Alberta’s Carbon Revolution

Could our big liability become our main asset?

By Markham Hislop

Alex Walk was captivated. He had flown to Edmonton because he had heard that Alberta researchers might have found the Holy Grail of materials manufacturing: a cheap feedstock for carbon fibre. The stakes were high. Abundant, inexpensive carbon fibre could revolutionize the auto industry, for example, by reducing the weight of electric vehicles, thereby boosting travel range. Now here he was, standing in a University of Alberta lab, watching a researcher “spin” gooey bitumen into filaments, finer than a human hair, that looked like black cotton candy.

“How can we take bitumen and make a continuous fibre at half of today’s cost?” asks Walk, VP of sales for Zoltek, a large Missouri-based carbon fibre manufacturer. Zoltek’s light composite material is five times stronger than steel, but it’s also expensive. Using bitumen as the feedstock could finally make carbon fibre competitive with more traditional materials like steel. “The big market will be the automotive industry, but there are others. It’s a very exciting opportunity.”

A second opportunity might rival bitumen and carbon fibre—the production of hydrogen. This carbonless fuel is all the rage these days because it promises to decarbonize hard-to-electrify sectors such as long-haul freight trucking, aviation and marine shipping. Countries are competing to be an early mover in the emerging sector. Hydrogen was a big part of the Alberta government’s natural gas “vision and strategy,” released in October 2020. “Blue hydrogen” is made with natural gas; then the carbon dioxide is sequestered in old oil-and-gas reservoirs. Alberta, as it turns out, is very good at capturing and storing CO2 at a reasonable cost.

Using bitumen as a feedstock for carbon fibre and turning natural gas into hydrogen are two examples of how Alberta could transform its oil and gas industry. This would be a big step for the province. Despite creating North America’s first carbon tax in 2007, Alberta was still rife with climate change denial in the oil and gas sector. A decade later, when the science could no longer be ignored, industry leaders and the Jason Kenney-led United Conservative Party were still claiming that Alberta hydrocarbon production is the cleanest, most environmentally responsible in the world. More-progressive actors—such as Suncor, Canada’s largest integrated oil and gas company—were working quietly behind the scenes to advance a new worldview.

On Canada Day last summer, Corporate Knights magazine published an op-ed co-authored by Suncor CEO Mark Little and Laura Kilcrease, CEO of Alberta Innovates, titled “Canada’s oil sands are best positioned to lead the energy transformation.” The provincial government’s innovation agency spearheads the Bitumen Beyond Combustion research program, and Suncor is an enthusiastic partner. In this program, Alberta scientists are working on ways to use bitumen to produce materials, not only carbon fibre but polymers, graphene, activated carbon, controlled-release fertilizers and high-quality asphalts—alternatives to refining bitumen into fuel like gasoline and diesel.

If successful, there’s a huge pot of gold at the end of the rainbow, according to Alberta Innovates, perhaps three to four times more value than selling bitumen as ultra-heavy crude oil to refineries in Illinois or Texas. Bitumen Beyond Combustion is suddenly important because Alberta’s existing markets might not be as stable as the industry thought.

Little and Kilcrease suggest that the COVID-19 pandemic might hasten the decline of oil, “giving us a glimpse into a not-too-distant future where the transformation of our energy system could disrupt demand on a similar scale.” In other words, Canadian hydrocarbon producers like Suncor are thinking now about how to move beyond simply selling oil to be burned as transportation fuel. “Disruption breeds opportunity, and forward-looking companies and countries will need to step up and lead.”

European oil and gas supermajors such as Royal Dutch Shell (Netherlands), Total, (France), Equinor (Norway) and BP (UK) are already leading. From Big Oil to Big Energy is the mantra, in large part because policymakers have an ambitious agenda that is supported by European voters. “We’re seeing a natural experiment play out,” says Akshat Rhati, a London-based reporter for Bloomberg News who also has a Ph.D. in organic chemistry from Oxford. “The only large governments that have adopted aggressive climate goals are in Europe. Clearly the European oil companies want to align with that legislation.” If they don’t, access to capital becomes more difficult, because European investors and financial institutions are trailblazing climate risk management. No wonder the supermajors are buying electrical utilities, building wind and solar farms, investing in electric vehicle charging infrastructure—and getting out of high-carbon oil.

Many of these companies were once heavily invested in the oil sands but recently sold their bitumen assets as part of an energy transition strategy. A growing number of European banks and insurance companies refuse to support anything oil sands-related, such as pipelines. The Norwegian sovereign wealth fund’s blacklisting in 2020 of four oil sands producers, including Suncor, brought accusations from Jason Kenney and Alberta business leaders such as Nancy Southern that the Europeans were grandstanding to earn green political credit.

In a University of Alberta lab, a researcher ‘spins’ gooey bitumen into filaments, finer than a human hair, that look like black cotton candy.

It may be surprising to members of Calgary’s Petroleum Club and to staff at Alberta’s energy war room to read Mark Little, the CEO of Canada’s largest integrated energy company, advocating a strategy not that dissimilar to the Europeans.

Little and Kilcrease propose the means to achieve that strategy: an independent public agency to commercialize new hydrocarbon-based processes and products. Alberta already has a model for the agency: Peter Lougheed’s AOSTRA (Alberta Oil Sands Technology and Research Authority), a Crown corporation created in 1974 to match funding for research into new methods to extract the gooey sand and oil mixture that is bitumen. AOSTRA’s underground testing facility in northern Alberta was responsible for numerous technical breakthroughs. And it attracted billions of research dollars from industry. The steam-assisted gravity drainage technique, for example, was commercialized in the 1990s after AOSTRA did most of the research and development heavy lifting. SAG-D now accounts for half of oil sands production.

A new agency wouldn’t be starting from scratch. Industry and governments invest hundreds of millions of dollars each year in energy and cleantech research. Alberta has an extensive innovation ecosystem of university researchers, technology startups, energy companies and industry associations. What it often lacks, especially when compared to the aggressive US approach of showering innovators with money, is capital to power through the “valley of death.” This is the situation where innovation has shown promise in the lab and small demonstration projects, but the investment necessary for full-scale commercialization is unavailable. Like AOSTRA, the new agency could use public funds to lever private sector capital to bridge the investment gap.

For example, it’s one thing to melt-spin several strands of bitumen in a lab, quite another to do it at commercial scale, says Walk: “The researcher is making one filament, but my company makes 50,000 filaments at a time. Big difference in scale.”

Oil sands companies have shown a willingness to partner with cleantech startups to solve similar technical problems. Last year, for example, Suncor invested $50-million in Enerkem, a Quebec-based company with world-leading technology for converting municipal waste into low-carbon biofuel. The company’s flagship is a partnership with the City of Edmonton to process 100,000 tonnes of solid waste—including everything the City can’t recycle or compost, even carpet and shoes—into 38 million litres of ethanol and methanol. The project is the most advanced of its kind in the world, according to VP Michael Chornet. “It’s the project that attracted the attention of the Suncors of this world,” he said. Suncor is no stranger to biofuels, having built the
St. Clair Ethanol Plant near Sarnia, Ontario in 2006.

Little says Suncor, which generated $11-billion of revenue in 2019, and other oil sands companies are uniquely positioned to invest in cleantech innovators such as Enerkem. “The oil and gas industry is one of the largest markets for, and potentially investors in, clean technology in Canada,” he and Kilcrease wrote. “The challenges faced by the sector, combined with an entrepreneurial culture and the motivation to thrive in tomorrow’s low-carbon economy, provides a wealth of opportunity for clean technology investment by the sector.”

Not every oil sands producer is on board. Husky Energy is about a third of Suncor’s size and more cautious. Janet Annesley, senior VP for corporate affairs, says the company recently began modelling 2050 climate scenarios. She believes that even under the most stringent policy, price and greenhouse gas emissions scenarios, Husky’s future looks bright. “The scenario analysis was an affirmation that maintaining our focus on being the low-cost [raw materials] producer is the best approach to a low-carbon energy transition,” she says. Husky has an “entrepreneurial culture” and low-carbon investment opportunities with a good business case will be seriously evaluated, but the core business will remain oil and gas production, according to Annesley.

Of the five big Alberta oil sands producers, Cenovus and CNRL favour a more incremental strategy like Husky’s. Imperial Oil, majority-owned by Exxon Mobil, with a long history of research and development in Canada, falls somewhere in the middle. Suncor hews closest to the European approach.

Not all investors are optimistic that the European supermajors can pull off their low-carbon pivot. Financial returns from the likes of Shell and Total have been very poor since the price crash of 2014. Big Oil is now burdened with big debt. And its track record for integrating new businesses isn’t encouraging.

Canadian oil sands producers, on the other hand, set records, as the top five companies generated billions in net earnings. Economist Kevin Birn, IHS MarkIt’s oil sands specialist, thinks these producers will have the funds to invest in the new sectors if they choose. “The oil sands can generate significant cash, even in a modest price environment,” he said. “The question is what will they do with this money?”

If Europeans are betting the (wind and solar) farm on Big Energy, what might a Canadian Big Carbon strategy look like? The goal must be to lower GHGs, something the sector continues to struggle with. With more federal climate policy initiatives like the low-carbon fuel standard being rolled out over the next few years, oil sands companies will be under considerable pressure. Other investment possibilities, such as vanadium batteries used by electrical utilities, are well-advanced and feasible in the near term, some are early in their development, and others show promise but are still in the lab. What they share in common is they add more value to oil and natural gas than Albertans receive by simply shipping it raw via pipeline to US markets.

How big could the Bitumen Beyond Combustion opportunity be? The North American carbon fibre market alone will be worth over $200-billion per year by 2030, according to Kilcrease. Alberta Innovates calculates that refining three million barrels per day of bitumen into fuel yields $27-billion of value. Turn it into carbon fibre, polymers and road paving asphalt—among other products—and the value could be $84-billion. Alberta won’t capture all that value, of course, but doubling what it currently enjoys sounds doable. Imagine the number of jobs that would be created and the businesses supported.

Similarly the Hydrogen Council estimates that by 2050, hydrogen will account for 18 per cent of global energy demand, generate US$2.5-trillion per year and create 30 million jobs. The European Union released an ambitious plan last summer, and even the Saudis are targeting hydrogen as a key part of their economic diversification strategy.

Hydrogen appears to have a solid business case. Electricity is great for light passenger vehicles, as well for heating and cooling buildings, but too inefficient for big, heavy commercial trucks and industries that require high heat, such as steel-making. These are applications where hydrogen excels. When it burns, hydrogen produces no CO2, making it a perfect fuel for the low-carbon age. “Depending upon when Alberta starts and how committed we are, the value to the provincial economy could be tens of billions by the 2030s,” says geologist Maggie Hanna, a fellow at the Energy Futures Lab, an Alberta non-profit helping Canadians adapt to the energy transition.

Alberta could also become a global centre for carbon fibre manufacturing. “It will take some capital investment and some know-how, but Zoltek has proven that the best strategy is to locate carbon fibre manufacturing right next to where you’re making your precursor [raw material],” says Walk. “If we can melt-spin bitumen in Alberta, there’s no reason you couldn’t manufacture carbon fibre on the same site.”

Precursor is the raw material used in manufacturing, essentially the bitumen “cotton candy” that Alberta researchers have proven can be made in the lab. To scale up precursor processing and make it commercially viable, in July Alberta Innovates launched a “grand challenge” that provides funding to researchers in Canada, the US and Australia. Simon Park from the University of Calgary is using electromagnetic irradiation (think microwaves) to prepare the asphaltene for processing. “We are confident that we will be successful, but a lot more in-depth research and development is required,” he explains, illustrating why Alberta Innovates thinks commercial production is still five to seven years away.

Potential economic impacts of materials and hydrogen processing are only back-of-the-cocktail-napkin calculations now, but experts agree that the benefits will be significant. “The number of jobs would go up, because any time you process a commodity or a raw resource, you do more to it, you’re going to create more economic activity,” says economist Allan Fogwill, CEO of the Canadian Energy Research Institute. 

Alberta’s economy needs a boost. It isn’t the oil and gas jobs machine it once was. Employment peaked in 2014 at 173,000 oil patch workers and has been declining ever since. There were 140,500 jobs at the end of 2019 and then another 20,000 were lost because of the COVID-19 pandemic. Many of those jobs might not come back. New automation and digital technologies enable cost-cutting companies to produce more with fewer people. The Calgary Economic Development Agency conceded several years ago that oil and gas companies are not going to fill the 30 per cent of downtown office space vacated after the last oil and gas downturn, from 2015 to 2017.

How will Alberta replace those jobs? Imagine this future:

By 2030 conventional oil and gas production has only grown modestly, while oil sands output has grown by one-third, to four million barrels per day. The industry has matured and become more efficient. GHG emissions are poised to decline. Costs have been lowered to the point where Alberta can compete long-term in global markets. Stability, not the frenetic growth that characterized the sector from 2008 to 2014, is the new normal. Tens of billions in investment pours into materials manufacturing, hydrogen production, petrochemicals, biofuels and technology. Previously vacant downtown Calgary offices are filled with scientists, technicians and startup companies. Edmonton fabricating plants are bustling, and tradespeople are busy erecting new plants. Well-paid professional, technical and trades jobs and business opportunities have been created for the next generation of Albertans.

By embracing carbon, Alberta turns its biggest negative into a huge positive, since the new approach includes a more vigorous effort to reduce emissions from oil and gas production. The “dirty oil” moniker hung on Alberta by environmental groups—which has done so much damage to the province’s global reputation—goes away. European banks (HSBC), insurance companies (Zurich Group) and sovereign wealth funds (Norway) rethink divestment from the oil sands. A more robust domestic market for hydrocarbons improves oil and gas prices and reduces volatility. Alberta’s approval rating in Ottawa and other provinces—especially key ones like BC and Quebec—goes up.

The provincial government and much of the industry leadership are fixated on protecting the status quo. Their narrative is “the world needs more Canadian energy,” just another spin on growing output and increasing exports, the industry’s strategy for the past 70 years. And, not satisfied with the three oil pipelines currently under construction, industry associations such as the Canadian Association of Petroleum Producers want to build still more pipelines to the west coast.

This is a bet on the past, not the future.

But support for an alternative vision of Alberta’s future, and the idea that Canada should play a significant role in it, is picking up steam. In September 2020, Adam Legge of the Business Council of Alberta—whose membership includes many corporate heavy hitters such as Suncor, ATCO and ATB—called for the “federal government to view Alberta, and the country’s largest resource industries, as a welcome partner in a green recovery.” The senior government’s financial resources could be a key to Alberta’s transition toward materials manufacturing and low-carbon fuels.

“Now is the time to take a big step forward,” Little and Kilcrease wrote. “As the history of the oil sands reveals, disruption and transformation are nothing new for Albertans, and we’re optimistic that the Canadian energy industry is up to the challenge and best positioned to invest in and lead energy transformation.”

Suncor and Imperial Oil, with their long history of new-product development, might invest directly. CNRL, Cenovus and Husky might do the same or elect only to sell heavy crude feedstock to the manufacturers. However those decisions settle out, the promising business cases for the new processes suggest that capital and expertise won’t be hard to attract to Alberta. But, as Little and Kilcrease argue, governments need to step up too.

Alberta’s carbon revolution isn’t going to start itself. 

Markham Hislop’s Energi News covers oil and gas, the energy transition, clean energy, technology and politics.

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