(Photo: Todd Korol)
Funny, isn’t it, that just as investment in Canada’s vast reserves of oilsands hits a new high—$134 billion worth of projects under construction or soon to start—we should be struck by an unexpected question: Does anyone even want our oil? Given recent events, you couldn’t blame us for wondering.
For virtually all of the oilsands’ 45-year operating history, the overwhelming challenge was at the upstream end, finding technically and economically viable ways of getting the oil out of the sand, and coaxing brave investors to fund them. In the blink of an eye, the greatest obstacle has drifted downstream to the relatively simple matter of getting the stuff to market.
The obvious solution is to build pipelines emanating from northern Alberta to deliver more of our crude to the world. But recent events have shown that to be more problematic than anyone could have guessed.
Certainly the announcement on Jan. 18 was an abrupt and unexpected reality check. Forced to render an immediate decision on the controversial Keystone XL pipeline proposal by Republican opponents in Congress, U.S. President Barack Obama turned down would-be builder TransCanada Corp.’s application.
The Calgary-based pipeline company was free to reapply, the State Department was quick to add, following an altered route around Nebraska’s ecologically sensitive Sandhills region on its way to the Gulf Coast. But approval then would come in 2013 at the earliest, and there would still be an uphill battle against an environmental movement that views the oilsands as a climate catastrophe.
The decision disproved a long-held assumption of TransCanada, the energy industry and the Harper government: that when push came to shove, the U.S. would drop its pretensions, do the sensible thing and embrace Canadian oil. “To have [Keystone] turned down for the reasons being indicated is horrible for our industry, and it’s a horrible precedent,” Pat Daniel, president and CEO of rival pipeline company Enbridge, admitted at an investor conference. “It’s bad in terms of future approvals. It will only embolden those opposed to Gateway and other new project developments.”
It feels as if Canada’s oilpatch, so busy digging holes in the northern Alberta soil, has raised its head just long enough to discover that nobody wants our oil. For others, it’s a wake-up call of another kind, as the country creeps toward what Slate columnist Will Oremus called “a jingoistic petro-state.” Interests on both sides of Canada’s widening energy divide are calling for the federal government to take the reins and impose a new national energy strategy.
Before embarking on a series of ill-advised and ultimately costly policy missteps, though, Canadians need to calm down, take stock of the independently regulated and market-driven energy sector we have now and decide for ourselves what’s in the national interest. We may find that the solutions offered by the more strident voices out there—both for and against pipeline development—are not in our interest after all. Most important, we need to come to terms with the fact that Canada is now an oil nation. And rather than apologize, we should responsibly manage, to the greatest possible benefit, the enormous wealth with which our land was gifted.
Make no mistake, Canadians in large part have oil to thank for the rise in our standard of living, and the relative solvency of our government since the late 1990s. Today, oil is Canada’s largest single earner of foreign exchange, a shot in the arm for flagging industrial productivity and a subject on which Canadians have developed unparalleled expertise.
“It’s something that creates employment and wealth and income from coast to coast,” says Patricia Mohr, vice-president, economics for the Bank of Nova Scotia. The direct beneficiaries include migrant workers from the Atlantic provinces bringing paycheques home from Alberta, bankers, lawyers and steelworkers in Ontario as well as oil and gas industry workers (not to mention public-sector employees and taxpayers) in Western Canada.
Oil’s dominance in the economy is such that maintenance shutdowns of oilsands plants were blamed for a 0.1% pullback in GDP in November. But it’s not turning Canadians back into hewers of wood and drawers of water, the economists argue. Canada’s oil resources are huge but hard to access, hence extracting them requires a lot of ingenuity and capital expenditure. “This is not a low-tech industry. Quite the opposite,” Mohr says.
In a global economy plagued by overcapacity and lack of demand, oil is one product people need and will pay top dollar for. The world consumes about 89 million barrels of oil a day. Canada’s production is approaching 4 million barrels per day, with most of that coming from the oilsands. We are now one of the largest oil producers in the world. Many are surprised to hear that we are in sixth spot among oil-producing nations—third if you combine oil and natural gas—ahead of well-known petro-giants such as Nigeria and Norway.
Unfortunately, that status comes with an asterisk. As Shell Canada president Lorraine Mitchelmore lamented in a speech last September, “We are the only major oil producer that does not have access to a global market.” Using less than a million of those barrels a day domestically, we export more than two million barrels, virtually all of it to the United States. Curiously, the U.S. market is actually shrinking, from 20 million barrels per day before the recession to 19 million today. But this illustrates an important point about the oilsands’ role in world energy supply going forward: Canadian exports are growing as traditional sources of oil, such as Mexico and Venezuela, become depleted. In other words, even as the demand for oil peaks and economies shift to other sources of energy such as natural gas and renewables, the world will still need oil from the oilsands to replace the old sources.
In fact, the International Energy Agency, which represents energy-consuming nations, estimates that the global demand for energy will grow by nearly 50% by 2035. Gas and renewables will be hard-pressed to meet that demand, let alone replace the existing supply of oil, coal and nuclear power too.
While Enbridge’s planned reversal of the Seaway pipeline between Cushing, Okla., and Texas, to be completed in a year or so, will ease the tightest pinch point between Alberta and the Gulf Coast, the pipes carrying oil out of Alberta itself will be fully committed by 2016 or 2017, according to Calgary-based investment bank Peters & Co. Time is running out before the rising production out of the oilsands becomes literally stranded, and the boom goes bust.
Canada’s oil exports in 2010 were $50.4 billion, accounting for virtually all of Canada’s trade surplus with the U.S. and then some. Were it not for oil, Canada would have a $20-billion-a-year trade deficit with the U.S. As it is, we have a trade deficit with the rest of the world, for example $31.5 billion with China in 2010, which is why exporting oil to that country would help ease the imbalance of payments. At a planned capacity of 525,000 barrels per day and a price of $100 a barrel, Northern Gateway alone would boost Canada’s exports by more than $18 billion a year, to the very countries with which we have the biggest trade deficits.
But wait, there’s more. Most of our oil is currently sold at a discount. Existing export pipeline capacity out of Alberta mostly terminates in the Midwest, which is glutted with oil coming from not only the oilsands but from the newly prolific Bakken formation in North Dakota and Saskatchewan. If, by diverting some of that supply to the Gulf Coast or offshore, new pipelines eliminated the spread between the continental North American (West Texas Intermediate) and world (Brent) benchmark prices, the money coming into Canada would grow.
Last summer Peter Tertzakian, chief energy economist at Calgary-based ARC Financial, estimated that Canada’s producers were leaving $4.6 billion a year on the table simply because of the WTI-Brent differential. In December, a report commissioned by Alberta Energy from Houston-based consultant Wood Mackenzie estimated that, without greater pipeline access to the West Coast, that forfeited revenue would rise to $8 billion a year after 2017.
Seeking to determine exactly what the lack of export capacity is costing Canada and will cost it in the future, a team from the University of Calgary’s School of Public Policy recently modelled the impact of new Pacific and Gulf Coast pipelines. It concluding that access to these markets would boost Canada’s GDP by $131 billion between 2016 and 2030 and add 1% a year to GDP growth throughout the period, creating 649,000 person-years of employment and enriching government coffers (mostly Alberta’s, but the federal and other provincial governments’ too) by $27 billion.
This explains why the Harper government has so transparently taken sides in the pipeline debate and is so fixated on diversifying Canada’s energy markets. In addition to condemning the influence of foreign environmental groups in an open letter dated Jan. 9, Natural Resources Minister Joe Oliver expressed a need for “quicker and more streamlined” project approvals, in contrast to the current “slow, complex and cumbersome regulatory process.” In a speech a week later in Vancouver, he telegraphed a willingness to confront unreasonable obstruction of Gateway by B.C. First Nations with unresolved land claims, if it comes to that: “We have a moral and constitutional obligation to consult and to accommodate, and if that doesn’t work, to justify.”
However the Conservative government has stopped short of proposing what the oil and gas industry, the Alberta government and, intriguingly, a number of interest groups at the opposite end of the political spectrum are calling for: a national energy strategy.
After decades of vigilance against any federal incursion into energy policy, energy producers last year formed the Energy Policy Institute of Canada (EPIC) “to develop a comprehensive, pan-Canadian approach to energy.” The first order of business was pushing for “major changes to the country’s regulatory system” that would allow faster, less costly vetting of projects that benefit the country as a whole. At a meeting of provincial energy ministers in Kananaskis, Alta., last July, host Ron Liepert of Alberta (who earlier in the year wished out loud that Obama would just “sign the bloody order” approving Keystone XL) tried to rally support for a national strategy, only to have his Ontario and Quebec counterparts disavow the meeting’s action plan upon returning home.
Nonetheless the broader oilpatch is increasingly worried that projects like Gateway will never fly under the status quo. More weight must be given to the national interest and less to provincial and local ones, they insist. As Roger Gibbins, president and CEO of the Canada West Foundation, wrote recently, “Without an encompassing national energy strategy, the development of alternative markets could be next to impossible.”
Meanwhile groups ranging from the Council of Canadians to the Green Party are pushing for a national energy strategy that would instead steer the country away from fossil fuels and encourage renewable alternatives. Labour groups, in turn, want a more protectionist policy that would still embrace the oilsands but force producers to upgrade bitumen in Canada and pipe western oil to eastern refineries.
That so many disparate interests are demanding a national energy strategy, though, could be an indication of just how half-baked an idea it is. First, it runs up against the provinces’ constitutionally enshrined jurisdiction over energy. Secondly, such a strategy would be hard pressed to achieve other goals, such as growing our refining industry. Within Canada, you can only upgrade bitumen, the solid-state oil extracted from the oilsands—we can’t do the higher-value refining work because the end products such as gasoline are explosive and dangerous to transport by tanker or pipeline. Even then, “it’s too late” to build the needed upgrading capacity in Canada, says Michael Moore, who led the U of C study. “You’d spend a lot of money, and you wouldn’t be able to out-compete” the world’s largest refining cluster on the U.S. Gulf Coast, which is already geared to bitumen-like heavy oil.
Even streamlining the approval process is flawed insofar as it would undermine regulatory integrity. “The one thing that makes the regulatory institution valuable over time is that it is independent of policy-makers,” says Moore, a former California regulator. “Without that independence, among other things, there’s absolutely no confidence in capital markets for what’s going to happen. When you start interfering or second-guessing your regulators, you’re guaranteeing you’re going to shoot yourself in the foot.”
Broadly speaking, a national energy strategy that intervenes in what is today a market-driven industry risks further enmeshing the fate of government and industry, and socializes the risks of bad decisions. Mexico and Venezuela both have vigorous national energy strategies, Moore notes. “The government intervention in that case has not made them better off.”
Besides, the truth is most energy strategies get ignored like constitutions in a dictatorship. “I have studied and written a gazillion energy policies,” says Mark Jaccard, an environmental economist at Simon Fraser University and author of Sustainable Fossil Fuels. “They all say the same thing: develop local resources, care about the environment, keep prices down, allow markets to work, interfere in markets as necessary. In other words, they are useless.”
What Canada needs, Jaccard argues, is a climate policy with teeth to help meet Stephen Harper’s stated goal of reducing greenhouse-gas emissions by 65% by 2050. But he doesn’t see it happening, in part because it’s virtually incompatible with further developing the oilsands. He points to a recent Massachusetts Institute of Technology study which modelled the growth of the oilsands industry under three scenarios. Assuming no climate policy, oilsands production would grow sixfold, the researchers determined. If emissions caps are implemented only in developed countries, that growth would be reduced by 65%, and much of the upgrading activity would migrate to developing countries. In the final scenario, where emissions caps are adopted worldwide, “Canadian bitumen production becomes essentially non-viable”—not because its own carbon costs would be prohibitively high, but because the demand for and price of oil would drop below the oilsands’ already high cost of production.
Others, however, see a middle ground where a proactive Canadian climate policy could not only coexist with further development of the oilsands, but make the industry less vulnerable to policy shifts in other countries. “The debate about the oilsands has become polarized in a way that is unproductive from an economic as well as an ecological standpoint,” says Andrew Heintzman, co-founder of Investeco Capital, a Toronto-based fund manager focused on green technology. Environmental groups advocating a shutdown of the oilsands, and opponents like Ethical Oil, a pro-oilsands NGO, are both ignoring important realities, he says. Heintzman believes a more practical answer lies in encouraging technology development and best practices that cut emissions. “There’s a whole range of things you can do. Carbon pricing is the most obvious and probably the most effective one.”
For all Oliver’s talk of foreign-funded “radical groups” hijacking the Northern Gateway process, the hearings so far have been dominated by local, primarily First Nations presentations, and they have been overwhelmingly opposed to the project. They’ve established some incontrovertible facts: the proposed export corridor is virgin territory for oil pipelines and tankers, featuring some of Canada’s most prolific salmon rivers and marine fisheries, and history shows that spills from pipelines are only a matter of time. Enbridge’s answer has been to make Gateway safer than any pipeline so far built, crossing rivers through sunken tunnels and requiring unprecedented navigational safeguards for tankers—all of which will be double-hulled. To those who would say there won’t be any local benefits, the company is offering jobs and a revenue-generating stake in the pipeline to First Nations located within 80 kilometres of the line. It’s fair to say the jury is still out.
The politics around Keystone XL in the U.S., meanwhile, are inching ever further from a timely approval. The brinkmanship of Republican supporters has had the effect of hardening Democratic opposition to the pipeline, meaning it may only go through under a Republican president.
This being out of Canadians’ control, however, what’s to be done? First, Canada needs to maintain regulatory integrity, for the sake of the proponents as much as environmental or community interests. Those who would speed up the process, including Oliver, often cite the Mackenzie natural gas pipeline to the Arctic as an example of a project effectively killed by a nine-year approval process. But there’s another way of looking at Mackenzie. Imagine it had been approved earlier and was now nearing completion. Natural gas prices have plunged with the rise of shale gas—for decades, many analysts say—meaning the Mackenzie project would be unprofitable for producers and pipeline operators alike. The regulatory process, which is a part of any well-functioning free market, in fact saved private industry from too hastily sinking billions into a huge white elephant.
“Canada has all the institutional infrastructure in place to provide forums for the requisite decision-making and taking into account economic factors, sustainability factors, environmental factors,” says Geoffrey Cann, oil and gas consulting lead for Deloitte Canada. “If we let these institutions work, they should generate the right answer”—that is, whether or not a particular project is in the public interest.
Second, we should let the market take the lead in resolving its own distortions. Keystone XL or Gateway are not the only options to grow and diversify Canada’s oil markets. Old pipelines are being repurposed and new ones built to overcome specific bottlenecks currently keeping Canadian exports from refineries in the Gulf Coast, eastern Canada and the U.S. Eastern Seaboard. Railways, though more costly, are carrying crude from the Bakken and could possibly carry bitumen to the Pacific too. Kinder Morgan’s Trans-Mountain pipeline from Edmonton to Vancouver, which already supplies 300,000 barrels a day to West Coast and Asian refiners, is looking to expand. Some are even talking about a pipeline to a terminal on Hudson Bay. “The private market will absolutely solve the problems around oil price differentials. They’re doing that right now,” Cann says.
Finally, if the will of Canadians is to more vigorously address climate change, we should adopt a climate policy that does that. We shouldn’t approach it through the back door of an energy strategy or demonize one sector. Use policy tools that harness the competition between companies and the self-interest of consumers, such as carbon pricing, to lower emissions. Cenovus Energy is reportedly producing bitumen at or below the average carbon footprint of all oil consumed in North America at its Christina Lake and Foster Creek oilsands projects. We need policies that reward such efforts.
You don’t have to be a cheerleader for the fossil fuel industry, just a supporter of free markets, to recognize that allowing oil exports to grow is Canada’s best option to maintain the standard of living to which the country has become accustomed—not just in wide-screen TVs, but in access to post-secondary education, dependable infrastructure and high-tech cancer treatments.
“If you want to have an economy that is strong and is generating good employment opportunities, this is something that does that,” says Scotiabank’s Mohr. “It’s tricky to question things that work well and think you’re going to be able to replace that with something else.” Growing that industry beyond today’s level, though, will require new export capacity, she states unequivocally. “It’s not only a national priority. It’s actually a national necessity.”
