Challenging times for the competitiveness of Canada’s oil & gas industry: the ‘green energy’ imperative

February 2017 | SPOTLIGHT | SECTOR ANALYSIS

Financier Worldwide Magazine

2017 marks a new era for the Canadian oil & gas industry as the policy preferences of the recently elected centre left Liberal Party at the federal level, coupled with the unprecedented election of the left leaning New Democratic Party (NDP) in Alberta (the epicentre of the Canadian energy industry) begin to take shape. Armed with their new mandates, both the provincial and federal governments introduced a renewed focus on the issue of climate change along with measures intended to reduce Canada’s greenhouse gas (GHG) emissions.

The Alberta provincial government introduced a carbon-pricing regime that came into force on 1 January 2017. Subsequent to Alberta’s adoption of a carbon-pricing regime, the government of Canada announced that it would be setting a floor price for carbon and require all provinces to adopt a carbon pricing system, either by way of a carbon-pricing regime or through the introduction of a cap-and-trade system, by 2018. In the absence of a provincial carbon-pricing system, the federal government has indicated that a federal carbon-pricing regime (details of which remain undeveloped) would apply. For jurisdictions with a price-based system, or which are subject to the federal regime, the carbon price floor is set at $10/tonne in 2018 with annual increases of $10/tonne per year to an eventual rate of $50/tonne in 2022.

While the Alberta NDP sees the imposition of the carbon-pricing regime as a historic opportunity to fundamentally reshape the Canadian economy and position Canada to be a leader in the ‘green energy’ future, the federal government, for its part, views the absence of a price on carbon as a key ‘market failure’ that governments can, and must, play a key role in correcting.

While the full impact of these measures will not be known for some time, two things are certain. First, these policies will have a negligible impact on reducing global GHG emissions. In 2012, Canada’s GHG emissions represented only 1.6 percent of global GHG emissions and this share will inevitably decline over time with the anticipated increase in GHG emissions of the much faster growing, developing and emerging economies of China, India, Brazil and Indonesia. Second, the imposition of carbon pricing in the Canadian market, particularly as the levy increases, will initially negatively affect the competiveness of Canada’s oil & gas industry – an industry already struggling as a result of the global decline in crude oil & natural gas prices over the last number of years.

On a global scale, Canada is one of the only large oil & gas exporting countries subject to a carbon-pricing regime. Moreover, Canada’s carbon-pricing regime is unprecedented. While 111 countries represented at the Marrakesh climate change conference supported combating climate change, only countries with a combined 17 percent global emission share intended to honour that proclamation. None of those committed are significant trading partners. Moreover, more than one-third of the countries pledging support for the Marrakesh proclamation actually subsidise fossil-fuel use. International Energy Agency data shows that in 2014 fuel subsidies totalled US$493bn. There is and will continue to be clear demand, on a global scale, for fossil fuels for some time to come. Of the top 10 net exporters of crude oil & natural gas, few countries have shown greater environmental stewardship and regulatory oversight than Canada. Will our less regulated competitors, such as Saudi Arabia, Russia, Iraq, Nigeria, Venezuela or Indonesia join us as leaders of a global green energy future? Are we not, by imposing a carbon-pricing regime to reduce Canada’s 1.6 percent of global emissions, only moving these emissions to other, less environmentally responsible jurisdictions?

The Canadian federal and provincial policies also stand in stark contrast to the energy security and independence policy preferences expressed by the new US regime following the election of Donald Trump. The US, once our largest customer, now one of our largest competitors, will not have a carbon-pricing regime. Donald Trump as president-elect has made it clear that the US will withdraw its support for the principles discussed at the Marrakesh climate change conference. President-elect Trump, moreover, is expected to weaken the authority of the US Environmental Protection Agency to regulate methane emissions from oil & gas operations, directly in contrast to Canada. Furthermore, according to publicly available comments, Mr Trump’s campaign statements indicate that he will likely adopt policies that attempt to expand fossil fuel production, ease regulations on the industry and roll back president Obama’s clean air policies. Mr Trump has said he will pursue a policy path to open up more US lands and waters to drilling and, in turn, boost consumption of even cheaper US domestic oil & natural gas. In 2014, 21 percent of US oil production and 14 percent of gas came from federal lands, according to the most recent report from the US Energy Information Administration.

The policies proposed by Mr Trump are designed to spur economic growth and are likely to increase demand for hydrocarbons. Additionally, Mr Trump’s possible efforts to end incentives for alternative energy development could boost short-term demand for fossil fuels. For example, a potential cut in the investment tax credit to 10 percent from the current 30 percent would slash solar installation demand by 60 percent, according to S&P Global Market Intelligence. When the demand for fossil fuels increases, naturally the price increases which increases drilling in areas that can respond quickly to the economic opportunity like the US onshore shale plays.

Canadian natural gas has already seen a decrease in US demand for imports amid an increase in US production. Canada already faces a multitude of factors that hinder the country’s competitive stance with the US, including: depressed natural gas prices; capital requirements for unconventional gas drilling; no means to export natural gas offshore; a lack of capital required to build liquid natural gas facilities; and US natural gas exports into eastern Canada. The additional cost imposed by the carbon-pricing regime in Canada, together with the anticipated new Trump administration policies, is very likely to further reduce our attractiveness for investments in oil & natural gas projects in favour of investment in US oil & natural gas projects.

There can be no question that each nation, including Canada, has a responsibility to address climate change. It is true that national boundaries mean that each country is limited in how it alone can address global issues of concern. This means that unless or until the global superpowers and other net exporting nations of the world decide to take similar action, Canada’s ‘green imperative’ will have a negligible impact on addressing the global problem and indeed, Canada is arguably simply moving the problem offshore. These actions will initially reduce the global competiveness of Canada’s oil & gas industry, and in so doing, will likely weaken the Canadian economy. How deeply and for how long, remains to be seen.

That said, Canadians have always demonstrated resilience and technological leadership in the sustainable development of oil & gas resources. As such, it may prove to be the case that the early adoption of carbon pricing may enhance Canada’s position as a leader in climate change technologies. Indeed, companies such as BP, Royal Dutch Shell, Suncor, Statoil and Total have gone on the record to state that a carbon-pricing regime is necessary to provide workable solutions to the challenge of providing more energy while tackling climate change. Canada has risen to the challenge of tackling climate change in two large-scale carbon capture and storage (CCS) projects which, combined, have captured and stored more than 28 million tonnes of carbon dioxide since 2000: the Quest Carbon Capture and Storage Project in Alberta and the Weyburn-Midale Carbon Dioxide Project in Saskatchewan, the world’s largest geological CCS site. With these CCS projects, Canada has nearly one-fifth of the 22 large-scale CCS plants operating or under construction around the world. Given Canada’s resilience and technological capacity, we anticipate that Canada is likely to meet the challenges and may have an advantage over our competitors that are required to take similar actions at a later date.

Furthermore, by enacting federal and provincial regulations needed to make good on the commitments made to reduce methane emissions, made in conjunction with, and as part of Canada’s overall plan to reduce GHG emissions, Canada has the opportunity to get a head start in positioning itself as a leading provider of methane solutions. Methane is more than 20 times more effective at trapping in heat than carbon dioxide, making it one of the most potent greenhouse gases contributing to climate change. The good news is that reducing methane emissions is one climate challenge that is easy to meet and relatively cheap. An Environmental Defense Fund and Pembina Institute study shows that the Canadian oil & gas industry can nearly fully achieve a 45 percent reduction for less than one penny per thousand cubic feet of gas produced – in many cases, fixes are as easy as tightening loose valves and repairing leaky equipment. At a time when voices are rising in opposition to oil & gas development because of concern over climate change, Canada, as a whole, is well positioned to provide a roadmap for other oil & gas producing nations to follow.

Alicia Quesnel and Evan Dixon are partners and Brittany Scott is a student at Burnet, Duckworth & Palmer LLP. Ms Quesnel can be contacted on +1 (403) 260 0233 or by email: akq@bdplaw.com. Mr Dixon can be contacted on +1 (403) 260 0162 or by email: edixon@bdplaw.com. Ms Scott can be contacted on +1 (403) 260 0373 or by email: bscott@bdplaw.com.

Alicia Quesnel, Evan Dixon and Brittany Scott

Burnet, Duckworth & Palmer LLP