Long view needed in new energy climate
A promising outlook for the Canadian energy industry as major oil and gas producers pull out of Russia in response to the Ukraine invasion.
By RJ Johnson, presented at the 2022 ATB Business Summit 2 August 2022 5 min read
With unprecedented and ongoing shifts in energy market dynamics, oil continues to tick higher while supply remains tight. Over the next decade, Western Canadian energy producers have a unique opportunity to spotlight Alberta as a key supplier in the world market.
Since the invasion of Ukraine earlier this year, many countries across the world have narrowed in on energy security as a key focal point, as sanctions and supply constraints created new fuel and price challenges. Add slower growth due to the pandemic and increased signals of a global recession, and you have the makings of another super commodity cycle for natural gas, said Robert Johnston, Special Advisor on Energy and Climate to Eurasia Group, a political risk consultancy.
Speaking with ATB’s Chief Risk Officer Lisa McDonald during the recent 2022 Business Summit, Johnston noted that in the short-term, geopolitical conflict has bolstered crude oil prices and more than doubled natural gas prices in fuel-constrained Europe and Asia. But markets remain volatile, proactive Canadian producers would be wise to look towards the far horizon.
“We have to reposition our western Canadian economy to look 10 years down the road,” he said. “ Two years ago, many Europeans felt they were in a faster transition away from gas. Now they’re foreseeing gas as part of the conversation, and asking, ‘who are the reliable suppliers?’.”
Major oil and gas producers, such as Royal Dutch Shell, BP, Total and Eni, have pulled out of Russia since the invasion of Ukraine - raising questions about where they will invest capital next. Johnston suggested Canada could attract majors back, not necessarily to the oil sands but into minerals and natural gas for liquified natural gas (LNG), hydrogen, wind, and biofuels.
“I think Alberta needs to be part of that conversation,” he said. “Because you’re talking about a massive redeployment of capital out of Russia, into somewhere else.”
Alberta producers should start touting the Canadian advantage to new markets, in terms of our political stability, high environmental standards and common values around safety, Johnston said. “One of the big challenges for Canadian producers is convincing the Europeans that this isn’t business as usual LNG.We’re paying careful attention to carbon neutrality and scope one emissions, carbon capture, utilization and storage (CCUS), and using renewable electricity.”
Security trumping transition
Since the invasion of Ukraine and subsequent curtailments of oil and gas exports from Russia, the narrative has been focused on energy security for many countries. At the same time, a global recession looms, on rising inflation and climbing interest rates, creating more uncertainty for producers.
On the natural gas side, Johnson sees this potentially playing out into volumes flowing on new trade routes over the next decade, with more Russian gas being shipped to China, U.S. gas moving to Europe, Canadian LNG backfilling northeast Asia, and Australian LNG supplying southeast Asia and India.
The transition era
Renewable power will continue to have a role in transitioning from fossil fuels to less carbon-intense energy.The current lack of critical minerals and infrastructure necessary for a full transition opens prospects for natural gas, as well as making gas-to-hydrogen conversion a viable commercial opportunity.
Johnston would like to see the federal government focus more on mining than manufacturing, where China, Germany, and the U.S have cornered the market as mega-manufacturers. A case in point is the first rare earth mine being developed outside of China is in Canada’s Northwest Territories.
Mining in Canada is not just about big new greenfield projects, but how companies capture value from existing resources, he said. “Think about people in Alberta doing direct lithium extraction from brines from oil fields. That’s the most Alberta thing that I’ve ever heard. I love it – we have a resource, and we go back every year to find a new way to extract value.”
Canada has some of the most environmental, social, and governance (ESG)-aligned commodities in the world - not just oil and gas, but steel and lumber, as well. If energy security concerns align with climate action by restricting trade among economies (like Canada and the U.S. and Europe) that have a version of carbon pricing, Canada could benefit, Johnston noted.
“It aligns with the geopolitical moment where if China and Russia, and Saudi Arabia are going to collaborate, and we’re putting back together a NATO alliance, this could be another interesting aspect that would help showcase what we have in Canada,.”
Robert ("RJ") Johnston is Special Advisor on Energy and Climate to Eurasia Group. RJ founded the firm's Energy, Climate, and Resources practice in 2006 and served as the firm's CEO from 2013 to 2018, overseeing a period of rapid growth and international expansion. RJ has 25 years' experience working closely with corporate and institutional investor clients in the oil and gas, mining, electric power, and clean tech sectors on strategy, risk assessment, government relations, as well as communications around policy, markets, and geopolitics.
RJ is also an Adjunct Senior Research Fellow at the Columbia Center for Global Energy Policy. He is an advisor to start-ups in polysilicon/solar PV manufacturing, climate-focused fintech, and energy transition supply chain private equity.
Prior to joining Eurasia Group, RJ served as managing director of equity research at Medley Global Advisors, where he was responsible for providing political and strategic insights to clients in the institutional investment community and served as the lead analyst for global energy equities. RJ, in addition, was a research director at UBS Warburg Energy, working directly in support of energy trading. And he previously directed internal research teams supporting oil, LNG, metals, and FX trading at Enron Global Markets. Earlier, at ArmorGroup, RJ directed political risk research for corporate clients in a variety of markets including China, Russia, Colombia, and Indonesia.
Recent notable achievements include published contributions to the Atlantic Council, World Energy Council, Harvard University Belfer Center, the National Petroleum Council, the International Gas Union, and the Canadian Energy Research Institute. He participates regularly in industry policy development initiatives including the Canadian Association of Petroleum Producers Oil Sands Dialogue, the Brookings Institution Task Forces on US Crude Oil and LNG Exports, the Atlantic Council Global Energy Forum Abu Dhabi, and PwC Energy Visions, among others. RJ is a member of the Trilateral Commission and was a Senior Fellow at the Atlantic Council Global Energy Center from 2017 to 2021.
RJ holds a doctorate in international relations from American University, a master's degree in political science from McMaster University, and a bachelor's degree in political studies from Bishop's University.