Now that America's presidential race is decided, Canada's need to seek energy markets beyond the U.S. has never been more urgent.
This article appears in the January, 2013 issue of Oilweek; photo from here
By Peter McKenzie-Brown
The day after America’s
presidential election, the Calgary-based Canadian Defence and Foreign Affairs
Institute (CDFAI) hosted a panel discussion on the political and economic
significance of President Obama’s second term.
Some of the most
interesting observations came from Jonathan Baron, an American lobbyist with a primarily
Republican clientele. “What you need to know about Republicans and Democrats is
that they hear different things when they hear the word energy. Say ‘energy’ to
a Republican, and he will think about increasing energy production. Say
‘energy’ to a Democrat, and she will think about mitigating environmental
impacts. It’s like another world.”
Now he was on a roll.
“When a Republican thinks about Canada’s energy resources,” he added, “they
really do think that these resources belong to America. There isn’t a strong
sense that they are a sovereign asset for Canadians. For Republicans, the idea
of North American energy security is a no-brainer.”
The irony is that the
International Energy Agency issued its annual report a few days after this
panel discussion – a report which seemed to put the cat among the pigeons. According
to the IEA, “The global energy map is changing, with potentially far-reaching
consequences for energy markets and trade. It is being redrawn by the
resurgence in oil and gas production in the United States and could be further
reshaped by a retreat from nuclear power in some countries, continued rapid
growth in the use of wind and solar technologies and by the global spread of
unconventional gas production.” According to this respected agency, the US will
become the world’s top oil producer by 2017, and could be nearing energy
self-sufficiency two decades later.
A bearish outlook for
Canada’s oil producers, is this report worth long-term worry? Probably not. Since
the 1972 publication of The Limits to
Growth, a book which forecast shortages of virtually every commodity by the
end of the 20th Century, a good rule of thumb has been that
long-term natural resource forecasts are always wrong.
To a large extent, this
is because major forecasts are political. IEA member governments and some oil
companies vet them before they go public. In the highly likely case that the
United States reviewed the IEA forecast before it hit the streets, they would
have wanted the agency’s report to justify fracking, Keystone, perhaps, and the
West’s embargo of Iranian oil. As one commentator observed, “Forecasters test
scenarios – they assess economic and energy trends to produce numbers. Among
the enormous range of possibilities, one forecast is chosen for public
purposes.” Also, of course, since Adam Smith published The Wealth of Nations in the 18th century, economies
have shown repeatedly that markets eventually equilibrate.
If you focus instead on
the near-term implications of the recent US election, there is a lot of good
news.
·
Before campaigning began, global warming
environmentalists developed traction by opposing Keystone. Notwithstanding
their public protests, sources Oilweek
spoke to believe the project has a good likelihood of getting State Department
approval. An okay would increase the integration of Canadian oil and bitumen
production into US markets and provide tidewater access to overseas buyers.
·
On the gas side, this commodity will expand its
market for power generation, and Canadians will perhaps gain an advantage in the
export of this commodity overseas.
Keystone
President Obama’s re-election
was a near-term good news story for Canada’s oil patch. If approved, he
Keystone Pipeline will move bitumen to the 7.6 million barrel-per-day Gulf Coast
market. It is worth remembering that the Department of State originally
deferred its decision on the pipeline as a political gesture, so as not to alienate
environmentalists during the election. The reason given was concern about a
proposed segment of the pipeline route through environmentally sensitive sand
hills in Nebraska.
According to Maryscot
(“Scotty”) Greenwood, a left-leaning Democrat, “There is awareness in the
United States about the importance of energy from Canada and I believe that
awareness was heightened during the campaign. There is a renewed appreciation of
the importance of North American energy independence.” She is reasonably confident
the project will go ahead, using TCPL’s revised route. In a separate interview,
AJM Deloitte’s geoscience director Dave Russum enumerated the reasons the State
Department might stand behind Keystone: “Job creation, economy boost in the US,
secure supply.”
For Canada, the benefits
are different. Keystone would provide Canadian oil sands producers with direct
access to America’s single biggest oil market. Thus that pipeline’s throughput would
not be subject to the price differentials that have become chronic – especially
for the oilsands sector. More importantly, the project would provide Canadian
producers with access to tidewater. This would mean overseas markets and
international prices. Meanwhile “we are in for a rocky time in the Canadian
industry regardless of who is in the White House,” according to Russum. “When oil
prices were more than $100, many projects looked pretty attractive, but current
prices in the $85 range make the economics much less robust.”
Carbon emissions kept
coming up during the CDFAI forum, and Greenwood stressed the political
importance of the environmental constituency. “During the second term of the
Obama administration (president Obama) has an imperative to deal with some new
legislation which covers coal ash, soot and other environment-related
questions. This will affect core constituencies. However, there is not
necessarily a conflict between these two. You can look after these regulatory
issues, and also do Keystone.”
Right-leaning Jonathon
Baron disagreed. “The environmental community feels frustrated, so (their
protests) have moved down to the state level. The president is going to have to
do quite an interesting balancing act to deal with fracturing and Keystone.”
A master of Realpolitik, Baron
offered hope for crude oil prices – but hope with a bitter taste. “There’s
going to be more instability in the Middle East during an Obama presidency,” he
said; after all, the president campaigned on having ended “a decade of war.” If
the president is not willing to use American might in response to Iran’s
apparent nuclear build-up, Baron argued, there will be mischief in the Middle
East. “That volatility means high prices going forward. That has important
implications in American markets for Canadian oil sands and natural gas.”
Gas Prices and Markets
Canada’s gas industry is
likely to benefit from President Obama’s next term through the conversion of
its power industry to natural gas. According to Scotty Greenwood, who served
for two terms as a staffer in the Clinton White House, suggested that he “is
looking for ways to regulate more stringently, to pivot to natural gas because
it’s a cleaner burning fuel than coal. He does have a desire to build demand
for natural gas and to clean up the coal industry.” Since it’s his second term,
the president will find America’s powerful coal lobbies less daunting.
“During the election campaign
Obama virtually did say ‘I hate coal!’” Baron told the CDFAI audience. “Cheap
natural gas has given the president an opportunity that didn’t exist before.
Because the United States knows that it is not going to be able to implement a
carbon tax, it will instead increase the price of coal through regulation,
making coal less competitive.”
North American gas
markets are likely to expand at the expense of coal. In itself, this may not be
cause for much celebration in Canada, since the United States is nearing
self-sufficiency in this commodity, and its production and transportation costs
are lower. However, Greenwood noted another area where the US political environment
could unwittingly favour Canadian natural gas.
In the American political
system, Congressional committees have plenty of muscle, and it matters who
serves as the chair. The incoming chair of the Senate’s powerful Energy and
Natural Resource Committee is Democrat Ron Wyden. Wyden believes large-scale
LNG exports would raise natural gas prices in the US, harming the economy. In
the past he has argued that Washington should impose a “timeout” on new LNG
export facilities, pending review. “That could be the end politically for (additional)
natural gas exports from United States,” said Greenwood.
“There is a gigantic and
very legitimate debate about whether we should be exporting natural gas,” she
added. “My observation is that in the United States it will be politically very
difficult to export (gas to other countries).…This could be a big opportunity
for Canada, since the same political challenges do not exist here.” Baron
concurred. “There are already a number of LNG export projects in the United States.
LNG exports along with hydraulic fracturing will be major issues during the
president’s second term.”
While the Americans
dither, Canada could approve and construct facilities for overseas markets. Eastern
Canada already imports about two billion cubic feet per day of gas from the US,
and “this is a cheaper source than Western Canada. We are of course a net
exporter to the US, but that role is shrinking. We need alternative exports” said
AJM Deloitte’s Russum. He observes that Canada is ‘way behind Australia and
other countries in developing or expanding LNG facilities. While the US already
has gas export facilities in operation, Canada’s first plant won’t be ready
until 2019.
“To me the problem is
that Canada can’t compete with gas supplies that are abundant, cheaper, and
closer to market in the US – for example, Marcellus, Fayetteville, Barnett and
Eagleford,” he added. “Gas is still a fossil fuel, so while it is cleaner and
more environmentally friendly than coal, it still has the fossil fuel stigma and
the fracking stigma. I’m unclear whether it is a problem or a solution in the
US. In any case, if prices rise the US has shown it is able to drill and bring
on new volumes of shale gas very quickly, which would in turn dampen prices.” Russum
added that “prices for natural gas need to be considerably higher to make the
industry profitable here.”
The US/Canada Alliance
Prime Minister Brian
Mulroney once famously said that “the relationships (between prime ministers
and presidents) are absolutely indispensable. If you don’t have a friendly and
constructive personal relationship with the president of the United States,
nothing is going to happen.”
According to Greenwood,
the Canada/US relationship is “hugely important, writ large. It’s much bigger
and more integrated than any personality. It matters who is in the White House,
but in the end the relationship will do well because it has to, and because of
all the history between the two countries.” She added that “the US government
does not want to prevent Canadian development in any way. We have very close
relationships, and those relationships are of great value on both sides of the
border. I think the United States, as Canada’s most important commercial
partner, wants Canada to be commercially successful in every possible way.”
Colin Robinson, a
Canadian diplomat who helped broker the Canada-US Free Trade Agreement and
NAFTA, stressed the importance of international cooperation to help prevent trade
disputes. “The first lumber dispute between Canada and the United States goes
back to the time of George Washington,” he reminded the CDFAI audience. “These
kinds of things do lead to protectionism. In a lot of cases, we have to put competition
aside and think of things as North American.”
“Whenever (a diplomat has)
to do something in the United States you have to do it through the White House,”
according to Baron. The State Department is critical for international affairs,
but other parts of government are in play. Formerly Canada’s ambassador to the
US, Frank McKenna once said that “The president can love you to death, but that
doesn’t mean you don’t have constant harassment from Congress….The tone at the
top helps, but it’s not conclusive.”
As this article went to press,
there was optimism that the United States would not fall over the “fiscal
cliff.” For the sake of talking about the near-term future, this article
assumes a compromise that won’t suffocate North America’s economies. If America
remains a house divided, though, Canada needs to declare greater independence
from US commodity markets. That truth is self-evident.
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