Pandemic-fuelled oil crash hastens Europe’s flight, but oil sands are resilient

Europe’s retreat from the Canadian oil sands is picking up speed as big questions about oil demand emerge in the economic crisis that the COVID-19 pandemic has wrought.

Total SA, Deutsche Bank and Zurich Insurance Group are the latest among multinational oil companies, financial institutions and insurers to pull back from Canada’s energy sector as part of a push to reduce their impact on climate change, driven in no small measure by major institutional investors.

Now, questions about postpandemic oil price forecasts are being layered onto the impact of environmental, social and governance (ESG) measures that are now part and parcel in investment decisions, especially in Europe.

“The Europeans had already been ahead of the curve from the perspective of the energy transition and being a lot more conscious on the carbon footprint of their assets and their portfolios,” said Abhi Rajendran, director of research at Energy Intelligence.

“This whole downturn over the last three, four, five months has really sort of put them in a position to just accelerate all of that.”

Total’s announcement on Wednesday landed with a thud – the Paris-based company announced it was taking a US$7-billion writedown on its oil sands assets. The company’s operating assets in Alberta include stakes in the Fort Hills oil sands project, operated by Suncor Energy Inc., and the Surmont project, run by ConocoPhillips.

Total said it has recognized just proven reserves on its books from those projects – as opposed to probable ones, which it says may not be produced before 2050, assuming a long-term Brent crude oil price of US$50 a barrel. In addition, Total – once an active acquirer of oil sands assets – will not approve expansions of those projects, it said.

In a further separation from its oil sands confrères, the company decided to tear up its membership with the Canadian Association of Petroleum Producers, citing the “misalignment” between the lobby group’s public position on climate and its own.

The carbon issue is one aspect of an oil demand puzzle that has become much more complex due to uncertainty over how quickly economies will rebound if and when COVID-19 is tamed by a vaccine. Mr. Rajendran said it is unclear if global demand will return to prepandemic levels, especially if large numbers of people resume working from home and avoid air travel. Indeed, some analysts have projected the world could hit peak demand this decade, if it hasn’t already.

In July, the U.S. Energy Information Administration predicted global liquid fuels consumption would average 92.9 million barrels a day this year, down from 101.4 million in 2019. Next year, consumption is pegged at 99.9 million barrels a day.

Demand could fall further in Europe, as many government economic stimulus packages included incentives for spending on renewable energy sources and other green initiatives, Mr. Rajendran said.

Alberta Premier Jason Kenney and his government have taken pains to try to counteract much of the anti-oil-sands messaging emanating from across the Atlantic. Energy Minister Sonya Savage called Total’s moves “poorly informed and short-sighted.” That was similar to her reaction earlier this year, when Norway’s US$1-trillion sovereign wealth fund excluded Canadian Natural Resources Ltd., Cenovus Energy Inc., Suncor and Imperial Oil Ltd. over “unacceptable greenhouse gas emissions.”

Mr. Kenney has said Alberta’s oil patch does not get the credit it deserves for its improvements in environmental performance. But he also has criticized the pushback against fossil fuels. Last year, after Moody’s Investors Service downgraded the province’s debt, partly blaming its exposure to environmental risks, he lambasted the bond rating agency for “buying into the political agenda emanating from Europe, which is trying to stigmatize development of hydrocarbon energy.”

But Europe’s retreat has not ceased. In recent days, Deutsche Bank said it would no longer finance new oil sands projects, including production, transport and processing, as well as Arctic fossil fuel extraction. Further, it is studying all its investments in oil and gas this year, and plans to set new limits on financing the industry globally. Zurich, meanwhile, said it was pulling out as lead insurer for the Trans Mountain pipeline expansion project, now under construction.

In a recent interview, Natural Resources Minister Seamus O’Regan said the danger for Canadian producers is that they become “a box to check” for investors looking to satisfy ESG demands. “If you can picture the portfolio manager at the end of his long table in New York or London or Zurich or wherever, looking down at his juniors and saying ‘What are we doing about climate change? Well, we’re writing off investments in Canadian oil and gas,’ And the box is checked.”

This highlights the necessity for Canada to commit to a net zero target on carbon emissions, he said.

In many cases, the overall carbon impact of the oil sands is misjudged in comparison to other crude oil sources, said Jackie Forrest, executive director of ARC Energy Research Institute. A peer-reviewed study by Stanford University researchers in 2018 rated the Canadian oil industry the fourth-most carbon-intensive of 50 countries, trailing only Cameroon, Venezuela and Algeria.

Ms. Forrest said the study’s findings have become the benchmark for European banks. Those institutions do not take into account recent advances in the oil sands, including those at new projects, or ambitious targets set by producers investing in technology.

“Total obviously knows that. They are producing in the oil sands, so that’s a little bit different. But the banks and other institutional investors that have chosen to divest or not support oil sands, the root cause is that information,” Ms. Forrest said.

Europe’s snubs don’t mean the end of the oil sands once the pandemic subsides. Indeed, the industry has showed its resilience as it resupplies the North American market.

As much as one million barrels a day of Canadian production was taken offline, but is slowly being brought back. U.S. shale output, meanwhile, dropped off rapidly and is expected to require massive investments to arrest the production declines before increasing output, even with U.S. oil prices sticking around US$40 a barrel.

Once oil sands production is back up and running, the cash required to maintain it tends to remain steady, which goes against the perception that it will be the first to fall in a lower-carbon world, Ms. Forrest said.

With a file from Emma Graney

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