Canada Must Become an Energy Leader Again

Essay, Energy, Joseph Quesnel

Canada must demonstrate federal leadership and all provinces and territories must come together as a country to support our energy economy, given its relative importance to Canada’s entire economy. 

If it does not, Canada will continue to see its energy sector fall behind the United States and other larger powers, losing its traditional position as a strong market-based global energy power.  

Despite the effects of the pandemic on global oil prices, Canada continues to be an energy supplier to the United States. Canada is still the largest energy partner to the United States, and yet lags behind our southern neighbour in terms of achieving energy security for its own domestic market. 

Canada is a formidable energy power and enjoys the status of having the world’s third-largest reserves of oil and being the world’s fifth-largest producer of natural gas. However, this is not as relevant if policy actors are squandering that untapped wealth or selling it in sub-optimal conditions and for sub-optimal prices. 

This was not always the case. In the energy sector, there should be the same level of national urgency and need for getting the public policy mix right. Canada is falling behind the United States in energy policy and has lost much ground to them in terms of oil and gas energy development. Over time, by deliberate policy design, the U.S. has gone from being Canada’s largest export customer for crude oil and natural gas, into its largest competitor in the same area.

But this was not only the fault of the Americans who were only acting in their national economic self-interest. In our own country, policy actors were acting in ways that undermined our national energy interests.  

Prior to the COVID-19 outbreak, Canadians know all too well the frustration of Canadian energy firms in not being able to sell our crude oil outside of the United States. Our country had become a captive market to the U.S. and was selling at prices below what Canada could get on the international market. In terms of economic benefits, American markets were only too happy to allow this unbalanced situation to continue. 

Policy environments make a big difference. Canada must act similarly on behalf of the energy sector. Canada and the United States have had differing policy environments for energy development. In the U.S., the owner of the lands owns the hydrocarbons underneath property – whereas in Canada, and most other jurisdictions, the government owns subsurface mineral rights. The U.S. also has a vast infrastructure network that can handle an expanding energy sector. 

With all the stalled pipeline projects in Canada, clearly Canada and the United States have diverged in their developing energy economies. Within all the news focused on COVID-19 almost 24/7, Canadians may need a reminder of the energy policy environment prior. 

Our prime minister had given verbal assurance that several critical pipeline projects would proceed, but the actions of the government told a different story. The Liberal government introduced Bill C-48, an Act that imposed a moratorium on oil tanker traffic on British Columbia’s northern coast. The bill killed any hopes for pipeline projects that sought to move Alberta’s land-locked crude oil to the Pacific coast through only one port. Then, of course, the government introduced Bill C-69, a controversial piece of legislation that was well-intentioned in terms of streamlining and shortening the assessment process for individual projects but ended up creating less clarity and more potential for legal mischief. 

The federal government also gave a tepid response when Alberta and British Columbia began an inter-provincial war of words over certain pipeline projects. The government allowed Bill S-245, a bill designed to assert federal authority over inter-provincial pipelines and pave a way for federal action, to die at second reading in the House of Commons. The federal government also did not intervene when the premier of Quebec told the eastern provinces that no pipeline would pass through Quebec territory. 

The policy divergence between Canada and the United States has been going on for a while. One Financial Post columnist commented back in 2015 that since 2010, the United States had built the equivalent of ten Keystone XL pipelines. Although President Obama ended up vetoing the Keystone XL project, his administration was relatively open to new pipelines. 

According to the U.S.-based Association of Oil Pipe Lines (AOPL), between 2009 and 2013, more than 8,000 miles of oil transmission pipelines were built in the United States. That was compared to the 875 miles TransCanada wanted to lay in the states of Montana, South Dakota, and Nebraska for the Keystone XL project. 

By and large, it has been much easier for American companies to build pipelines to alleviate energy bottlenecks. The White House also relaxed offshore drilling regulations to ramp up production. 

While there is always some local opposition to pipeline projects, at the state level, the opposition is mainly to transporting crude oil by rail, not pipeline. In that sense, the discussion south of the border is more advanced because the public and politicians understand that pipelines are the safest way to transport oil and gas. 

Canadians need to learn from that. 

Also, particularly under the Trump presidency, there has been an explosion in natural gas development in the United States. That administration opened-up large tracts of federal lands to energy development and is recognized as instrumental in the “shale gas revolution” that expanded oil and gas reserves in the United States, leading the country towards energy independence. The administration changed regulations allowing for natural gas development through hydraulic fracturing (or “fracking”). The Department of the Interior also worked on allowing Native American communities to better utilize energy resources on Native American tribal lands, to the benefit of those impoverished communities. 

Policy environments and incentives matter. Private companies are rational actors and engage in energy exploration and investment, seeking good infrastructure, regulation, and taxation policies. 

The United States – largely under the current president, but begun under different presidencies – has emerged as an energy superpower that is closer to energy independence than ever before, while Canada – under this Liberal government  – has become an energy laggard where energy investment has fled to the United States and other countries. 

This important shift is largely due to the America First Energy Plan adopted by the Trump presidency. Lawyer Alicia Quesnel of Burnet, Duckworth and Palmer wrote the Plan declares “American energy dominance” as a “strategic economic and foreign policy goal of the United States” and seeks to “unleash an energy revolution” by tapping into “$50 trillion in shale, oil and natural gas reserves, plus hundreds of years in clean coal reserves”. 

Meanwhile south of the border, the Trump administration ramped up oil and gas exploration by changing royalty rates for oil and gas leases on federal lands, as well as changing water regulations for fracking on federal and tribal Indian lands. The Department of the Interior also accelerated the pace of offshore oil auctions and reduced royalty rates so more energy companies could enter the market. 

Table 1

(Source: U.S. Energy Information Administration, Short-Term Energy Outlook

Table 2 

Source: U.S. Energy Information Administration, Short-Term Energy Outlook

At the same time, Canada, Quebec and some Maritime provinces had imposed moratoriums on fracking activities, despite the proven existence of vast untapped natural gas reserves, especially in New Brunswick. Now, some provincial governments, most notably in New Brunswick, have opened discussions about fracking. These discussions seemed to have stalled, and with COVID-19, are not newsworthy any longer. 

Now, obviously, that is not the fault of the federal government, but it would not hurt if the federal government encouraged or incentivized provinces to accept limited fracking operations. 

While some of the energy explosion in the States can be explained by better technologies and methods, much can be attributed to regulatory and policy changes, as well as transformational leadership. The Trump administration also issued the Keystone XL a presidential permit, after President Obama had denied the project such a permit arguing the project was not in America’s interests.  However, presumptive Democratic nominee Joe Biden has pledged to veto Keystone XL once again. 

The problem was that while Canada was listening closely to environmental interests and adopting a weak federal response to energy development, the United States was busy adopting winning policies and asserting a lead federal role in pursuing energy development, for both economic and foreign policy reasons. 

To be clear, Canada need not adopt a Trump-style “Canada First” policy or mimic what has been done in the States. Canadians in all regions value strong environmental regulation and wish to protect wildlife habitats, especially endangered ones. A great issue of contention between Canada and the U.S. is whether the policies of both our countries will be in harmony with the Paris Agreement on reducing carbon emissions. The American departure from that Agreement has put Canada at a disadvantage vis-à-vis its neighbour. However, at the same time, the U.S. has demonstrated it can reduce carbon emissions without the Agreement.  

Canada needs a much more balanced approach that recognizes Canada’s desire to maintain itself as an energy superpower in the world, with its own made-in-Canada policies that respect both the environment and the new energy economy, and of course respecting principles of the free market. Canada already has global-standard-setting environmental rules and technologies. 

During this time of the pandemic and especially as we see the light at the end of the tunnel, the federal government, the provinces, and territories need to adopt a free market-based national energy strategy to maintain our position as an energy leader.  

 

 

Joseph Quesnel is a research associate for the Frontier Centre for Public Policy. www.fcpp.org