The cancellation of the Keystone XL pipeline has things off on the wrong foot for Canada/U.S. energy relations as U.S. President Joe Biden starts his presidency. On the other hand, renewed focus on environmental issues in the U.S. could help level the competitive playing field between Canadian and U.S. natural gas and oil producers.
Gary Mar, president and CEO of the Canada West Foundation think tank speaks with Energy Examined host Leighton Klassen about the future of Canada - U.S. energy relations: the threats, the opportunities, and what Canadians need to do to about both.
Transcript of podcast:
Leighton: Hello and welcome to another edition of the Energy Examined podcast, the podcast that discusses the issues facing Canada's oil and natural gas sector with the insiders in the know. I'm Leighton Klassen. Today, I'm joined by Gary Mar. He's the president and CEO of Canada West Foundation, a pan-Western non-partisan think tank. In today's podcast, we'll talk with Gary about how the new presidential administration in the United States will affect Canada's oil and natural gas industry. Gary, thanks for being part of Energy Examined.
Gary: Leighton, it's my pleasure to be here.
Leighton: Well, first, tell us about Canada West Foundation.
Gary: Canada West Foundation is one of Canada's oldest think tanks. We've been around for 50 years since 1971. And we are the only think tank in Canada that really focuses on the economic interests and the public policy of the four Western provinces, British Columbia, Alberta, Saskatchewan and Manitoba. And we have three centres that we focus our public policy on. One is on trade and investment. One is on human capital. And the third one is natural resources. And it's our natural resources sector that really looks deep into issues involving energy, forestry and mining. So, it's this third centre for the Canada West Foundation that I think will have the most interest to the listeners of this podcast.
Leighton: That's right, and on the energy and natural resource issues that you just alluded to, can you comment a bit on why this is a key priority for Canada West?
Gary: Natural resources and energy in particular, is such an important part of the economy of the provinces in Canada's West. I think it's noteworthy that about a quarter of Canada's exports come in the form of crude oil. It speaks to the issue of the importance of being able to develop what we have in this province and being able to sell it to markets abroad, including the United States, of course, because it's an important part of our economic story and part of the reason why we enjoy a very high standard of living and quality of life here in Canada.
Leighton: You've been with Canada West for a while now, and you have a decorated background. So, can you tell us a little bit about yourself and in particular your past experience in government and U.S. relations?
Gary: Well, I am born and raised here in the city of Calgary. And so, I've certainly watched the energy business grow dramatically and what it's done for our province, for Western Canada and Canadians overall. The revenues that come from oil and gas help to support many of the things that Canadians and Albertans feel very strongly about, goes into supporting our social services, our education system and our healthcare. So, those are some of the areas that I actually had as an elected official, as a cabinet minister.
I was first elected in 1993 and I spent the next 14 years in elected office and was a cabinet minister in six different portfolios over that period of time. It included portfolios of education and healthcare, the environment, international trade, intergovernmental relations. And then when I left elected office in 2007, I was appointed to be Alberta's representative at the Canadian embassy. And so, it's a diplomatic appointment. And I worked in the Canadian embassy representing the interests of the province. And I spent four years in Washington, spent a lot of time working on issues like Keystone XL pipeline. And then thereafter, I left and was re-posted in Hong Kong, where I looked after Alberta's Asian offices. I was based in China and the Alberta Government had offices in Hong Kong, Beijing, Shanghai, Tokyo, Seoul, Taipei and Singapore. And that is another interesting area related to energy because over that period of time, from 2011 to 2015, we attracted nearly $30 billion in foreign direct investment in the energy sector just in the province of Alberta.
Leighton: OK, now, before getting into what the newly elected Joe Biden Administration in the U.S. means for Alberta and the rest of Canada, generally speaking, and you've obviously been in this situation in the past, given your history, how important is our relationship with the U.S. when it comes to the energy sector?
Gary: Well, this is a critically important relationship for us to be able to manage. Roughly almost 100 per cent of the oil that we produce here in Canada gets exported to one marketplace, and that's the United States. There are some small shipments that go to places like China and other parts of the world. But by and large, almost 100 per cent of our oil that we export goes to one marketplace. And that is significant. It's a significant volume. And when I first arrived in the United States in 2007, at that time, about 11 per cent of U.S. oil imports came from Canada. By the time I left, it was closer to 17 per cent. Today, it's about 50 per cent. So, the United States relies heavily upon Canada for its energy imports. And so, it's an important relationship for us, but it's an important relationship for the United States as well.
Leighton: So, what are some of the benefits and challenges of this close relationship that we have?
Gary: Well, it's about the challenges associated with changing political directions that may happen either at a state level or at a federal level. I'd say that, you know, when you look at the kind of rhetoric that both Mr. Biden and Mr. Trump had during the election, they both talked about 'Buy America.' They both talked about, you know, really focusing on improving their trade relationships. They both, you know, in some ways they campaigned on a similar platform. The difference between Mr. Biden and Mr. Trump is that Mr. Trump's policies were not nearly as well articulated. They tended to be ad hoc. And that, of course, creates great difficulty when this is your number one trade partner.
I think that Mr. Biden will be different in two respects. One is that his trade rules are going to be more comprehensive, but also be more comprehensible. And secondly, I think that Mr. Biden is much more interested in multilateral approaches to dealing with trade issues and issues in general and the world stage and not as unilateral as Mr. Trump was. This kind of multilateral approach may be helpful to Canada, because if you've got a Buy America policy, I mean, it has ripples. And Canada's inside the first circle inside the United States. In the past, when Mr. Obama had made comments about, you know, Buy America First, there were exceptions that were made for certain kinds of Canadian products that found exemption from the general rules that apply to other countries.
And so, it'll be important for Canada to be very much first in line when it comes for our cabinet ministers with the Trudeau government to get in line to meet with their counterparts with the new U.S. administration as they become appointed and passed through the confirmation process.
Leighton: OK. Now, I think it's fair to say in the minds of many Albertans, the relationship hasn't started well in 2021 because of the quick cancellation of the Keystone XL pipeline. What's your take on that and what it does for Canada's relationship moving forward with the Biden Administration?
Gary: Well, Premier Kenney really had a very strong and visceral reaction when he said that this was like a gut punch to Albertans. I would say that that's a completely understandable and accurate sentiment that would be expressed by many people in Western Canada and Canadians in general that are involved in the energy business.
I think it's important to note that this is not an Alberta energy business. It's not even a Western Canadian energy business. It is a business that applies deeply all across Canada. So, as an example, you look at places like Sault Ste. Marie. They make steel there. We don't make steel in Alberta. And so, the Tenaris plant in Sault Ste. Marie employs about 600 people. One hundred per cent of the steel that they make goes into making tubulars for the oil and gas business, and so it speaks to the importance of the Canadian energy sector to all Canadians, not just Albertans. So, I guess what I'd say is that, you know, we've got to recognize that there's a great benefit to having such a great customer because, again, over three and a half million barrels of oil a day come from Canada and go into the United States.
But there are challenges with that that really involve politics. I mean, if you look at, for example, the case for why Keystone XL should be approved, it makes very, very good sense for the United States, for the people who use energy. From the point of view of energy security and geopolitical security, it makes sense for KXL to have been approved by the United States. But the symbolism that Mr. Biden was trying to create was to shore up support for a political base that it voted for. And it's a shame when, you know, good sense and data that would yield a correct outcome is displaced by political symbolism.
Leighton: Well, as I'm sure you've heard, some have called for a trade war imposing tariffs. What are your thoughts on that?
Gary: Well, let's not start something that we don't have that much control over. And to me, it's another issue to really think about what the KXL decision on the revocation of the presidential permit will mean for us. I think it will embolden those opponents of Canadian energy to go after other infrastructure. And you've seen recently Governor Whitmer from the state of Michigan wants to end Line 5, wants it to cease operations in May of 2021. That is a serious issue.
I don't believe that she has the jurisdiction to do it. The permits are federal permits. The regulator is a federal regulator. Moreover, the Line 5 goes into Detroit where it goes into a Marathon refinery, which provides the gasoline and diesel that is needed to fuel up the automobiles in that area. I can't imagine what the cost of gasoline would go to if you had to truck that gasoline from the Gulf Coast all the way up to Detroit. So, is the shutting down of Line 5 something that makes sense? The answer is no.
And it is -- it will have big impact on Canada as well, because if Line 5 is shut down, then it doesn't come back into Sarnia. Right now, that line takes oil from Western Canada, takes it into Michigan, but after it leaves oil behind in Michigan, it then continues back into Canada and goes into refineries in Sarnia. Almost 50 per cent of the crude oil used in the province of Ontario is supplied by Line 5. Line 5 then connects Line 9, another Enbridge line that goes on to Montreal. And that's where the feedstock goes to the petrochemical business in Quebec and refineries that are there. And my recollection is that the numbers are that almost two thirds of the crude oil used in the province of Quebec come from Line 5.
And so, we have a very big issue if Governor Whitmer is able to execute on her stated intention of closing Line 5. I think we should be focused on issues like that and making the case with consumer groups in the United States, with transportation companies. The price of groceries will go up. You have to look at the refiners themselves and we've got to get groups like the Teamsters onside and motivated to speak up in favour of maintaining Line 5. And while we're at it, I would argue that that's the approach that should be taken with Keystone XL as well.
Leighton: OK, and now, you know, I'm glad you brought up Line 5 because that's another issue that's come up in the news a lot. And as you alluded to, a very important issue. With the Biden Administration in now, is there -- we know what happened with Keystone, we talked about that. We don't know what's happening with Line 5 -- is there any good news? Is there good news with the Biden Administration broadly, broadly put?
Gary: Well, what I hope is possible is that the Canadian government and the U.S. administration, I hope that they'll have a good relationship. And it appears that the President and the Prime Minister have a good personal relationship. And we should never underestimate the importance of good personal relationships at the highest level to be able to move the yardsticks on public policy that is mutually beneficial to both countries.
And one needs to look at the relationship that Brian Mulroney had with President Reagan and the tremendous things happened at that time. The original Canada-U.S. free trade agreement occurred. They were able to deal with acid rain. Nobody talks about acid rain is an environmental issue anymore because the two countries were able to work out a treaty to deal with acid rain. Nobody talks about the thinning ozone layer anymore. The two countries, the two leaders were able to work on that. And the Montreal Protocol came about and we found different ways for aerosol propellants and for refrigerants that didn't use CFCs, chlorofluorocarbons, which harm the ozone layer.
So, one wonders and hopes that the Prime Minister and the President have a good personal relationship as the two of them go to the Conference of the Parties, COP 26, which is set for November of this year in Glasgow. And hopefully they can come up with something that makes sense in terms of a North American competitive energy strategy that they can work on together and maybe level the playing field.
So, for example, the methane emission regulations in Alberta and Saskatchewan, by my understanding, are much better than anything that they have in the United States. So, if the U.S. were to put in those kinds of regulations, that would be good for the environment. And it fits within the overall theme that energy is good, it's emissions that are bad. And so, if we can focus on things that deal with emissions collectively, that would it make it more competitive as a as a U.S.-Canada or even a North American strategy, that would be a good thing to move forward on.
Leighton: It sounds like, you know, this brought opportunity in which we can collaborate with the United States on in particular with energy. Right?
Gary: Yes. And I think that it's not just energy. It's got to be energy and environment policy combined. I think the world is looking for that. The world is expecting that. There may be people who disagree with that within the oil and gas sector, but in my observation, the train has already left the station. I think when I look back as a legislator or policymaker years ago, there was a time when the spheres of public policy, of energy, the environment and economic development were all largely independent of one another. But today, more than ever, if you were thinking about a Venn diagram, those three policy spheres overlap with one another.
You cannot develop any kind of economic development without access to affordable, reliable energy, and you can't develop any kind of energy, including renewables, without having some impact on the environment. And so, when you look at all three of these together and where they overlap, that's the sweet spot where we've got to work together to make sure that we do have affordable, reliable energy into the future that is all of the above -- that includes fossil fuels, that includes renewable energies and includes geothermal. It includes small, modular nuclear.
But I mean, here's the case. We're going to be relying on fossil fuels for a long, long time to come. And here in Western Canada, if you look at cleantech, about $2 billion that's been invested in cleantech, about one $1.6 billion of it -- more than three quarters of it -- has come from the oil and gas business. And so, the fossil fuel business understands the importance of decarbonization of the use of fossil fuels. This is a good thing for the future. We should have some sense of optimism that just like we were able to solve issues like acid rain and the ozone layer, that we can solve this problem as well.
Leighton: Well, and CAPP recently issued a forecast predicting a modest increase in capital spending in Canada this year. So, kind of building on what you just said, do you think this also signals a brighter future for Canadian oil and gas?
Gary: Well, let me say that if you go back far enough, I mean, there's been a dramatic reduction in overall investment in oil and gas. My recollection is that the numbers are that back in 2013, 2014, there's about just over $80 billion that was spent in energy, and then by 2019, it had dropped to about half and then it's dropped further since then.
But it is good news that there appears to be an uptick. And I hope that the efforts being made by the oil and gas business are being recognized, that they are, of course, the important buzzword is ESG and it's not a buzzword anymore. It is an important part of being able to attract capital that you have ESG characteristics. Now, the challenge is trying to figure out whose ESG ratings are we going to be applying? And this is a difficult target for some companies to deal with because different rating agencies will have different emphasis on what you are doing with respect to the environment.
So, it is encouraging to see that there's going to be an uptick, even if it's a modest one. And I think it speaks to the reality that we're going to be using fossil fuels for many decades to come. And that's not me saying that. That's the International Energy Agency that shows that it will be some time before we ever bend the curve on the use of oil and gas.
Leighton: Now, we talked about Keystone XL. We know what happened with that already, but are there any other threats or concerns Canadians should be worried about or for the industry specifically given the new Biden Administration?
Gary: Well, I mean, I don't think we even have to go to the Biden Administration. We should look within Canada itself. I mean, I think it'd be relatively easy to, if I were briefing the President of the United States, if I were, you know, if I were opposed to Canadian oil, I'd say, well, Mr. President, it's easy for you to turn down KXL because they can't even get pipelines approved in their own country.
And so, I think that it will be important for us to maintain a good relationship with the Biden Administration to make the case why the existing infrastructure should continue. We shouldn't be afraid to advocate for increased infrastructure, but I think it also bespeaks of the need for Canadians to be focused on getting infrastructure done within Canada itself. I mean, if Line 5 were ever shut down, that would strand energy in Canada to be able to get to Canadians. Hopefully, it will encourage people to redouble their efforts on getting the completion of the TMX.
It means that we should be re-examining Bill C-48, which prevents tanker traffic off the northwest coast of British Columbia, which is absurd because tankers travel through those waters all the time as Alaskan crude is passing by the British Columbia coast to bring crude oil from Alaska down to refineries in Los Angeles. It makes no sense that we cut our own throats to being able to breathe life into that opportunity ourselves.
And maybe there's another opportunity to re-examine Energy East. Maybe we should be looking at trade corridors that go in other parts of Canada. We should be thinking about how Russians are using the northern seaway route to move gas supply into Europe and that thinning Arctic ice and new ice breaker technology is allowing that to happen. We should think about how you can move energy through the Northwest Passage and do exactly the same thing as a way of expressing our sovereignty, which is in jeopardy in Canada's high Arctic. So, there are many, many things that are on the radar that need to be considered over and above our interests in the United States, which will always be our biggest customer. But if there's one thing better than one really good customer, it's two or more really good customers.
Leighton: Yeah. So, last question: the administration is in for the next four years. And we talked about, you just mentioned what we can do kind-of within Canada, but would you see Alberta and/or the Canadian government doing to make this relationship or best position the industry for success in this next four years?
Gary: Well, in so many ways, our energy systems in the United States and Canada are integrated. I mean, so it will be incumbent upon not only efforts of the federal government working with people in Washington, but also, you know, governments at the provincial level working with their counterparts at state-level governments in the U.S. And one thing that Canadians don't appreciate that really became evident to me when I lived and worked in Washington, is that today's governor becomes tomorrow's senator. Today's state assemblyman might become tomorrow's congressman. Today's attorney general in a state might become a secretary of the cabinet in Washington.
So, cultivating these relationships with state-level governments is really important. Thirty-five U.S. states described Canada is their number one trade destination, and all of Canada's provinces would describe the United States as their number one foreign export destination. So, these are important relationships for us to have and to foster. And we need to be working with the governors of those states that are in the energy business -- the folks in Louisiana and Texas and Oklahoma and Wyoming. I think that there's much in common and some of the threat that they see coming from the U.S. government with its emphasis on environmental symbolism, I think that they've got an equal set of interests to making sure that the oil and gas industry remains an important part of the economies of their states. And that is a common interest that we have and where our interests can align. That's where we should be focusing our efforts.
Leighton: So, thanks very much for being on the show, Gary.
Gary: Leighton, it's my pleasure and I'll be happy to do it any time you ask.
Leighton: And that was our conversation with Gary Mar, president and CEO of Canada West Foundation. Stay tuned for our next Energy Examined podcast. And if you liked this episode, please share it with a friend and make sure you subscribe on whatever podcast network you use. For more stories and their views on Canada's energy industry, check out our website, context.capp.ca. See you next time.