Talk to any lawyer working in the oil and gas sector today and, alongside traditional production and M&A, you’ll hear about the transition to alternative energies, ESG concerns and the industry’s commitment to net-zero emissions.
For example, “if you look at any of the M&A announcements recently, there’s certainly a focus on the emissions intensity of the production of the acquired company and the impact that has on the overall emissions intensity of the acquirer,” says Peter Danner, a partner in the Calgary office of Torys LLP whose practice includes mergers and acquisitions and strategic investments.
Investments in new technologies are tied to new government regulations — as well as an investment climate focussed on environmentally sustainable energy production — and have “spurred companies to really focus on the ways to reduce the carbon emissions,” Danner adds.
“We’ve seen most of the major oil and gas companies in Calgary have pledged to net-zero by 2050, but for many years … the oilsands producers have been major investors — if not the largest investors in Canada — in cleantech. We’ve actually had dramatic emissions reductions in the last couple of decades.”
And the sector is on an uptick, too. The “dire circumstances” of the early COVID-19 pandemic have passed and oil prices have risen dramatically along with global demand.
“Certainly, we are very busy,” says Christine Milliken, a Calgary partner in Blake, Cassels & Graydon LLP with an M&A and project development practice.
“There seems to be an appetite for companies expanding their capital programs [and] for investment in the oil patch these days, with record-high prices for oil and natural gas [and] continued M&A activity. We’re seeing announcements every day of major projects — mostly, I would say, in the LNG [liquefied natural gas], renewable energy-type space. I think we are in a post-COVID era of increased economic activity.”
A shift to hydrogen and carbon storage
The federal government’s Hydrogen Strategy for Canada: Seizing the Opportunities for Hydrogen was released in December, following Alberta’s natural gas vision and strategy and Ontario’s low-carbon hydrogen strategy. The federal strategy aligns with provincial initiatives, including Alberta’s “blue hydrogen,” in seeking to stimulate Canadian production, domestic use and export of low carbon-intensity hydrogen.
There has been an alignment between Ottawa and Alberta on several sector policies, including hydrogen, which several provinces are developing, says Peter Bryan, leader of the Energy-Oil & Gas Group for Borden Ladner Gervais LLP, from his Calgary office. In Alberta, “blue hydrogen” is sourced from natural gas through a process known as steam methane reforming. The carbon dioxide emissions produced are then captured and stored underground using Carbon Capture, Utilization and Storage (CCUS) technology, leaving nearly pure hydrogen, which producers can export for energy use.
Alberta is naturally suited to develop this owing to its “favourable geology for carbon sequestration and a regulatory environment that promotes pore space ownership and a long-term liability regime,” Bryan says. (The pore space of rock contains oil, gas or water, and large amounts of absorbed hydrocarbon in these spaces.)
CCUS technology can capture and effectively use high concentrations of carbon dioxide, injecting it underground into an oil-bearing formation, says Sander Duncanson, a partner in Osler, Hoskin & Harcourt LLP in Calgary with a practice in regulatory, environmental, Aboriginal and land issues.
“Once it’s injected there, it’s permanently sequestered underground,” Duncanson says, “but … by injecting that CO2 into an oil-producing reservoir, you’re also allowing for enhanced oil recovery from that reservoir.”
The federal government has said this application of CCUS is not eligible for various incentive programs introduced over the past year, he says. Instead, these programs have had to focus on proposals for funding for carbon sequestration. He says that that’s just one example of the “conflict between the push for CCUS as a means of sustaining or even growing the oil and gas industry” and trying to phase out the industry altogether.
“All of that is to say there’s a lot of disruption right now in the oil and gas industry,” Duncanson adds. “You’ve got conventional oil and gas activity that is benefiting from this uplift in commodity prices; you’ve also got a lot of attention in these emerging sectors like hydrogen and CCUS.
“Where there’s a lot of government attention in those areas, there is government money that is being directed — and, of course, Canada is not the only jurisdiction looking at these [emerging sectors]. So, there’s a lot of pressure to move quite quickly in securing some of these projects and being an early mover in this space, and that’s resulted in quite a lot of activity throughout the sector.”
Regulatory regimes, policy and strategies
Alberta’s natural gas vision and strategy, released in October, outlines its five pillars as hydrogen, petrochemical manufacturing, liquefied natural gas, plastics recycling and industrial demand. Its strategy aims to export hydrogen to other parts of Canada and around the world by 2040. Segments of Alberta’s energy sector are already using hydrogen technology, and Alberta is anticipated to be a leader in domestic heavy transport decarbonization, and clean hydrogen production for industrial, electricity and residential heating demands.
Also in October, Alberta announced a plan for geothermal energy development in its introduction of Bill 36, the Geothermal Resource Development Act, which aims to facilitate the development of geothermal energy in the province, also by capitalizing on Alberta’s unique natural resources. In December, the bill received royal assent. It should create jobs in the oil and gas industry and economic opportunities for Indigenous and rural remote communities while lowering greenhouse gas emissions.
Although policies affect the oil and gas economy, they are not what drives it, says Bryan. “Being a global commodity, we’re impacted primarily by the global supply and demand and global pricing. No amount of policy can completely override that.”
There’s also a difference between provinces and the feds in the pace and manner in which greenhouse gas pollution pricing takes place, says Bryan. That said, “Alberta has a tiered regime that prices greenhouse gas emissions that’s largely aligned in objective with the federal legislation.”
In December, Environment and Climate Change Canada (ECCC) released a draft of its proposed Clean Fuel Standard regulations for review and comment. The regulations would require “primary suppliers” of liquid fossil fuels to reduce the carbon intensity of the fuels they produce and import annually; they would introduce a credit creation and trading system for primary suppliers to meet their reduction obligations; and they would establish a compliance fund that primary suppliers could pay into to satisfy some of their obligations.
And in February, British Columbia amended its contaminated sites regime, with specific carve-outs for oil and gas sites. The province made the B.C. Oil and Gas Commission responsible for managing oil and gas activities, including the remediation of those sites.
Net-zero emissions by 2050
Recently, there have been many announcements of major energy companies’ commitments to work toward net-zero, says Blakes’ Milliken. She says that T.C. Energy announced it will turn to renewables to run its pipelines, and Cenovus Energy said in July that it would buy renewable power from a partnership between Cold Lake First Nations and Elemental Energy Inc. through a power purchase agreement.
This acquisition will help Cenovus “advance two of its environmental, social & governance (ESG) focus areas by addressing climate & greenhouse gas (GHG) emissions as well as further supporting Indigenous reconciliation through economic engagement,” the company said in its announcement.
The energy industry “has always been world-class when it comes to [the] responsible development of our resources,” Milliken says. “But with the shifting priorities in Ottawa, it’s made them look at other ways to be even more sustainable and more responsible, and there’s a focus on that ESG component more so than there ever has been in the past.”
The market in oil and gas
“There’s been a wave of consolidation from across the oil patch, which has led to a number of spin-off transactions,” says Torys’ Danner. “It’s been very busy of late, and I suspect that will continue for a while.”
Larger parties that can access capital more readily will be better able to consolidate, and we will continue to see consolidation in the sector as larger players reduce the number of players, says Bryan. He anticipates that it will be more difficult for mid-caps and smaller players to be acquirers.
“The mid-caps and juniors have a higher cost of capital when trying to access debt these days, and I think notwithstanding the higher commodity prices, there hasn’t been necessarily a reprieve from the lenders. In fact, I think the lenders may push for some changes to borrower portfolios or sales,” he says.
Although the industry has seen many downturns over the years, “there seems to be a level of excitement in the industry right now,” says Milliken.
“I think that there’s a lot of hope for the future. What we’re seeing these days in terms of activity is very promising.”