TFE.ca: The World Energy Council released a report in October 2016 where it stated that we are beyond the tipping point for a global energy transition, and that oil and gas companies have to innovate or they will die. Do you agree with those assertions and are Canadian companies in the oil and gas sector doing enough to innovate?
Dr. Paul Bunje: In a broader sense, the notion of needing to innovate or die is true of every sector, and it is particularly true in this day and age when we are seeing such massive disruption. However, in my mind it is not really worth knowing when that tipping point is or is not taking place, but knowing that it is coming or that it already is here. I do agree that the energy sector in general is not doing enough to innovate, and I say that with all due respect to the amazing amount of innovation that is happening. A place like COSIA is a great example of efforts to do a tremendous number of big things. But we are talking about a part of civilization, the energy sector, that underpins almost everything else, and as a consequence of being so massive in scale, it is difficult to shift into a new direction. It is hard to overstate the amount of innovation that is needed in this case. That is not a criticism of any one company or the energy industry as a whole, it is just a recognition that there are demands placed by the public, the economy, and by policymakers at national and international levels; they are all pointing to doing things fundamentally differently with respect to energy. As a result, companies that move on this quicker will stand in a position to succeed in the new world in really important ways.
TFE.ca: Which areas of technology represent the most potential for the oil and gas industry and for its successful transition?
Canada’s energy sector has a heavy reliance on resource extraction. That is important because historically resource extraction has been environmentally damaging and we are past the days where anybody wants to get away with that. One of the things that I have observed about Canadian energy companies, the Canadian government, or the general mood of the public, is that there is a broad consensus that it needs to be done in an environmentally sustainable way while at the same time recognizing that an important part of the economy is based on resource extraction. Not only does it produce jobs, but it produces resources – oil and gas, minerals, and other resources – that the world relies on. Therefore, innovating in the energy space is going to be really important, and I think that it is already happening in Canada in a way that addresses the environmental impact associated with resource extraction.
A lot of work is clearly being done by COSIA. We have seen that through the Carbon XPRIZE, and there has been a lot of work throughout Canada by companies that are thinking about new ways to mitigate carbon dioxide emissions through capture technology and conversion technology, the latter being our focus in the XPRIZE. We have been impressed with the number of different approaches and their maturity among Canadian universities, start-ups, and companies.
“Innovating in the energy space is going to be really important, and I think that it is already happening in Canada in a way that addresses the environmental impact associated with resource extraction.”
Those are all places where the Canadian energy industry in some respect is out in front. It is trying to deal with a resource extraction industry that has traditionally had environmental externalities that are quite damaging, and Canada at large seems to have come to conclusion that it needs to deal with both issues. It has started to invest in significant ways in basic research development in universities through lots of little start-ups that are dealing with everything from wastewater mitigation to carbon dioxide emissions. I am a big believer that you should build on your strengths and dig into your expertise and try to improve that.
There is a whole separate question with respect to the source of energy. Global economics are at play in changing the resource extraction models. Looking at something like oil sands, it is impacted by the price of oil and its global dynamics. It is hard for me to say what kind of investment and innovation is needed for those types of energy, particularly as the world moves to other types, sources, or locations to get its energy. A somewhat similar story has played out in the United States with respect to coal, which had seen its demand plummet largely as a result of the shale gas boom, which has completely changed the dynamics and economics of energy generation. The question then becomes: how do we invest in energy innovation if you are a coal producing state or community in much the same way as Alberta is an oil sands producing economy or has a significant reliance on that. Those are the bigger questions when determining what to do if that source of jobs and industry were to go away completely. I do not have an answer to that but it is one that should absolutely be considered lest something disrupts the entire industry and you do not have a plan B.
The XPRIZE sets a competitive environment to generate innovation. Is a competitive environment more effective than an organic market-based process?
An incentive prize competition like an XPRIZE is not necessarily better than a traditional market process, but it is exceptionally effective when there are market failures and when the market itself cannot, for various reasons, solve an issue.
To be specific as it pertains to the NRG COSIA Carbon XPRIZE; essentially there is a market failure in that CO2 emissions are an externality and there are no internal market incentives for dealing with them. The most common solution to that is to internalize incentives to deal with CO2 emissions through regulations or a price on carbon, which is another tool in the toolbox for addressing market failures. There was also a significant lack of investment in technological innovation that could lead to a market pull. We are incentivizing teams to create products out of CO2 that you could sell in the market for a monetary upside.
But the market failure in this case was that nobody was investing in even the basic research and development associated with it. There were some efforts around the world but they were few and far between, they were disconnected and there was no clear market at the end of the tunnel for doing so. An XPRIZE therefore is an effective mechanism to fill that gap and offer an incentive to conclude your technological innovation through the offering of a US$20 million prize purse.
“There has been a lot of work throughout Canada by companies that are thinking about new ways to mitigate carbon dioxide emissions through capture technology and conversion technology.”
The product competition brings different groups and focuses on that community, as well as all other members that surround it, to building up a new market opportunity. In many ways, a prize is most effective when it is a complement to market-based processes and it can fill the gap where the market might just be failing for any reason.
A prize pays for success, which means we are not paying for ideas. You have to prove that it is accomplishable. For the Carbon XPRIZE, you have to build something and then actually convert CO2 into a usable product that has market value at a real operating power plant.
Can you tell us specifically about the Carbon XPRIZE with COSIA?
COSIA and NRG, which is an American energy company, are the two sponsors. This is a prize that XPRIZE has been interested to work on for a number of years and that recognizes all the different challenges associated with energy; particularly climate change and dealing with CO2 emissions at their source is a critical step. COSIA and NRG recognized that and agreed with us, which is why they are underwriting the prize competition.
Recognizing that there was a problem in the primary form of electricity generation through coal and gas, that carbon dioxide emissions were driving climate change, and addressing hot to take that out of the equation was a critical step for the XPRIZE.
There have been a number of very important efforts to date; from carbon pricing, regulations, and investments in technologies such as carbon capture and storage. But there had yet to be a direct market incentive to deal with CO2 and to make a product in and of itself. That is what the Carbon XPRIZE is doing. It challenges teams to convert the CO2 from a working power plant into a product that has the highest net value. Those products can be anything you can make out of carbon and we are seeing exactly that with what the teams are proposing to do. If they have positive value, then these are products that could be sold in the marketplace, which would give anybody that is producing CO2 or wants to sell it to somebody that can convert it, a market-based incentive to deal with it and not just waste it. Ideally, that is a massive complement to any regulatory structure, but it is something that had been missing until we launched the prize.
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The COSIA Carbon XPRIZE is obviously still in process, but can you offer measurable results that have been generated by an XPRIZE innovation in the area of energy, and if possible, in carbon emissions?
This is the first specific prize for carbon emissions. The only other prize that deals directly with energy that we have awarded to date was the Progressive Insurance Automotive XPRIZE. This award was a US$10 million competition to incentivize 100-mile per gallon equivalent vehicles. What we saw come out of that were a couple of things. One was a remarkable array of different technologies that have now gone into hybrid cars that are on the road or into materials to make traditional internal combustion vehicles lighter and more efficient. These and other technologies have helped spur an increase in fuel economy that we have seen globally in vehicles.
One other thing that came out of that was the XPRIZE had to commission consumer reports to come up with a metric of miles per gallon equivalent to tell what the equivalent fuel economy would be between a gasoline valve engine, an electric vehicle, or a hydrogen powered vehicle, so that you could compare their energy efficiency levels.
Having run competitions on a variety of sectors and having achieved laudable results, what would you recommend the Canadian government and industry to do in order to accelerate the pace of innovation, particularly in the energy sector?
Canada is in an advantageous position, particularly with respect to carbon mitigation technologies, which is much broader but also includes carbon conversion associated with what we are looking at now. There are a number of reasons for that position. First, Canada has a large and important resource extraction economy. Second, Canada has a clear goal and broader public consensus with respect to the need to deal with environmental sustainability and issues like climate change in the energy sector. Third, Canada has the advantage of having a small community in comparison to other countries such as the United States, and that is focusing on an area where it is ahead of the game and building out an innovation ecosystem around that. I think it is potentially world changing.
Innovation requires a lot of different pieces; expertise from academia, investment and buy-ins from corporates and industry, support and latitude from governments at local, provincial and national levels, and they all have to work together. It is really hard to get that level of coordination and support from each other. Canada has all of those pieces. The quality of the research in the universities and the attention to these issues that comes from the corporate sector as well as the government sector in Canada are all world class. The general interest in doing good things for the world, it is all there.
“To be really innovative means you cannot do it all and you should not try to literally change the world with respect to energy. You should capitalize on where your expertise lies.”
What I would love to see Canada do is choose an area where it is already ahead. I think carbon mitigation is one area where it is doing phenomenally well already, especially relative to other parts of the globe that are overlooking it to a degree, including the United States. To be really innovative means you cannot do it all and you should not try to literally change the world with respect to energy. You should capitalize on where you expertise lies, and I think that in Canada’s case a number of those things are already there.
The last piece is to invest in it as a community. There has to be a broad Canadian effort to move past any internal competition that might exist because there will quickly be external competition for being the global leader for carbon mitigation innovation technologies. Maybe it will be Germany, maybe it will be California, or maybe it will be China; who knows. Canada is in a good position to really move forward on this and I would love to see Canada double down and recognize that it is already ahead of the game in many respects and it has an opportunity to move forward.
I want to see centres of excellence and centres of innovation, be it national ones or others, to really put forward and create some amazing breakthroughs. That is one of the reasons I am so excited about the Carbon XPRIZE getting there and I am even more excited about what it has introduced me to in terms of innovation and the innovative capacity that is already happening. We all win if Canada or any other place is able to do this and do it quickly, and that is what I am interested in seeing.One other thing that came out of that was the XPRIZE had to commission consumer reports to come up with a metric of miles per gallon equivalent to tell what the equivalent fuel economy would be between a gasoline valve engine, an electric vehicle, or a hydrogen powered vehicle, so that you could compare their energy efficiency levels.