Way back in the early 2000s, shortly after the complete and utter Y2K letdown, I met a guy at some corporate golf event. He was polite and kind to both my disturbing golf game and my 50-dollar Canadian Tire bag of scarred up irons, even though he was a president of an oil company. Perhaps his humility and down-to-earth manner was due to the humble origins of his company: he’d started it with a $25,000 loan from his mother. I can only imagine the scoldings at board meetings (“No more equity unless you put on a coat! None!”).
To most battle-scarred industry participants it will come as no surprise to hear that that phenomenon of low-buck start-ups is as dead as a post. Stories like that are from a different era, and we don’t really expect them to come back. That’s ok and sort of normal; we’ve actually seen several major seismic shifts in the two decades since.
On that topic of seismic, well, ouch…A few decades ago seismic activity was key to development; now, exploration is nearly dead and the trick is to get out economically what everyone knows is there. And there have been much larger shifts too. The royalty trust boom that was then emerging ended like a spent firework on October 31, 2006. That was massively destabilizing to the industry. As the trust era died, several other earthquake-sized shifts were happening, including the oil sands boom which was hitting its stride and attracting hundreds of billions in investment. A decade and a half later, that boom is old news (though the oil sands remain a gigantic engine of prosperity for Canada) as growth has disappeared; Tim’s can find employees in Fort Mac and there are no longer direct flights from there to Vegas. Also in the interval was a shale boom, felt mostly in the US but not insignificantly in Canada as well, and that revolution has thoroughly reshaped the industry. Along with it, a different fracking industry appeared out of nowhere; a new army of specialists, tacticians, engineers, and scientists that redefined the hydrocarbon sector.
There is a point to the reminiscing beyond remembering what a seriously in-the-money stock option felt like (another dead-as-a-post phenomenon). The point is that the industry periodically goes through massive upheavals, and adapts to them. The shifts catalogued above are in addition to the pricing booms and busts that come along semi-regularly as well, which are even more unsettling than new production directions. To top it all off, the hydrocarbon sector has been wading through an onslaught of hatred worse than the tobacco industry endured some decades ago. (Interesting footnote about tobacco, worth remembering: tobacco enables exactly zero lives (and takes many); hydrocarbons unequivocally enable 7+ billion; and yet there remain 5 tobacco companies with enterprise values in excess of $40 billion (two exceed $100 billion). Capital starvation strategies as a means of social engineering are impressively delusional.)
Even though those changes are all within the hydrocarbon sector, they have been massive and revolutionary in terms of industry redeployment. In other words, the industry, like few others, can adapt to wholesale change.
Good thing too, because, there on the horizon is quite likely the next big thing: a move towards a significant hydrogen economy.
That sounds possibly too grandiose and definitive, but consider the signs. A year or two ago, hydrogen was on the fringe of energy discussions – hydrogen fuel cells had made little headway despite big hoopla and investment a dozen years ago (Ballard Fuel Systems’ (fuel cell pioneer) stock languished under $5 for a decade), and only small pockets of enthusiasm could be found globally. While Toyota and Honda have bravely introduced singular hydrogen fuel cell models in very limited markets, Elon Musk, today’s business deity, claimed hydrogen fuel cells to be “mind-bogglingly stupid” and that their “success is simply not possible.” The news flow remains relentlessly full of stories about the inevitability of an electric vehicle takeover, despite falling sales figures in most parts of the world that no one likes to talk about (some sites do like to talk about soaring EV sales in, say Europe, while other equally pertinent stories on the subject point out some harsh realities of that sales “success”: for example, Germany’s most popular EV, the Renault Zoe, is currently free (leased) with subsidies; one German dealer notes they’ve had 3,000 inquiries about the free Zoe offer and 300 firm orders…apparently then 2,700 curious people couldn’t be bothered to go get a free one. The dealer’s claim to be “short of salespeople” resonates as faintly absurd. Nevertheless, EV sales are “soaring” in Europe, the story goes, as the media remains dazzled by large percentage increases of very small numbers…).
As the belligerent certainty of the solar>wind>EV>New World Energy Order starts to crumble, out of the rubble is emerging a new movement based on actual thought (as opposed to wishes) and strategic consideration. Over the past 8 months, nations have unveiled hydrogen strategies (Germany, Australia and…even Saudi Arabia). Here in Alberta news just arrived that by next summer 5,000 Canadian Utilities customers will be burning a mix of hydrogen and natural gas in a pilot project – the provincial government is looking to grow the hydrogen sector. In a further effort, two hydrogen-powered semis will be plying the Edmonton-Calgary corridor next year, showcasing the ability of hydrogen to meet trucking needs while drastically reducing emissions. Critically, both these pilot projects utilize a lot of existing infrastructure, and the goal is to have those be the first of many such beasts.
Confirming the potential of hydrogen fuel cell big rigs, a new long-haul truck start-up, Nikola Corp., claims to have orders for $10 billion worth of hydrogen fuel cell semis (or whatever they’ll be nicknamed), which seems like a crazy number but not when considering that trucking companies want to reduce their emissions but are not crazy about battery-electric versions. Despite Tesla’s fountain of rhetoric, the fact remains that hauling massive quantities of batteries around is considerably illogical in an industry where profitability is often weight limited. Hydrogen fuel cells, however, fit the bill quite nicely, with an unbeatable emissions profile. And speaking of Tesla, BMW recently announced a hydrogen-fuel-cell X5 for the 2022 model year, as the German company joins Toyota and Honda in the H2 automotive marketplace.
There are hurdles of course, and naysayers are quick to point out the lack of hydrogen infrastructure and the cost to create one. It won’t be cheap, that is true, but consider holistic costs. A hydrogen economy that is designed to work with existing natural gas infrastructure, rather than replacing it (the standard renewable advocacy goal), is going to cost a fraction of the latter, not just in infrastructure costs but in terms of plugging the value hole in the economy that eliminating hydrocarbons would create.
Hydrogen can be produced from many sources of which Canada is bountifully blessed – natural gas, wind, solar, hydro, and, if Proton Technologies lives up to promise, from oil fields that may or may not be considered depleted. The latter would be an absolute game-changer for Alberta, for western Canada, and indeed for all of Canada. Imagine reinventing Canada’s energy industry, utilizing a lot of existing infrastructure, and doing so by working with an existing industry, rather than pursuing some pipe dream to replace all of it (and all the civil war that entails).
Finally, and this might be the best part, rational people across the emissions reduction spectrum can see the value and the potential of having Canada lead the way in a new hydrogen-based economy. That factor alone is incredibly powerful because it includes decision-making people in Ottawa and every other power center across the country.
A hydrogen-heavy future is a way out and a way forward for the hydrocarbon sector. Pipeline battles will not get easier. Future oil sands mining projects will face the same ferocious opposition that the Teck mine did – unjustly so, but no one ever said life was fair. Hydrogen has the advantage of truly overlapping with the industry as it is, and furthermore, by greatly slashing emissions, will buy western Canada’s petroleum sector the right to keep developing assets as it should. And to all those trying to shut down Canada’s petroleum industry, let’s universally focus on one thought: Massive success is the best revenge.
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Read more insightful analysis from Terry Etam here, or email Terry here.
