A Cautionary Tale for Canada

In 2005, Exxon’s CEO Lee Raymond said to Reuters gas production had peaked in North America. At the time the number of rigs drilling for natural gas was up around 20 per cent, and prices were at record highs giving producers ample motivation to generate more supply, however those same producers were struggling to keep up.

In 2007 The IEA chimed in and executive director Claude Mandil stated “While the 2006 Review expressed concern about insufficient investment, we are even more worried this year and see it as the major threat to secure, affordable global gas supplies over the medium to longer term.”

By 2008 the U.S. faced a natural gas crisis. The crisis was due to the decline in indigenous supply and the increase in natural gas prices. The crisis was significant enough that former Federal Reserve Chairman Alan Greenspan suggested that a solution would be to import large amounts of LNG. This would be extremely capital-intensive, as much infrastructure would have to be built to support the types of increases that he advocated for. Trinidad and Tobago, the largest exporter of LNG to the U.S. and the fifth-largest exporter of natural gas in the world, sent at its peak month July 2007 just over 60 billion cubic feet of gas in that month alone.

Seven years after the statement made by Exxon’s CEO the U.S. is poised to become the largest producer of energy in the world, overtaking the long supreme leader of oil, Saudi Arabia, by the year 2020 and the current natural gas champion Russia by 2017. In 2012 in the month of April the U.S. imported just over one billion cubic feet of gas from Trinidad compared to the 60 billion cubic feet in 2007.

A dramatic shift in tides like this begs the question “What happened?” Taking into consideration the type of capital-intensive industry energy is, and taking into consideration this happened at the same time as the largest recession since the Great Depression of the 1930s, while some of the greatest experts commented on what was the conventional wisdom of the day. Exxon’s CEO, the legendary former head of the FED, and the IEA, the agency that is charged to have a keen eye on our energy future all pointed to the “natural gas crisis” as a clear and present danger that could place energy security at risk.

Many point to the fact that there was development of disruptive innovation in the area of unconventional natural gas and that was the game changer. Indeed, hydraulic fracking was a game changer, but more surprising was the fact fracturing as a method dates back to the late 1800s.

In 1949 Haliburton performed the first two hydraulic fracturing treatments; in 1977 the U.S. department of Energy pioneered projects in tight sandstone formations; and in 1997 the method that made fracking economical “slickwater fracturing” was developed. The technological method to answer the natural gas crisis in 2007 was already developed some 10 years earlier, the patents and history a matter of open sourced record, however, it seemed undetected by hundreds and hundreds of the experts globally.

In my mind this may be a cautionary tale for Canada. In 2011 Canada supplied about 2 million barrels a day to the U.S. or just about 22 per cent of their crude imports. In 2008 Canada’s total production was somewhere in the area of 2.7 million barrels and is predicted to rise to about 4 million barrels by 2020.

These numbers suggest a significantly high percentage of Canada’s current exports go to the U.S., now slated to be the largest producer of oil and gas in the world by 2020 and a net exporter in just 17 years.

This observation taken in isolation has many responses and we can rest assured that we will have the privilege of hearing from many experts. We will hear that the oil sand producers will face an uphill battle from the technological revolution that no one saw coming; that they will have to compete for pipeline access with U.S. tight oil, that cost overruns will need to be overcome to follow through with projected increases in production, and the macro economics of the oil price environment is plagued with high volatility making it difficult to decide on long term, capital intensive projects. These however are the very same rational types of discussions that took place back in 2005-2007 with regard to the natural gas crisis. The challenge is that most of the experts are experts in their field of interest. They view the world with a set of loose subjective indicators and or numbers that revolve around their specific area of expertise. Outside and back dated knowledge of alternative information streams that may increase their view is not always taken into consideration.

Now I am by no means an expert in oil and gas, however, I often wonder if companies are keeping an eye on emerging trends, technologies and the convergence of those trends and technologies into disruptive innovations that could reduce the demand of their supply at best or completely change the game entirely. The fact that slickwater fracking slipped by many of the global pundits and industry leaders suggest that most may not have this type of view included in their strategy.

About three quarters of the oil produced globally is used in transportation. What if a disruptive technology in the area of synthetic biology was developed that could use another feedstock to create fuel that mimicked that of diesel or gasoline? What if this technology could in someway sidestep many of the incumbents today to directly access the end users? What about the means of transportation itself? What if the way in which we created cars and vehicles were democratized and crowd sourced and as a result rapidly reduced the need for fossil fuel consumption in cars and perhaps even planes? What if large consumer product industries were spending large sums of money and effort to significantly reduce or eliminate their exposure to fossil fuel volatility? What if they were successful? What if all these things happened in the context of emerging social media fueled environmental activism? What if within that context all the above converged?

Interestingly enough, some of these things may not be as far off as one may think and like the slickwater fracking, some of the components for the disruptive situations mentioned may already on stand-by waiting for the right convergence of circumstances to make them viable options.

Having a comprehensive, relevant and timely view of the evolving ecosystems around a company or industry has become extremely valuable in the age of information. In the past companies might have relied on market research, where an expert analyst would interview and survey a certain sample of CEOs of a particular industry, they would then research another sample of the companies in that industry and gain insights from those points of data. Traditionally this made sense, as we had to rely on subjective and opaque responses of companies, however today in the age of information we have a vast number of indicators and information streams to choose from.

Our ability to acquire ecosystem intelligence to monitor the ever-changing landscape of information we find ourselves in has increased significantly. Articulating the right questions to challenges and potential outcomes will become more important as we are faced with the opportunity and threat of an information deluge that can sometimes shroud emerging realities in plain sight.

Trinidad and Tobago spent a lot of time and effort preparing itself to service the natural gas crisis of 2007 and 2008. The U.S. exports were to power the country into “developed world” status by 2020. The dramatic reduction in natural gas imports by the Americans in such a short space of time has drastically altered that reality. Today Canada seems faced with a similar predicament, our goals to become the energy superpower of the next decade seem to require some re thinking with the latest announcement of US dominance, however with a wider lens of the energy ecosystem Canada has a fantastic opportunity leverage the present economic reality to diversify the future. A look at Saudi Arabia’s $106 billion solar ambitions may provide some hints and potential ways forward.

By Dwayne Matthews

Dwayne Matthews is the Executive Director of d&a Visual Insights, a leader in ecosystem intelligence.