How much Suncor and its peers need to spend to hit net-zero
Decarbonizing Canada's oil patch will cause a material hit to the free cash flows of producers, but it won't be a "death blow," according to analysts at Scotiabank who worked up rough cost estimates for six of the largest companies.
The bank looked at the Oil Sands Pathways to Net Zero initiative, a partnership between Suncor (SU.TO)(SU), Canadian Natural Resources (CNQ.TO)(CNQ), Cenovus (CVE.TO)(CVE), Imperial Oil (IMO.TO)(IMO), MEG Energy (MEG.TO), and ConocoPhillips (COP) to use carbon capture and other technologies to cut greenhouse gas emissions from operations to net-zero by 2050.
The companies collectively account for 95 per cent of oil sands production. Those firms estimate it will cost $75 billion over 30 years, or roughly $2.5 billion per year, to eliminate the 68 megatonnes of greenhouse gases they emit annually today.
With no company guidance available, Scotiabank based its own cost estimates on the proportion of oil sands production, and applied metrics for greenhouse gas intensity. Canadian Natural Resources and Suncor are projected to spend the most, at $765 million and $760 million per year, respectively, followed by Cenovus at $470 million, Imperial at $380 million, MEG at $65 million, and ConocoPhillips at $60 million.
The figures represent the largest increase in capital spending compared to expected levels in 2022 at Imperial, Canadian Natural, and MEG, at 23.5 per cent, 16.7 per cent and 16.3 per cent, respectively. These numbers assume all costs are borne by industry.
In July, Ottawa formally committed to reducing its greenhouse gas output by 40 to 45 per cent below 2005 levels by 2030. The government plans to hit net-zero emissions by 2050.
"Discussions continue between industry and the government on [the] level of financial support," analyst Jason Bouvier wrote in the report released on Friday.
"Although difficult to predict when the governments will provide clarity, we expect it sometime over the next year (hopefully in the early part of 2022). In our view, this clarity is required before industry will start spending meaningful capital."
Bouvier estimates a roughly 70 basis point drop in debt-adjusted free cash flow (DAFCF) yields for the oil sands producers, once the costs to decarbonize are included. That assumes $65 U.S. benchmark crude (CL=F), and 50 per cent government funding of projects.
"DAFCF will remain attractive, even with added decarbonization spending," Bouvier wrote. "Decarbonization costs have a material impact on free cash flow, but we still expect free cash flow to be available for shareholder returns."
Oil prices climbed on Monday, after booking the longest stretch of weekly declines since 2018 last week. Both West Texas Intermediate and European Brent crude have climbed more than 40 per cent year-to-date.
That strength will come in handy as companies ramp up spending to shrink their carbon footprints, according to Deloitte's 2022 oil and gas industry outlook.
"High oil prices are allowing companies to fund their net-zero commitments," the report's authors wrote. "After European oil and gas companies led in net-zero pledges in 2020, many U.S. oil and gas companies, Canadian oil sands producers, and a few national oil companies have joined the net-zero group in 2021."
Deloitte says higher commodity prices have enabled investment in "riskier and expensive green solutions, such as carbon capture, utilization, and storage."
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.
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