At the Global Petroleum Show held June 11 to 13 in Calgary, Kevin Birn, vice-president of North American Crude Oil Markets & Canadian Oil Sands Dialogue at IHS Market sat down with Tim McMillan, president and CEO of the Canadian Association of Petroleum Producers. They discussed a range of timely issues arising from CAPP’s recently published 2018 Crude Oil Forecast, Markets and Transportation report.
Trans Mountain and the federal government decision to purchase
Birn: Trans Mountain. Do you have any comments about it? Because I think it surprised many of us, both how it came to pass and how the government got involved.
McMillan: I think we have been very supportive of the federal government stepping in and taking ownership. We have also said repeatedly we should never find ourselves in a situation where the government has only one choice again. With the coastlines we have, with the regulatory system, with the environmental protections that are embedded across our industry, Canada should be the supplier of choice. If it’s climate issues—if we look at where the next barrel of oil is going to go to—China or India or [another] growth market, it could come from Canada. Or it could come from Venezuela or Nigeria or Saudi Arabia or Iran.
For those today that are opposing Canadian export capacity, I think that they are missing, or a portion of them are missing that if not Canada, who? And Canada just has the environmental performance and a culture of continuous improvement that leaves us second to none. For the federal government to take the pipeline on gives it that clear path. So I wasn’t surprised that they made the decision of two weeks ago, but very disappointed that we found ourselves in that situation. Had Northern Gateway, which already had its approvals been allowed to be under construction and coming online here shortly, I don’t think we would have had a gun to our head. If Energy East had worked through its regulatory approval, that would’ve been done by now and we’d have another outlet, and the pressure wouldn’t have been built on this one project—which is also a very good project—but I think we need to aspire to more than just one outlet.
Opposition to pipelines
Birn: The division in this country—or the seeming division. Do you have any sense on that or opinions on that? Kinder Morgan may have been the most recent flashpoint, but I don’t think it’s the only one. What is CAPP doing in that regard?
McMillan: Great question. I think that on any issue in Canada, and energy issues in particular, but not exclusively, all Canadians don’t agree. If you did a referendum on any project or any national discussion, it’s going to be 60 – 40 at best. For the Kinder Morgan project—which is now the government project—to have the levels of support it does, I think that leaves the project in very good stead. That being said, those that oppose energy projects have viewed Canada as a very generous place to do their business. I think that it isn’t lost on most Canadians that the large portion of the organization that’s driving the protests comes from south of the border. There was quite a bit of news coverage that a Hive and Swarm model was being implemented that 350.org had penned specifically for the Canadian protests. I think we all need to take a step back and understand that we shouldn’t expect unanimity on an issue and also look at those that oppose; anyone in Canada should have the right to protest—free speech is fundamental in Canada—but we also should have a bit of a weather eye on where it’s coming from and is it out of the norm and how that fits in a democracy like ours.
Canada’s relationship with the U.S.
Birn: The recent exchanges between our largest trading partner. Do you have any thoughts from perspective of the voice of the Canadian petroleum industry
McMillan: We’ve been looking at the U.S. because they have been the biggest change agent in global markets for several years. When they’re growing their capital by 20 per cent one year, by 38 per cent the next, a lot of that capital otherwise would have come to Canada, or a decade ago was the capital coming to Canada; now it’s found a home in the U.S. So, we’re looking at a competitive imbalance on the production side that Canada’s been losing. We’ve been challenging our governments to retool and to address this challenge. What you’re asking me is on top of all of that, we now have a new pressure—we have one customer for oil and gas, the U.S., and all of our pipelines to export markets are north-south, except for Kinder Morgan that will…
Birn: Which delivers a lot currently to Washington.
McMillan: Which is a west pipeline that still feeds all of its export capacity to the U.S. So if that [trade relationship] were to blow up, we would hope that the bilateral nature of energy trade would not be sideswiped because it is so integrated across the borders. We’ve never heard that as one of the areas that is specifically of concern. And I think all parties recognize it would be more damaging to both countries than either would be interested in inflicting. That being said, if there’s ever been a time for reflection about why wouldn’t we have optionality. As the U.S. is ramping up oil production–they’re already a gas exporter—Canada has a lot of coastline facing global markets. So, we need to get the Trans Mountain expansion built. But we see another axis off the North coast as crucially important that is not the direction our federal government is going right now. We think that access to Eastern Canada and the eastern coast is important—Energy East was not successful through the regulatory process. But if there’s ever a time where we need to reassess decisions made even a year or two ago it’s now.
The Newfoundland and Labrador ‘The Way Forward’ report, and how Canada can compete in the future
Birn: You drew specific attention to a government of Newfoundland report. What is it about that you see promising?
McMillan: Government leadership has a huge impact on our industry—and probably on all industries. When we’re raising capital in Boston, New York and Europe, investors know what is being said by the leaders in Canada. They want to see a vision that Canada wants to be part of the global demand pool and we want to be part of the supply. We want to see plan for how we’re going to retool to be increasingly important and attractive for investment. Newfoundland put out that paper earlier this year after a lot of work of how they can be more important, how they can drive prosperity for their citizens. It’s not something that you sit back and wait to happen to you; it’s something that you work very hard on, and they have done that. The prospective area in Newfoundland where we’re currently producing and where we could be—it’s one and a half times bigger than the Gulf of Mexico…
Birn: Everything in Canada is bigger.
McMillan: Yeah. So it’s not lack of opportunity, it’s lack of vision. And the Newfoundland government has stepped forward with a bold vision and bold targets that sometimes governments are hesitant to say. They don’t like to put out targets until they’ve manufactured the path. They’re saying we got to work on this together and that they’re part of it and they’re willing to do the work to get there. I think that that’s a model we’d like to see in provinces across Canada and specifically, the federal government as well.
Birn: How do you think the government, or Canada, or the industry will evolve to be more competitive in the future?
McMillan: We’ve seen a lot in the last couple of years. Global pricing has forced everybody to be more efficient. Of our existing producers, that has been core to their businesses. The successful businesses that are growth companies today, they know their costs. They’ve worked hard on getting them down to where they can compete. That’s going to be crucial. The infrastructure piece is something that is bigger than just our industry, it has a regulator and government component that’s going to require ongoing leadership. This isn’t an event; this is a new way of doing business. As we get those pieces in place, I’m confident that Canada can compete, that our ability to adapt and develop new technology positions us out in front of any of the other global producers that are also vying for that same opportunity.