In Conversation: Mike Rose, CEO, Tourmaline Oil [Gas In Transition]
Tim Egan: Mike, we want to talk about innovation and Tourmaline’s innovation story, so I thought why don’t we start with you giving us a bit of a snapshot on Tourmaline, how it came about and how you built the company to what it is today?
Mike Rose: Well, I'm a geologist. I started 44 years ago in this business and when I started at Shell in 1979, I was actually told that this might be a sunset industry. The sun is still shining brightly and will for many more decades. I worked at Shell for 14 years in exploration and production; the last job I had was running E&P research for Shell Canada with significant interaction with the entire Shell group. I was always a technical, detail-oriented geologist, a good playmaker, but that research exposure really opened my eyes to the power of technology and research and that's helped me to this day. I left Shell in 1993 as I had an opportunity to go the independent route and start Berkley Petroleum, which we grew to an Intermediate E&P until March 2001, when it was sold to Anadarko. I started Duvernay Oil immediately after that as a private company, went public, and also grew to Intermediate size. We were a pioneer of the Montney play and Shell bought Duvernay in July of 2008 – the last time, ironically, that we had $8 gas, for $5.5bn.
That was when I started Tourmaline, in the summer of 2008, during the major financial crisis. We were in a good position because we were well capitalised coming out of the Duvernay transaction and it was one of the rare times that the very large companies and the majors would part with premium assets in the best part of the Basin – the two premium Canadian gas plays – the Alberta Deep Basin and BC Montney.
Tourmaline went public in 2010 and we've grown from there. We're now the largest natural gas producer in the country as well as the largest natural gas liquid producer – fourth largest producer overall. Importantly, we have by far the largest future drilling inventory of any of the North American large gas producers. The long-term goal is to control the largest lowest-development-cost, lowest-emission natural gas supply in North America; we're well on the way.
Tim Egan: So let's go down that path a little bit, your goal to be the lowest-emitting producer. Often in the present conversation there seems to be a conflict between the shareholders’ interest and the environmental agenda. How do you reconcile those two?
Mike Rose: I think our shareholders are very happy with what we're doing on that front. The ones that have invested in us obviously like natural gas. They realise that of the fossil fuel group, natural gas has the highest energy density and the lowest emissions when you burn it. We're certainly not hiding or afraid of the fact that we do create emissions, but we work very hard at reducing those emissions across the whole production chain. I think we're a leader in that regard, and that makes shareholders happy as well. That's what this company is, and we plan to be, on a net basis, the lowest-emission producer in Canada, and Canada, we believe, leads the world in that regard.
Tim Egan: How do you measure that as a producer? Is there a straight-up simple measure? Is there a means to do it?
Mike Rose: Yes, everybody's reporting now, any company of size, and so you have to report your total CO2 emissions and your emission intensity, as well as methane emissions. I think it's gotten pretty sophisticated. Measurement is continually evolving in the field, with standardised measurement protocols being finalised. I'm not the expert in that, I'm just good at finding the stuff, but we have really talented people who manage this aspect of the business.
Tim Egan: You’re now recognised in Canada as being the lowest-emissions producer. Do you feel that falls on deaf ears with decision makers in this country?
Mike Rose: To a large extent yes, as we are working very hard on emissions reduction and making material progress, and it is frustrating.
Tim Egan: You make a point in your corporate reporting to talk about GHG emissions, but a lot of people seem just fixated on that when they talk about the environment, and you have a much broader take on environmental performance. You talk about air quality in general, water and surface impact as well. Do you want to talk about that a little bit?
Mike Rose: Sure. Our mantra is full environmental performance improvement for air, land and water. Man is certainly polluting all three as our overall population grows, and we want to improve our performance in all three areas. We need as much fresh water as possible around the world, hence we've systematically eliminated fresh water usage from virtually all of our fracking operations.
And we're also a leader in the basin in diesel displacement, getting our drilling rigs and frack spreads off diesel onto our own natural gas. That leads to material emissions reductions, and not just CO2, but all the other more noxious emissions that are released when you burn diesel. We also have a whole CCUS strategy on the gas side of the business that we will enact.
How we approach our environmental performance improvement is to lay out five-year plans on improving our performance in all three areas, similar to our EP/Financial plans, which we've produced for a long time. We set hard targets in those five-year environmental plans, and we have a perceived technology roadmap to get there. When we get to the end of the five-year plan or achieve the targets early, we set a new five-year plan and put new hard, challenging targets in place. We’re now in our second five-year plan on overall environmental performance improvement. Notably, on methane emission reduction, we hit that target three years early, and we have subsequent targets that we’re evolving and we’ll continue down that path. Importantly, that's not methane intensity reduction, that's a 25% reduction in net methane emissions, three years early, and we're probably the fastest-growing producer in the basin.
Tim Egan: So that kind of environmental performance is about technology. Do you want to talk a little bit about your perspective on technology and where you want your company to be on innovation technology?
Mike Rose: We approach all aspects of the business with a very strong scientific and technology focused lens, as well as a very strong economic lens. And really, all our decisions are made that way. We deliver the lowest capital cost completed horizontals in our two main gas areas, the Montney and the Deep Basin. We have brand new state-of-the-art infrastructure that we've constructed; we're actually the fourth largest gas midstreamer in the basin. Brand new, low emission, and super efficient; we’re at the leading edge, technology-wise, in all of these areas.
When we’re talking about environmental performance improvement, we have that same lens. I talked about our diesel displacement and I think we are the first company to get our whole drilling fleet off diesel. That has also saved us $60 million on a net basis over the past three years. You can improve financial performance as well as environmental performance. If there is an opportunity to achieve a positive return from this important environmental performance improvement, then shareholders get a double win – they get a cleaner environment, and they get a more profitable underlying company.
Tim Egan: So when you think about technology innovation in environmental performance, you noted that a key part of your motivation is delivering best value to shareholders to drive your cost down. Do you also think of these technologies as new innovations that you might then patent or develop and carry into the market for use by others out there? Because it seems to me that this kind of innovation is in itself a huge value to others out there in the market.
Mike Rose: We are in the Natural Gas Innovation Fund, which is about sharing technologies, and we're all over that because not only do we want Tourmaline to be the best company out there, but our whole sector needs to be getting cleaner, for all the macro issues that we're continually dealing with. Technology and its innovation application is the answer. We all agree that we need a comprehensive integrated energy and environment strategy that balances improving the environment and reducing emissions while considering the economic well-being of the country, its individual citizens and providing energy security for all. And you can't do that in isolation. Technology and innovation will drive environmental performance improvement. It won't necessarily happen on arbitrary timelines like 2030 or 2050, but it will happen. It's science and technology and innovation that will provide the real answers on our environment.
Tim Egan: The public conversation about what needs to happen on energy is that that there needs to be this kind of dramatic transition, but as you describe the kinds of things you do, it's steady, continuous improvement. It's incremental change, it's setting short-term goals internally as a company and building on them. Is there a disconnect between the sort of high-level government objectives and this idea of a transition and what companies actually do on the ground?
Mike Rose: Yes, I think there is. And it's mostly because the targets that have been set are arbitrary, as are the timelines, and a top down approach in just about anything doesn't work. It needs to be systematically and corroboratively built from the ground up, and we're on the ground now and we're building from the ground up and that's what will actually accomplish something meaningful in the end.
We all need to work together to develop that comprehensive plan. And as I said, you can't do one in isolation, which is pretty much how the approach has been. The world needs more of all forms of energy. We prefer the term transformation to transition, particularly when you talk about oil and gas, because transition suggests it's going away, but we don't think it's going away at all. In fact, oil and gas demand is increasing and has been for some time and will continue to; we will all work in the entire energy industry to reduce emissions and improve our collective environmental performance.
We believe natural gas is the key right now to the energy transformation. We think of it as the great enabler. It's affordable, it's reliable, it's abundant, and if you live outside more than 20 degrees either side of the equator, it's essential for life as well. We just need a pragmatic, scientific, economic approach to this file. If you look at some of the cost estimates on the world’s energy transition, if we did get completely off fossil fuels, some of the numbers being tossed around are in the range of $150 trillion. In the Shale Revolution in the US between 2010 and 2020 – the total capital expenditure was $1.3 trillion and that was a technical revolution. We really did figure out how to create an enormous amount of abundant low-cost energy; we just ironically killed our own supply-demand equation. That's $1.3 trillion between 2010 and 2020, but to completely get off fossil fuels the think tanks are saying $150 trillion. And we don't have a plan on how to actually accomplish this, and neither does the United States and neither do any of the Western governments.
Tim Egan: But to your point, why would you try to get off? I mean, the reality is that every source of energy we've ever used, we continue to use, and in fact use more of than we ever have before. Use more wood than we ever did, more coal than we ever did, more oil than we ever did. But we’re using them better.
Mike Rose: And we're making them better. I think all of our energy choices should be made on an energy equivalent, full-cycle basis, comparing the true cost per unit of energy delivered, and the true, full-cycle environmental impact and emissions footprint of each of those sources. And when you do that natural gas actually screens at or near the top. But in reality, we don't have the luxury to pick one or two sources – we need more of everything.
Now there are some in power in the various Western nations who are trying to arbitrarily accelerate this transition off fossil fuels to 2030 or 2035. It's an incredibly risky path and will materially change the entire world economy and compromise the standard of living of all Canadians starting by impacting the most disadvantaged .
Tim Egan: You note that any kind of change really comes about from the ground up. When it's pursued from the top down, it doesn't go well. What do we do as an industry to make that clearer to decision makers, so that that reality is better realised and we can capitalise on the opportunity we have?
Mike Rose: First, we go out in the field, on the ground, and demonstrate how it can be done! We need to do as good a job as possible of making sure the Canadian population understands the entire energy/environment equation and what we require, and that we can't just stop using fossil fuels tomorrow, but we do need to get ever cleaner with them. Better energy literacy for all Canadians would go a long way in helping to shape a regulatory environment that reflects that whole equation.
Tim Egan: Part of the challenge is to attract younger Canadians to the sector, to see the sector as being innovative and cutting edge. Do you have any suggestions on what we can do to attract more people into the sector and to play up the innovation stories that we have within?
Mike Rose: I think we have to keep communicating. We have to do a better job of elucidating how a career in oil and gas is not only exciting, fulfilling and all those things you want from a great job, but an excellent way to drive the type of innovation that can make a huge difference in the world. We also need the public and the government better educated on what we do, and that's on us as well. And I think we need to somehow encourage a more balanced media to deal with, as well, because they play a big role in in shaping the issue.
Tim Egan: There's a terrible moment in world history right now. Russia has invaded Ukraine. There are monstrous things happening on the ground there. It's forced Europe to reflect on its energy picture, it’s forced the world to talk about energy security in a way it hasn't for a very long time. Is this an occasion for Canada to step up? And if so, what more can we do to step up?
Mike Rose: I think yes, is the answer to that question. Can we provide more natural gas to Europe in the immediate short term? No. Can we supply a little bit more gas south to the United States and then in effect, displace some gas that might have been going to Asia and get it to Europe? Yes, we can. We are going to be doing that as Tourmaline commencing in January 2023 with our Gulf Coast LNG venture. What we actually don’t really need from our governments, provincial and federal is money, particularly on the gas side; we don't need to be subsidised. We just need consistent regulatory support for the approvals and doing it quickly, so that we can build more pipelines, because that is the key to providing clean, low-cost Canadian energy to the world. Canada will have an LNG industry on the West Coast when LNG Canada starts up in 2025 or 2026. It's currently slated at 2bn ft3/day; it will hopefully grow to 4bn ft3/day, but ideally we should build another LNG project or two. North America can be completely energy independent and ‘Energy Secure’ – it is certainly on the gas side now.
The 12bn ft3/day LNG export business that has emerged on the US Gulf Coast in the past three years could have been on Canada’s West Coast if we’d moved more decisively in the 2010 – 2015 time period. Fortunately, our country has a second chance at this as natural gas evolves into a truly global commodity. The Great Enabler!