The impact of the ‘America First Energy Plan’ on Canada’s oil & gas industry

September 2017 | SPOTLIGHT | SECTOR ANALYSIS

Financier Worldwide Magazine

September 2017 Issue

The US is Canada’s biggest export customer for crude oil & natural gas and is now its biggest competitor. With Canada’s focus on sustainability, the country’s desire to address climate change and the country’s strict regulatory rules governing the promotion of health, safety and the environment, Canada is in an ever challenging position with low oil & gas prices and changing global market dynamics. One of those dynamics is the Trump presidency and the recently released America First Energy Plan. The Plan declares “American energy dominance” as a “strategic economic and foreign policy goal of the United States” and seeks to “unleash an energy revolution” by tapping into “$50 trillion in shale, oil & natural gas reserves, plus hundreds of years in clean coal reserves”. And most importantly, the plan aims to make the US “totally independent of any need to import energy from OPEC” or “any nations hostile to US interests.”

Canada’s industry proponents welcomed one of president Trump’s first actions – the approval of TransCanada’s Keystone XL pipeline. If constructed, Keystone XL will provide greater access to markets for Canadian heavy oil and feedstock for many US refineries that process heavier hydrocarbons. It is a ‘win-win’ for both Canada and the US. Unfortunately, on most other fronts, the plan will have negative consequences for the Canadian oil & gas industry. So, while Canada has welcomed president Trump’s enthusiasm for the energy sector, his quest for US energy dominance in global energy markets has Canadians worried.

To be sure, technological advancements in fracking and the discovery of vast US shale reserves are first and foremost underpinning America’s global energy advancement. Unquestionably, the promise of quicker and higher returns through the lower cost development of US shale reserves has been principally responsible for the exodus of US based companies from Canada’s oil & gas sector over the past 18 months. And with the significant increase in US shale production, exports of both Canadian crude oil & natural gas to the US have declined in recent years. Canadian production is being displaced by lower cost Marcellus production, not only in the Midwest US, but also in central Canadian markets. Unleashing “$50 trillion in shale, oil & natural gas reserves” will have the effect of keeping commodity prices low, but that is not the only major difficulty facing Canadian producers. Several actions that are being taken or that are contemplated to be taken by the Trump administration to use the US energy sector as a political instrument and to roll back climate change initiatives undertaken by the Obama administration will put Canada on a different competitive footing than the US. These actions will negatively impact Canada’s ability to attract foreign investment into the oil & gas industry, to compete in North American markets and to diversify Canadian markets beyond the US.

At the same time that the US is touting global energy dominance and reducing American dependence on foreign oil, the Trump administration is all about ‘America First’ and its policies have taken an ever increasing protectionist tone. The Trump administration is using the energy sector as a political instrument to rebalance its trade deficits with countries such as China, Japan, India and South Korea, and to help Eastern Europe reduce its dependence on Russian oil. In North America, Trump raised the threat of imposing a tax on Canadian energy imports into the US. This would be devastating for Canadian producers. Fortunately, this proposal quickly and quietly retreated upon the realisation that a tax on Canadian imports of oil & natural gas would significantly increase prices for US consumers. Finally, Trump initially sought to dismantle the North American Free Trade Agreement (NAFTA) as a “bad” deal for the US. However, he will settle on renegotiating NAFTA for now. Though it is too early to tell what that means, of course, uncertainty is always more costly than certainty.

It is no secret that president Trump, his energy secretary Rick Perry and his director of the US Environmental Protection Agency (EPA) Scott Pruitt, question whether climate change (if it exists) is caused by human activities. Less than a week after taking office, president Trump ordered the removal of the climate change page on the EPA’s website, and subsequently cut funding to the EPA resulting in the loss of about 20 percent of its staff, the reduction and elimination of regional pollution clean-up programmes and the reduction of budgets for enforcing regulations. At the same time, the EPA is now expected to provide expedited environmental reviews for ‘priority’ energy infrastructure projects. In June, the US withdrew from the Paris Climate Agreement while at the same time taking action to reverse the ban on coal leasing on federal lands, repealing rules that would have limited coal companies from dumping waste into streams, attempting to reverse rules to curb methane emissions from oil & gas equipment, expanding drilling on federal lands (including lands previously declared national monuments), expanding drilling rights in parts of the offshore in the Arctic, Atlantic and Pacific oceans and repealing securities disclosure rules aimed at curbing corruption at oil, gas and mining companies (on the theory that it made US companies less competitive vis-à-vis state-owned enterprises). It is quite a list.

In contrast to the US, Canada would like to be known globally as a leader and advocate for sustainable and carbon reduced resource development and environmental protection. The federal and provincial focus has been on transitioning to a low carbon economy by eliminating coal-fired electricity generation, making it more costly to produce oil & gas and allocating investment dollars to clean technology and related infrastructure. Indeed, Canada’s ‘energy future’ is focused on clean growth, not on the growth and development of its resources sectors. The Canadian federal government and several provinces, including Alberta (where 80 percent of oil & gas is produced) have taken steps to impose a carbon tax, implement a 100 MT cap on emissions from the oil sands sector, maintain a moratorium on oil tankers on the west coast, impose tighter regulations on methane emissions and have done little to address Canada’s highly politically charged and lengthy regulatory approval processes. Suffice it to say, not only does this approach make it more costly to explore for, develop and produce Canada’s vast oil & gas reserves on an ‘absolute’ basis, it is much more costly, on a relative basis, to the development and production of US reserves, as well as the reserves of other significant global players that do not share Canada’s commitments.

Canada’s goal is to become a key player in the global long-term energy transition. While there is much to be said for greater energy efficiency, improvements in the competitiveness of renewable energy and the decarbonisation of the world’s global energy mix, the global demand for energy will continue to rise. The extent to which Canada’s resources are developed to meet this demand is an open question. Overall, the divergent paths taken by the US and Canada in how they perceive their ‘energy future’ have had, and will continue to have, at least in the near term, a negative impact on Canada’s ability to attract foreign investment for the development of Canada’s conventional and non-conventional resources, the country’s ability to compete with North American production and even its ability to diversify its oil & gas markets beyond the US.

Alicia K. Quesnel is a partner at Burnet, Duckworth & Palmer, LLP. She can be contacted on +1 (403) 260 0233 or by email: akq@bdplaw.com.

Alicia K. Quesnel

Burnet, Duckworth & Palmer, LLP