A Saudi Predator?

How market manipulation helped the kingdom become a major investor in western oil companies

By Peter McKenzie-Brown

The last twelve months have been rough for companies invested in Alberta’s oil sands. Things began rough, with Norway’s US$1 trillion sovereign wealth fund, which has its origins in the country’s offshore oilfields, announced that it would unload the US$81 billion it had invested in bitumen companies. The reason? Such an investment was out of alignment with the 2^oC global warming target set by the 2016 Paris Agreement on greenhouse-gas-emissions. “By going…oil sands free,” the Norwegian news release said, “we are sending a strong message on the urgency of shifting from fossil to renewable energy.”

A strong message it may be, but also haughty. There is a direct correlation between a nation’s oil consumption, its GDP and the quality of life its citizens enjoy. By what right could the world’s rich nations – for practical purposes, the 37 members of the Organization for Cooperation and Development, with a population of about 1.3 billion – justify denying affordable energy to other countries in the world? Well, there is the matter of the global warming emergency.  The case for developing alternative energy resources is dire. After all, the population of our planet is rapidly approaching eight billion.

Norway’s wealth fund soon sold its US$81 billion interests in Calgary-based Cenovus Energy Inc., Suncor Energy Inc., Imperial Oil Ltd. and Husky Energy Inc. From that point on, the statement said, the fund would exclude companies involved in the oil sands from consideration as appropriate investments.

The shares in those companies responded immediately by falling. Even though there is widespread concern about global warming in Alberta, many of us with backgrounds in the oil patch felt affronted. “What else could go wrong?” we wondered. We did not know it at the time, of course, but there would soon be the matter of COVID-19.

As the dangers of travel across a pandemic-stricken planet became obvious, governments imposed lockdowns around the world and global oil consumption plummeted. As international travel crumbled, oil prices dropped for an industry which cannot too quickly shut in production. The poster-child for this event came on April 20^th, when the headline price for a barrel of West Texas Intermediate oil fell into negative territory for the first time ever. For the only time in history, sellers had to pay buyers to take their oil. (See chart.)

                Why did it happen? Essentially, because of the way oil markets function in Texas. The Texas Railroad Commission is the steward of the oil-rich state’s natural resources and the environment, and its regulations led to the reality of oil prices crashing from US$18 a barrel to -US$38 in a matter of hours. Rising stockpiles of crude threatened to overwhelm storage facilities and forced producers to pay buyers to take the barrels they could not store. Was this the doing of big oil – such vast publicly-traded oil companies as ExxonMobil, British Petroleum and Royal Dutch Shell, which are so often characterized as villains when pump prices rise at your local gas station.

In fact, the world’s 13 largest energy companies, measured by the reserves they control, are government-owned and operated – by name, Saudi Aramco, Gazprom (Russia), China National Petroleum Corp., National Iranian Oil Co., Petróleos de Venezuela, Petrobras (Brazil) and Petronas (Malaysia). These state-owned companies and their smaller siblings control more than 75 percent of global production. By contrast, the multinationals produce only ten percent.

Markets, manipulated

In early March, OPEC officials presented an ultimatum to Russia to cut production by 1.5 percent of world supply. For her part, the Eurasian giant foresaw continuing cuts in her market share: after all, America’s shale oil production, which uses fairly new technology, was making the country both the world’s largest consumer of oil and the largest producer. Anxious about this concern, Putin’s government rejected the demand – in effect ending a three-year partnership between OPEC and major non-OPEC producers, widely known as the OPEC Plus cartel. Another factor was weakening global demand resulting from the COVID-19 pandemic. This also resulted in OPEC Plus failing to extend the agreement cutting 2.1 million barrels per day that was set to expire at the end of March. Saudi Arabia, which has absorbed a disproportionate amount of the cuts to convince Russia to stay in the agreement, notified its buyers on March 7^th that they would raise output and discount their oil in April. This prompted a Brent crude price crash of more than 30 percent before a slight recovery and widespread turmoil in financial markets.

Perhaps this Saudi-Russian price war was a game of chicken to see who would blink first. But neither of the major players had much reason to blink. In March 2000, the Saudis had US$500 billion in foreign exchange reserves; Russia had US$580 billion. More to the point, the Saudi cost of production, depending on the grade produced, is three dollars per barrel, compared to US$$30 per barrel in Russia.

Thus, the OPEC plus price war was designed to take advantage of a weak global economy, infected by COVID-19. It Saudi Arabia's case, it assaulted the Western petroleum sector – especially America’s. To ward off from the oil exporters price war which can make shale oil production uneconomical, US may protect its crude oil market share by passing the NOPEC bill.

In April 2020, OPEC and a group of other oil producers, including Russia, agreed to extend production cuts until the end of July. The cartel and its allies agreed to cut oil production in May and June by 9.7 million barrels a day, equal to around 10 percent of global output, to prop up prices, which had previously fallen to record lows.

The Russia/Saudi Arabia oil price war, which had begun the previous month, had a huge impact – probably by design – on the ownership of large oil companies in Europe and North America. Saudi Arabia’s sovereign wealth fund saw nothing but opportunity in the global oil price plunge. During the battle, the kingdom scooped up billions of dollars’ worth of shares in downtrodden energy companies, including Canadian firms.

Filings with U.S. Securities and Exchange Commission indicate the kingdom’s Public Investment Fund (PIF), which has an estimated US$320 billion in assets under management, bought stakes worth US$481 million and US$408 million in Suncor and Canadian Natural Resources, respectively, during the first quarter of 2020. That month, the values of the Canadian producers and three other energy stocks PIF bought — Royal Dutch Shell plc, Total SA and BP plc — had all more than halved from their 52-week highs at the time the kingdom made its acquisitions. The illustration shows the prototypical Royal Dutch share price after the crash. It also shows the quick return the kingdom made from the package of acquisition of these five stocks as markets rebounded: more than US$182.6 million since the end of March.

One Man, Immeasurable Impact

How J. Howard Pew's intense and unwavering belief in the oil sands created an industry.

This article appears in the August issue of Oilsands Review 

By Peter McKenzie-Brown

If he is remembered at all, Americans interested in business history think of J. Howard Pew as an industrialist who created what was once one of the world’s largest energy companies. For Canadians, though, he was the legendary force behind the harnessing of the oilsands. Though his efforts in the oilsands sector were a cash drain for his company – at the time, one of the 20 largest in the United States – for this country he created an industry.

The thumbnail sketch of his life is this: Born in 1882, J. Howard Pew graduated from high school at age 14, from university at 18 and became president of Sun Oil at age 30. With his brother Joseph he transformed Sun (founded by his father; now called Sunoco) by introducing new refining, marketing, and distribution techniques. He was astute. During the First World War he responded to the war-time demand for crude by building a navy of tankers. That fleet became one of Sun’s most profitable businesses.

A publication celebrating Sun Oil’s centenary in 1986 described the man, who had died in 1971. “Tall and broad-shouldered, with bushy eyebrows, he was often seen clutching an enormous cigar in his fingers as he moved about Sun’s corridors. He was intense, sure of himself and deliberate in his speech even in old age.”

The Venerable Pew: An extreme conservative in his religious and political views, Pew was passionate about his work. “Working for Sun Company these years has been not merely a job,” he said in 1956. “It has been participation in an exciting adventure – a way of life providing satisfaction in the accomplishment of our goals. So our people have become a great team, welded together by great ideals and purposes accepted by each of us.”

In the 1940s the venerable Pew took a serious interest in the oilsands, in part because of an investigation of potential crude oil sources Sun undertook during the Second World War. In the early 1950s, George Dunlap had a remarkable interview with Pew before moving to Calgary to set up Sun’s Canadian exploration and production operations.

“I have one area that I am interested in and would like to share with you my interest,” Pew told him. He went to a cabinet to pull out a thick file marked “Athabasca Tar Sands,” then shared his vision of the future importance of the oilsands. He told Dunlap to ensure that “Sun Oil always has a ‘significant position’ in the Athabasca Tar Sands area!”

The venture was called Great Canadian Oil Sands Limited (now the Suncor plant), and in 1962 the Oil and Gas Conservation Board (today the ERCB) granted approval for the company to proceed with a 31,500 barrel-per-day, $122 million plant, but imposed severe environmental restrictions on the plant. The partners had serious concerns about economies of scale for such a small project. Costs began to rise and financial difficulties ensued. By 1964 it was clear that a company with deep pockets – not Canadian Oil Sands Ltd. – was needed to lead GCOS. Sun took on that responsibility. The capacity of the proposed plant increased to 45,000 barrels per day and the cost escalated from $122 to $190 million.

The larger plant received approval in 1964, partly because Pew wrote a letter to the Petroleum Resources Conservation Board (now the ERCB) saying “I believe in the future of this project and I will put up my own money without reservations if the permit is approved.” Read aloud at a meeting of the Conservation Board, that letter carried the day. By the time GCOS reached completion in 1967, costs had risen to $235 million.

Building the Plant: The contractor for the project was Bechtel of Canada, and the engineer representing Sun during construction was Robert (Bob) McClements, Jr., who later became chairman and CEO of Sun Oil. McClements described Pew as “one of the strongest influences on my life.”

Pew would visit the construction site and “we would have engineering (and other) discussions. He would ask ‘How much does it cost to feed a man an average twelve hours on a shift?’ He was very, very detailed. I still remember: it was six to eight pounds of food per person per day and a little less than $2.00 per person to feed a construction worker… Anyway, there was a side of J. Howard that I don’t think has really been widely recognized. I think many people would describe him first perhaps as an industrialist. He was certainly known as the leader of a large corporation. Sun was always in the top 20 of the Forbes list of companies. It was a huge company. But there was also a spiritual side to him. He was a very religious individual. His conversations often included two words: faith and freedom, and they were welded together….”

The Sun Company McClements joined in the 1960s was much different from those in today’s oilpatch. “There was no retirement plan, there was no healthcare plan, there was no sick plan. When you were sick, you took your own time off….You would pay for that time. When you retired – and nobody quit and nobody was ever fired at the Sun Company – you retired at 50% of your pay. There were no documents explaining this in those days.”

McClements described the only meeting he attended between Pew and Premier Ernest Manning. “I’m telling you I’ve never been in a business meeting in my life like that. It was like you and me sitting here talking. There were no hard specifics. (There) was a feeling of absolute trust between the two of them. And I remember when I went back to the plant, somebody asked me about it. Without thinking, I said ‘Those two men just reeked with honesty.’ The relationship they had was unbelievable, exactly the same wavelength.”

McClements served as master of ceremonies at the official GCOS opening. A Sun Company publication commemorating the event quoted him as saying “synthetic crude is a natural for petrochemicals. I see no reason why the stretch along the Athabasca (river) cannot become an industrial valley in time.”

McClements vividly remembered the official opening. “It was the end of September in 1967 at the dedication of the plant. Pouring rain, not a very good day at all.” Premier Ernest Manning and Pew (then 85 years old) both addressed the audience of about 200.

According to Manning, “no other event in Canada’s centennial year is more important or significant.… It is fitting that we are gathered here today to dedicate this plant not merely to the production of oil but to the continual progress and enrichment of mankind.” For his part, Pew told the assembly that “No nation can long be secure in this atomic age unless it be amply supplied with petroleum. It is the considered opinion of our group that if the North American continent is to produce the oil to meet its requirements in the years ahead, oil from the Athabasca area must of necessity play an important role.”

McClements, who was the first plant manager for GCOS, recalled a tour he gave Pew once production had begun. “We had visited the mine and were in the refining section of the plant (when he) asked to see a sample of what we were running and I asked an engineer to pull a sample of the product we were making at the moment. Mr. Pew took the bottle and held it up to the light. It was water white. He unscrewed the cap, held one nostril and sniffed the oil again. Finally, he stuck his finger in the bottle and tasted the oil. When he did, you could just see his face beam.”

A broad view of the GCOS story comes from Paul Chastko, a renowned oilsands historian. “When Great Canadian Oil Sands began production in 1968, it represented a remarkable achievement,” he wrote: “a Canadian company, backed by the investment capital of a U.S. multinational corporation, used a separation process researched and developed by scientists funded by the governments of Canada and Alberta to produce a synthetic oil capable of competing against conventional Saudi crude in world oil markets.” All true, but the energy behind this effort was the vision of J. Howard Pew. The impact on the oilsands of this one man has been immeasurable.

Waste to Wealth

Why waste management in the oilsands could better echo the mutually beneficial relationships in nature. This article appears in the August issue of The Oilsands Review.

By Peter McKenzie-Brown
Academics have developed a discipline known as industrial ecology to help explain the behaviour of the economic world, but you can do more than use this discipline to understand economics. You can use it for strategic planning. According to an influential group of thinkers headquartered in Alberta, the future of the oil sands lies in “industrial symbiosis” – a specialty within the field. It’s a simple idea, but it could have the power to transform the oil sands sector.

A few months ago I got an invitation to participate in a workshop developing this idea, with a key proviso: If I reported on the proceedings, I couldn’t attribute a quote to anyone without first getting permission. The point was to create a working environment in which no one felt constrained by the presence of a reporter. No problem: for this article, the ideas are more important than the industry, government, and university people behind them.

The workshop was jointly sponsored by ConocoPhillips and Alberta Innovates, an umbrella group of provincial agencies meant to be “catalysts of innovation” in the energy and environment, health, technology and bio sectors.

We met at the provincial government’s McDougall Centre in Calgary. While the topic was zero waste from the oil sands, participants produced the usual amount of think-tank rubbish in the form of Styrofoam cups and disposable plastics. Probably nothing was recycled – one of the easy forms of waste management.

The task set before the group was to brainstorm a plan for regional integration in the Fort McMurray area. Under this scheme, industry and government would look for ways to encourage the creation of waste-reducing business ties. Oil sands companies, other industries and municipalities in the region would share or co-locate infrastructure to reduce redundancy, harness waste energy and convert residual materials into value-added by-products.

The Big Word
To understand this, let’s get the big word out of the way. Symbiosis occurs when living things develop cooperative or dependent relationships with others so they can live longer or better and prosper. Familiar examples: people on the one side, cultivated plants and domesticated animals on the other. Each side needs the other to thrive.

Industrial ecology describes industries as ecosystems with behaviours somewhat similar to those in nature. Industrial symbiosis involves creating dependent or cooperative relationships within the sector. Done right, this approach can create more sophisticated, efficient and profitable businesses. It can also reduce the output of such industrial wastes as heat, carbon dioxide emissions, and other pollutants.

There are many instances of companies extracting by-products from a waste stream and then transforming them into money-making products. For example, Williams Energy Canada removes pentanes, butanes, propane and olefins from the off-gas stream at Suncor’s Fort McMurray operations. The company pipes the butanes and olefins to Redwater, where its 14,000-barrel-per-day plant further processes them into petrochemical feedstock. In May Williams announced a series of expansions to this system, including the construction of more processing facilities and a new pipeline.

Another example is the fertiliser plant at Syncrude, which helps the oil sands giant comply with environmental regulations. Marsulex Inc. owns and operates the plant which, using technology the fertiliser company developed, employs waste ammonia from Syncrude to help clean up sulphur emissions from bitumen processing and upgrading. The value-added by-product from the operation is ammonium sulphate fertilizer.

Similarly, Shell strips feedstock from the hydrocarbon stream at its oil sands upgrader at Scotford. The company pipes those by-products to its nearby petrochemicals plant for feedstock.

Looking into the future, Edmonton-based Titanium Corporation has developed an entire business plan based on processing waste oil sands material into valuable products. The company has developed technology that can recover both heavy minerals (zircon and titanium) and bitumen from tailings ponds at Fort McMurray-area plants.

There are economic and environmental benefits to this approach. Companies can generate profits for their shareholders. The environmental footprint is smaller, because symbiosis enables industrial players to manage emissions and other waste streams better. And there are improvements in the economics of transforming low-cost bitumen into higher-value products. It seems like a no-brainer.

The Toilet and the Tailings Pond
Over two days, workshop discussion was thoughtful and varied, and it included colourful one-liners enlivening subtle and colourful ideas. One person summed up a complex discussion with an on-the-spot maxim: “Don’t connect the toilet to the tailings pond.” The idea is that the plumbing should be designed to easily redirect plant by-products (including waste heat) to new facilities as money-making uses for them are found.

Co-author of an executive primer titled Discovering Industrial Ecology, the University of Alberta’s Dr. Stephen Moran suggested that companies should “assign to each major waste a product number, then assign a product manager to it.” An important outcome of that perception-altering idea would be the creation of markets for valuable wastes. Syncrude’s waste ammonia is one good example. Another: the propane and heavier hydrocarbons which Suncor used for plant fuel until Williams began to extract them for feedstock.

At the other end of the feedstock spectrum, consider that ERCB regulations now require the companies drilling Steam-assisted gravity drainage (SAGD) oil sands wells to send all materials from the well, including oil sands from the horizontal legs, to a secure landfill. Why not treat that material as oil sands ore and ship it instead to a mining operation for processing?

According to Bob Taylor – formerly Alberta’s Assistant Deputy Minister for Oil and now a consultant who specializes in energy systems innovation – all manner of coordination is possible. If several facilities coordinate their waste management operations, there will be fewer garbage trucks barrelling down the road. What about gasifying solid waste produced by field camps along with suitable regional waste, including slash from woodland operations? He also suggests a regional water strategy that “seeks to utilize this limited resource to support a much higher level of development and production than if we continue down the current path.” Taylor sees co-generation as another important area of opportunity. For example, waste heat from generating electricity could produce steam for cyclic steam stimulation (CSS) or SAGD operations.

There are also opportunities in assets external to the oil sands – infrastructure like roads and highways, the power grid and an often-discussed railway link to Fort McMurray. According to Taylor, “engaging parties beyond our normal spheres of influence (will help us) realize (symbiotic) opportunities that will enable our industry to better meet social and profit expectations alike.” The ideas got increasingly complex, and it quickly became clear that the potential is huge.

Triangles
One appeal of waste management through industrial symbiosis is that it contributes positively to three of society’s broadest concerns: economic growth, stewardship of the environment and efficient energy consumption. Take the Williams off-gases project, which strips heavier hydrocarbons from Suncor’s fuel stream. This industrial magic enables the plant to operate more efficiently, reduces Suncor’s carbon dioxide emissions and provides feedstock to the petrochemical industry. Not a bad outcome for a single piece of innovation.

A participant noted with some surprise that the environmental footprint is triangular in shape, with its three sides consisting of land, air and water. “What you do to change results in one of these areas affects results in the others.”

In that context, the goal of zero waste from the oil sands can act as a principle to help the industry overcome the public perception of the industry’s behaviour by directly addressing the issue. It will also provide guidance to the build-out of the industry. Forecasts suggest that three quarters of the plants that will dot the oil sands in 2030 are yet to be built. These facilities are still at the concept or design stage, and they represent the biggest opportunity to embrace industrial symbiosis. Notably, they will be receiving the greatest scrutiny from regulators and a public demanding “greener” energy.

Another triangle is driving oil sands development. Its three sides are social attitudes and demands; regulatory and industrial codes; and technical skills and operating environments. As in the case of the footprint triangle, what you do to change results in one of these areas affects results in the others. In the area of technical skills and operating environments, there’s a triangle of areas where industry players need to look for improvements.

According to Dr. Doug James, who with Bob Taylor facilitated the workshop, one is “inside the plant fence.” Individual operations need to seek out better processes for cleaning up or eliminating waste generation. These could include capturing and using waste heat, for example, and using waste materials for gasification. Joy Romero, Canadian Natural’s vice president of bitumen production, cited a process at Horizon which “purchases waste CO2 to add to our tailings. This undoes the effect of caustic soda, allowing fines and clays to settle, and water is released for reuse almost immediately from the tailings ponds.”

There are also “across the plant fence” opportunities, by which different companies work together to make their combined operations more efficient. For example, they could build joint facilities for water treatment and waste water handling or develop joint hydrogen production facilities – perhaps using gasification of coal and biomass – for use in upgraders.

And there are opportunities from “across-the-region coordination” – the construction of common pipelines and other transportation infrastructure. One possibility would be regional landscape planning with Alberta-Pacific Forest Industries, which has forestry rights covering most of the oil sands area. This “might reduce the joint forestry-SAGD footprint by 30%,” said James.

Tragedy of the Commons
In a presentation, Dr. Eddy Isaacs of Alberta Innovates described a 90-year pattern of oil sands development. His essential argument was that oil sands development periodically goes into crisis before being rescued by a visionary. Sunoco Chairman J. Howard Pew saved a floundering Suncor, for example, and Frank Spragins, the first president of Syncrude, brought that project back from a near-death experience.

The oil sands are now in crisis because of public perceptions. According to one academic, “Perception is reality and the perception is that you guys are making a mess up there. You’ve got a problem.” Dr. Soheil Asgarpour, president of the Petroleum Technology Association of Canada, agreed. “We aren’t communicating what we are doing properly,” he said, “and we aren’t doing enough.”

According to facilitator Bob Taylor, industrial symbiosis is a key part of the solution, since it harnesses economic forces to reduce waste and save energy. The best part of this system, though, is that it develops naturally. Symbiotic relationships began forming long before the idea was coined.

In Alberta, the classic example is the Industrial Heartland, north of Edmonton. That industrial region has grown organically since the late 1940s, when Imperial Oil brought a tin-pot World War II refinery down from Whitehorse in response to the discovery of oil near Edmonton. Not until recently was the idea of industrial symbiosis even whispered there. Now reflecting more than $25 billion in investment, this 582-square-kilometre region hosts forty large companies and many small ones. Together they operate numerous refineries and plants, pipelines, fabricating facilities, service companies and other interdependent businesses.

For the oil sands, there is no reasonable alternative to greater and continually evolving industrial symbiosis. In a background document, Bob Taylor and Doug James suggested that the extreme alternative to a sensibly industrial ecology is reflected in a notion known as “the tragedy of the commons.” The phrase was first articulated in an influential 1968 article by the late Dr. Garrett Hardin, an academic whose First Law of Ecology proclaims, “You cannot do only one thing.”

In his famous article, Hardin described a situation in which individuals act independently and rationally in their own self-interest. Collectively, however, they deplete a shared, limited resource even when it is clear that it is in no one’s long-term interest to do so.

To illustrate his point, Hardin proposed a hypothetical and simplified situation based on land tenure in medieval Europe. The picture he drew was one of herders sharing a common pasture for their cows. It is in each herder’s personal interest to put the next (and succeeding) cows he acquires onto the land, even if this means exceeding its carrying capacity and temporarily or permanently damaging the land. The herder receives all of the benefits from an additional cow, while the damage to the common is shared by the entire group. If all herders make this individually rational economic decision, the common pasture will be depleted to the detriment of everyone.

Society is now much more complex than in medieval times, of course, and today’s petroleum sector clearly understands that permission to produce Alberta’s resources requires public approval. Oil sands people at the workshop frequently mentioned the need to “preserve your social license.”

“The implication for the oil sands industry,” wrote the two workshop facilitators, “is that, in the absence of a higher guiding principle, each company will tend to act in its own interests, ultimately resulting in degradation of the environment. Of course, the government through regulations imposes such higher guiding principles. However, it appears at this time that the rapid expansion of the industry operating on an individual basis reaches sub-optimal results regarding environmental stewardship.”

One way for industry to demonstrate better stewardship is to collectively develop good will by sharing new, lower-waste technologies. It is important for companies to secure intellectual property rights for their ideas. If they didn’t, someone else could secure the patent and demand royalties on the technology. However, producers have little reason not to share them within the oil sands community. After all, said Doug James, “in the oil sands once you acquire your land the competition is over. Compared to the revenue stream from oil sands production, any income you might derive from licensing production technology is peanuts.”

Moving toward zero as a goal will reduce waste products, he said, but it will also reduce “wasted opportunities, wasted human capital, wasted funds and wasted reputations.”