Innovation in Oil & Gas

Companies in this space are needing to lean in, with creative results
Innovation and oil and gas aren’t exactly an intuitive association for Canadians. To the untrained eye, for example, oil wells appear to have changed little since the first well was commercialized in Canada about 150 years ago. And images of the oil sands are forever bleak, anything other than evocative of the notion of creativity.

But those who know the industry know better. Indeed, oil and gas companies and service providers were forerunners in the adoption of digital technology as far back as the 1970s. And today, artificial intelligence and big data are playing significant roles in the industry’s evolution.

It doesn’t hurt that the Canadian sector is part of a global industry, but that’s hardly the whole story. The estimated value of clean tech in Alberta’s oil and gas sector market is $2.7 billion, including $1.3 billion in Calgary. For its part, Canadian Natural Resources Limited spent $527 million in 2015 alone towards research and technologies to enhance resource recovery, operating efficiencies and environmental performance — a spend that put the company seventh in Canada in overall research and development spending.

“Canada has been exceptionally active on the innovative side partially because of the tough weather conditions in this country and partially because of the challenges of extraction from places like the oil sands,” says Peter Bryan in Borden Ladner Gervais LLP’s Calgary office. “And that’s been occurring on both the process and the product side.”

According to a 2017 Calgary Economic Development report prepared by the Delphi Group, what’s impressive is that the innovative streak seems to be permeating the entire industry, not just the giant producers and service providers.

“Entrepreneurs developing new clean technologies, service providers that are creating new business models that support clean technologies, oil and gas producers and pipeline companies in the midst of inventing and adopting clean technologies, and an innovation ecosystem that is keen to support, form this growing sector,” the report states. 

The innovations range from faster and more precise drills, to mobile rigs that can move from one drilling site to another without having to be taken apart and re-assembled, to using artificial intelligence for ocean floor exploration, to taking advantage of reinforcement learning to guide drills underground based on historic information or simulated data — a concept that has much in common with the driverless car.

Arguably, Canada is contributing at least as much to oil and gas innovation as it is drawing on the efforts of innovators abroad.

“Because of the harsh conditions we face here, our innovations are deployable all over the world,” says Vivek Warrier in Bennett Jones LLP’s Calgary office. 
Domestically, the industry’s degree of commitment to innovation crystallized in 2012 with the formation of Canada’s Oil Sands Innovation Alliance. Today, COSIA’s membership accounts for more than 90 per cent of oil sands production in the country. 

“Ultimately, COSIA is a clearing house for innovation and technological solutions, with implementation left to individual companies,” says Simon Baines in Osler, Hoskin & Harcourt LLP’s Calgary office. 

The organization’s vision, as stated on its website, is to “enable responsible and sustainable growth of Canada’s oil sands while delivering accelerated improvement in environmental performance through collaborative action and innovation.” 
More particularly, COSIA aims to:
• Produce oil from the oil sands with lower greenhouse gas emissions than other sources of oil;
• Reduce the footprint intensity of oil sands mining on the land and wildlife;
• Improve the management of oil sand tailings — the sand, silt, clay and water found in oil sands that remain behind after extraction; and
• Reduce water use and increase water recycling rates.

The organization’s ongoing initiatives include:
• Exploring the use of carbon capture and storage options to divert carbon dioxide underground before it reaches the atmosphere, including a pilot project that engages algae to reduce GHG while producing valuable products;
• Collaborating with other stakeholders to release a comprehensive review of technologies that will accelerate tailings treatment; and
• Investigating steps to reduce freshwater use intensity by 50 per cent and the net water use intensity from the Athabasca River and its tributaries by 30 per cent, both by 2022.

By joining COSIA, members commit to sharing experience and intellectual property with other members with a view to achieving these goals. As of July 2018, according to a report prepared by the Canadian Association of Petroleum Producers, the organization’s members had shared 981 distinct technologies and innovation that cost more than $1.4 billion to develop.

Finally, with the announcement from Alberta Premier Jason Kenney’s new United Conservative Party (UCP) government that it intends to replace the $1.4-billion carbon tax imposed by the previous government with a Technology Innovation and Emissions Reductions program for large industrial emitters, innovation in Alberta’s oil and gas industry appears to be on a roll.

So, governmental action aside, what’s driving all this innovation?

On one hand, low oil prices, and on the other hand, environmental concerns. As it turns out, they operate synergistically in many cases.

“Reducing the environmental impact of a process sometimes goes hand in hand with cutting costs,” says Brett Slaney, a patent agent in Blake, Cassels & Graydon LLP’s Toronto office. “And because of the competitive pressures in the current market, companies have begun innovating whether they realized they were doing so or not.”

By the late ’90s, Slaney points out, there were virtually no patent applications from the oil and gas sector in Canada.

“By 2013, there were 2,000, and there’s been a continuing uptick since,” he says. “Innovation is happening on both the process and the product ends, with large energy companies and large service providers ranking about equally among the top 10 filers in the country.”

Baines is of similar mind.

“Oil and gas companies, particularly in the oil sands space, have for some time been intent on improving their industrial and manufacturing processes and increasing efficiency by reducing utilization of some of the inputs required, such as water and energy, which not only reduces costs but is good for the environment,” he says.

The future also looks bright. As Slaney sees it, the oil and gas sector has barely begun to scratch the innovative surface.

“When it comes to creating efficiencies through innovation, there’s a lot of low-hanging fruit out there,” he says.

Not surprisingly, the oil and gas industry has been counting on its lawyers to innovate as well. 

“Because of the downturn, Canadian producers and midstreamers have had to come to new and innovation risk-sharing agreements, and at the same time be a little more collaborative than has historically been the case,” Warrier says. “Industry lawyers can play an important role here.”

By way of example, producers have traditionally had to commit a fixed amount of product when contracting for pipeline access, the so-called “take or pay” model.

“The difficulty with the model, of course, is that producers have to pay whether they use the capacity or not, and that’s increasingly frustrating in today’s volatile environment,” Warrier says.

So, arrangements between producers and midstreamers have evolved. One of many solutions is the area dedication model, where instead of committing a fixed volume for transport, producers commit all the production from a specific area, whatever that turns out to be.

“Midstreamers have seen that their customers, the producers, are really suffering, so they’ve adopted new creative structures ensuring that they get a rate of return on infrastructure that takes into account the risk to build, and that producers can get their products to market without breaking the bank,” Warrier says. 

This type of risk-sharing solution, however, cries out for legal expertise — particularly because the midstream sector has lacked experience with such arrangements.

“As lawyers, we have to find a way to ensure that the financial solutions work from a legal perspective in the sense that they don’t create undue exposure for either party and that both parties will benefit,” Warrier says. “This is especially so because our midstream sector has not traditionally had a huge appetite for risk-sharing.”

All this having been said, industry optimism has grown since the election of a UCP government that is expected to be more business-friendly than Rachel Notley’s New Democratic Party.

“My feeling, just from answering the phone over the last couple of weeks, is that investors were sitting on the sidelines and unwilling to move until after the election,” Warrier says. “They seem much more ready to do so now.”

All of this has attracted the interest of US-based private-equity interests, which have seen rapid growth in the Permian Basin in the US drive multiples there sky-high.

“What these investors have discovered is that that can get a very similar yield in places like Alberta’s Duvernay Basin, but that they can get into them at a much better price point that will drive greater returns,” Warrier says.