The Niagara Independent, December 9 & 16, 2022 – “It is easy to dodge our responsibilities, but we cannot dodge the consequences of dodging our responsibilities.” – Sir Josiah Stamp, British industrialist and economist
Today, millions of Europeans are threatened by a critical energy shortage. Canada has the potential to respond to this mounting energy crisis – if it were not for a federal government that has forsaken the promise of our oil-and-gas-rich nation.
The cover piece for The Economist magazine last week displayed a European continent incased in ice with the headline: “Frozen Out.” The feature article detailed the costs and consequences of the energy crisis in Europe. Prior to its invasion of Ukraine, Russia supplied 40 to 50 per cent of the gas imports to the European Union (EU). It now supplies about 15 per cent, a greatly reduced amount that Russia is threatening to cut further in the cold of the coming winter months.
The EU’s inadequate supply of gas has resulted in an enduring crisis of energy that is quite literally a matter of life and death. Gas prices have skyrocketed and, by The Economist’s modelling, the unaffordability of home fuel may cause more than 100,000 extra deaths of seniors over this winter.
In the longer term, European gas prices are forecasted to remain high. According to the international commodities conglomerate Trafigura Group, there will be an increased demand to import “huge volumes” of liquefied natural gas (LNG) to replace Russian oil and gas imports. What compounds this supply issue is the fact that global long-term contracts for LNG are sold out. There will be no new LNG supply for three years; the top two exporters – U.S. and Qatar – are not able to increase their capacity until 2025-26. This makes next winter even bleaker than the current situation.
Though Canada currently has no ability to export LNG, Europeans look to our country to provide some relief for the strained supply of energy in the next few years. German Chancellor Olaf Scholz is cited as identifying Canada as “our partner of choice.” Scholz met with PM Justin Trudeau at the G7 meetings and subsequently visited Canada to appeal for Canadian natural resources.
As has been well documented, Trudeau turned down Germany’s request and explained to Canadians that there was no business case for developing the country’s LNG exports to Europe. In a follow up interview, the PM went on to state that with the Russian invasion his government is “absolutely accelerating” the transition away from Canadian oil and gas export and development.
Olaf Scholz left Canada empty-handed, but shortly after the German Chancellor was successful in signing a 15-year contract with Qatar. This contract is for a minimum of two million tonnes of LNG annually, starting in 2026.
Despite PM Trudeau’s view on LNG, global demand for this resource is bullish. Last year the U.S. became the world’s largest LNG exporter and roughly half of all LNG projects to be built by 2030 are south of the border. American LNG exports rose 12 per cent to 57 billion cubic metres (bcm) in the first half of 2022. Nearly two-thirds of this went to Europe. Even taking into account the increase, the EU has called on the U.S. to supply an extra 50 bcm per year through the 2020’s.
So, no business case for LNG? Just this year, five LNG developers in the U.S. signed more than 20 long-term deals that will export more than 30 million metric tonnes annually to Europe and Asia. In Qatar, the demand is such that there is a $50 billion 5-year plan to increase the country’s export capacity by nearly two-thirds. Mexico has 12 LNG export projects in the early stages with a plan to export a North American supply, which will include Canadian gas transported via pipeline to LNG export facilities in the Gulf of Mexico. Five Mexican projects will begin exporting over 2 billion cubic feet of LNG per day as early as 2024.
Currently, there are new pipelines being built throughout Europe, increased transatlantic shipments scheduled, multiple floating LNG platforms and floating storage regasification units now under construction. With the forecasted high energy prices in Europe, the demand for LNG is insatiable.
The increased demand for LNG is not the only energy-related development that has resulted from the Russian invasion of Ukraine and the disruption of world energy markets, trade and commerce. China and India are increasing their imports of Russian oil and gas. The EU is revisiting its ban on fracking. The U.S. is lifting sanctions on Venezuelan oil production.
In the last 12 months coal has become “black gold.” India has increased its coal imports and usage. Germany, Holland, Italy, France, and UK have all restarted decommissioned coal-fired power plants. Poland now gets 70 per cent of its energy from hard coal or lignite. China depends on coal for 60 per cent of its energy and it is increasing the number of coal-power plant construction projects both at home and in Africa and Asia.
This increased use of coal around the world has serious environmental implications and that fact has caught the attention of the Trudeau government. Canada’s deputy PM and finance minister Chrystia Freeland recently observed, notwithstanding the PM’s business case assessment, that Canada would entertain LNG projects to keep other countries from using coal. In Washington D.C., Freeland stated that LNG “is an important transition fuel.” Indeed it is: developing Canadian natural resources and actively exporting into the global energy marketplace will positively impact the environment.
Canadian energy consultancy Wood Mackenzie has recently issued a report that outlines thoughtful development of Canadian LNG exports to Asia could account for 20 per cent of their market share by 2050. Remarkably, this amount can reduce annual global emissions to the equivalent of removing every vehicle from Canadian roads.
Another recent Canadian study by SecondStreet.org estimates that within seven to ten years, should Canada develop its oil and gas production and export capacity, Canadian resources could offset nearly 60 per cent of Russia’s natural gas and 46 per cent of its crude oil exports internationally. In a few years, with a supportive federal government strategy, Canada could replace about 20 per cent of Russia’s oil and gas.
Given the findings of these studies a responsible energy policy suggests that Canada should pursue a more aggressive oil and gas development and export strategy. The fact that the Trudeau government is dodging this responsible course comes with consequences – dire consequences for the prosperity of present and future Canadians.
The Promise Domestically
As much as there is a business case to develop Canadian oil and gas for export to Europe and Asia, there is an even more compelling argument for developing the country’s natural resources to sustain Canadians’ standard of living. The country’s prosperity, today and for years to come, depends on the health of Canada’s oil and gas industry.
The Trudeau government’s aversive policy approach to Canadian oil and gas, if unchecked, will have dire consequences for Canadians. Simply put, this sector fuels Canada’s economy; to kneecap the sector is to trip up Canadians. Consider these facts:
- The Canadian Association of Petroleum Producers forecasts the oil and gas sector will provide $50 billion to government coffers in the form of royalties and taxes in 2022. The federal government receives the lion’s share. It also stands to see increased corporate taxes of $5 billion and higher income taxes due to the high oil prices.
- Canadian Energy Research Institute factors in a 2016 report that for every one Canadian dollar gain in the WTI price there is a $1.7 billion boost to the country’s GDP.
- Petroleum producers are spending $33.5 billion in Canada this year and an estimated $36 billion in 2023, according to Canadian consultancy Wood Mackenzie.
- Canada Energy Regulator projects the oil sector will grow by almost 50 per cent and the natural gas sector by 30 per cent, from 2018 to 2040.
Canada is the world’s fifth largest producer of oil and gas, blessed with huge reserves of both. The country is the fourth largest exporter of these resources. Most all petroleum production is exported and this accounts for Canada’s large trade surplus. Currently, almost all (98 per cent) is exported south of the border to American refineries and export facilities.
Here are more numbers from the federal department of natural resources. Ottawa published national numbers in 2020 that revealed the country’s oil and gas sector accounts for $118 billion of economic activity (5.7 per cent of the country’s GDP), $86 billion in exports (that’s one of every six dollars in export sales), and $38 billion in capital expenditures within the country. The government estimates that the sector employs 178,500 Canadians and supports another 415,000 jobs.
The department’s report concludes that “petroleum, natural gas, coal and hydrocarbon gas liquids are vital components of Canada’s energy mix, and continue to be a leading driver of employment, exports and broader economic activity.”
These are all big numbers that speak to the significance of the oil and gas sector for Canada’s economy.
Canada is resource-rich and fortunate to have a prosperous oil and gas industry. However, federal politics and government environmental and energy policies have shaken the confidence in investment and future development of the country’s natural resources.
The oil and gas industry is booming and world affairs suggest there will be sustained pressure to boost oil and gas production. Yet, oil and gas companies operating in Canada are not reinvesting into Canadian projects, rather diverting money to their projects outside of Canada. ARC Energy Research Institute reports that a decade ago, for every dollar of after-tax cash flow, the Canadian oilpatch reinvested $1.22 in oil and gas production. This year, that ratio of reinvestment is estimated to have collapsed to just 29 cents.
The Trudeau government has also been vocal in criticizing another disturbing trend occurring within Canadian oil and gas companies. Instead of putting their money back into their Canadian operations, companies are increasing both their dividend payments to investors and their share repurchases. Concerning the latter, Wood Mackenzie reports that Canada’s five largest public oilsands producers have repurchased $16.4 billion of their own shares in 18-months, from January 2021 through June 2022.
To counter companies from repurchasing their shares, finance minister Chrystia Freeland introduced a new tax on share buybacks in the government’s fall economic statement. Ottawa is now taxing companies more if they do not reinvest their profits in the Alberta oilsands (ironic given the same government is looking at ways to cap production). In a series of interviews, respected industry portfolio manager Eric Nuttall responded to the new tax grab, “It is the epitome of stupidity.”
Nuttall assessed, “This will not increase a single barrel of production in Canada. All it does is make our sector feel even more alienated and potentially less competitive.”
Alberta-based news columnist Cory Morgan has been very vocal of late commenting on the rising tension within the oil and gas industry as well as the rift between eastern Laurentians and western Canadians. On the matter of companies’ and investors’ lack of confidence in Canada, Morgan writes that Canada has become an investment pariah, “Foreign investors look at the long game. They put funds into large capital projects where the timeline is measured in decades rather than months or years… Canada just isn’t a safe place to invest.”
In responding to Chrystia Freeland’s comments about Canada being perceived as a banana republic, Morgan places the blame directly on an overbearing Trudeau government. Morgan writes, “Prime Minister Trudeau killed the Northern Gateway pipeline after Enbridge invested millions of dollars and years into it to meet 2009 conditions. Energy East was regulated to death, and the Trans Mountain pipeline expansion had to be purchased by the federal government after they drove Kinder Morgan away from the project. The Coastal Gaslink pipeline has been hopelessly delayed by illegal protests the government seems loath to address, and Trudeau was nearly silent when President Biden killed the Keystone XL pipeline. Trudeau’s West Coast tanker ban helps ensure new conventional oil and gas development remains stunted as well.”
Cory Morgan tweeted out this week: “Trudeau said he wants to phase out Alberta’s prime industry. It’s laughable to hear some people trying to claim Alberta could lose investment if it stands up for itself. We will be bankrupted by ideologues in Ottawa if we don’t push back.”
Verily, the argument over the development of Canada’s oil and gas sector has devolved since the election of the Trudeau government in 2015. For western Canadians, it has become an existential question stoked with a growing sense of alienation. At the core is the divide between the realities of the oil and gas industry and the political agenda of the federal government.
The mounting frustration with the Trudeau government is palpable, this year spawning a trucker protest convoy as well as two provincial legislative acts that draw bright lines respecting the federal-provincial jurisdictional responsibilities for resource development.
So, to return to that quote of Sir Josiah Stamp about the consequences of dodging responsibilities… It is time for the Trudeau government to recommit to the promise of Canada’s oil and gas industry, if not to address the crisis on the European continent than to ensure Canadians’ continued prosperity.
Chris George is an Ottawa-based government affairs advisor and wordsmith, president of CG&A COMMUNICATIONS. Contact: ChrisG.George@gmail.com
LINKS: https://niagaraindependent.ca/the-forsaken-promise-of-canadas-oil-and-gas-industry-part-one/ & https://niagaraindependent.ca/the-forsaken-promise-of-canadas-oil-and-gas-industry-part-two/