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The day after America’s presidential election,
the Calgary-based Canadian Defence and Foreign
Affairs Institute (CDFAI) hosted a panel discussion on the political and
economic significance of President Obama’s second term.
Some of the most interesting observations came from
Jonathan Baron, an American lobbyist with a primarily Republican clientele.
“What you need to know about Republicans and Democrats is that they
hear different things when they hear the word energy. Say
‘energy’ to a Republican, and he will think about increasing
energy production. Say ‘energy’ to a Democrat, and she will think
about mitigating environmental impacts. It’s like another world.”
Now he was on a roll. “When a Republican
thinks about Canada’s energy resources,” he added, “they
really do think that these resources belong to America. There isn’t a
strong sense that they are a sovereign asset for Canadians. For Republicans,
the idea of North American energy security is a no-brainer.”
The irony is that the International Energy Agency
issued its annual report a few days after this panel discussion – a
report which seemed to put the cat among the pigeons. According to the IEA,
“The global energy map is changing, with potentially far-reaching
consequences for energy markets and trade. It is being redrawn by the
resurgence in oil and gas production in the United States and could be
further reshaped by a retreat from nuclear power in some countries, continued
rapid growth in the use of wind and solar technologies and by the global
spread of unconventional gas production.” According to this respected
agency, the US will become the world’s top oil producer by 2017, and
could be nearing energy self-sufficiency two decades later.
A bearish outlook for Canada’s oil producers,
is this report worth long-term worry? Probably not. Since the 1972
publication of The Limits to Growth, a book which forecast shortages
of virtually every commodity by the end of the 20th Century, a
good rule of thumb has been that long-term natural resource forecasts are
always wrong.
To a large extent, this is because major forecasts
are political. IEA member governments and some oil companies vet them before
they go public. In the highly likely case that the United States reviewed the
IEA forecast before it hit the streets, they would have wanted the
agency’s report to justify fracking,
Keystone, perhaps, and the West’s embargo of Iranian oil. As one
commentator observed, “Forecasters test scenarios – they assess
economic and energy trends to produce numbers. Among the enormous range of
possibilities, one forecast is chosen for public purposes.” Also, of
course, since Adam Smith published The Wealth of Nations in the 18th
century, economies have shown repeatedly that markets eventually equilibrate.
If you focus instead on the near-term implications
of the recent US election, there is a lot of good news.
<!--[if !supportLists]-->· <!--[endif]-->Before
campaigning began, global warming environmentalists developed traction by
opposing Keystone. Notwithstanding their public protests, sources Oilweek spoke to believe the project has a good
likelihood of getting State Department approval. An okay would increase the
integration of Canadian oil and bitumen production into US markets and
provide tidewater access to overseas buyers.
<!--[if !supportLists]-->· <!--[endif]-->On the
gas side, this commodity will expand its market for power generation, and
Canadians will perhaps gain an advantage in the export of this commodity
overseas.
Keystone
President Obama’s re-election was a near-term
good news story for Canada’s oil patch. If approved, he Keystone
Pipeline will move bitumen to the 7.6 million barrel-per-day Gulf Coast
market. It is worth remembering that the Department of State originally
deferred its decision on the pipeline as a political gesture, so as not to
alienate environmentalists during the election. The reason given was concern
about a proposed segment of the pipeline route through environmentally sensitive
sand hills in Nebraska.
According to Maryscot
(“Scotty”) Greenwood, a left-leaning Democrat, “There is
awareness in the United States about the importance of energy from Canada and
I believe that awareness was heightened during the campaign. There is a
renewed appreciation of the importance of North American energy
independence.” She is reasonably confident the project will go ahead,
using TCPL’s revised route. In a separate interview, AJM
Deloitte’s geoscience director Dave Russum
enumerated the reasons the State Department might stand behind Keystone:
“Job creation, economy boost in the US, secure supply.”
For Canada, the benefits are different. Keystone
would provide Canadian oil sands producers with direct access to
America’s single biggest oil market. Thus that pipeline’s
throughput would not be subject to the price differentials that have become
chronic – especially for the oilsands sector.
More importantly, the project would provide Canadian producers with access to
tidewater. This would mean overseas markets and international prices.
Meanwhile “we are in for a rocky time in the Canadian industry
regardless of who is in the White House,” according to Russum. “When oil prices were more than $100, many
projects looked pretty attractive, but current prices in the $85 range make
the economics much less robust.”
Carbon emissions kept coming up during the CDFAI
forum, and Greenwood stressed the political importance of the environmental
constituency. “During the second term of the Obama administration
(president Obama) has an imperative to deal with some new legislation which
covers coal ash, soot and other environment-related questions. This will
affect core constituencies. However, there is not necessarily a conflict
between these two. You can look after these regulatory issues, and also do
Keystone.”
Right-leaning Jonathon Baron disagreed. “The
environmental community feels frustrated, so (their protests) have moved down
to the state level. The president is going to have to do quite an interesting
balancing act to deal with fracturing and Keystone.”
A master of Realpolitik, Baron offered hope for
crude oil prices – but hope with a bitter taste. “There’s
going to be more instability in the Middle East during an Obama
presidency,” he said; after all, the president campaigned on having
ended “a decade of war.” If the president is not willing to use
American might in response to Iran’s apparent nuclear build-up, Baron
argued, there will be mischief in the Middle East. “That volatility
means high prices going forward. That has important implications in American
markets for Canadian oil sands and natural gas.”
Gas Prices and Markets
Canada’s gas industry is likely to benefit
from President Obama’s next term through the conversion of its power
industry to natural gas. According to Scotty Greenwood, who served for two
terms as a staffer in the Clinton White House, suggested that he “is
looking for ways to regulate more stringently, to pivot to natural gas
because it’s a cleaner burning fuel than coal. He does have a desire to
build demand for natural gas and to clean up the coal industry.” Since
it’s his second term, the president will find America’s powerful
coal lobbies less daunting.
“During the election campaign Obama virtually
did say ‘I hate coal!’” Baron told the CDFAI audience.
“Cheap natural gas has given the president an opportunity that
didn’t exist before. Because the United States knows that it is not
going to be able to implement a carbon tax, it will instead increase the
price of coal through regulation, making coal less competitive.”
North American gas markets are likely to expand at
the expense of coal. In itself, this may not be cause for much celebration in
Canada, since the United States is nearing self-sufficiency in this
commodity, and its production and transportation costs are lower. However,
Greenwood noted another area where the US political environment could
unwittingly favour Canadian natural gas.
In the American political system, Congressional
committees have plenty of muscle, and it matters who serves as the chair. The
incoming chair of the Senate’s powerful Energy and Natural Resource
Committee is Democrat Ron Wyden. Wyden believes large-scale LNG exports would
raise natural gas prices in the US, harming the economy. In the past he has
argued that Washington should impose a “timeout” on new LNG
export facilities, pending review. “That could be the end politically
for (additional) natural gas exports from United States,” said
Greenwood.
“There is a gigantic and very legitimate
debate about whether we should be exporting natural gas,” she added.
“My observation is that in the United States it will be politically
very difficult to export (gas to other countries).…This
could be a big opportunity for Canada, since the same political challenges do
not exist here.” Baron concurred. “There are already a number of
LNG export projects in the United States. LNG exports along with hydraulic
fracturing will be major issues during the president’s second
term.”
While the Americans dither, Canada could approve and
construct facilities for overseas markets. Eastern Canada already imports
about two billion cubic feet per day of gas from the US, and “this is a
cheaper source than Western Canada. We are of course a net exporter to the
US, but that role is shrinking. We need alternative exports” said AJM
Deloitte’s Russum. He observes that Canada is
‘way behind Australia and other countries in developing or expanding
LNG facilities. While the US already has gas export facilities in operation,
Canada’s first plant won’t be ready until 2019.
“To me the problem is that Canada can’t
compete with gas supplies that are abundant, cheaper, and closer to market in
the US – for example, Marcellus, Fayetteville, Barnett and Eagleford,” he added. “Gas is still a fossil
fuel, so while it is cleaner and more environmentally friendly than coal, it
still has the fossil fuel stigma and the fracking
stigma. I’m unclear whether it is a problem or a solution in the US. In
any case, if prices rise the US has shown it is able to drill and bring on
new volumes of shale gas very quickly, which would in turn dampen
prices.” Russum added that “prices for
natural gas need to be considerably higher to make the industry profitable
here.”
The US/Canada Alliance
Prime Minister Brian Mulroney once famously said
that “the relationships (between prime ministers and presidents) are
absolutely indispensable. If you don’t have a friendly and constructive
personal relationship with the president of the United States, nothing is
going to happen.”
According to Greenwood, the Canada/US relationship
is “hugely important, writ large. It’s much bigger and more
integrated than any personality. It matters who is in the White House, but in
the end the relationship will do well because it has to, and because of all
the history between the two countries.” She added that “the US
government does not want to prevent Canadian development in any way. We have
very close relationships, and those relationships are of great value on both
sides of the border. I think the United States, as Canada’s most
important commercial partner, wants Canada to be commercially successful in
every possible way.”
Colin Robinson, a Canadian diplomat who helped
broker the Canada-US Free Trade Agreement and NAFTA,
stressed the importance of international cooperation to help prevent trade
disputes. “The first lumber dispute between Canada and the United
States goes back to the time of George Washington,” he reminded the
CDFAI audience. “These kinds of things do lead to protectionism. In a
lot of cases, we have to put competition aside and think of things as North
American.”
“Whenever (a diplomat has) to do something in
the United States you have to do it through the White House,” according
to Baron. The State Department is critical for international affairs, but
other parts of government are in play. Formerly Canada’s ambassador to
the US, Frank McKenna once said that “The president can love you to
death, but that doesn’t mean you don’t have constant harassment
from Congress….The tone at the top helps, but it’s not
conclusive.”
As this article went to press, there was optimism
that the United States would not fall over the “fiscal cliff.”
For the sake of talking about the near-term future, this article assumes a
compromise that won’t suffocate North America’s economies. If
America remains a house divided, though, Canada needs to declare greater
independence from US commodity markets. That truth is self-evident.
Peter McKenzie-Brown
Language Instinct
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