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Oilpatch Innovation Continues Despite Shortage of Capital – David Yager


By David Yager for EnergyNow
Energy Policy Analyst – Oil & Gas Writer

“One hundred years from now people will be looking at this carbon warehouse in Alberta and will thank the world that we have it”. So spoke Alan Johnson, former Calgary Progressive Conservative MP, coal executive and president of the Coal Association of Canada. A Calgarian, Johnson is the consummate Alberta carbon man, a living dinosaur by the definition of today’s anti fossil fuel driven climate change movement. He has spent most of his life working with coal and will go the grave talking about all the incredible uses for carbon.

Johnson’s view that coal, oil or natural gas – so-called fossil fuels – are anything other than a menace to life on earth as we know it, is in sharp contrast to the growing mountain of claims we most stop using carbon resources as soon as possible. To him, the future is carbon fiber building materials for everything from electric vehicles to airplanes. Like other resource-based industries, being located near the source of supply will ensure a competitive advantage.

Carbon, a key element of life on earth, has become a dirty word this century. They even named a tax after it to discourage its use. Carbon taxes may become a major political issue in the Alberta and federal elections in 2019.

Fortunately, many oilpatch entrepreneurs don’t believe everything they read and soldier on with what they do best – inventing new ways to do the old job better. This is probably the most exciting opportunity for Alberta’s carbon resource industries, but success will only come with materially different approaches than those currently in place. Alberta was built on carbon resources. Its future remains in resources, not tourism or ever-larger governments.

Alan Johnson’s current project is “aerio, an H Quest company”. H Quest is based in Pittsburgh, Pennsylvania, an American coal and steel town if there ever was one. The website reads, “H Quest Vanguard, Inc. is an early-stage technology company based in Pittsburgh, PA. We are developing a transformational process to derive advanced carbon materials, including graphene and carbon fiber, from low-cost, abundant resources: natural gas and coal.”

“Our proprietary low-temperature plasma conversion process can transform these materials in a fraction of a second. This process has no CO2 emissions and can be deployed at orders of magnitude lower costs than conventional chemical plants employing legacy technologies”.

Johnson is partnered with Allen Wright, another long-time Calgarian, former oil company public relations professional and Coal Association president. His company is called CarbonERA, because, as Wright explains, “We’re entering into a new carbon era”. Over lunch the pair tells your writer that carbon has a brilliant future as a building material; carbon fiber for airplanes, wind turbine vanes, and graphene, a carbon-derivative that is currently the strongest and lightest material in the world.

Johnson expands about where scientists believe the world could go with carbon. Graphene, a new material made of pure carbon, is proving to be 10 times (some say 200 times) stronger than steel and only 5% as dense. Scientific dreamers have long theorized about a “space elevator”, a man-made structure that could convey objects beyond the atmosphere without rockets. Graphene may take this one step closer. Website graphene.com states, “…graphene is the strongest material ever discovered”. Tests have also shown that has applications in energy efficiency because graphene is, “…potentially better at conducting electricity than, for example, copper at room temperature”.

The pair is seeking early stage financing of US$10 million to take the laboratory process to a “commercial demonstration plant” to prove their claims. They want to work where there is lots of cheap carbon, like Alberta. The dream is going into mass scale production of pure carbon as an industrial input for a wide range of products, plus pure hydrogen which could power cars or heat houses. Combust hydrogen and all you get is water. The promoters claim the process does not use much energy. They only need what used to be a modest amount of money to prove it.

But raising capital in Calgary for anything but marijuana cultivation or one-way equipment hauls to the Permian Basin is all but impossible in the fall of 2018. There was a time, not that long ago, when an entrepreneur with a good idea could pass a hat around at the right cocktail party in downtown Calgary and raise that kind of money in an hour.

But the private sector risk capital so essential to fund the transformation of Alberta’s economy from what it was to what it could or should be has been decimated by the combination of reduced commodity prices, mountains of new government regulations and taxes, and the successful denial of market access pipelines for Alberta’s growing oil production. Valuations of all but the largest players in the oil and gas industry have fallen sharply. Others have collapsed. The rest went broke.

While oil prices and company valuations have recovered in the rest of the world, Alberta has not. This has cost the province and everyone in it tens, if not hundreds, of billions of dollars.

The enemies of carbon – professional environmentalists, climate change alarmists, voting-seeking politicians and a generation of people who have no idea how the world got this far before they showed up – have won the battle in Alberta.

But they’ve lost the war. If the world must make a rapid transformation to new sources of everything that release less carbon emissions into the atmosphere, it cannot be done with slogans, fear, boycotts, lawsuits, the existing inventory of zero-carbon energy sources, miraculous  policy unanimity among the world’s scores of diverse countries, or perpetuating the lie the world could go carbon-free tomorrow if big oil would just quit financing the climate change denier movement.

The only solution is technology and innovation and unleashing the capital and creative genius of the private sector, something Alberta’s carbon resource industries have proven they have in abundance. Or did have.

Regina is the home of the International CCS (Carbon Capture and Storage) Knowledge Centre, established in 2016 by global mining giant BHP and SaskPower. SaskPower was an early adopter of CCS at its Boundary Dam 3 coal fired generating plant at Estevan in 2014. BHP is large global resource developer, including coal. Using the installed CCS recovery unit at Boundary as a working laboratory, the objective is to refine CCS. The current operation removes about 1 million tonnes per year from the atmosphere and sells it to a nearby oil producer for enhanced recovery. Its information material says this is equivalent to taking 250,000 cars off the road.

CCS Knowledge Centre figures they are ready to move to the next phase with a new a large CCS installation at the nearby Shand generating facility, which is three times as large. Mike Monea, President and CEO, says in a news release, “We are excited about it because many of the common hurdles for large scale CCS are being addressed and results show that next generation CCS technology will be significantly cheaper, more efficient, and integrate well for renewable energy”.

Alberta went down the CCS path in 2007 with great fanfare and expense at the Quest pilot project north of Fort Saskatchewan. Operated by Shell Canada but built primarily with federal and provincial funds, Quest has been operating for three years. Over 3 million tonnes of CO2 are gone, injected into a subsurface reservoir with tremendous CO2 storage capacity. The CO2 is captured at the nearby Shell oil sands upgrader. What used to go into the air is now disposed of underground.

Another CCS initiative with significant government backing because of the expense is the Sturgeon Refinery/North West Upgrader, nearing completion in Redwater, Alberta. When completed it will cost $9.7 billion, nearly double original estimates. It is government supported through BRIK oil sands barrels (Bitumen Royalty in Kind) as feedstock and a commitment by the Alberta Petroleum Marketing Commission (APMC) to pay a set fee for turning BRIK barrels into market products like diesel fuel. The plan is for the market value of the finished products to be greater than the market value of a barrel of raw bitumen. If the spread is positive, it’s a stroke of genius. If the spread is negative, the Alberta government – owner of APMC – could be on the hook for billions.

This was related to a grand plan in 2007 to capture CO2 from Sturgeon and other plants in the “Industrial Heartland”, ship it south via the so-called “carbon trunk line”, then use the gas to increase oil recovery from mature oilfields in central Alberta, the same model as Saskatchewan. After years of false starts the project got off the ground in August of 2018 when it was announced a 240 km. pipeline would be built to Lacombe to ship CO2 from the Sturgeon Refinery and the Redwater Fertilizer Facility.

These are classic, big, “doing something” projects that politicians love and the public accepts as helpful. But what this type of capital-intensive solutions overlook is dozens if not hundreds of smaller ideas which, if broadly adopted, could lead to meaningful long-term carbon reductions and commercial opportunities in global markets because of their broader application and lower cost.

Horizon Oilfield Solutions Inc. was founded by Josh Curlett and his brothers. While the company supplied two of their original technologies to drilling operations before the downturn, in 2015 they undertook what Curlett calls a, “Post-correction diversification strategy”. They rebranded as CLEANTEK to focus less on the drill bit and more on investing in new technologies to diversify their revenue base. With government policy shifting towards minimizing industry’s carbon footprint, CLEANTEK developed and launched new technology-based equipment to make clients more money and help reduce their environmental impact.

A main CLEANTEK product is lighting. Using a combination of solar panels, batteries, high output custom-designed LED lights and computerized systems management, these products can reduce emissions by 80% from conventional and more popular diesel generator systems. The updated version results in 95% lower emissions than conventional systems used advanced batteries. The website says, “This innovative design was built for use anywhere on the planet”.

Working with recently-acquired Apollo Energy Services, CLEANTEK retooled an existing patented lease lighting system called “Halo” for drilling rigs. Because of its reduced weight, existing masts could be retrofitted without upgrades to mast hoisting rams. Halo lights the whole lease from a single location at the top of the mast plus cuts fuel consumption and maintenance.

CLEANTEK’s two other inventions turn waste water into steam by dehydrating clean water from concentrated contaminants. Industrial waste water – which is generated in billions of barrels in North America alone – has for years been trucked away for subsurface disposal. CLEANTEK separates the water from contaminants by vaporizing the water thereby leaving a low volume of solid for disposal. Less trucking and handling, fewer emissions.

One of the most promising technologies uses exhaust heat from a processing facility such as a gas plant or drilling rig as the sole source of energy. This reduces trucking required for water disposal by up to 90% in some cases, thus cutting carbon emissions from diesel fuel. Curlett estimates that the first gas plant deployment will result in approximately 9,000 less truckloads of water in the initial 10-year operating span.

Curlett concluded, “Every technology we develop is a step change in its respective industry”.

Hydraulic fracturing has revolutionized the oil and gas in Alberta and North America. It uses large volumes of water. This creates cost and emissions getting water to the location for fracking, then more cost emissions disposing about half when it returns. At Trace Water Solutions, founder Pat Carswell wants to clean and recycle water, not dispose of it. The brochure reads, “Our revolutionary technology takes frac flow-back water and turns it into 100% fully-reusable, alternative water”.

According to climate watchers, water is going to become precious. Since we’re not going out of the oil business anytime soon, Carswell figures his company can help the industry do the old job better, one of many micro-steps to green what we’ve got. His brochure reads, “…90% of water is not re-used during fracking, making it one of the must unstainable processes in oil and gas”.

Carswell is veteran of the of the oilfield waste disposal business having spent years with major operators like NewAlta and Secure. While this industry figured out long ago how to separate crude oil from water and recycle it for money, the water was generally destined for subsurface disposal. Carswell saw a real need for water recycling, particularly water impacted by hydrogen sulphide the industry regarded as too dirty to treat. Recycling water is popular in the oil sands for SAGD because of the efficiency of dedicated treatment facilities. The always-mobile hydraulic fracturing business did not have this benefit.

So began a multi-year odyssey to today’s Trace. Carswell originally purchased mobile treatment units to be used on-site but then decided dedicated facilities were more efficient. Trace now has three plants in Rycroft, Fox Creek and Kakwa. He figures operators can reduce total water costs by 40% to 60% by recycling when transportation and disposal costs are included.

But after seven years on this project, he’s frustrated at the rate of adoption. Money is very tight, and oil company clients are afraid to try something new if they don’t have to. The current solution is to do the old way at a reduced cost, not change gears and rethink the entire process. Carswell laments, “Industry wants to change without risk, they want to be the 3rd or 4th adopter, not the first”.

Nobody know this better than Jim Ross, a former investment banker who, with partner engineers Steve Price and Steve Kresnyak, have been working for 15 years to commercialize new hydrocarbon processing technologies that will create what their website calls, “the next generation of synthetic fuels…Our timing is excellent. Synthetic fuels technology has become simpler and more cost effective and is poised to play an integral role in supplying alternative, environmentally friendly fuels for decades to come”.

But until recently, the only thing Expander expanded was its inventory of patents and the number of potential financial backers that said no. But the company finally found enough money to build a demonstration plant under the name Rocky Mountain GTL Inc. near Carlsand, east of Calgary. GTL stands for gas-to-liquids. The plant will convert 5.5 million cubic feet per day of natural gas into 500 barrels of high-performance diesel fuel.

Ross is now Rocky Mountain’s CEO. He says for the life cycle of the natural gas from reservoir to diesel, there is a 15% reduction in GHG emissions. But Rocky Mountain’s diesel fuel is chemically pure with no sulphur and no aromatics. This means improved combustion performance, long catalytic converter life, and no sulphur dioxide or particulate emissions. Ross says once proven, the technology is scalable and, as importantly, exportable. Another Expander project after years of trying is a biomass to diesel pilot plant near Edmonton.

R&D is most successful in a business environment where risk capital is plentiful and the rewards are great. Alberta has had these characteristics before, but not in 2018. The prize for new and innovative ways to improve efficiency and reduce emissions and is high now that carbon is taxed, but the funds to pursue it are scarce.

This is not the first time Alberta’s great oil and gas gravy train has been off the tracks, when capital had little interest in investing the province. The 1980s were similar in many ways. Back then the Don Getty administration introduced the Junior Capital Pool Program, or JCP, and the Alberta Stock Savings Plan, ASSP, which offered a 30% tax credit for investing in certain listed Alberta equity offerings.

This was the 1980s downturn version of corporate crowdfunding, except investors got a piece of the action through equity ownership. It allowed entrepreneurs to raise some seed capital from friends and family – all equity, not debt – and get on with creating a new businesses, jobs and wealth. Some of the former JCPs had spectacular commercial success. While not all were successful, investors lost their own money, not the government’s. All the government did was give investors a reason to put their capital at risk.

R&D is no place for government direct investment. Not only can bureaucrats not pick winners, but governments must tell people where they are investing and, as importantly, when they fail.

When faced with a dead-end investment, private investors cut and run before they lose more money. Venture capital models show that of 10 investments, most fail, a few break even, and one or two are spectacular successes which cover the other nine.

Because governments aren’t using their own money, they’re inclined to prop up losers long after they should. Unavoidable losses balloon to huge losses. Alberta did this is a big way with failed attempts at industrial diversification in the 1980s. There was a lot of good money thrown after bad for political reasons.

Ensuring the private sector has enough disposable income to fund R&D is not the fiscal direction of the centrally-planned, big governments of today. Since 2015 Alberta and Ottawa have both introduced policies which reduce disposable income and discretionary investment capital through higher taxes on everything, then trickle it back on pet projects through investment decisions often made by people with no experience or knowledge in the field in which they are investing taxpayer funds.

The combination of punitive government policies, pipeline construction obstacles the lowest market-set oil and gas prices in the world have domestic and international investors intentionally avoiding the Canadian oil and gas industry and pleading for governments and regulators to change direction.

In Alberta, everybody pays carbon taxes then the funds are supposed to flow back into renewable energy subsidies or, in the case of Calgary, LRT expansion. These are selected by governments, not market forces. While each of these may indeed reduce emissions, they are not exportable solutions. Nor, on a cost-per-tonne basis, are they the most cost-effective. If governments are taxing carbon to reduce global warming, they should be taking a global, not regional, view of the required solutions.

Subsidizing electric vehicles, forcing greater use of wind and solar power, or banning coal-fired electricity generation regardless of cost in Canada will do nothing to reduce emissions where it matters, which is the rest of the world.

Fossil fuels will power the world for some time yet. Instead of penalizing Canada’s carbon resource industries, they should be encouraged to find, foster, develop and commercialize products, processes and technologies which can make the production, transportation and consumption of fossil fuels as efficient as possible with increasingly lower level of emissions per unit of resource consumed. Exportable technologies with broad market applications around the world.

Canada’s oil and gas industry is full of problem solvers. Alberta, the industry and the world would be far better served if the ever-diminishing private sector and talent pool were tasked with solving the global climate change challenge, not penalized for their tiny contributions. These are the people best equipped to figure out the most cost-effective and innovative ways to reduce emissions and what to do next with Canada’s massive carbon resource base.

About David Yager

David Yager is currently writing a book about climate change and Alberta’s carbon resource industries. The foregoing is adapted from a chapter titled, “If you really want to solve the problem…” The book will be released in early 2019. More at www.davidyager.ca.

 



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