Keeping it clean

In September last year, our group corporate governance manager, Matt Crossman, visited Royal Dutch Shell’s oil sands operations and carbon capture and storage plant in Alberta, Canada. The purpose of the trip was to evaluate the company’s governance and sustainability credentials by considering how it approaches projects with challenging environmental impacts.

Picture of an oil slick

Matt Crossman, Group Corporate Governance Manager, Rathbones

How do we define “ethical investing”? Very generally, the idea is centred on allocating capital to companies whose philosophies are in line with one’s personal views - whether environmental, religious or political. As Matt Crossman explains, a fundamental challenge is to determine whether those ideals are truly aligned.

Winding through the province of Alberta, from the Jasper National Park to Lake Athabasca in Fort Chipewyan, the waters of the Athabasca river basin snake towards the frigid environs of the Arctic Ocean.

In days past, they were a major transport link relied on first by aboriginal peoples, and latterly by the Hudson’s Bay Company to promote trade in fur. It is now the site of a more recent industrial transformation — the modern-day “boom town” of Fort McMurray and home of the flourishing oil sands business.

The lower Athabasca River plays a crucial part in the story of the oil sands. The river flows through massive deposits of sand containing bitumen — a sour, viscous and semi-solid cousin of the sweet, light crudes found in Saudi Arabia. The First Nations communities indigenous to the region first made use of the material to waterproof canoes, and late-18th-century European settlers paved the streets of Ottawa with Athabasca bitumen. However, it was not until the 1960s that technology developed to process the bitumen into a liquid fuel.

Whereas Saudi crude requires minimal processing before refining into useful products, the oil sands need considerable handling. The process — known as “upgrading” — essentially involves heating and cleaning the material and disposing of the impurities, producing a crude that can then be refined and waste water and materials, known as “tailings”, that must be processed and disposed of.

Nearly 150,000 Albertans earn their living in the industry, extracting 2.3 million barrels a day of oil, with capacity for much more.

Aerial image of the Athabasca river
Athabasca river basin - click to expand
Image credit: Ashley Cooper - Corbis

Viewed from a sunrise flight from Shell’s aviation centre in Edmonton, the long flat plains of the Athabasca river basin reveal centuries of agricultural development. This soon gives way to grassland and forest. However, the first thing that hits you on landing isn’t the sights, but the smell — reminiscent of sulphurous WD-40, the signature mark of hydrocarbon development. Then you notice the constant hum of refinery and processing equipment, the distant roar of diesel engines and the random, multi-decibel explosion of propane gas cannons designed to keep local bird life away from harm.

Driving from the dedicated airstrip serving Shell’s two mines in the region, we are taken to the “lookout” at the Albian mine. The effect of that first view of a major extractives development is hard to explain. The sheer scale is almost beyond comprehension. Caterpillar dump trucks with three-metre-high tyres, carrying 400 tonnes of payload, look like children’s toys. Even these are dwarfed by the four truly massive extraction shovels working on different areas of the oil sands deposit. When confronted with an enormous man-made hole in the ground, it is hard to conjure up a definition of “sustainable” to which it could apply. And yet the companies involved claim to be responsible developers. How can this be?

Image from space of the mine
View from space - click to expand
Image credit: NASA - Corbis

The first step to sustainability is dealing with the remediation of the land, a process strictly regulated and demanded by the local authorities. In the early phases of mine development, the topsoil and trees are taken off site and stored. The next layer, referred to as “overburden”, is similarly taken off site, until the hydrocarbon layer is reached. Once the mine reaches a certain size, remediation and reclamation can begin during the life of the project. Overburden and remediated tailings are then filled back into the mine.

Since 2005, Shell has invested nearly $400 million in tailings research to develop technologies to speed up the drying of tailings from years to weeks. The end result is reasonable, at least superficially.

The second issue concerns local communities. The companies operating in the region are again constrained by prescriptive legislation which dictates that they be able to document a robust engagement with local indigenous communities. Shell has a good record on this score, winning an award from the Canadian Council for Aboriginal Business. We visited a lake, planted with indigenous medicinal plants as requested by the local community, which is being used as a replacement fishing ground.

The third issue, and perhaps the wider concern, is the impact of the projects on the atmosphere, and in particular the emissions to air involved. The Albian project pipes its diluted bitumen south for upgrading. The entire process requires energy, resulting  in an increase in carbon intensity compared with an average barrel of US oil, on a so-called “well to wheel” basis (which accounts for the fact that the majority of the carbon emitted associated with oil is in its final use, not in extraction). Mindful of this fact and the vital role the energy industry will play in helping the world achieve the needed low-carbon energy transition, Shell has worked with the Albertan government to make a major investment in carbon capture and storage (CCS) in the region.

Approximately 250 miles due south of the mine, the Scotford facility has been home to a refinery since the 1980s and home to an upgrader since 2003. 2015 saw the commissioning of a $1.2bn carbon capture unit, which is attached to the upgrader and is capable of capturing one million tonnes of CO2 a year, cutting emissions by 35%. The site of the well head where the liquid CO2 is pumped underground is underwhelming, but deep beneath the surface, potentially harmful emissions are permanently locked away in geological structures. This is no small commitment from the industry.

Questions remain about the scale at which CCS can be developed and what impact it can have. The International Energy Agency has published various technology roadmaps which suggest that investment in CCS is lagging where it needs to be. However, Shell is serious in its commitment to investing in the technology.

Flying out with an aerial view of the region’s development created an opportunity for reflection. Mines like Albian provide the oil products that fly our planes, drive our vehicles and also the feedstock for refineries producing the plastics and other products on which we rely. Around the world, open cast mines produce the rare earth minerals that make up the electronics we take for granted.

Companies like Shell are responding to the demand we create and the demand of a growing global population. Regulation ensures that they do so with an eye to the future, and the company’s management have committed large sums to research and development of lower-carbon technologies. Sustainable development requires tradeoffs. At least in Canada, a combination of pressure from regulators, investors and local communities is making sure that long-term interests are being given attention.

 

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