Andrew Leach, an energy and environmental economist at the University of Alberta, recently observed that a number of things challenge the oil and gas industry in Canada, particularly the oil sands sector. And some of those challenges aren’t 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 Alberta Premier Jason Kenney likes to blame his predecessor, Rachel Notley, and Prime Minister Justin Trudeau for some of the industry’s woes.
It’s typical, if not edifying, for provincial premiers to bash their predecessors and the federal government. But there are things that Notley and Trudeau did that made the situation for the sector worse than it already was.
Notley raised corporate income taxes. That made profitability, already difficult after a steep plunge in oil prices, that much more difficult. And it made investment much less attractive in any industry. Her regime also increased regulations, including those on safety and pollution, which increased burdens and liability on the hard-pressed industry.
There was also a planned cap on emissions created by oil sands producers and a carbon tax that inhibited oil and gas sales and production, although it was minor compared to the oil price slump.
The Northern Gateway pipeline would have brought Alberta bitumen to Kitimat on the Pacific coast. But by forbidding tanker traffic along that northern B.C. coast, the federal government effectively killed the pipeline.
As well, Ottawa’s carbon tax made investment in oil sands projects less attractive.
Inadequate environmental studies and insufficient consultation with First Nations by the federal government led to the first cancellation of the Trans Mountain pipeline expansion to Burnaby, B.C., from Edmonton. It would have added 590,000 barrels a day of capacity, or 21 per cent of Canada’s heavy oil exports for 2018.
The federal government also did little or nothing to assist either TC Energy or Enbridge in their efforts to get additional shipping capacity approved to either the U.S. midwest or Eastern Canada. Part of that was avoiding any confrontation with Quebec about its opposition to pipeline construction.
Finally, the federal government rammed Bill C-69 through Parliament. It gives huge latitude to intervenors to oppose resource development or other heavy land-use projects on nearly any grounds.
Leach cites four other things that make life difficult for oil sands producers:
- the longer-term outlook for oil prices has dimmed;
- market access for output;
- a preference for shorter-cycle projects such as shale oil development;
- oil super-majors avoid more carbon-intensive projects because institutional investors, governments and other stakeholders put direct and indirect pressure on them to lessen their contribution to climate change.
With respect to the first factor, it’s up to the industry to decide what are reasonable oil price forecasts and to see what those projections do for their estimated total project returns. And producers have made great strides in lowering production costs.
When it comes to market access, government policy makes all the difference. The more vigorous – and belated – effort by the federal government to push the Trans Mountain expansion through, now that it 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 Keystone XL line built, relieving excess supply pressure in Alberta. So too 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’s needed, particularly now that Venezuelan heavy oil is unavailable. So there’s indeed demand, if 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. 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 hasn’t stopped many longer-term projects from going ahead, such as major offshore developments in the Mediterranean and the Caribbean seas.
Adverse public and institutional receptiveness to fossil fuel development, production and combustion of any kind remains problematic. 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. To cope, major players in the industry are developing more gas projects.
There may be pressure brought to bear on skittish companies with big institutional investor followings who face government and activist scrutiny. But that leaves more room for smaller, more independent producers to responsibly and cleanly bring oil sands bitumen and synthetic oil to consumers and industries that need them. There are no good substitutes readily available.
Oil and gas producers and oil sands developers face a challenging future. Politicians don’t have to make things worse by erecting obstacles along their route to survival, at the same time putting thousands of jobs and Canada’s economy in peril.
Ian Madsen is a senior policy analyst with the Frontier Centre for Public Policy.