Recently, Andrew Leach, an energy and environmental economist and political scientist at the University of Calgary, observed that there are a number of things that are currently challenging the oil and gas industry in Canada, particularly the oil sands sector, the largest part of that industry, some of them not the fault of Canadian politicians or environmental ‘activists’.
He noted that the Canadian Association of Petroleum Producers (CAPP) said that “Pipeline constraints, a lack of market diversity, and inefficient regulations are largely responsible for holding back Canada’s oil sector.” He also said that Jason Kenney, Alberta’s premier, likes to blame his predecessor, Rachel Notley, and the current prime minister of Canada, Justin Trudeau, for some of the industry’s woes.
Leaving aside that it is normal and typical, if not edifying, for provincial premiers to bash their predecessors, and especially to bash the federal government, there are some real things that both Ms. Notley did and Mr. Trudeau did that made the situation for the sector, and the industry, worse than it already was. Ms. Notley raised corporate income taxes, which made profitability, already difficult after a steep plunge in oil prices, that much more difficult, and made investment much less attractive in any industry. Her regime also increased regulations, including safety and pollution regulations, which increased burdens and liability on the hard-pressed industry.
According to the Edmonton Sun in 2017, a leaked Alberta government document that, at the time, the United Conservative Party opposition obtained projected that new methane and CO2 emission regulations to go into effect on January 1st of 2018 could lead to loss of investment of billions of dollars and the loss of thousands of jobs. There was also a planned cap on emissions of oil sands producers. The carbon tax that the government of the day implemented also inhibited oil and gas sales and production, although it was minor compared to the oil price slump.
As for Ottawa, its cancellation of the Northern Gateway pipeline, which would have brought Alberta bitumen to Kitimat on the Pacific coast, and its forbidding of tanker traffic along that coast effectively brought to an end any hope of sending oil production to that location. Ottawa’s imposition of its carbon tax made investment in oil sands projects less attractive. Inadequate environmental studies and insufficient consultation with First Nations conducted by the federal government led to the cancellation of the first TransMountain pipeline expansion to Burnaby from Edmonton, which would have added 590,000 barrels per day of capacity, or 21% of Canada’s heavy oil exports for 2018.
It also did little or nothing to assist either TC Energy or Enbridge in their efforts to get additional shipping capacity approved to either the US Midwest or eastern Canada, including avoidance of confronting Quebec about its efforts to stop pipeline construction. Finally, it rammed Bill C-69 through parliament, which gives huge latitude to intervenors to oppose resource development or other heavy land-use projects on nearly any or all grounds.
Mr. Leach cites four true things that are making life difficult for oil sands producers: the longer-term outlook for oil prices has dimmed; market access for output; there is a preference for ‘shorter-cycle’ projects such as shale oil development; oil ‘supermajors’ are avoiding more carbon-intensive projects because institutional investors, governments and other ‘stakeholders’ are putting direct and indirect pressure on them to lessen their contribution to purported ‘climate change’.
With respect to the first factor, it is up to the oil industry actors to decide on what are reasonable oil price forecasts and to see what those projections do for their estimated total project returns. As luck, or hard work would have it, producers have made great strides in lowering production costs. When it comes to the second, market access, government policy makes all the difference. The belated more vigorous effort by the federal government to push the TransMountain expansion through, now that it actually owns the pipeline, may help it finally get built, despite further court challenges by adamant opponents.
Similarly, a more positive approach in the United States may now help get the TC Energy Keystone Express XL line built, relieving excess supply pressure in Alberta, as will rebuilding other lines that have regulatory or legal problems at the state level in the United States. American refineries on the Gulf coast are configured for Alberta heavy oil; it is needed and wanted there, particularly now that Venezuelan heavy oil is unavailable. So, there is indeed demand, not the transport – yet.
As for industry preference for ‘short-cycle’ projects such as shale formations, that may be true for some participants, but there are still Canadian and other investors who see opportunities in the oil sands, as that very shale liquids and natural gas abundance have led to sharply lower diluent costs to transport the bitumen and lower heating costs for the steam used to separate the oil from the sand in Alberta. That ‘short-cycle’ notion is not all-pervasive: it has not stopped many longer-term projects from going ahead, such as major offshore developments in the Mediterranean and the Caribbean seas.
The last item is potentially troubling: adverse public and institutional receptiveness to fossil fuel development, production, and combustion of any kind. Even natural gas is not looked upon very favourably by ‘clean energy’ absolutists. Yet fossil fuels of all varieties will have to be used for the foreseeable future until other forms of energy become truly viable (energy storage costs for solar and wind are coming down, but are not low enough yet). To cope, majors are developing more gas projects.
There may be pressure brought to bear on skittish companies with big institutional investor followings and government and ‘activist’ scrutiny, but that leaves more room for smaller, more independent producers to responsibly and cleanly bring useful oil sands bitumen and synthetic oil to consumers and industries that need them for transportation, for which there are no good substitutes readily available.
Current circumstances have already made things difficult for oil and gas producers, and oil sands companies face a challenging future. Politicians do not have to make things even worse by erecting obstacles to their route to stay alive, and put thousands of jobs, and our economy in peril.