Independence Day

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 20^th 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 18^th 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.

The Case against Dirty Oil

This article appears in the February 2009 issue of Oilsands Review; graphic taken from here.

By Peter McKenzie-Brown

“Two wars, a planet in peril, the worst financial crisis in a century.” In his victory speech in November, with those words Barack Obama summed up the challenges his new administration would face.

The phrase “a planet in peril” was, of course, shorthand for climate change and other environmental troubles. For those in the oilsands industry, it seemed to threaten lost market share. After all, during the campaign Senator Obama promised to ban imports of dirty oil – that is, oil that releases a great deal of CO2 during production and upgrading. At present, the United States is the only market for Alberta’s bitumen and upgraded oil.

This article suggests that the US market for oilsands producers may not be as secure as Canadian producers may hope. Canada can compete in the market, but it may increasingly be at the expense of other global oil producers as this continent’s energy mix changes. There are a lot of caveats to that theme – not least of which is that the drive to greener bitumen production is now an almost unstoppable force. In Canada’s traditional export market, the greenest producers may become the most successful players.

American legislators have already begun to target it as an easy way to reduce emissions without hurting American voters. For example, Congress has already passed a law banning federal government agencies from directly promoting energy projects that will emit greater greenhouse-gas emissions over their entire life cycle than conventional oil. A section of the US Energy Independence and Security Act of 2007 prevents federal agencies such as the military from entering into fuel contracts that directly encourage unconventional energy development. This could include the oilsands.

For its part, California has passed regulations requiring fuel suppliers to reduce the emissions from the fuel they sell – and to account for those emissions right back to the original source of production.

Energy calculus of this kind is unprecedented, and if followed to its logical conclusion could be devastating for Canada. The world’s largest per capita consumers of energy, Canadians are also the world’s largest per capita producers of CO2. Regulations that limit the carbon quotient in other imported goods could shut a variety of Canadian products out of American markets. Whether or not such rules will ever apply to other commodities, for oilsands producers these developments are immediate matters of deep concern.

Will President Obama, who often used green rhetoric on the campaign trail, continue down that road? “No”, according to Murray Smith – a one-time provincial energy minister who until recently served as Alberta’s representative in Washington, D.C.

“(Obama) was trained in the very tough political environment of Chicago. In order to operate inside today’s political conditions,” Smith said, he “must govern from the centre. From November 4th to the 5th, his move from the political spectrum of the left to the political spectrum of the middle was virtually instantaneous. So presidential candidate oratory that mentioned the oil and gas sector as a target for higher taxes, promises to increase environmental efficiency and to take other measures for energy efficiency measures are either already law or just promises.”

Smith added that the president is a “former senator from an important coal-producing state, a state that relies almost exclusively on coal for electricity generation. In fact, he sponsored an important coal-to-liquids bill” – albeit one that didn’t make it out of the Democratic caucus. In Smith’s view, “energy and environment will drop to tertiary issues as the USA digs itself out of the economic hole that the mortgage and housing crises dug.”

As if in support of this view of the world, in one of his first radio addresses after his win the president-elect put his energy program in the context of infrastructure projects. “We’ll put people back to work...building wind farms and solar panels; fuel-efficient cars and the alternative energy technologies that can free us from our dependence on foreign oil and keep our economy competitive in the years ahead.”

Unwilling to take a chance, the day after the election prime minister Stephen Harper proposed a joint US-Canada pact on climate change which would exempt production from Alberta’s oilsands from import controls on the grounds that it could contribute to Obama’s goal of making the US independent of Middle East sources of supply.

The Tar Sands Controversy: In Canada, the dirty oil question became a high-profile public issue with the publication of a rambling, ideologically incoherent and highly inaccurate book on the oilsands. Author Andrew Nikiforuk and his publisher promoted the book well, and environmental issues surrounding oilsands production got a great deal of play in the media. This touched raw environmental nerves across the continent.

Consider some of his statements, however. “Many tar sand projects puff out nearly a million tons of carbon dioxide a year.... A million tons – a megaton – is enough lethal carbon dioxide to fill one million two-storey, three-bedroom homes and suffocate every occupant.” Where do you start with such a statement? CO2 is no more lethal than water, and far less likely to become a disagreeable or life-threatening localized pollutant. Like water, it is essential for life.

Nikiforuk’s sloppiness is extraordinary. For example, his diatribe on carbon capture and storage (CCS) stumbles from technical blunder to unsubstantiated claim and shows no comprehension of the economics of the concept. Then, astonishingly, he pronounces the whole idea – a demonstrably safe (though expensive) system of pollution reduction already being used around the world – to be “morally bankrupt.” This seems an absurd term to apply to technologies that remove pollutants.

Straightening out the endless errors in this book would be a thankless and time-consuming job, but let the following illustrate Nikiforuk’s efforts to, apparently, deliberately mislead. “The average Canadian burns twenty-five barrels of oil a year,” he claims. “The average Albertan burns sixty barrels, due to an above-average use of fossil fuel toys such as ATVs, trucks and SUVs.”

In fact, Alberta’s energy use is higher than the national average because its industry is heavily focused on the energy-intensive businesses of producing and processing energy – including growing volumes of unconventional oil and gas, which are especially energy intensive. Consumer toys have almost nothing to do with it. The author of a book on the oilsands would surely know this.

The Princeton Wedges: At one end of the climate change spectrum are demagogues like Nikiforuk. At the other are those who say the issues are imaginary or, since they are unsolvable, irrelevant. A more pragmatic part of this latter group are those who, like St. Augustine 1500 years ago, ask to be granted “chastity and continence, but not yet.” Although concerned about the challenge, they hope CO2 emissions will be rendered “tertiary issues” because of the world’s financial meltdown or lack of political will, so they can postpone the cost of action.

In the centre are those concerned about the scientific consensus on climate change and global warming, and they are the group who will ensure the issue does not go away. Dirty oil became a campaign issue in Obama’s dignified presidential campaign because it is now a mainstream concern. That is unlikely to change.

A few years ago, physicist Robert Socolow and ecologist Stephen Pacala from Princeton University wrote that “Humanity already possesses the fundamental scientific, technical, and industrial know-how to solve the carbon and climate problem for the next half-century…. Although no element is a credible candidate for doing the entire job (or even half the job) by itself, the portfolio as a whole is large enough that not every element has to be used.” The world of environmental politics took note, and the concept of stabilization wedges – commonly called the “Princeton wedges” – was born. The wedges represent emissions that can be taken out of the world’s growing volumes of pollution by different techniques. In many quarters, they revolutionized thinking about greenhouse gas emissions.

Socolow and Pacala identified 15 strategies that could reduce business-as-usual increases in emissions by 25 billion tonnes of emissions over a 50-year period. They include using more efficient vehicles, developing more efficient buildings, and using natural gas instead of coal. Each stabilization wedge would lower the angle of the line representing carbon-emissions growth; together, they would reduce CO2 emissions enough to stabilize its concentration in the atmosphere. To put the magnitude of the problem in perspective, human activity is now adding 7 billion tonnes into the atmosphere annually. Unchecked, that figure will double in the next half century.

Each Princeton wedge is a steel-jacketed bullet in the struggle against CO2 pollution. For the issue of CO2 pollution as a whole, there are no silver bullets – especially since 85 per cent or more of CO2 emissions from oil come out of the consumer’s tailpipe.

For the oilsands industry, however, one bullet is at least a silver alloy. The province is counting on CCS to meet 70 per cent of its long-term GHG reduction targets. Compared to a “business-as-usual” case, the province’s climate change strategy has targeted annual reductions of 200 million tonnes of CO2 per year by 2050 – compared to that slippery “business-as-usual” case, a 14 per cent reduction from 2005 levels. Of total reductions, 139 million tonnes would come from CCS. Not bad for a morally bankrupt strategy.

Back to the Future: However, the real risk to the oilsands market may not arise directly from environmental issues. Perhaps the new American administration will take action to back out crude oil demand by frog-marching a shift to electric and natural-gas fuelled vehicles. Such a development would have mixed implications for the petroleum sector.

In a recent presentation to the Canadian Society for Unconventional Gas, ARC Energy’s Peter Tertzakian proposed that rapid change in the transportation fuel mix could represent opportunity for gas producers. “We are in a period that is very 1973-ish,” he said. “Things have to change. About 60 per cent of our energy comes from coal and oil, and they are disadvantaged fuels” for several reasons. Both commodities present serious environmental problems. Oil prices in general are volatile, and Middle Eastern oil also carries a lot of geopolitical baggage. In the US there is a strong sense that the country has to stop importing oil from Persian Gulf suppliers.

According to Tertzakian, “There are policies coming at us,” and they will lead to fundamental changes to North America’s energy mix. “The two opportunists are renewables and natural gas, and I’m here to tell you that renewables are winning.”

To prosper in the changing environment, he said, the gas industry needs to think strategically. “Gas is a clean fuel. It’s plentiful and scalable. It’s time this industry took control and said this fuel is the fuel of the future. If we don’t, we’ll remain hostage to a situation in which all we do to market our (natural gas) production is to sit around the table waiting for the weather report.”

For the oilsands sector, strategic thinking needs to take different forms. By year-end 2009, supply from the oilsands is likely to increase by 150,000 barrels per day, and that supply is going to be competing in a recessionary market. Looking to the longer term, the new US administration and state governments will likely find additional ways to discourage the consumption of oil and the shift to other fuels.

A pipeline to the Pacific is in order, and Enbridge has already begun to develop its Gateway project. One appeal of this line is that Canadian producers would get bids on their crude oil from other markets than the United States. Also, of course, pipeline costs would be less. The downside is that it may come too late to avert a near-term supply glut.

If crude oil demand is going to continually shrink in North America, suppliers to the diminishing market will have to compete on geopolitical, economic and environmental terms. This will involve the continuation of advertising campaigns like those of PetroCanada, Husky Energy, Shell, BP and other integrated firms, which paint the corporation green. More importantly, it will require measures which, like carbon capture and storage, directly reduce emissions.

To win the battle for hearts and minds, both industry and government will need to fight the perception that oilsands production is “dirty oil.” At present, 20 companies – including oilsands players Canadian Natural Resources, ConocoPhillips, Shell and Petro-Canada and coal-fuelled electricity producers Epcor and TransAlta – are vying for a $2 billion pot the province has made available to kick-start CCS within Alberta. As those projects go into operation, Alberta will become a global leader in this technology. The province has also put aside $2 billion to promote public transit.

To make the province’s oilsands production more marketable, provincial strategy is clearly to build a greener image. A three-year, $25 million public relations initiative to improve Alberta’s image is a tiny part of a much larger package.