A Tale of Two Canadas: The case for market access

Economic experts agree: access to new markets is vital for Canada to create jobs, attract investment and generate economic growth.

Early this year the head of one of Canada’s largest banks stood in the Canadian Club of Toronto to make the case for building new pipelines. “At a time when the price of oil is low, conversations about pipelines might seem counterintuitive. But, in fact, these conversations are long overdue,” Scotiabank president and CEO, Brian Porter, told the audience of senior executives.

“We must make global market access for Canadian energy a national priority today, and then make it a reality,” he stated.

Royal Bank of Canada president and CEO Dave McKay echoed the thought in a speech earlier this fall, emphasizing Canada’s historic opportunity:

“If we don’t take on the energy infrastructure that we so clearly need, the world will move on, and we would lose our opportunity to help lead the global energy transition,” he said.

What these statements by two leaders of Canada’s banking industry illustrate is that we have reached a pivotal — some might even say crisis — moment in Canadian history. Canadians today are faced with choices: to build new oil and natural gas pipelines, or not. To nurture a nascent West Coast LNG industry, or allow that opportunity to pass.

Each choice comes with consequences. Cumulatively, the decisions we make in the next few years when it comes to Canadian energy infrastructure will have a significant impact on our national economy, our ability to attract foreign investment, and our capacity to deliver jobs and prosperity to all Canadians. Ultimately, it will be a choice between a robust, economically vibrant future for Canada, or a Canada that squanders its greatest resource assets through squabbling, delay and incomprehension.

New Market Access: Soon or Possibly Never

The historic opportunity to which Porter and McKay refer is the convergence of two important facts. One: Canada possesses enormous, accessible crude oil and natural gas energy resources. Two: global energy demand is steadily increasing, driven primarily by worldwide economic growth and improved living standards in places like China and India.

“Increasing global energy demand means that crude oil and natural gas will remain vital for global energy security for decades to come,” says Terry Abel, executive vice president at CAPP.

Abel’s statement is borne out by the latest forecast by the International Energy Agency, which published its 2016 World Energy Outlook this November. It predicts that global energy consumption will rise 31 per cent by 2040. This includes a 12 per cent increase in oil consumption and a 49 per cent increase in natural gas. The numbers factor in growth in renewables and government commitments to reduce GHG emissions made in last December’s Paris Accord.

Abel adds that Canada is well positioned to meet this energy demand as a preferred supplier—due to its strong reputation for political stability and for having a world-class regulatory regime.

“We’ve developed tremendous, world-class technologies and expertise when it comes to economically feasible, safe and sustainable resource extraction. I think anybody who cares about the environmental and safety records of the producers they get their oil from would choose Canadian oil and natural gas first.”

At the same time, Canada can no longer rely solely on exports to its historic primary customer: the United States. The rapid growth of shale gas and shale oil production south of the border has blunted U.S. demand for Canadian natural gas and depressed prices for oil.

Without new markets overseas—and the pipelines, LNG terminals and marine transport facilities to get our products to these markets— there is a strong likelihood that Canada’s oil and gas industry will stagnate.

“While there’s strong interest around the world in Canadian oil and natural gas, the fact is, these markets won’t wait forever. If we don’t act soon, investment will dry up here, and other nations will fill the void,” says Abel.

Robert Skinner, executive fellow at the University of Calgary’s School of Public Policy adds, “If we don’t pull this off and improve industry access to tidewater — with at least one or two new pipelines — then Canada risks sending an enormously important signal to the world that, largely for symbolic reasons, we’re prepared to sacrifice a critically important sector of the Canadian economy.”

There’s No Status Quo

Based solely on current and committed investments, crude oil supply in Western Canada will increase from 3.98 million barrels a day in 2015 to 5.45 million b/d in 2030, a 37 per cent increase.

This production growth should be a good news story. However, at the same time as crude oil supplies are increasing, pipeline takeaway capacity from the Western Canada Sedimentary Basin is nearing capacity. Without new pipelines capable of reaching new markets, in a few short years the industry will begin facing severe transportation bottlenecks. History has taught us that this will arrive with severe consequences.

“If we continue to grow production out of the Western Canada Sedimentary Basin and don’t have takeaway capacity, we’ll run into a supply bottleneck that will again decrease commodity pricing. And that’s a problem,” says Michael Loewen, an energy commodities strategist at Scotiabank.

Loewen is referring to pricing differentials created when transportation bottlenecking creates a regionalized oversupply of oil. This was a major issue a few years ago, with oil from Western Canada having no place to go except into the already saturated mid-Western United States market. The supply glut resulted in Western Canadian oil becoming heavily discounted relative to international benchmark prices.

Loewen notes, “For every $1 per barrel discounted relative to world prices, there’s an opportunity cost to the Canadian oil industry of about $1.4 billion per year. In 2014, for example, we estimate that had Canadian oil been able to reach tidewater rather than being locked inland, producers could have gained $14.3 billion in additional revenues. That’s a substantial sum of money to leave on the table—money of course that could contribute to government royalties, and investments in jobs and economic growth for Canadians.”

Price differentials have narrowed in recent years due to improvements to existing pipeline infrastructure and low prices globally. However, as global energy demand continues to grow, and if Canada remains trapped with a growing land-locked crude oil supply, the differentials could widen again, costing Canadian producers once more.

Natural gas faces a similar market challenge. Dramatic increases in production south of the border are keeping prices in North America depressed, while also gradually eroding traditional markets for Canadian producers.

“Production growth in the U.S. has been disruptive and transformative,” says Skinner, noting that the boom in U.S. natural gas supply is steadily displacing Western Canadian gas in the U.S. Midwest and U.S. Northeast and above all in Central Canada. U.S producers are also ahead of Canadian producers in LNG exports.

“Quite simply, our biggest buyer has become our biggest competitor,” says Skinner.

The impact: total exports of Canadian natural gas have declined by nearly one-third between 2007 and 2015. “Access to energy-needy markets in Asia via LNG shipments, where Canada has some relative competitive advantages including shorter shipping times and existing trade relationships, would definitely help reverse this trend,” says Abel.

A Canada Without

The oil and natural gas sector is Canada’s single largest industry. Today, the industry is struggling. Admittedly, the current slowdown, particularly in the case of oil, is due more to the global price environment than Canada’s market access challenges. However, the economic impacts being felt by the industry, and the ripple effects across the entire Canadian economy, are acutely illustrative of what the oil and natural gas industry means to all Canadians—and what we might have to learn to live without permanently should a ‘no pipelines’ agenda prevail.

One of the greatest casualties is employment. Tens of thousands of jobs have been lost—most in Alberta, but elsewhere too. Moncton used to have 14 chartered flights a week carrying workers to Fort McMurray. Today it has none. That’s more than 3,000 New Brunswickers who no longer work in the oil sands to support their families back home.

Financial impacts are also being felt by the more than 3,400 companies in Canada but outside of Alberta who supply goods and services to the oil sands sector now forced to cut costs and scale back on new projects.

“The oil downturn is certainly affecting manufacturers in Ontario,” notes Mary Webb, Scotiabank’s director of economic and fiscal policy. “It’s one reason why Ontario reports that its interprovincial exports have been trending lower recently.”

Falling oil and gas revenues also means the average $15 billion a year in royalties, leases and tax revenues (source: CAPP) the industry generates for governments in Canada are at risk.

“Decreasing government revenues would affect everything. It might make the difference between a new school in your community being built or not, or whether your local hospital is able to buy a new MRI machine to lessen wait times,” says Abel.

Finally, more than $44 billion in capital investment has been cut in the last three years—a 55 percent decrease. That’s capital investment that could create Canadian jobs and spur economic growth. It’s an area that Martha Hall Findlay, president and CEO of the Canada West Foundation, believes Canada’s market access challenges are already having a toll.

“We’re used to being seen as a good place for investment, but today we’re having trouble getting major infrastructure projects built – not just energy but any trade infrastructure.  And that raises questions among foreign investors,” says Hall Findlay.

The pain of low oil and natural gas prices and decreasing capital investment into the Canadian economy is temporary—perhaps. As global energy demand catches up, the oil supply glut should reverse, triggering a rally in oil and LNG prices. Provided Canada has the infrastructure to access new markets—and remains competitive relative to other producers—Canada’s fortunes should rise alongside.

“This sector has proved its resiliency time and time again,” notes Webb. “If the industry could get its oil and natural gas products offshore and fetch higher prices in those markets, it would be hugely positive for producers as they strive to contain costs during an extended recovery in petroleum prices.”

Building a Strong Nation

The opportunity before Canada is to greenlight new pipelines and support the creation of a vibrant, new LNG industry. A number of proposals have been developed that would access key markets to the east, south and west. The economic benefits of each proposal have been well-studied by multiple different independent think tanks and research organizations.

The Conference Board of Canada, for example, calculates that Kinder Morgan’s Trans Mountain Expansion Project, which would twin an existing pipeline carrying oil out to a shipping terminal in Burnaby, would result in more than 800,000 new jobs, or 32,000 new jobs for each of the next 25 years. In addition, it estimates this pipeline project would generate more than $46.7 billion in new government revenues across Canada, or $1.87 billion in new revenue every year for 25 years.

Similarly, TransCanada’s Energy East project would generate more than 14,000 jobs each year during development and construction, while generating $10 billion in government tax revenues and contributing $55 billion to Canada’s GDP over its project life.

And even a modest West Coast LNG industry, exporting about 30 million tonnes of natural gas a year, would grow Canada’s economy by an average of $7.4 billion annually over the next 30 years, according to a Conference Board study.

What’s more, economic growth can help drive the innovation needed for a long-term transition to lower-carbon energy sources.

“As we move to a pan-Canadian carbon strategy, we believe that continuing investment into innovation is the key to ensuring the energy-mix of the future has a much lower carbon footprint, while still delivering the energy security Canadians and others demand,” notes Abel. “It’s a vision of a strong and sustainable industry that balances Canadians’ economic aspirations with their environmental concerns.”

Ultimately, expanding Canada’s energy transportation infrastructure through new pipelines and LNG terminals is an investment in a more prosperous and engaged future.

“Any time you have projects that could benefit national prosperity, these projects become incredibly important to our country’s future. There is a lot at stake,” says Hall Findlay, who has compared proposed pipeline projects to nation-building projects like the building of the St. Lawrence Seaway or the Trans-Canada Highway.

One Canada for All

Much is made of the divisiveness of the energy debate. The fact is that polls show a decisive majority of Canadians support Canada’s resource extraction industries, and the pipelines needed to transport our products to market, provided they are transported in a safe and sustainable manner.

“I think most Canadians understand the importance of the issue. They understand the need for Canada to be competitive. They’d like to see development and that Canada take advantage of the resources we have. But they want us to do it in a way that is done well and in an environmentally sustainable way,” says Hall Findlay.

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