1EXTRACTIVES CLUSTERS IN CANADA
Extractive industries compose a major sector in Canada, the fifth-largest producer of oil and natural gas in the world as of 201328, with more than 75 per cent of the world’s mining and exploration companies calling the country home29. All of the Canadian extractives companies (oil and gas, utility, mining and water companies) are experiencing challenges as they attempt to remain competitive in the global economy. These challenges include lower commodity prices, reduced profit margins and rising costs.
The Cluster Atlas of Canada lists 16 different mining clusters across Canada and an additional 13 oil and gas clusters30. Mining clusters exist in eight of 10 provinces, with only Newfoundland and Labrador and P.E.I. lacking established clusters. Ontario leads the way with four mining clusters (Greater Sudbury, North Bay, Thunder Bay, Timmins) and Quebec is next with three (Rouyn-Noranda, Sept-Îles, Val-d’Or).31
Oil and gas clusters are less geographically dispersed, with 10 of 13 clusters found in the province of Alberta.32 The three remaining clusters are located in Sarnia (Ontario), Regina (Saskatchewan) and Fort St. John (British Columbia). Activities in the cluster include transportation and manufacturing activities in addition to extraction, as the Cluster Atlas below shows:
2INNOVATION IN THE EXTRACTIVES INDUSTRY
Innovation in the extractives sector has focused on minimizing costs by improving the upstream processes and improving the management, transportation, transformation and use of extractives.33
Collaboration via private- and public-sector partnership is seen as key to ongoing innovation in this field because of the cost and complexity of technology development.
Companies working in this sector have expressed concerns that recent lower commodity prices and reduced profit margins will make innovation more difficult and yet more important.
Canada has several research and development tax incentive programs in Canada to stimulate investment in innovation. Many of these programs are aimed at the extractives sector.
3PAST STUDIES OF EXTRACTIVES INNOVATION
Natural Resources Canada (2015): In Innovating for a Strong Canadian Energy Sector, Natural Resources Canada presents an overview of innovation in Canada’s energy and minerals and metals sectors. The report highlights the importance of innovation to maintaining Canada’s competitive edge in these sectors and the ongoing need for collaboration in technology development and use within this sector because of the high level of complexity of this field. The report calls for ongoing partnerships across the private and public sectors to ensure continued innovation. The report notes that as harderto- access resources are needed and companies around the world face pressure to safeguard the environment, innovation will become ever more important.
Mining Association of Canada (2013): The brief report Energy Investments and Innovation in the Canadian Mining Sector focuses on the research and development and innovation investments that Mining Association of Canada member companies have made to both improve energy efficiency and reduce emissions, which totalled $677 million in 2013. Examples such as the use of wind and liquefied natural gas to fuel both mobile and on-site power are highlighted. The need for innovation in technology that will allow more efficient energy use at remoe mining sites, including improvements in provincial and territorial power grids, is also highlighted.
Monitor Deloitte (2016): Innovation in Oil and Gas in Canada 2016 examines current perspectives on innovation in the oil and gas industry in Canada. It highlights a complex set of issues, including rising costs, multiplying risks, environmental concerns and shrinking margins. The report notes that while innovation in this environment is imperative, most companies in the sector “do not have the resources, capabilities or leadership commitment to innovate to the degree they know they should.” Through the study of 10 companies, the report authors found that this sector has begun to innovate, but the innovations are not well co-ordinated and are limited by a focus on using technology to either reduce costs or develop better extraction methods.
The report also states that driving innovation beyond the technological requires organizations to mobilize outside the technical and R&D groups in the organization. It is here that traditional structures can work against oil and gas companies. This report calls for companies in the sector to expand their innovation to include areas outside of technology and to develop an environment in which companies collaborate with both oil and gas technology providers, other sectors and stakeholders and the federal and provincial governments.
Deloitte (2015): Gaining ground in the sands 2015: Pipeline 2020 examined the role of innovation for pipeline companies. It notes the difficult situation pipeline companies find themselves in across North America. The debate over the safety of pipelines and the need for investment to keep old infrastructure safe and functional has been difficult for the sector. The authors of this report call for the industry to see these challenges as opportunities to invest in technology that can make their sector safer and more productive. Their recommendations include using big data, smart connectivity and new sensor technologies to allow for real-time evidence-based decision making. They conclude by highlighting the need for companies to begin to make budget and R&D decisions now to ensure they are competitive in 2020.
4WHAT OUR ROUNDTABLE TOLD US
The Canada 2020 team headed to the offices of Bennett Jones in Calgary, Alta., where we assembled a group of private- and public-sector leaders in the oil, gas and mining sectors. Here is just some of what we heard in our two-hour session:
Willingness to innovate: Many roundtable participants thought that other industries could take lessons from Alberta’s oil industry. They pointed to the sector’s willingness to take big risks and a lower fear of failure than seen in other industries. One participant believed that taking a risk that led to bankruptcy was seen as a black mark in most Canadian cities, but that Calgary was more open to second and third chances. Another believed that this was out of necessity, stating “without innovation, we would not have been able to turn the oilsands into a profitable industry that creates wealth for Canada.”
Another roundtable participant added that “to be competitive we have to innovate or we do not survive. Being out west, a lot of us our rural-based. That is an innovative culture baked into you, people who do not accept the status quo.” Roundtable participants felt that despite this, there was still room for a culture-shift in the sector toward a willingness to innovate.
The mining sector was seen somewhat differently, with one participant noting:
“We need to distinguish between three kinds of innovation. Core innovations are day-to-day things you do in your operations. Adjacent innovations are things that are transferred from one industry to another. Transformational innovations are technologies that create whole new industries or whole new ways of doing things. In mining, we are good at core innovations, but not good at adjacent or transformative ones. We are ‘first to be second.’ It comes down to risk, and the Canadian industry is risk-averse. When we are forced to make our operations profitable, we find a way. But when a mine is in production, we tend not to make improvements. We fine-tune, but we don’t take the next step and find significant improvements.”
Need to collaborate with other sectors: Many roundtable participants noted the need for the cluster to work with other sectors, to obtain and adopt adjacent innovations. Several noted that the cluster is both a user and a developer of high-tech innovations, particularly around the internet of things. Another gave examples of MRI technology that is used for medical innovations and for monitoring pipeline health. One participant mentioned the difficulties in collaborating with institutes of higher education, noting that universities tend to be insulated from market pressures. He noted that “part of the Canadian problem is that some guy at a university in a lab coat may think he’s developing innovations, but the output may only be theoretical or on a longer time horizon. The real innovation in Calgary is people chasing money and chasing their goals. If we spend money on innovating in a university environment, it won’t get done or be real.”
A final participant added the need for government to work directly with the sector, rather than through intermediaries like universities that do not understand the market pressures facing the industry.
Brownfield challenges to innovation: Roundtable participants felt that it was not hard to incorporate innovative technologies and processes when designing new facilities, but incorporating them into existing operations was difficult. As one participant put it, “one of the other defining features of our industry is the size of the capital investments involved. If something goes wrong, such as an unplanned outage, the impact is enormous. That impacts whether you pursue innovation, as well as what kinds of innovation you pursue. So changing something fundamental to your technology or your processes could be really risky.”
Perception consequences: Many participants made a point of noting that labour or environmental troubles at one company reflect badly on the industry as a whole meaning one firm’s poor performance imposes a negative consequence on all other firms in the industry.
“Yes, firms in the industry are competing with one another. But when it comes to the environment, we realize that this sector is competing not against each other, but against other fuels. So we are only as strong environmentally as our weakest performer,” said one roundtable participant.
The Syncrude tailings pond incident was an example cited by another participant, who stated: “When that incident happened, a negative perception was placed on every firm in our industry. Even companies without tailings ponds got labelled poor environmental stewards.”
Talent shortages: Some roundtable participants believed that these perceptions make it difficult for the sector to attract young innovators.
“We are one of the most vilified sectors in Canada and around the world. It impacts our ability to attract talent. We need creative people, and they often choose other sectors. There’s a lot of competition for innovators – why would they want to work on a problem for one of the most vilified sectors in Canada when they can work on something that instead makes them feel good?”
Another noted that these perceptions spill over to government policies, as negative public perceptions make governments disinterested in working with the cluster.
Small-business challenges: Two roundtable members noted that small- and medium-sized enterprises (SMEs) face uphill challenges when it comes to commercializing innovations, despite these companies being well-positioned to be innovative. One roundtable member noted that “SMEs face huge problems, but lots of the technological innovation comes from SMEs. Much of the problem is that they are not business savvy, they are not market savvy, and they do not know how to work the regulatory and granting systems. The IRAP [Industrial Research Assistance Program] can help these companies, but there is a limit.”
Another participant noted that “there is a bias in how innovative ideas and projects get funded. There is a place where we get stuck if we are not big enough but also not small enough to just be considered a start-up. The big guys are interested in reducing costs. The little guys are innovating and going after the gold rush. We get stuck at $2 million of capitalization.”
Access to capital: Feelings were mixed about the ability of firms to access capital. One participant noted that “Calgary is one of the easiest places to get capital and support. It is innovation-central, not because of the ideas, but because you can form capital very quickly. If you can speak about it and sell it competently, you can get money.”
Others disagreed, with one stating, “Capital is not all that available, you do have to work hard for it. It is called ‘the valley of death’ for a reason, and it exists in our industry.”
All participants agreed that the size of capital investments and the length of time it takes to put a project together creates challenges that other industries do not have. Several roundtable participants cited Sustainable Development Technology Canada as a funding partner that understands the needs of industry.
Pressures to innovate: Roundtable participants largely felt that innovation was driven by “necessity,” and without that necessity, it would be easy to get complacent. Falling commodity prices, in the view of many members, create a need for innovation. Participants felt that Governments can also create that need through their policy decisions. Several felt that prescriptive regulations that require the use of certain technologies were harmful to innovation.
Outcomes-based regulations, by which governments require companies to hit certain targets but do not force the use of particular technologies, give companies incentives to create innovative technologies and to do so at the lowest possible cost, the participants said.
Finally, roundtable participants believed that government can also create pressures to innovate through “moonshots,” such as John F. Kennedy’s promise to put a man on the moon by the end of the 1960s, or Alberta premier Peter Lougheed’s creation of the Alberta Oil Sands Technology and Research Authority (AOSTRA) and his tasking it with developing technologies to make production in the oilsands economically viable. There was a consensus that governments at all levels were trying to do too much and that they should instead focus on “picking winners” that had the potential to produce significant returns on investment.
Final thoughts: Despite the challenges the cluster has faced, from falling commodity prices to the Fort McMurray wildfires, the mood in the room was remarkably upbeat. People in the extractive industry, while recognizing the pressures they face, also believe the current situation has given them a need and an opportunity to become more innovative.
“AS AN INDUSTRY, WE KNOW EACH OTHER. WE KNOW WHO WE COMPETE WITH. IN A CAPITAL-CONSTRAINED ENVIRONMENT LIKE WE ARE IN NOW, YOU WILL LIKELY SEE US WORK TOGETHER MORE. IT WILL FORCE US TO WORK TOGETHER MORE. WHAT’S UNIQUE THOUGH, IS THAT WE HAVE FIGURED THAT OUT, BECAUSE WE KNOW ONE ANOTHER, WE TRUST ONE ANOTHER.”
28 (Global Affairs Canada, 2015), Oil and Gas Industry: Canada’s competitive advantages
29 (Mattner, 2012), Institute for the Study of International Development, The Development Impact of Extractive Industries: Policy Options for CIDA
30 (Spencer, 2014), Cluster Atlas of Canada
31 The remaining clusters are in Bathurst, N.B.; Calgary, Alta.; Cape Breton, N.S.; Edmonton, Alta.; Kamloops, B.C.; Prince George, B.C.; Regina, Sask.; Saskatoon, Sask.; Thompson, Man.
32 Specifically, Calgary, Cold Lake, Edmonton, Grande Prairie, Lloydminster, Medicine Hat, Okotoks, Red Deer, Sylvan Lake and Wood Buffalo.
33 The ideas in this section are based on Natural Resources Canada’s 2015 report, Innovating for a Strong Canadian Energy Sector.