUS in a report we published back in 2021, entitled “Dare to Dream Big”, and in our previous podcast on the subject from December, 2021. It is also available on our Industries in Motion podcast page, so I'd encourage you to listen to that for more details. But let's go back to phase one of Pathways between now and 2030.
Phase one is really foundational. It's anchored by a core infrastructure corridor that'll link a network of oil sands facilities in the Fort McMurray, Christina Lake and Coal Lake regions of Alberta, via a 24, between a 24 and 36 inch diameter pipeline, roughly 400 kilometers long or 250 miles. So this is a very long pipe that is going to link the oil sands to a storage hub, deep underground near Coal Lake. About half of phase one is CCUS, with the other half non-CCUS emissions reduction projects. So that would include things like solvents to replace gas, and in situ recovery amongst others.
Andre Hardy:
What does the timing look like on all of this?
Greg Pardy:
Yeah, good question. Pathways is in the process of building its applications, which it's targeting for submission in late 2023. So assuming a one-year regulatory approval process, Pathways could be capturing and sequestering emissions by late 2026, in the Coal Lake region, near the storage hub. But the lion's share of oil sands facilities that require the pipeline, there we are looking at early 2029, to ramp up in earnest.
Andre Hardy:
2029 feels far away. Can the timeline be accelerated?
Greg Pardy:
No, not really. Pathways does not have the regulatory green light to proceed at this juncture. But, you can also think of pathways as a multi-billion dollar mega project with lots of moving pieces. And aside from the regulatory applications, you've got environmental field work, consultation with indigenous communities, and engineering work, and those are just a few of the items. At any one time, currently, there are between 200 and 500 people advancing this initiative.
Andre Hardy:
Wow. Lots to do here as you suggest. How much will this cost and who's paying for it?
Greg Pardy:
Yeah, phase one has been scoped at a capital cost of $24.1 billion, and the price tag on the whole enchilada is around $75 billion. So we are talking about huge numbers. When it comes to investment, this is a private-public partnership in which member companies will co-invest alongside governments.
Andre Hardy:
You mentioned CCUS as playing a big role in Pathways. I understand there's a tax credit that Canada introduced last year. How does it work and what else is coming?
Greg Pardy:
So government incentives are key in spurring decarbonization, no question. And, a lot has changed after or since the US passed the Inflation Reduction Act of 2022, which I'll just refer to as the IRA. But on the first part of your question, Canada's federal government introduced an ITC or investment tax credit last year for CCUS, excluding EOR project or enhanced oil recovery projects. And that ITC provided a recovery of 50 cents on the dollar for expenditures on the capture component of CCUS, and that's typically about 75 to 80% of the cost on CCUS projects. And with respect to the ITC, we're going to come back to that in a minute. Now, the ITC has not been legislated, but this may be by design. Let me explain. When the US passed the IRA, they supercharged incentives for CCUS adoption in the US.
So in fact, credits for CCUS excluding EOR projects, rose 70% to $85 US a ton, and they rose about 86% for CCUS using EOR in the US to $65 a ton. And the duration of those credits is 12 years. And in fact, in the US, CCS and CCUS developers have 10 years to start a project, and they can take direct payment, over the first five years. So this was a big, big change. What it means is that the US is going to attract capital into CCUS. And so, we think Canada's federal government may expand the ITC when its budget is released this spring.
So now let's turn to Alberta. We expect Alberta's provincial government to provide additional, call it stackable incentives, although this is probably something that will occur after the provincial election on May 29th. So a lot coming down the pipe over the next six to nine months or so, on the government side of things.
Andre Hardy:
Thanks, Greg. This has been really informative. The Pathways Alliance is certainly an exciting and unique initiative as part of the global efforts towards decarbonization.
So what else lies ahead in today's ever-evolving markets and industries? We'll be keeping track right here on Industries in Motion. Thank you for joining us on this episode recorded on February 14th, 2023. Please make sure you subscribe to Industries in Motion wherever you listen to your podcasts. If you'd like to continue the conversation, or if you are interested in more information, please contact your RBC representative directly, or visit our website at www.rbccm.com/industries-in-motion. Thank you very much.
Speaker 3:
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