BMO CAPITAL MARKETS: Powering Canada’s Balanced Energy Transition

Rich in nature, the second largest country in the world, heavily exposed to adverse climate impact such as flooding and wildfire, Canada is an advocate of the global energy transition. Shifting from fossil fuels to renewable energy sources to reduce CO₂ emissions and limit global temperature increases, the country is ambitious, aiming for greenhouse gas emissions reductions of 40‑45% by 2030 from 2005 levels, and to reach net zero emissions by 2050. The diverse plan to achieve these goals includes major policy changes such as a modern carbon pricing system, clean fuel legislation, commitments to phase out unabated coal use in the next seven years, nuclear plant expansions, upstream methane regulations, energy efficiency programmes, and decarbonising activity in the transport sector.

Of course, like everywhere else in the world, these targets and concepts require funding. Not just grants and subsidies, but monumental financial figures – Deloitte predicts 6% of GDP.

There will also be significant M&A activity as the majors look to align with the journey. Acquisition and divestiture activity will increase, and the requirement for stringent review and advice will be significant.

The story of Denmark’s Ørsted is perhaps the most famous organisational transition, taking a decade to shift entirely away from coal and conventional generation, becoming the world leader in offshore wind and delivering financial results that surpassed the expectations of most. Initially, the aim was to upend the generation mix from 85% conventional and 15% renewable to 85% renewable over a 50-year period. After just 10, the business has achieved its goal and is continuing to invest in green energy all over the world.

BUSY BUSINESS

For Canada, significant deals have been done in recent times. Supporting the health of the North American economy, working closely with its big neighbour, the USA, the country is a hive of transactional activity.

In 2019, Shell Canada Energy sold its Foothills Assets – Waterton, Jumping Pound and Caroline gas plants, associated wells and pipelines and the gas fields which feed them – to Pieridae Alberta Production Ltd. In the same year, Devon Energy Corp sold its Canadian business to Canadian Natural Resources Limited for CAD $3.8 billion. In Imperial Oil and ExxonMobil Canada agreed to sell their Montney and Duvernay shale oil and gas assets to Whitecap Resources in a $1.47bn deal. TotalEnergies also announced that it planned to sell its interests in Alberta-based, Suncor Energy-operated Fort Hills mining project, and the ConocoPhillips-operated Surmont thermal project, alongside associated midstream and trading-related activities.

To complete these types of transactions, banks must understand the environment. thankfully, Canada’s leader – BMO (Bank of Montreal) – has decades of experience in A&D for the energy sector, and the bank has taken a balanced approach to benefit the future clean vision for the country as well as the interests of its clients. In 2017, the company was hired by Petronas to sell oil and gas drilling rights, wells, pipelines and three gas processing plants mainly located in north-western Alberta.

Last year, Cheryl Sandercock – Co-Head, Energy A&D Advisory and a Managing Director in BMO Capital Markets – told Energy Focus that the company had fantastic people power internally and was the obvious choice for large, complex sales. “Our team members are predominantly technical specialists, including geologists and engineers, who understand the energy assets and technical aspects related to owning and operating these assets.

“Banks have an important role to play helping our clients manage the impact of the energy transition on their business. Helping our clients adapt and thrive through the coming transition requires a thoughtful, balanced, and accelerated approach.

“In an environment as volatile as today’s energy market, we act as that experienced advisor helping our clients get the results they want.”

Today, the market is even more unpredictable and with the transition becoming a core element in company and country strategy, impartial advice is hard to come by. Dan Barclay – Chief Executive Officer of BMO Capital Markets says that this major change should be viewed as an opportunity and be carefully managed to achieve business growth and sustainable environmental success.

“It’s encouraging just how much the climate change narrative has evolved in the last few years,” he says. “Climate change is an integral part of the conversations we have with our clients, and I can confidently say that it’s part of the agenda for every CEO and clients that I know.

“To reach net zero by 2050, to get sufficient capital to the table, how we get there needs to be targeted, policy driven, accelerated and above all practical.”

He adds that the transition activity must be exactly that – activity. There cannot be an immediate halt of all long-established motion but an appealing and valuable path forward. “The reality is that the global economy will only reach net zero by 2050 if investment themes that have the highest impact on GHG reductions promote economic growth and allow private capital to flow are prioritised. We need to focus our efforts on generating more clean energy and reducing emissions for carbon intensive sectors with the biggest near-term impact.”

He is also clear on the fact that oil and gas companies cannot drive the transition alone and there must be multi-industry, multi-sector, and multinational approach. “Partnering together, the financial sector and government can show people and businesses why it’s worth taking the risk of changing how their produce or consumer energy, or both. The shape of the energy transition is not binary. It’s an ‘and’ rather than an ‘either/or’ conversation.”

JUST TRANSITION

Thankfully, with support from important global organisations including the U.N., World Economic Forum, the International Renewable Energy Agency, and more, the realisation that the transition is a long-term project is hitting home. Of course, more action must be taken, but the mindset of ‘stop one, start another, immediately’ is being adjusted.

“The narrative pendulum has swung back to talk of a sensible and just transition and away from calls for the world to just turn off fossil fuel,” says Barclay. “We need to focus on what it takes to achieve an orderly transition, meeting the needs of today while achieving a sustainable future. We’re aligned on the goal, let’s chart the course and get on with it.”

To do this, BMO has two essential initiatives amongst a raft of clean energy offerings. Firstly, the clean energy index ETF – designed to replicate, to the extent possible, the performance of the S&P Global Clean Energy Index, net of expenses. The Fund has a high exposure to the theme of clean energy by investing in companies that are involved in clean energy related businesses.

“Most investors think that energy companies must be excluded rom responsible investment products given the impact the environment, however there are energy companies that are working to transition their businesses and lessen their carbon footprint which are worthy of consideration,” says Erin Allen, Senior Product Manager, BMO Global Asset Management.

“The transition has created an opportunity for investors to invest in energy companies that are leading the green energy revolution. BMO’s clean energy index ETF (ZCLN) gives you exposure to clean energy companies globally that are at the forefront on innovation.”

The company is also a big backer of clean Canadian energy, and efficient fossil fuel production as part of the transition, positioning the country as a global leader as governments seek new relationships with Russia out of the equation. After announcing a wind-down on US oil and gas lending in 2020, BMO promised to reduce scope 1 and 2 emissions from its oil and gas borrowers by 33%. But the technological and innovative approach in place across many Canadian operations make it a fantastic choice for those seeking sustainable O&G partnerships.

“As the world reassesses reliance on Russian energy and looks for alternatives, nations risk repeating the same mistakes: Sourcing energy from countries with troubled human-rights records, potentially reversing course on their energy-transition goals or risking the instability that would come from blanket divestment,” says Darryl White – Chief Executive Officer, BMO Financial Group. “The future of global energy security will be won by nations that can provide ethical and sustainable sources of energy production. That makes Canada – a major oil and gas producer with significant investment in emissions-reducing technology, while also being a pluralistic democracy and a defender of human rights – exceptionally well-positioned to lead.”

He highlights a recent report from the bank which confirms the country’s strong standing.

“A 2019 study of major oil-producing nations by BMO Capital Markets examining the full spectrum of important environmental, social and governance concerns identified Canada as the clear overall leader. Given significant R&D investment since the study, the case for Canada is even clearer today.

“Canadian energy companies have led global investment in technology since 2010, totalling more than $13.1-billion. This leading R&D position has meant that the average reported emissions intensity of Canada’s large cap oil producers fell about 25% since 2013,” he adds.

Canada’s wider environmental strategy involved protecting at least 25% of land and water by 2025. Today, almost 2.2 million km2 is under official protection order, and boasts a quarter of the earth’s wetlands, temperate rainforests and boreal forests, alongside 20% of its fresh water and the longest coastline in the world. plainly, the country is reliant on its natural resources and realises the importance of sustainable development.

Brad Wells, Head of Energy at BMO Capital Markets, highlights the company’s understanding of the unique position of Canada, and agrees with White that the country must aim to become an example for all.

“Today, we’re at a pivotal moment… we have the opportunity to position Canada as a global leader in secure, affordable and responsibly-produced energy. This ambition will require investment, innovation and collaboration. Energy is a sector that we have long partnered with, served and remain committed to today.

“We have to be focused on meeting the energy and economic needs of today and doing what it takes to create a low-carbon economy now and into the future.”

BMO is perfectly positioned to assist clients and compatriots in their energy transition journey. Whether that is buying or selling oil plays, or attracting investment for renewable projects, the organisation is a full-service financial services provider with a portfolio that rivals the world’s best.