Energy Q&A: Athabasca And Beyond

Canada has a new and larger role to play in the world's energy solution.

Clive Mather, president and CEO of Calgary-based Shell Canada Ltd., recently delivered a speech to the Empire Club in Toronto, updating the audience on the state of technological development in the energy industry. From rigs that walk well-to-well to GPS-guided drilling bits that can tunnel in any direction, Mather, the former chairman of Shell U.K. Ltd., made it clear: energy-industry productivity enhancements are proceeding apace. If there was an underlying message in Mather's address, it was that these are the kinds of tools that are going to help us avoid the long-term environmental damage that resource extraction inevitably causes and, perhaps, help us navigate the short-term political crises that threaten in the face of rising global demand for energy resources.

Gas prices, of course, have hit real record highs as a result of a few well-timed hurricanes and a rate of new oil reserve discovery that hasn't kept pace with rising global demand. But billions of dollars' worth of investment has been announced in the past two years, and that means Canada has a new and larger role to play in the world's energy solution, a task we might best view as a matter of maintaining global energy peace. At least that's the sense one gets from Mather, who stopped by the Canadian Business offices the day after his speech to talk to staff writer Jeff Sanford about selling Canadian heavy crude to the Chinese, the importance of technology and the responsibilities that come with resource wealth.

Canadian Business: What is the reason behind the recent volatility in gas prices? And how soon might we see new supply come online?

Clive Mather: If you wind the clock back only a few years, we were looking at crude prices below US$10 a barrel. At that price it was not economic to invest in new exploration and production. But by the time the industry had worked out that new production was needed [a result of rising demand in Asia], we were into a catch-up game. That's why there's been a bit of a shift upward in prices. My own view of this is that we will see production grow sufficiently to meet demand as a result of the huge investment that is now going in. Canada, of course, is part of that game. Alberta possesses astonishing resources. But if you want to grow the production in Athabasca, as we do, from the current million barrels a day to, say, five million barrels a day, it's going to take us 15, 20 years. You can't just click your fingers and turn on the tap.

CB: How will Canada fit into the global supply picture of the future?

CM: Canada is important today in terms of absolute production, and it's much more important in terms of future production. The percentage of energy in the U.S. supplied by Canada is going to increase inexorably in the years to come. You can imagine that some of the energy, particularly the heavy oil, will also find its way to China. And I think that's a good thing. It means there is more choice for Canada as an exporter, and the one thing you want in business is to have different choices. That makes for a more robust long-term commercial environment. China is hungry for oil. Canada has it. It's just the Pacific that divides us, and that can be bridged. I think pipelines will be built from Athabasca to the west coast of Canada, and then product will be shipped across. First prize in economic terms will be to ship this stuff south. But I'm sure the Chinese market will open up.

CB: It is clear Canada is in the midst of a dramatic increase in total national oil production. How much are we going to be producing?

CM: I'm not sure. The Athabasca expansions that are currently being announced will bring us ? and this is just for heavy oil ? from something like 1% of world production up to 3%, 4% or 5%. But that's not the whole game. There is a lot of exploration going on the East Coast, and I'm sure there is more exploration to come, up north in the Beaufort. Canada is becoming a very significant provider of world energy, and you see that reflected in the Canadian dollar. I believe that underpinning the value of the Canadian dollar is this vast resource, which is at a systemically higher price than it used to be.

CB: Are we now in an era of permanently higher crude prices?

CM: It's only six or seven years ago we went below US$10 [per barrel]. Now, we're around US$60. I suspect the answer lies somewhere between the two. But don't underestimate the ability of the industry to crank up production. And don't underestimate consumer reactions to high prices. There will be correction back to the mean. But even more important, and more worrying to me are the fuel prices people will pay through the winter for heating their homes. I think there will be changes in consumer behaviour. The capacity to conserve energy is huge, if we ever get serious about it. People may look at me and say, “Why should you be worried about this, sitting on top of an organization whose job is to sell energy?” The reason I'm worried is because this underlying demand from Asia is so strong that it's going to underpin world demand for a long time to come.

CB: Governments seem to be more concerned than ever about the security of international energy supply.

CM: The security of energy supply is an issue that has risen up the political agenda in many parts of the world. There are two reasons for that. One is this underlying shift of supply and demand as a result of China and India. The other one has been that events in some countries have made governments realize that they are perhaps not as securely supplied as they would have hoped. [Hurricanes] Katrina and Rita are an example of that, but the problems in Nigeria, Venezuela and Norway are also examples. In some cases it may be labour problems, some may be political and some may be social. But all of them one way or another have impacted production, and governments have said, “Hang on a minute. Are we genuinely secure?” Nobody likes paying high prices to gas up their cars. Even more, they hate the prospect that supply will not be there. From that perspective, diversity of supply is important.

So when people ask me, “Will the U.S. go LNG [liquefied natural gas] or Athabasca?” well, the answer is both. In the U.S., they're looking at all sorts of options: LNG, bitumen from Athabasca, explorations in Alaska, while also ramping up oilsands and oil-shale technology. People over the last couple of years have been given a bit of a wake-up call. That's one of the reasons we have this massive increase in investment in exploration and production across the industry.

CB: How do we ensure that investment continues in terms of government policy?

CM: There are two or three things that are pressing from our point of view. I think the first issue is the labour market. Alberta is an astonishing resource. This is, I am pretty sure, the world's single biggest resource of hydrocarbons, bigger than Saudi Arabia. But I believe there are resources even deeper than we have currently mapped, and as technology changes we can legitimately aspire to access these. I wouldn't at all be surprised if Alberta doesn't eventually overtake Saudi Arabia. But getting oil out of Saudi is a walk in the park by comparison to Athabasca. We need to attract a lot of quality resources to the province to execute well the projects we want to do. And we are talking of literally tens of thousands of trades, as well as project engineers and other professionals. And managing that is going to be a huge challenge. A solution to this is partly to be found around encouraging the development of skills from the technical colleges and universities. But it's also going to have to be around immigration. Bringing in foreign labour will always be the last thing we want to do because it is the most expensive. Whatever local solution we will find, that's where we will go first. But I do think the numbers are such that we probably can't avoid it.

In the same way, there's an issue around infrastructure: roads, airports, housing, sewage. The eyes of the world are upon us, and Canadians and Albertans have to manage this well. And managing well means putting in the infrastructure ahead of time.

The other issue I flag is ensuring that the whole business commercial environment remains stable. As someone who came to Canada only 18 months ago, I've been extraordinarily impressed with the regulatory, fiscal and business framework. It is, in my view, as good as you'll find anywhere in the world. That's one of the reasons why Canada is attracting the huge investments that it has. But we mustn't disrupt that. And so, sometimes when I read the papers and I hear issues flashing around linking oil to other games, I do get concerned. We are linked at the hip with the U.S. around this. U.S. technology is vital to the development of the oilsands. And they represent a wonderful marketplace for our product. So let's not get carried away on short-term issues of the day. This resource is a prospect not of a year or two but of generations, and we need to keep stability in all aspects of that framework to make sure we deliver its full potential.

CB: Your speech to the Empire Club focused on the role of technology in the energy industry.

CM: The point I was trying to get at in my speech was this: Increasingly, a lot of the production is more complex than it used to be. When I started my career 36 years ago, Athabasca was off the map. We knew about it, but nobody was interested in it because it was too difficult. You could go to the Middle East and just stick your pipe in the ground and out came the oil. Who would bother to go and worry about this extraordinary effort that is required in Athabasca? It's the same thing with basin-centred gas [the kind of engineering-intensive natural gas production used by EnCana]. I don't think the issue is going to be around supply. There are huge reserves of oil and gas still to be found and many prolific areas that have hardly been explored at all. But technology is going to be key to unlocking the supply we need.

CB: What technologies do you think look most promising for a greener future?

CM: We may all want to see an energy supply over time that is entirely green ? and we're investing in that and we're committed to it ? but the simple reality is that for the next 30, 40, 50 years we have no alternative to hydrocarbons. So we have to provide that stuff, and we have to make it as clean and cheap and sustainable as we can. We have a process now that can turn natural gas into synthetic diesel. The first plant already exists in Malaysia, and we're now building a massive commercial-scale plant in Qatar, which has one of the largest single gas fields in the world. Gas is a wonderful fuel, but it's quite difficult to transport to market. If the market is not geographically close to the field, you have two choices: You either liquefy it by freezing it to -160¡C, and then you transport it in insulated ships to an LNG terminal, where you re-gasify it and put it into the grid. Or, as with this new technology we've developed, you turn it into a fuel, a liquid. And the beauty of this fuel is that it is ultra-clean. And it's available now.