The Decibel - A multi-billion dollar bet on natural gas

Episode Date: September 14, 2023

Enbridge Inc. has become North America’s largest natural gas utility after acquiring three U.S. utilities for US$9.4-billiondollars. It’s a big bet on the role that natural gas is going to play in the future as governments try to transition the economy off of fossil fuels.Emma Graney is The Globe and Mail’s energy reporter. She has been covering the deal and explains how this fits into the wider picture of the energy industry in Canada, as well as our emission reduction targets.Questions? Comments? Ideas? E-mail us at [e-mail]

Energy reporter Emma Graney has covered lots of stories about natural gas. Natural gas is a funny old thing. It's loved and hated. And right now, natural gas is having a moment. Despite being a fossil fuel that we pull up from the ground, natural gas has stayed relevant in our transition to renewable energy. In part because we use it in our lives a lot. It can be used to create electricity, for example, through natural gas power plants.

We use it to heat our homes. You may have used it this very morning to, you know, light on your stove to make yourself a cup of tea. And last week, Enbridge, who you probably know as your gas company, placed a big bet on its future by buying three natural gas companies. But does this make sense in an economy that's supposed to be transitioning away from fossil fuels? Today, Emma's on the show to tell us what's behind this strategy and what's happening in Canada's energy industry.

I'm Maina Karaman-Wilms, and this is The Decibel from The Globe and Mail. Emma, thanks so much for joining me. Lovely to be here. I'm wondering if you can just give us an overview, Emma, of the acquisition that Enbridge made. So what is important to know about this deal from last week? So these were giant deals. acquisition that Enbridge made. So what is important to know about this deal from last week? So these were giant deals. So it decided it's going to buy three U.S. natural gas utilities for $9.4 billion, United States dollars, that is U.S. dollars. And that's billion with a B there. Okay, yes.

Billion with a B, USD, to create the continent's largest natural gas utility. So this is huge. So as well as the deal, Enbridge announced it was also going to launch one of the largest share sales in Canadian history to help fund this deal. So we're not just talking cents and dollars here. We're talking a huge amount of money. Okay, so this is a lot of money. They're taking on some debt, this massive share sell-off to actually make this happen. It seems like this is a very substantial deal for Enbridge. What has the company said about why it actually decided to go through with these acquisitions? So what Enbridge wants to do is diversify its offerings. And the CEO, Greg Ebel, he phrased it as, we're looking at a three-legged stool approach. So we've

got renewables, we've got a bit of liquids, i.e. oil, and we've got natural gas as well. So if customers want to get energy from A, B or C, they have the ability to provide that to their customers. Enbridge will have the ability to further provide that to their customers. The idea is to kind of diversify its offerings, therefore making sure it's not putting all its eggs in one basket when it comes to energy sources that it can offer to its customers, which is not just, you know, people, but this is also industry as well. They do have some really big industrial partners who may need, for example, access to renewable energy because they need to reduce their carbon footprint in order to meet net zero goals that they might have set. Right. So

the idea is basically diversify. We've got our fingers in lots of little pies now, and that'll make it better for us in the long run. Okay. So I can see why this would be like a good business decision. You want to diversify your offerings, give customers choices of what they want. So just coming back to this metaphor, though, of the three-legged stool. So this is oil, natural gas, renewables. Is this a stable stool? Like, is this a stool you want to sit on with equal sized legs? So, I mean, I guess it's how you define the stool. I mean, at this point, post-acquisition, liquids pipelines are going to make up about 50% of Enbridge's business. Gas transmission is going to make up about 25%. Gas distribution is 22%. And then renewables is 3%. So maybe don't lean

too hard on the renewables side. But when you do look at it in terms of like liquids, pipelines, gas transmission and gas distribution, that is where you're seeing a more holistic three-legged stool approach. It's probably not going to topple if you have a couple of beers and sit on it. Okay. Okay. I see. Okay. But renewables is 3%, you said. So that's not super substantial. And I mean, if you look at a lot of their advertising that they're putting out these days, right, they're focusing on renewables because this is a lot of the talk. A lot of companies and customers are looking for this kind of thing. But it is still a very small percentage of their makeup. It is, yeah, for sure.

And, like, Enbridge, I mean, it does have a net zero by 2050 target. And it has some, you know, midway targets as well. So it wants to reduce emissions intensity by 35% by 2030, for example. But what's interesting about Enbridge is it's kind of not just talking about it because they have actually tied executive compensation to delivering on the environmental, social and governance goals or ESG targets, right? And what's interesting as well about Enbridge is that they're also looking at scope three emissions. So those are emissions that come out, you know, end use by consumers. So like when you burn gasoline to run your car or natural gas to heat

your home. Yeah, that's a way of like classifying emissions, right? Like scope one is like getting it out of the ground. Scope three is like the final stage. Yeah, exactly. And you know, that's a tricky old thing for companies to measure, right? But Enbridge has been tracking and reporting scope three emissions since 2009. So, you know, it does have a plan on how it wants to get there and it is investing in renewables and lower carbon infrastructure. So that does include wind and solar power generation, hydrogen as well, and renewable natural gas. That's all part of what it's looking to kind of reach net zero by 2050. Okay, but this deal, though, is still a bet on natural gas, right, which is still not great for the environment. So, Emma, can you just, I guess, help me understand

the rationale here of doubling down on natural gas? Yeah, right. I mean, when you look at natural gas compared with coal or gasoline, it's actually relatively clean as a fuel. So, right. I mean, when you look at natural gas compared with coal or gasoline, it's actually relatively clean as a fuel. So the combustion of natural gas emits about half as much carbon dioxide as coal and about 30% less than oil and far fewer pollutants as well, particularly when you're looking at coal, right? So yeah, if you flip a power grid from coal-powered to natural gas-powered, you are definitely going to save some emissions for sure. And in fact, the US is a really interesting example because it substituted gas for natural coal in a lot of regions. And it's actually helped reduce power sector emissions to mid 1980s levels.

So that's nothing to be sneezed at. But the end of the day, it is still emitting a bunch of carbon dioxide. So it's comparatively clean, but it's not clean, clean. However, Enbridge, and in fact, the fossil fuel sector here in Canada, and I would say North America, potentially globally, are of the mindset that natural gas will play a huge role in the energy transition. And the reason is that natural gas, when it comes to electricity particularly, can be used to provide reliable baseload power because wind and solar, they have intermittency issues, right? So they're not, you know, the sun is not shining and the wind is not blowing all the time. I mean, there are other solutions in

the works when it comes to battery storage or looking at geothermal for, you know, baseload reliability, but natural gas is really seen as the tool that will provide that reliable, secure and affordable option for people to be able to turn on their lights, for example. And so this deal really does just underscore how much Faith Enbridge and its CEO, Greg Ebel, have in natural gas as a continued part of the global energy transition mix. So they're really putting money where their mouth is when it comes to their belief in natural gas. Okay. Yeah. So like you're saying, it's kind of seen as this transition fuel. So not as bad as coal, not as good as renewables, but it's somewhere in the middle that might help us bridge that transition. Can you give us a sense, Emma, like how big is the natural gas industry in Canada?

It's big. So both oil and gas are really huge contributors to Canada's coffers. We're the fourth largest producer of crude oil and the fifth largest producer of natural gas in the world. So to put this into perspective, about 22% of Alberta's total revenues came from oil and gas in 2022. And when you look at revenues on a national scale, natural gas and oil generated about $105 billion for Canada's GDP in 2020, right? So it's big. What's actually interesting is that natural gas, like every fossil fuel, like every commodity, it's got some wild fluctuations in the prices. But in November 2022, so yeah, last year in November, Western Canadian natural gas production actually hit an all-time high.

The previous record was like 20 years ago. And so last year was really interesting for natural gas here in Western Canada because it included at least eight of the top 10 producing months since January 2000. So natural gas production is just ramping up hugely out here in Western Canada, like to a huge degree as well, like just setting records left, right and center because it made a lot of sense price wise for companies to produce it and sell it on the global market. Can you just spell out for us, though, like obviously this is an important sector for Canada. What is the environmental concern with natural gas? Like what is actually the issue here with extracting? It's not as bad as coal, but what is the environmental concern with natural gas? Like, what is actually the issue here with extracting it? It's not as bad as coal, but what is the problem?

The natural gas ecosystem is a little bit guilty of having a lot of methane leaks. So that's a really powerful greenhouse gas. And obviously, that's not good. So there's problems in terms of where they happen, how much they're measured. And that's really bad for the environment as well. So the problem is, for environmentalists in particular, is that when you're burning a fossil fuel, you're creating carbon dioxide. And why would you burn a fossil fuel to make electricity when you could just use renewables and then use different kind of backup technology to provide baseload power,

which means you're not producing any carbon dioxide as opposed to just using natural gas, when, sure, it's a lot cleaner than coal, it's a lot cleaner than oil, but it's not clean, right? It's not nothing. And not nothing for a lot of environmentalists is obviously worse than nothing. We'll be back in a moment. Okay, so Enbridge is a Calgary-based company. So what is happening in Alberta with respect to natural gas projects? So natural gas is kind of, with prices rising, some companies have decided to increase production as well. And that's why we saw those record production numbers being set late last year, because there is a good price right

now. And so here in Alberta, there is definitely, or Western Canada, I should say, you know, there is a push to kind of continue along with the natural gas production. One of the concerns, though, that has been raised is, well, what about natural gas power plants? How come we don't have any of those on the books? Or why aren't we getting enough of those to ensure that we can keep providing electricity? One of the other big things that has come up politically here in Alberta is the provincial government's pause on renewable energy project approvals. So basically, at the beginning of August, it came out and said, we are going to order that the Alberta Utilities Commission, that's the AUC, which kind of oversees all of these, you know, approvals and that kind of thing for energy projects. We're going to order that they don't allow any projects of renewable energy to be approved up until the end of February. It gave a few reasons. I did speak with the Utilities and Affordability Minister, Nathan Nudoff, who actually announced this. And he said, well,

you know, there have been concerns raised about whether valuable agricultural land is being used for gigantic solar projects. People are concerned about how wind turbines don't look very pretty. People are also concerned about reclamation. So when it comes to the end of life for these projects, you don't want solar panels, you know, or wind turbines just getting rusty in case a company goes bust or walks away and just leaves them there. And that's been a huge problem with traditional oil and gas. The problem is that when it comes to the pause, the government actually

did not give anyone in the renewable sector a heads up about it. They didn't discuss it. They didn't consult them. Isn't that strange? Yeah, it's a bit weird. Yeah, you don't really hear of governments doing that very often. In fact, I've spoken with a number of companies who have approvals in the pipeline. They have project applications in the pipeline. They knew they were close to approval. And in fact, the day before the pause, they got a note from Alberta Utilities Commission saying, hey, can you give us some more information, please, about your application so that we can continue processing it? 24 hours later, the government announces a pause.

It's really created a lot of uncertainty in the renewable sector and a lot of unease as well, because this is a government that the United Conservative Party purports to really champion, you know, free market access. I was just thinking this. Yeah. Don't they even have a minister of red tape or something there too? Yes, we do. We have a minister of red tape reduction out here in Alberta.

And in fact, the government's, you know, Premier Smith's mandate letter to that minister included, hey, how about we develop some kind of automatic yes system so that projects just get a yes? This seems like the exact opposite of that, doesn't it? You know, one could very well make that argument. So it's it's created a lot of confusion. And the reason being that Alberta leads Canada in renewables investment by a huge margin. This is a multi-billion dollar industry out here. It's grown significantly over the last few years. But now the government has basically just said, we're going to freeze this entire industry for close to seven months.

And this is creating a lot of uncertainty for not just the companies themselves, but investors, companies overseas that were looking at building here in Alberta are now taking a step back. I was speaking with one guy who was looking at a massive Alberta project, heard the news, and then immediately started calling some contacts in Iceland because he went, well, I mean, is it really worth us even beginning to spend that first dollar? Because if it's a sunk cost and then everything's going to change in Alberta, what's the point? So that's the Alberta government. I want to also ask you, Emma, about the federal government, because a lot of what we're doing towards climate actually does come from the federal

government as well. And the federal government has some ambitious emission reduction targets. What is it doing in response to the fact that we are seeing some pushback to the pivot to renewables? Yeah, I mean, the federal government has released its clean energy regulations and talking about clean power and getting to a net zero grid by 2035. And Alberta has really pushed back on that, saying we can't do it because, you know, renewables are just not reliant enough and it's very cold here and we need to be able to turn on the lights. And that's where we can really draw it back to the discussion about natural gas, because particularly here in Alberta, we very quickly got off of coal and a lot of those plants got converted to natural gas plants. And because natural gas revenues make up such a huge chunk of what we get as a province, it's made a lot of companies very uncomfortable that perhaps, you know, they've spent all this money and now won't recoup it when it comes to natural gas plants. However, the federal government's regulations do say you can keep using those plants. No worries. Go for it. Because there's

an end of life clause in there, right? So it's not actually outlawing use of natural gas plants. But here in Alberta, it's become quite a political thing. Okay, so the federal government does see this as a transition fuel, but with a fairly short runway with the idea that we're going to transition to renewables, you know, rather quickly. Yeah. And, you know, it's not just the federal government here that looks at natural gas as a transition fuel. I mean, globally, the International Energy Agency has said the very same thing, that right now it makes sense to use natural gas as a transition fuel. What makes it kind of positive in terms of being a good fuel to use is it's easily stored,

it can be delivered through pipelines, or it can be liquefied and sent by ship. And because gas-fired power plants can turn on and off relatively quickly, it's actually a really convenient way to respond to those seasonal and short-term demand fluctuations that you do see around the globe, right? But the challenge is to further reduce emissions that are being created by natural gas use, either by looking at something like carbon capture or just ultimately switching to other types of power like renewables or geothermal or even battery storage technology and energy storage technology that can provide that reliable baseload power that we need to see on a grid

to make sure everyone has energy when they need it. Well, this, I think, kind of relates to the very last question I want to ask you here. If we can just come back to the Enbridge deal that we started off talking about, we described this as kind of a big bet on natural gas. Overall, how risky of a bet might this be? I mean, that ultimately depends who you ask. I mean, if you ask the CEO of Enbridge, Greg Ebel, he will say this isn't a risky bet at all. What are you talking about? This is great. This is perfect. Why would we not have done this? But at the end of the day, it does come down to whether or not the world does indeed keep using natural gas as a replacement for coal or for transitioning energy in all kinds of other different ways. Emma, it's always great to talk to you. Thank you so much for being here.

Thanks for having me. If you've been following the news and listening to The Decibel's coverage, you'll know about the Greenbelt and how the Ontario government has been handling it. And you probably have a lot of questions. So we're going to answer them. Anything you want to know about the Greenbelt and how this saga has played out, just send us an email or a voice note to thedecibel at globeandmail.com, and you might be featured in an upcoming episode.

That's it for today. I'm Mainika Raman-Wells. Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show. Adrienne Chung is our senior producer, and Angela Pachenza is our executive editor. Thanks so much for listening, and I'll talk to you tomorrow.