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Dan Themig of Packers Plus Energy Services in his company's tool showroom in Calgary.Todd Korol

Dan Themig is in the vanguard of an energy revolution.

Mr. Themig is a founder and chief executive officer of Packers Plus Energy Services Ltd., a 12-year-old Calgary firm that is a leading innovator in the hydraulic fracturing techniques that sparked both a shale gas boom and a surge of production from tight oil fields across North America.

A decade ago, oil and gas drilling on land was "technologically barren," Mr. Themig says. But advances in drilling, geology and digital imaging combined to bring down the cost of development in fields that were previously unprofitable to tap.

"We focused on high-end areas in what has traditionally been a low-end market," he said.

Packers Plus has worked with producers like EOG Resources Inc., Royal Dutch Shell PLC and Petrobakken Energy Ltd. in the United States and Canada to unlock gas and oil in the most cost-effective manner possible from impermeable rock deep underground.

But there aren't enough companies like Packers Plus in the Canadian oil patch, which is often characterized as a low-tech sector associated with the disparaging phrase sometimes used to describe Canadian industry: "hewers of wood, drawers of water."

Canada is a high-cost producer of oil and natural gas, and the industry is facing competitive pressures as new production floods into North American markets. Rock-bottom prices for natural gas and steep discounts on Canadian crude mean producers here must drive down costs to protect their profits and attract investment, even as demand for imported oil and gas is expected to fall dramatically in their traditional U.S. market.

At the same time, oil companies are fighting a global battle over the high environmental impact of the oil sands extraction, pipelines, and the hydraulic fracturing needed to produce shale gas and tight oil. Executives acknowledge that the industry needs to improve its environmental performance, in part to quiet the insistent calls for crippling regulation.

In the face of those challenges, the industry is under fire for not doing enough.

"We had for quite a while a fair amount of headroom in terms of revenue versus cost and we were not investing as much as we should have in research and development," said David Emerson, a former federal cabinet minister and chair of the Energy Policy Institute of Canada (EPIC), an industry-financed advocacy group.

"So the whole issue of R&D has become way more urgent."

In total, oil companies spend about $1-billion annually on R&D, but that represents only about 0.5 per cent of revenues, compared to 1.8 per cent among all primary industries. And only six of the country's top 100 R&D spenders are oil companies, and none are in the top 10, according to the latest survey by Research Infosource Inc.

By far the leader among oil patch R&D spenders is Cenovus Energy Inc., which has a budget of $200-million a year devoted primarily to figuring out how to use less steam to produce oil sands bitumen, a goal that reduces energy costs as well as greenhouse gas emissions and water usage.

Cenovus chief executive officer Brian Ferguson points to the progress made in the past 10 years across North America.

At the turn of the 21st century, oil companies mainly relied on massive strip mines to produce bitumen from the oil sands; conventional crude reserves in North America were falling rapidly, and plans were being laid to import natural gas from the Middle East and elsewhere.

Now, oil sands producers are pursuing innovative approaches to extract bitumen using steam and solvents. The industry is taking advantage of advancements in drilling technology to produce oil and gas from deposits long considered too challenging for commercially-viable extraction. And companies are sharing what were formerly competitive secrets in order to work together on solving the most challenging environmental problems.

Cenovus is pursuing more than 140 development projects that aim to reduce costs and improve environmental performance, particularly with steam-assisted gravity drainage or SAGD production.

"With SAGD, we're at the relative infancy in terms of the development of this resource," Mr. Ferguson says. "We have commercial technology today that works and is competitive but we're continually investing in new projects that would reduce our environmental footprint but also reduce our operating and capital costs."

But there is a lot of inertia in the industry and a lot of oil patch executives that are married to the old ways of doing things, says Mr. Themig, the Packers Plus CEO.

"The key is upper management in the oil companies," he says. "There are companies that do not change anything they do and it permeates through the whole organization. And there are companies that say, 'We want to try any kind of innovation we can just to test it out' and it can be a big risk for them. But it can also offer big rewards."

A report prepared for federal-provincial-territorial energy ministers acknowledged that the energy sector has driven significant technological advancement. But it argued that government needs to work with industry to make Canada a global leader in energy innovation in order to leverage natural resources into sustainable wealth creation.

Ottawa and the provinces spend significant sums on energy R&D, either directly to fund laboratories and subsidize the commercialization of technology, or through tax incentives that underwrite company R&D efforts. Critics contend the government system needs to be better co-ordinated and better targeted, even as many environmental groups argue that resources should be shifted from fossil fuel industries to renewable energy.

In Alberta, the provincial government is collecting $60-million a year from its $15-a-tonne levy on excessive greenhouse gas emissions and funnelling the money back into fledgling technologies like carbon capture and storage or the use of solvents to extract bitumen in the oil sands. In Newfoundland and Labrador, the offshore petroleum board requires companies to devote a certain percentage of their revenues to research and development.

"In energy, we've been innovating for years and we need to continue to innovate," says Lorraine Mitchelmore, president of the Canadian unit of Royal Dutch Shell. "But we need to step that up to innovate around technology and environmental technology specifically."

Backed by generous federal and provincial funding, Shell has approved construction of the first carbon-capture-and-storage project in the oil sands at its Scotford upgrader near Edmonton. The Quest project will reduce carbon dioxide emissions from the upgrader by 35 per cent.

And after success in working together to clean up oil sands tailings ponds, leading oil companies have banded together under the Canadian Oil Sands Innovation Alliance to share promising technologies to reduce greenhouse gas emissions.

At the same time, producers look to their suppliers – whether the drilling companies such as Packers Plus and global giant, Schlumberger Ltd., or manufacturers like General Electric Co., which supplies a range of products including advanced filtering systems to reduce water use.

And GE has established a technology centre in Calgary where its researchers and engineers work with oil industry customers to enhance production efficiency, lower costs and reduce environmental impacts.

"The industry is doing much more than it was, and so I think it's been heading in the right direction in terms of its focus and collaboration on things that matter both to the industry and to the wider community," says Elyse Allan, president of GE Canada.

"But I think like many commodity industries, there is a tendency to focus on maximizing your extraction when the price is good and you innovate where you have to. There is an opportunity for them to focus more on innovation ... on the environment and on the whole area of optimization control and productivity of their production."