With the US/China Joint Announcement on Climate Change of a few days ago, I was reminded of a presentation I gave in Ottawa to the House of Commons Standing Committee on Natural Resources in May of 2013.
The US and China had just announced the formation of a working group to advance their bilateral efforts to address climate change. It appears their efforts have paid off. Their agreement will have far-reaching impacts, none the least of which will be reduced growth in China’s appetite for fossil fuels as the energy intensity of its expanding economy declines.
In May of 2013, I warned MP’s that Canadian producers might not be able to outrun the trends in the US energy market by diversifying into China and India.
With China, Canada’s best bet for a new fossil fuel market, now adopting a commitment to meet 20% of its needs with clean energy, it seems my prediction may be playing out. Canada’s potential for market diversification will be reduced unless Canadian producers can deal with their emissions and, given the slide in prices, their costs.
Here is the presentation I delivered to the standing Committee, two years ago. I think it’s still relevant:
May 9th, 2013
House of Commons Standing Committee on Natural Resources
Thank you Mr. Chair and committee members for giving me the opportunity to speak to you this afternoon.
For much of the last two and a half decades I have provided advice to governments and industry on Atlantic Canadian energy and natural resources issues…
I appear here today as an individual. The opinions I express are my own.
Time permitting I will outline:
- My perspective on the Canadian situation;
- I will identify some threats to our position as an energy exporter;
- Offer some advice on how we should use the benefits that come from export diversification; and
- Identify some things we need to do to facilitate the integration of our domestic markets and to increase exports.
Stranded resources are not a new problem
In the fall of 1957 Premier Ernest Manning came to Ottawa to enlist the help of Prime Minister Diefenbaker to solve Alberta’s over-supply of oil. He faced essentially the same problem we are facing today. Existing transportation infrastructure had been overwhelmed by new production from LeDuc and, even then, the East was a net importer of foreign oil.
56 years ago Canada might have developed a national vision that included energy corridors from coast to coast to coast. These could have supported market integration for all forms of energy.
Instead, we traded an integrated domestic market for a series of export driven projects that, with the exception of the trans-Canada natural gas pipeline, created infrastructure running north to south. These served important projects and some producing areas. But did little to create a national domestic market.
Threats are global
Canada’s energy developments have been largely driven by and have benefited from demand from the largest single energy market in the world.
But US market fundamentals are changing and Canada is paying the price. According to a report commissioned by the US Government, US Transportation bottlenecks will cost Alberta producers as much as $65 billion/year by 2030 if they aren’t addressed.
However, new technologies, which have enabled the production that has created the bottlenecks, as well as climate policies that are reducing demand, are not unique to the US.
They’re a part of a global trend that we may not be able to outrun by simply changing our market focus. Even if that new focus includes the rapidly growing economies of China and India.
Climate Change Mitigation is the Policy Risk that Can reduce Demand (Just as additional Supplies are becoming viable with new technology.)
While many still see the economy as a key preoccupation, others see climate change returning as a top of mind issue. The heads of the IEA, IMF and the World Bank have all stated recently that renewed action is needed to curb the growth of emissions.
Just last month, the US & China struck a working group to foster low-carbon economic growth. In its latest 5 year plan, China has also stated its intention to peak its use of coal.
And of course, this week Minister Oliver is back in Brussels fighting the Europeans’ plan for a Low Carbon Fuel Standard.
While policy risk is all around us, the technology revolution opens up new supplies world wide. The U.S. Energy Information Administration has estimated that with new technology, China’s recoverable shale gas resources could be 50 percent bigger than those in the United States.
If China can deal with its internal inertia, it will have substantial gas supplies of its own to compete with imports from countries like Canada, though it will become the world’s largest oil importer by 2030.
According to the IEA, new sources of supply, coupled with a slowdown in Emerging Markets and generally lower demand growth, “raises the prospect of a more comfortable supply/demand balance in the medium term”. This is not a recipe for higher prices.
How can we remain competitive if the upper end of our cost of production for new oil sands derived crude, overlaps the low side forecasts of the world price, especially when new supplies and policy risks are factored in.
Market diversification MAY buy us Time
Market diversification is part of the solution in the near term as it can buy us time to address high cost structure and environmental challenges. But we must also position ourselves with a counter-balance of supply sources. – Oil sands yes, but also by investing in our offshore frontier.
Newfoundland and Labrador production can compete with the best in the world but we must encourage higher rates of exploration to replace declining reserves.
The federal government; as an owner and co-manager of our offshore areas needs to step up and match provincial efforts just as it should lead a national debate on energy.
National Energy Corridors
A National Energy Corridor would facilitate the integration of our domestic markets while aiding diversification of our export markets.
Domestic markets can provide new customers for western crude as well as electricity from renewable sources across Canada. This can only occur with the support and cooperation of the provinces and a willingness by industry to invest in the required infrastructure.
We need a national energy corridor, one that can link our multiple domestic markets into a stronger whole, providing security of supply through diversification of sources; A corridor that allows Alberta Bitumen to reach tide water and allows Canadians to take advantage of renewables that are currently stranded away from major centers of demand.
Investors need certainty of regulatory process. They want to know what is required and when, with predictable outcomes. But, we mustn’t discourage involvement of ordinary Canadians and civil society. Energy projects must be sustainable and have a social license.
All this would be helped by a national consensus on energy, one that insures we are competitive, both as an exporter of energy and as an exporter of manufactured goods that are competitive because we have a domestic supply of affordable and sustainable energy.
We really need to get this right now and not wait another 56 years.
Thank you!
