Keynote Address by Brendan McCracken, on ESG and What It Means to the Network

Thanks, Deb. We really appreciate the chance to have a chat with you, but also a chance to connect with other members of the chamber here and the important work that they're doing. So, as you said, I just recently took the role of CEO here with the company. I've spent my entire career with Ovintiv. I'm originally a farm kid from Middlesex County, just west of London, Ontario, and have a huge passion for what we do and how we do it. Maybe just by way of background, we're a large multi-basin oil and gas producer. The company's legacy dates back 140 years to the Canadian Pacific Railroad discovering gas in Southern Alberta. Today, we're one of the largest North American independent producers. We make about 530,000 BOEs per day, pretty balanced commodity mix: just under 200,000 barrels a day of oil, just over 80,000 barrels a day of NGL, and 1.5 Bcf per day of natural gas. We're a big player in Canada, one of the largest producers in Canada, with almost half of our production, 225,000 BOEs a day there, some 750 staff in Canada, and with our partners, we're deploying about three-quarters of a billion dollars of capital in Canada this year. The main assets in our portfolio are in British Columbia, Alberta, Texas, Oklahoma, and North Dakota, so we've got a reasonable span across the major producing regions of North America. All we do is shale, and we're very good at it. And what we're particularly great at is getting better at it all the time. At the heart of our strategy is we use innovation to drive our performance, and that expertise not only drives our operational commercial performance but also our ESG performance. So I thought I'd just touch on a few very recent highlights that we just announced. In the last year alone, we delivered a 33% reduction in our methane emissions, and that meant we've actually met our long-term methane reduction target four years ahead of schedule, which just means we're back at the drawing board setting a new target. We also dropped our total greenhouse gas emissions by 20% and announced we're fully aligned with the World Bank Zero Routine Flaring initiative, some nine years ahead of the World Bank's target. And I think we're the only E&P company to be able to say that. And perhaps most importantly, it doesn't get a lot of attention, but we're also on track for our eighth consecutive safest year ever in 2021, with a total recordable injury frequency under 0.17, which is something we're very proud of and always working on. If I talk about emissions performance briefly, I want to just lay out a bit of a landscape as we see things today. We're going to use oil as an example, but we could just as easily talk about natural gas. There's a pretty apparent dynamic surfacing around the world today where we're seeing demand for oil quickly move back through pre-pandemic levels of 100 million barrels per day, and the last number of years have largely been characterized by underinvestment in supply. It's a combination of both investor sentiment and public policy that's led to that dynamic. But the normal dispatch curve for supply response that we would typically see is unfolding in a very different way today than it has for the last number of decades. If you looked at the historical trend of industry activity, we would expect to see over 900 oil-directed rigs active in North America today, and the actual count is just over 500. So there's a dramatically different supply response unfolding in North America, but also globally today. And so one thing that really strikes us when we think about that from an ESG perspective is we're actually in a period where the economic oil resource globally is actually pretty well understood. At times in our industry's history, that's very dynamic and there's lots of technical change, and it can be difficult to wrap our arms around, but today we're actually in a period of stability as far as understanding where that resource sits. About half of the best rock in the world today is in the hands of OPEC Plus. So if you want to think about a supply pie chart, you've got half of that economic supply in the hands of OPEC Plus, about a quarter of it is in what we would call long-cycle international projects, so that would be things like deep water and oil sands, and then the remaining quarter is in North American shale, what we do. It's in places like the Montney in Canada, the Permian in Texas, the Anadarko in Oklahoma, and the Bakken in North Dakota. And the only part of that supply stack that's making rapid progress on emissions reductions is the North American shale. And so it strikes us that there's a real opportunity here for Canadians and companies like ourselves to continue to embrace innovation, to continue to drive that progress so that we're able to meet the important energy demands that the world has, but yet still meet the climate ambitions that we have as well. And maybe I'll just close by saying we just this week took my board to spend a day in our operations in Texas, in the Permian, and the entire focus of that tour was on looking at what we're achieving on emissions reductions and showing the board what's coming next. And it was an extremely invigorating opportunity. The board certainly embraced seeing how we're looking at emissions reductions right alongside the commercial and operational performance measures that we've looked at for decades. So it's an exciting time in the industry, but full of lots of complicated challenges as well that I'm sure we'll get into in the questions.

Yeah, I think the dynamic you describe is challenging and complex. And I think part of why I raised the point in that resource pyramid and described where that resource sits in whose hands around the world and where the progress is being made, I think the concept of the responsible producers' role here in both meeting the acute energy needs that the world has—and we're seeing some of those dynamics unfold in Europe and Asia today where energy crises in those jurisdictions are causing very high energy costs for the citizens and the industries in those jurisdictions, and of course the folks that those high energy costs hurt the most are the folks that are most at risk to increasing costs. It doesn't hurt the rich. This is most impactful for people who are trying to improve their quality of life. So I think this concept of being a responsible producer is one that we clearly embrace, and we get a lot of great feedback from our investors on this. Certainly there are investors in the world that are choosing to just say we're going to stand on the sidelines, but I think the responsible investors are looking to create the performance that the world needs to both meet the energy needs as well as reduce our emissions and achieve our climate ambitions.

Yeah, I think the responsible producer role here, the one that we believe makes sense, is to make real tangible emission reductions today. And that's why you see our focus on highlighting the achievements I talked about. Those aren't achievements out a decade from now or two decades from now; those are achievements that we've already delivered, and we're setting near-term targets to continue that trajectory. And so our focus is on those real tangible emission reductions now, which it occurs to us that what needs to be happening here is not necessarily talking about ambitions long time out into the future, but what can we be doing today. And that's what leads us to this place of innovation and using technology and expertise in the process we use to run our business and operate our facilities to drive those emissions down today. We're having tremendous success doing that and doing a lot of work across the sector with our peers to advance that knowledge and learning very rapidly.

Well, look, I think what we've learned really clearly in this almost disruptive environment that we've all lived through in the last 18 months has almost underlined this. Having access to safe, affordable, reliable energy is at the root of our economy. And we know that the inflationary pressures the world is seeing today are a real factor in driving the economy forward and being able to work our way through the supply chain disruption, the rising energy costs, and access to labor pressures that every business in Canada is facing today. That's going to be a really important feature of the coming, I don't know how long, 12 plus months at least is probably my view. And I think being able to be part of that supply of safe, reliable, affordable energy is going to be really important. Clearly consumers are signaling, we're seeing it in that demand response both for oil and natural gas. Oil and gas are going to play a critical role in that for the foreseeable future.

Yeah, there's obviously a multitude of factors that are playing out there, but I would say the principal driver here is really investor sentiment expressing itself in producer behavior. So our investors have made it very clear what they want us to deliver is debt reduction and return of cash to shareholders. And so, I obviously can't speak for all of our peers in how they'll set their capital spending programs going forward, but I don't think we're going to be alone in focusing on those two factors.

You know, I think it is a difficult question to answer for the industry. I can tell you the tone and tenor today doesn't suggest the dynamic is shifting soon. And where we are at, if we talk specifically to Ovintiv, we've made it very clear we're not going to move to growth until we meet our debt objective and until we see that long-term price signal and true call on growth in the sector. And today, we still do have not an insignificant amount of OPEC Plus barrels still offline. So four to five million barrels a day of spare capacity, they're still returning to the market. So these are signals we're going to watch, but I don't see the dynamic shifting in the near term.

Yeah, I think we think the world needs to have a rational conversation on balancing the energy needs that the world clearly has to enjoy and improve the quality of life for billions, but also have a conversation around what can we do to drive emissions down to achieve our climate ambitions. And I think that's a role that we are ready and willing to play as a responsible producer. On the government side, we look forward to working with the new ministers, and that's been the approach we've taken for a long time with all governments that we interact with across our portfolio.

Yeah, I mean, I really think it boils down to this innovation strategy that we're pursuing. So if you think about a number of the approaches we're taking there, I described earlier what we're doing to eliminate flaring. We're certainly deploying a lot of exciting technology on leak detection and repair so that we can dramatically reduce that, and you've seen that in our performance. I didn't talk yet about that, but we've driven our flaring and venting percentage down to now minuscule amounts of our total production, and that's exciting. On the drilling and completions front, we continue to invest and work with our suppliers on lower carbon-intensive fuels to fuel those activities. And then in our operations, the use of automation to drive down emissions. Again, there's a lot of synergy between the approach that we've been taking across the board for commercial and operational purposes that are also driving emissions reductions. In Canada in particular, we've been leaders in electrification. Almost all of our production in British Columbia is electrified, and of course in that jurisdiction, it runs on hydroelectricity, so it has a very low carbon footprint as a consequence. So again, this is a place where we're actually enthusiastic about not only the progress we've made but the progress that sits in front of us as well.

You know, I think that is the debate. And I think all of the signals today, if you look at them in a rational way, tell us these energy systems are large and complex and global, and the opportunity to transform that mix is there, but it probably does take longer than the first or superficial interpretation might suggest. And the great example for Canadians to think about there is the role natural gas can play in decarbonizing the global energy mix. Clearly, one of the things that's driven the US experience here, where greenhouse gas emissions in the United States have come down dramatically in the last five to eight years, that was really all about natural gas displacing coal in the power plants. And that same opportunity exists globally for Canadian gas to play that role, and is one that I think Canadians should embrace.

Yeah, I mean, obviously we're encouraged by LNG Canada progressing, but as a sense of scale, that's going to be 1.8 Bcf a day of exports sometime mid-decade when that project comes online. And we're not in that project, so I'm speaking holistically about the benefit to the industry there. But you compare that today, the US is exporting some 11.5 Bcf a day of LNG, it's going to be 12 by the time the end of the year is up. And so American natural gas is displacing coal globally and making that impact. American exports of natural gas to Mexico are significant, in the six to seven Bcf a day, and that's creating a new power mix in Mexico and in places like Guatemala where Mexico exports electricity. So this effect is occurring globally, and I think we would encourage Canada to embrace that opportunity as well.

Well, I think that is happening. You've seen some Canadian producers directly connect gas through to US Gulf Coast exports, and I think that can happen, but it's going to be restricted by the amount of export capacity to physically connect those molecules. And so that is a place that some Canadian producers are participating, but obviously the real opportunity is off the west coast of Canada.

Yeah, I appreciate the question. Maybe I'd highlight two things that I think are particularly relevant today. One, we talk about our purpose as a company: we make modern life possible, and we're providing that safe, reliable, affordable energy that the world needs, but doing it sustainably. And I just recently spent time with our new grad cohort at the company, and that's incredibly important to them. And what they tell me is that that is a huge motivator for them to want to be part of that and to drive that progress from within, as opposed to sort of being a bystander and thinking about it from without. And then the other feature that is particularly important for us is to drive an increasingly diverse workforce where everybody has the same opportunity set, both once they've joined our company but also prospective employees that might join us in the future. And so we've been undertaking a number of opportunities in the locations that we recruit from to make sure we're ensuring an inclusive recruiting process that is going to drive that equal opportunity set for people going forward.

Yeah, I think we see an enormous growing part of the economy there. And I think one only needs to look at global capital flows to see that clearly a lot of innovation is being fueled in those spaces. Our view is we're building expertise and understanding how that is going to impact our business going forward. Today, we're not directly investing into those carbon capture and sequestration or hydrogen arenas. Today, we're focused on driving the real tangible emissions reductions that I talked about and supplying the world the energy needs that it needs to run its economy and improve modern life. And so that's something I think down the road, but certainly following it closely and appreciating the amount of innovation that's occurring in those spaces.

I think it's really just an order of operations piece for us. I think I would agree with the everything on the table prospect, but today we're making rapid and significant reductions by focusing on our operations. And so clearly down the road, we'll continue to evaluate other opportunities, but today that feels like the right place for us to play.

Yeah, I think our perspective into this is everything we evaluate, we evaluate through a value lens, and we look at full-cycle returns to think that through. And so our strategic priorities are super clear: we're reducing debt and we're driving free cash flow to fuel cash returns to our shareholders. And that's the place we're focused. We introduced a new capital allocation framework just this fall in September, and we're just this quarter executing on those incremental cash returns, and we'll announce our quarter next week. So more to follow on that front, but we're focused on those strategic priorities.

Well, look, I think our business model is not reliant on external financing. We're free cash flow generating, so this is a place where we don't need financing to be successful and achieve our strategic ambitions. I think if you look at our valuation, there's lots of opportunity for that to shift. And it's really where we're focused.

Yeah, I think we're making significant progress on that. We're not satisfied, but we're making significant progress. I think the equities have performed quite well year to date and outperformed more recently. And so, I mentioned we're just into the first quarter of executing on that new cap allocation framework. So I think this is something we've just got to continue to be focused on executing and delivering.

Yeah, I think the prospect of inflation is one that everybody in the economy is wrestling with. And we wouldn't hope for the environment to be inflationary, but it is a place where we can differentiate. Our team's proven time and again we're one of the leaders at using innovation to drive efficiency improvements. And so in the face of that inflation pressure, we expect to do better than the peers. And as we guide towards our 2022 activity, I'm enthusiastic about how we'll perform in that environment.