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Atlantic Energy Projects – Change in the Air?

FairweatherHill.com November 3rd, 2014

Traditional energy projects in Atlantic Canada have been as much about the politics of short-term jobs and saving political bacon as they’ve been about long-term economic vision.

Joey Smallwood  needed jobs from the Churchill Falls project to help his re-election in 1966 and he was willing to sign a “controversial” power deal with Quebec to get them.

While Joey was sparring with Quebec, Nova Scotia was doing a deal with Ottawa that would see a Heavy Water plant built in Glace Bay to manufacture cooling water for Canada’s Nuclear industry. That project did provide needed employment to industrial Cape Breton. But, it produced very little heavy Water. The last remains of the heavy water plant were recently cleared away at federal expense.

Of course, there have been notable exceptions to this history, offshore oil and gas has transformed the economy of Newfoundland and Labrador and to a lesser extent, Nova Scotia, and still holds potential for future growth.

New Brunswick Premier David Alward, in 2013, promised jobs from the building of a heavy oil pipeline and from the potential development of shale gas. New Brunswickers just needed to believe there were huge game-changing benefits, and no risks, in these developments. The promoters of large capital-intensive developments like hydro,  heavy water, or as in the case of New Brunswick, nuclear and pipelines, have always understood these realities and have used them to advantage, especially near election time.

As we know, with a hydro deal in hand, Smallwood went on to win re-election in ’66. Today’s public may be a tad more cynical than their parents were in the ’60s. Premier Alward’s pitch to voters fell short and his PC’s became New Brunswick’s second, consecutive, one term government when they were turfed out in 2014.

New Brunswick voters, as it turns out did have a memory. They remembered successive failures to launch promised big energy projects; a second nuclear reactor, a second oil refinery, and an LNG import terminal that was not needed by the time it was commissioned.

It would be a mistake, though, to think that voters are simply souring on “Big Energy”, when the real issue is cynicism over  the notion that big projects are the silver bullet to reversing our economic decline and that all government has to do is get out of the way.

Governments have fallen out of their traditional role. That is, to govern, ensuring that development is in the public interest and driven by the right balance of economics and environmental principle. The reality is that policitians have become cheerleaders, not stewards of the public interest. Politicians have as much responsibility for the resulting loss of social license as have the promoters. Public voices are beginning to ask, “if government isn’t see as actively managing that balance, who is?” New Brunswick voters might just be in the vanguard of a growing awareness of the importance of getting that right than some of our leaders.

While the incoming Gallant government can expect to see considerable jockeying by project promoters and their opponents, events unfolding outside the region will ultimately determine the fate of any new export focussed energy development here.

In the meantime, we must decide under what terms development should occur and we should have that debate now as the landscape is changing rapidly. The “managed” public consultations to which we’ve grown accustomed, aren’t the answer to regaining public trust or preparing us for the complexity of issues we have to confront.

Weakening oil markets, growing demands for necessary action on climate change, an expanding range of increasingly efficient renewable energy options and more distributed energy production are not short-term issues. They are deepening trends that, taken in totality,  represent a change in the way we will produce, distribute and consume energy.

These trends will also impact the potential of New Brunswick’s shale gas industry. Politicians and public policy practitioners need to cut through the conflicting signals;  The global market for renewable energy development to 2035 may be $23 trillion, but the estimated required expenditures on fossil fuels are greater, at more that $30 trillion; and While more than $300b in fossil fuel assets may be stranded if a low-carbon strategy is adopted worldwide after 2015, not all fossil fuels will be impacted uniformly. New Brunswick’s shale gas resources should be marketable long after coal production, for example, has ceased to be viable.

Industry understands that fossil fuel demand is subject to future policies aimed at reducing GHG emissions and is preparing in varying degrees to meet the challenge. But the stark reality, according to Christiana Figueres, Executive Secretary of the United Nations Framework Convention on Climate Change (UNFCCC), is that if we are to meet climate change targets, then fossil fuel consumption has to peak and then decline within this decade. Investment will soon flow mainly to high-graded opportunities while marginal development will increasingly have to be abandoned.

Clearly, investment predicated on continued growth in consumption will be unattractive if there is a risk that the assets financed will be stranded. In this environment, New Brunswick needs to be realistic about the potential for natural gas development and the impact of its “fracking” moratorium. We need to understand the implications of taking ourselves out of contention for one of the remaining fossil fuel investment opportunities even as we should have an eye out for opportunities in emerging energy technologies.

We’ll have to see if our new leaders can juggle more than one issue at a time or even if their horizon is wide enough to allow them to keep an eye on maturing opportunities as well as those that are just emerging. Investors will certainly have an ear to the ground. Lets hope our politicians have theirs there as well.

We’ll soon see if they’re listening…

(This is an excerpt from a more extensive opinion piece I wrote recently on energy trends and implications for Atlantic Canada. I’ll post it here when I’m able to release it)

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My Response to an Article By R. Bensh published on OilPrice.com

My response to a June 24th Article by R Bensh entitled “5 Things Ukraine Must Do To Become Energy Independent“

Ukraine’s problems can’t be fully addressed by simply changing the ownership of energy assets. This misses the potential for the Ukraine to solve its own energy issues, to make gains in energy security via energy efficiency, for example and by improving the management of state-run enterprises to get more out of its considerable domestic energy resources.
Norway demonstrates that state run enterprises can function effectively in the energy business, provided they are given clear mandates by government and have competent management, free of political interference.
As we’ve seen elsewhere, energy efficiency requires an energy price signal that is also independent of ownership.
If the Ukraine is to have secure supplies of competitively priced energy, then market reforms are clearly necessary to attract investment and Western technology.

However, reforms, which include a determined attack on corruption, should be implemented by the new Government before there is any wholesale divestiture of state energy assets. To begin that process now, without market transparency, would guarantee a fire sale that would be hard for Ukrainians to accept as they are forced to adjust to higher energy costs and fuel poverty for many.
Moving from a system of heavily subsidized energy consumers to a fully market-driven one in a single step, would create an enormous challenge to political and social stability and create fertile ground for outside mischief-makers.

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Just “Say Yes to Resource Development” – A Viable Option?

CANADIAN ENERGY STRATEGY CHANGES FOCUS

A few weeks before the start of the New Brunswick provincial election campaign, the Alward Government released a report, authored by Jupia Consultants. It outlined the economic impacts possible from five energy infrastructure and natural resource projects in the province. The report is one vision of New Brunswick’s economic future. But is it a realistic one?

On August 29th, 2014, Canada’s Premiers released a revised, Canadian Energy Strategy. The development of the Strategy was, until now, led by the Premier of Alberta and was largely focussed on facilitating the movement to market of that Province’s increasing oil sands production.

The revisions to the strategy announced in Charlottetown were significant as they reflect a much wider focus for the National Energy Strategy than intended by Alberta. For instance, “Climate Change”, which was not mentioned in the old draft, is now front and centre in the vision and principles section of the Strategy. The changes were the price of getting Ontario and Quebec to sign on and take a leadership role in Canadian Energy Policy development.

The added emphasis on addressing climate change in the Strategy will see a focus on clean energy and the need to reduce greenhouse gas (GHG) emissions, which are produced by burning fossil fuels.

In Charlottetown, Ontario Premier Wynne effectively placed the West on notice when she drew attention to the inevitable need for national targets to reduce Canada’s greenhouse gas emissions.

A SHOWDOWN?

The stage is being set for a showdown on how Canada’s GHG quotas will be shared when they are eventually established. One thing is clear, this is not good news for those who plan to produce, refine, and market the most carbon intensive energy, now seemingly at odds with the direction of Canada’s two most influential provinces.

A FAILURE TO RECOGNIZE CHANGING DYNAMIC?

After four years in government, the Jupia report represents the Alward Government’s idea of what might happen if their vision of development for New Brunswick is embraced by voters on September 22nd.

With the lion’s share of impacts identified in the Jupia report coming from construction of energy infrastructure, it’s clear that New Brunswickers are being offered the promise of another short term boom cycle as the solution to an economy still stagnating after the last construction bust.

The government commissioned report provides a vision that establishes carbon-intensive fossil fuel development as key to New Brunswick’s future growth and prosperity, not exactly a direction consistent with the new thrust of the Canadian Energy Strategy.

This isn’t the first time that we’ve failed to catch the winds of change. The New Brunswick Energy Hub was supposed to bring a decade of construction jobs and revenue from a second oil refinery, a second nuclear reactor, the Point Lepreau refurbishment and a Liquified Natural Gas receiving and re-gasification terminal.

As we know too well, the second refinery was shelved, the second nuke fizzled, the problem-plagued Lepreau refurbishment was over budget and late, and the LNG terminal, which was built for a market that no longer exists, remains an under-performing asset.

The energy hub failed to deliver the promised longterm benefits, not because of local conditions but because of events that weren’t anticipated by project proponents or the politicians who were riding their bandwagon. This is  history that shouldn’t be repeated.

Unfortunately the Jupia report, like the Energy Hub, reflects the same fatal flaw in the current Government’s vision for development. It fails to anticipate the impact of emerging national and global trends that are shaping markets for energy and altering how forward-looking development planners are positioning for success.

FIVE TRENDS

So while we must do everything possible to preserve the petroleum sector jobs we now have, here are five trends our politicians should address before they consider expanding our reliance on high carbon, energy intensive development:

  • The most successful developed economies are witnessing a delinking of energy consumption from growth as sunrise industries replace over-mature, energy intensive ones.
  • Demand for oil in OECD countries is steady or in decline, while increases in demand from some developing economies have not materialized to the extent forecast just a few years ago. Cheaper energy alternatives are allowing some third world consumers to leapfrog the “oil age” and transition directly to renewables, especially solar.
  • According to the International Energy Agency’s 2014 Oil Market Outlook, “…the peak in oil demand growth for the [global] market as a whole is already in sight.” This slowdown in demand growth is occurring as unconventional supplies are also coming on stream.
  • A growing consensus on the need for action to address climate change will further reduce demand or demand growth for fossil fuels through policies to lower greenhouse gas emissions. That is, if the world is to remain below the internationally agreed limit of +2 degrees of global warming.
  • New efficient technologies are reducing the cost of renewable energy, to the point where renewables are now at or near grid parity with other sources of electricity in many jurisdictions. That grid parity is moving farther into northern latitudes with each technological enhancement and with each reduction in cost. It should reach us within this decade.

WE’RE MISSING THE SUNRISE

These trends suggest that the “sunrise” in the energy sector is in the developing technologies associated with renewables and clean energy and not in the increasingly challenged fossil fuel sector. Ironically, the new efficient and cheaper offerings of renewable energy technologies are probably a greater threat to the future profitability of the fossil fuel industry than any policy that puts a price on carbon.

SHALE GAS DEVELOPMENT IS NOT A SILVER BULLET

That is not to suggest that the potential for shale gas development in the province should be ruled out. That may be the one fossil fuel opportunity that has potential.

However, those who see a natural gas industry developing at anywhere near the scale or in the time line envisioned by the Government’s report should insist on a reality check. The report paints an overly optimistic picture that raises expectations that relief from our economic problems is just a few short years away. Rosy broad-brush comparisons with other jurisdictions that only tell us what happened there and not why, can only distract us from establishing the necessary preconditions for development in New Brunswick while raising unreasonable expectations as to the possible scale and timing of economic impacts.

Pennsylvania, which serves as the basis for some of Jupia’s modelling of industry impacts, has a long history in oil and gas development and an active population of more than 100 operating natural gas companies. It is a poor analogue for a province that has just two operating companies nine exploration phase companies and very little experience with modern oil and gas development.

NEW BRUNSWICK DOESN’T HAVE A COMPREHENSIVE STRATEGY FOR DEVELOPMENT

Attracting new entrants to scale up exploration is made more difficult by the lack of a clear provincial development strategy. Without a provincial development road map, we see management by crisis.  The New Brunswick Government being sued by one exploration company for  an estimated $100 million in damages. This gives the  province the wrong kind of profile within the pool of North American companies that should be on the Province’s investment target list. Getting to Jupia’s estimated 75 wells per year by 2020 requires a large leap of faith and some additions to the base of operating companies.

LNG IS A DECADE OR MORE  AWAY – IF EVER

Another of thepoliticians’ wish list projects is an LNG liquefaction plant and export terminal. This is another long-shot. Without a secure, long-term, source of natural gas and the infrastructure to deliver it to tidewater on the Bay of Fundy, there is no case for investment. The gas supply, in the volumes required, is likely a decade or more away. But, as we’ve seen with the “New Brunswick Energy Hub”, a decade is a lifetime in the rapidly changing world of energy. Just as North American LNG import terminals were made redundant by the success of North American Shale gas, those that assume the energy world is static, are setting themselves up to be left behind in someone else’s dust.

NEW PIPELINES DEPEND ON EXPANSION OF ALBERTA’S OIL SANDS

Promoters of the west-to-east pipeline and marine export terminal can take little solace in the fact that Ontario and Quebec have now signed onto the Canadian Energy Strategy. The Strategy’s newly added recognition of climate change and the need to reduce GHG emissions, represent a forewarning of the inevitable conflict between the almost mutually exclusive objectives of increasing oil sands output and reducing Canada’s greenhouse gas emissions.

Keep in mind that an increase in oil sands output underpins the business case for the proposed Energy East pipeline. That pipeline is a key component of the Alward government’s vision. New Brunswick’s “energy pipeline” future appears headed for rough weather and there isn’t a plan “B” in sight.

ELECTIONS ARE AN OPPORTUNITY TO COMPARE POLITICAL VISIONS

During this election campaign, we should challenge politicians to deliver a vision that outlasts five year construction cycles. We need thinking that anticipates global trends in energy, thinking that gets us onto the platform before the next train arrives, not after it has left the station. Better still, we should be building the next energy train ourselves, rather than waiting for a promised ride on the Silver Bullet Express.

Michael Edwards  provides advice on energy issues.

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“Can Canada play a role in Europe’s Energy security”

On May 1st, 2014 I appeared before the House of Commons Standing Committee on Natural Resources. Below is my opening statement:

Mr. Chair, Hon Members Thank you for your invitation to contribute to this study.

I am an independent policy analyst and I focus on energy. I’ve been following the energy sector for about 3 decades. The opinions I express today are my own.

The current Political crisis unfolding within the Ukraine and between the Ukraine and Russia has raised the question, ” Can Canada play a role in Europe’s Energy security.”

If you believe this crisis might drive a market opportunity, then it may be fair to ask if that opportunity will actually outlast the political crisis?

Those in Europe with whom I spoke this week, cannot see a future when Russia will be displaced from the energy markets of Europe.

Russia simply has too large a role to play in supplying Europe with energy. Nearly 34% of Europe’s total market for gas and just under 30% of EU oil is shipped from Russia.

Europe and Russia have become entwined in a symbiotic relationship, a web of interlocking business and financial relationships, based primarily on energy.

Of course, we’ve seen disputes that have arisen between Russia and states of the FSU . these have created some collateral damage for Europe, including interruptions to gas supplies in 2009

Security issues aside, the priority need for the Ukraine today is financial help in meeting debts. I fully expect that Europe will assist in this as it is clearly in Western Europe’s interest to resolve the problem.

Is there an ongoing threat to European energy security?

If markets are any indication, the answer is not yet. We see that European gas prices have moved little on the latest Ukrainian troubles.

This is not an indicator that energy security is top of mind or that the intensity of the current political confrontation, is enough to create a willingness by Europeans to pay an annual  $35b premium for diversification away from Russia as a supplier of choice.

It is not likely, either, that European consumers will be easily convinced to accept a 50% increase in their gas bills. So the energy security issue may well fade provided the political crisis resolves itself.

After the last crisis in 2009, there was actually increased investment to support trade with Russia, The most notable was the €14b Nordstream project to bring gas directly from Russia to Germany under the Baltic.

Some states have decided to move toward less dependence on Russia, Lithuania, for instance, has commissioned a floating LNG receiving facility And I believe you’ve heard that Poland is also taking steps to tap the world market for LNG with a new marine terminal.

Europe currently imports about 11tcf of gas annually. The Russian share of that would be equivalent to 4 Sable Island gas projects exhausted every year or about the volume of output from 4 or 5 good-sized LNG projects like Sabine Pass.

Given the in-elasticity of global LNG supply, a move from Russian gas would be a lengthy process. Europe cannot afford to have uncertainty over where its energy will come from for even a few months, let alone the decade it would take to transition from Russia. During that decade there would be opportunity for an immense amount of dislocation both economic, social, and political.

As we have seen, the reaction from Europe on the issue of energy security is not uniform. That reflects that individual states assess their own vulnerabilities and these vary widely from the UK with little direct need for Russian Gas to FSU States who are wholly dependent on Russia.

Europe with so much Russian-focused infrastructure, may augment a small portion of Russian energy with a little more gas from Norway a little more LNG from the world market, a switch back to more coal, revisiting Nuclear, ramping up renewables, and redoubling conservation efforts

But in the end, Russia remains a key player.

We should therefore, assess markets realistically with Russia as part of the dynamic, an entrenched player that has a competitive cost base and the infrastructure to deliver its product and one who has demonstrated that it will defend its markets aggressively.

So What can Canada do?

Well Canadian gas is not available on the east coast in sufficient quantities to justify the investment in LNG infrastructure.

That may change with new discoveries or by making the investments in gas pipeline infrastructure required to bring more gas into the region. This is a 5 to 10 year prospect.

Notwithstanding this, LNG will still go where it will fetch the highest price. That is currently Asia.

Interestingly, we are about to repurpose the main west east gas transmission pipeline to move bitumen, which won’t really help the gas situation.

So is there really an opportunity for us to do something here?

Well, considering  the points I’ve raised and
The fact there is little interest in the European market demonstrated by the current round of US LNG export projects, whose focus is on Asia,

So if the answer is not gas is there anything else?

It has been estimated that if the Ukraine were as energy-efficient as western European countries, its own domestic gas production would be adequate for its own needs. I see an opportunity if Ukrainians decide to get off the Russian subsidized gas habit.

The real opportunity here, may actually be Canadian Energy efficiency expertise, working in partnership with knowledgeable Ukrainians, not more gas to feed an inefficient energy system.

A short comment on Oil:
Canadian producers have negligible impact on EU oil market. We currently export to the EU about 0.47% of their imports and that’s light sweet crude. Perhaps some room there to move more light sweet from Newfoundland and Labrador as more projects come on stream. I see no barriers to that production; it sells itself, very competitive!

Canadian heavy blends could displace imports to Greece and Turkey. But that would displace Heavier Gulf blends, not Russian Urals. That is also true elsewhere in the Atlantic basin.

Thank You.

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Some preliminary thoughts on sabre rattling and Russian Gas

Prime Minister Harper’s recent posturing on Russian gas suggests he may be stuck in the era when Canada had a national oil company and Prime Ministers could influence how that company did business. The Canadian Government vacated that stage with the sale of PetroCanada which began in 1991. In 2014, the privately owned Canadian petroleum industry have full control over their production to dispose of as they see fit. Mr Harper is no CEO and he doesn’t direct industry’s commercial decisions. He cannot, therefore, imply that we are ready to supply Europe with gas his government doesn’t have or control.

Most Russia watchers would agree that Putin has considerably more influence over Russian oil companies than Mr. Harper would have over ours. When it comes to who oil companies can do business with, about all Prime Minister Harper can do is to approve or disapprove oil and gas exports. If he interferes beyond that in the marketplace, he does so at significant political peril. In other words, it is easier to tell gas companies who they cannot sell to rather than who they must sell to.

Realizing that gas trade moves on commercial terms and the infrastructure that supports it involves putting private, not public, capital at risk, those proposing to displace Russian gas must overcome a key economic reality. Russian gas can move to Germany much more cheaply than LNG from North America. Therefore, investments in the infrastructure required to make this trade possible would likely need to be backed by guarantees in the event of future stranding of those assets if the taps to cheap Russian gas were ever turned back on.

Harper’s intervention in this marketplace is problematic on other levels. Not the least of which is the probable reaction of European consumers if they can’t have access to cheaper Russian gas because a politician from Canada was bear-baiting to please his domestic audience. I don’t believe Mr. Harper is willing to subsidize European consumers in that event or provide investment guarantees to business. Existing Russian pipeline capacity is sufficient to move nearly 8tcf of natural gas/year to Europe, almost double the volume of gas currently shipped. That represents a significant sunk cost that any North American contemplating a run at Russia should think carefully about.

Clearly, to be Europe’s preferred gas supplier we would have to overcome Russia’s competitive advantages. But we would also have to consider the realities of our own supply and logistics.

Canada doesn’t have the infrastructure to export gas to Europe and Europe doesn’t have adequate import infrastructure to handle the equivalent of what it now takes from Russia via pipelines. Remedying this would entail several long and cold European winters building export and import terminals and the vessels to move gas across the Atlantic. In the meantime, damage to the economies of countries like Germany and Italy could be significant, dependant as they are on supplies of imported Russian gas.

If Canadian gas were to move to Europe, it would logically ship as Liquified Natural Gas(LNG) from the East Coast. However, Canada has no spare gas positioned there to export and no capacity to produce LNG.

Fields off NS are depleting and as we saw this winter, infrastructure bottlenecks in New England caused prices to spike in the Maritimes as supplies there were stretched.

Newfoundland and Labrador has gas offshore. But it is physically stranded and therefore re-injected in favour of oil production.

Western Canadian gas ships as far as Quebec. But the “Energy East” project will see the TransCanada Pipelines Ltd main line converted to bitumen export. As a result it will be a challenge to serve the peak gas demands of Quebec and Ontario from Western Canada, let alone serve an export market.

Potential exists to convert an underused import (re-gasification) terminal in Saint John, New Brunswick into an LNG export facility. But this requires a major commitment in capital for a liquefaction plant as well as a 20 year supply of natural gas to make it feasible. New Brunswick doesn’t currently have access to a domestic gas supply to meet that requirement.

An interesting but unlikely scenario is the development of existing East Coast offshore gas reserves with a floating LNG (FLNG) vessel like the recently launched Shell “Prelude”. FLNG units are more flexible than shore-based facilities as they can be moved to exploit stranded gas fields remote from pipelines like those off Newfoundland and Labrador. FLNG units can be built in low-cost jurisdictions like Korea and moved to the gas supply.

Unconventional gas production technology has transformed the North American supply picture. But success has meant lower prices.  American gas producers would like to improve  their returns, but that suggests moving product to more lucrative markets in Asia, rather than Europe. Canada’s Foreign Minister might dream of the Americans willingly going up against entrenched Russian companies on their home turf while yielding their Asian market push to Canada’s fledgling BC LNG. This doesn’t really make sense.  In any event, US producers must expand export infrastructure, including pipelines to get new gas from the center of the continent to the coasts. This too will take time.

The bottom line is that Putin knows all this, Merkel also knows this and as with other aspects of the European Russian relationship, challenges like their over-dependence on Russian natural gas are much more complex than keeping some Canadian voters on side with sabre rattling. Mr. Harper may have oversimplified because he was appealing to a specific audience or maybe because he simply doesn’t understand the challenges facing Europe. In either case Europeans might be well advised to politely ask Mr. Harper to tone down the rhetoric, play in his own sandbox, and not promise what he can’t deliver.

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Keystone XL

www.OilSandsWatch.org
Oil Sands Infrastructure © The Pembina Institute
www.OilSandsWatch.org

The Keystone XL debate is much more than a fight over an oil pipeline. Whether we like it or not, the Alberta model of high carbon resource extraction is under scrutiny in the highly public Keystone debate unfolding in Washington.

A negative decision from the US President will hinge on issues that are ultimately independent of Keystone XL’s routing or even pipelines in general. President Obama will have to reflect on the growing consensus that we have to reduce greenhouse gas (GHG) emissions or face catastrophic climate change and he must, by extension, consider the role played in that by Canada’s oil sands.

A Presidential “No” on Keystone will seal the fate of the KXL project. But it will also represent a very public repudiation of Alberta’s oil sands bitumen and the development model that it represents. While this is happening, Edmonton & Ottawa can do little but bark from the sidelines because they’ve failed to implement an effective made-in-Canada plan to curtail their oil sands emissions.

Those who see Alberta as an economic engine for the rest of Canada should be very concerned as no one has yet been able to show how we can have growth in oil sands production while meeting Canada’s commitments to lower GHG emissions. As things stand, these outcomes are incompatible and on a clear collision course.  Our political leaders are missing the point if they think Alberta oil sands producers can outrun their environmental  problems simply by pursuing other markets. They can’t.

Bitumen’s substantial carbon footprint will follow it along every pathway to the world’s energy marketplaces. Oil-by-rail or the pipelines proposed for British Columbia or for the East Coast will not rescue stranded oil sands production if this is seen as  contributing to the larger and unresolved problem of climate change.

While some governments are taking concrete steps to cut greenhouse gas emissions, their efforts risk being overwhelmed by the policies of their neighbours. The phase-out of cheap coal-fired electricity generation in Ontario will cut that Province’s GHG emissions by an amount equivalent to taking 7 million cars off the road. On the other hand, a recent study by the Pembina Institute estimated that the Energy East pipeline, alone, will enable additional Alberta heavy oil production generating life cycle GHG emissions equivalent to putting those 7 million cars back on Canadian roads.

It’s clear we can no longer look at the impacts of these developments in isolation and we cannot ignore what’s happening on this issue in the wider world. Annual Reports from the IMF, the World Bank, and some Oil Companies give clues that the world’s energy markets are beginning to get serious about accounting for climate change risk. There is growing recognition that carbon will be subjected to increasingly punitive policy and regulatory pressures designed to reduce overall use of fossil fuels. Those efforts will be, as a priority, aimed at curtailing or eliminating production from the most carbon intensive sources.

Bond rating agencies  are already taking note of the risk of negative cost impacts that will be felt within the lifespan of long-lived capital assets like bitumen mines, their processing and upgrading facilities, and the pipelines which serve them. The worst GHG offenders like coal and ultra heavy oil projects will become increasingly harder to finance. This month, Norway’s Parliament, owner of the world’s largest sovereign wealth fund valued at nearly $1 trillion, is studying the withdrawal of that fund from investments in oil and gas and coal. Other fund managers are looking at de-carbonizing their portfolios in anticipation of the risk of stranded assets.

Regardless of President Obama’s decision on Keystone XL, these risks coupled with growing costs of production and predictions of steady or declining oil prices in the medium term, suggest that prospects are less rosy for significant growth in Canadian bitumen production. That is bad news for the economies that are dependant on the spin-offs.

Most worrisome is that Canada’s leaders seem to be oblivious to these risks with time running out and without a sustainable plan B.

© Fairweather Hill 2014

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A West East Pipeline Raises Many Questions

Bay of Fundy Beaches

Premier Alward made the pilgrimage to Fort MacMurray this week to promote a pipeline to bring oil sands crude to New Brunswick’s Bay of Fundy. The Premier’s enthusiastic endorsement effectively outflanks former Premier Frank McKenna and new Liberal Leader Brian Gallant, both of whom are also cheerleaders for the project. Alward was quoted in the Globe and Mail as saying, “This is something that is potentially a game-changer for New Brunswick, but more importantly than just New Brunswick, for all of Canada”.

Proponents have made claims that a pipeline will bring huge benefits to this province. We will have security of supply. The Saint John refinery will run on cheaper Alberta oil. Drivers will pay less for gas at the pump. Thousands of New brunswick jobs will be created during construction. Government coffers will swell with increased tax revenue that will pay for our healthcare.

Unfortunately, experience doesn’t support these optimistic scenarios. Some of those who, like me, were part of the discussion around construction of the Maritimes and Northeast pipeline will remember one of the proponents who dampened our local benefits expectations by frequently reminding us that the pipeline was “only a ditch!” As it turned out, he was right.

To be clear, we are not having this discussion because Alberta has decided to warm the hearths of eastern Canada. Albertans are looking east, and beyond, because their heavy oil producers have to find alternatives to the controversial Northern Gateway Pipeline to Kitimat  and the stalled Keystone XL project. Like our Nova Scotia neighbors, they see New Brunswick as simply a pass-through province on the way to market.

Alberta’s heavy oil, which is currently selling in the US at a significant discount off the world price, has to move to world markets if they are going to get more for it. Earlier this year, the CIBC estimated that stranded western petroleum resources were incurring losses to the Canadian and Albertan economies of at least $18 billion a year. According to a report commissioned by the US Government, US Transportation bottlenecks will cost Alberta producers of heavy oil sands grades and heavy conventional grades as much as $65 billion/year by 2030 if the current situation isn’t remedied. Alberta’s search for new export markets is a matter of economic survival for the oil sands industry. That may be the only argument to defend a pipeline east that doesn’t raise false expectations or otherwise mislead the public.

A west to east pipeline will not address energy security because Canada does not have an energy security problem. If we did, the National Energy Board would prevent exports. Canada’s exports represent more than we would need for domestic consumption if we had no alternatives. Because we are part of an integrated North American energy market and the North American Free Trade agreement supports the free flow of energy, we have pooled our requirements and our production within a single market. That provides a measure of energy security.  Today we have a surplus of petroleum in the west and we import some oil in the east. The complication is that we sell western resources low, at a US benchmark price and buy high at a world benchmark like Brent.

Logic might suggest that if we shipped Alberta crude east to displace imports, Alberta producers would get a better price and this would contribute to a positive balance of trade for Canada. Unfortunately most eastern refineries are unable to handle the heavy oil sands derived crude without blending with lighter grades. That means a bitumen pipeline to New Brunswick would likely end at an export terminal just like the one proposed for Kitimat by the Northern Gateway project. Because of refining requirements, bitumen isn’t the complete solution for any of our refineries; no cheap refinery feedstock and no cheap gas at the pumps.

The pipeline’s predicted 7,500 construction jobs are unlikely to go exclusively to New Brunswick workers. A pipeline would be built by pipeline contractors who will bring their crews in from the last job. Some excavation contractors would get work. But the construction period will be short and intense. Construction would occur simultaneously from “spreads” situated at regular intervals along the pipeline route.

If not jobs, what about taxes? Using the Northern Gateway as a guide, tax revenues from the New Brunswick portion of a pipeline could be in the range of $20m to $30m/yr. over thirty years. That would represent about a tenth of the province’s 2011/2012 deficit. That won’t exactly swell the treasury, but might be enough to cover the added costs of public services to the pipeline and marine terminal. That is, provided we don’t give the pipeline a tax break like some others we’ve done.

While we understand Alberta’s plight, New Brunswickers need to know if the arguments many are making against The Northern Gateway are also valid here. In British Columbia concerns have been raised about diluted bitumen spills along a route that crosses mountainous regions, many BC rivers and streams, and through challenging coastal waters, much of which includes sensitive habitat for endangered wildlife and the lands from which many First Nations derive a living.

Is there something about New Brunswick’s lakes and rivers and our coastline that make them immune from the issues raised in BC? What would a major spill of diluted bitumen do to the upper Saint John River watershed?  How much more marine traffic will be created by shipments from a marine terminal at the New Brunswick end of a West-East export pipeline?

Will a substantial increase in tanker traffic in the Bay of Fundy, and through the Georges Bank off southern Nova Scotia, result in any conflicts with the fishery or create threats to marine habitat or species at risk like the North Atlantic Right Whale?

While Irving Oil have done an exceptional job in routing their tanker traffic to avoid disturbing the whales, will an increase in traffic be met with opposition from concerned citizens and environmental groups as well as fishermen who have succeeded in having governments maintain a drilling moratorium on the Georges Bank?

If the Premier is a proponent of the project before these questions are answered, how will he represent our interests in any process to resolve them?

Finally, how does this pipeline position the province for what will happen globally in the coming decades?

In its 2012 World Energy Outlook, the International Energy Agency states that amid a changing world supply picture, there is one constant, “the world is still failing to put the global energy system onto a more sustainable path.”

While access to new unconventional petroleum resources have turned the world supply dynamic on its head, the reality is that if we consume more than one-third of proven petroleum reserves by 2050, the IEA predicts that we will exceed the CO2 targets that scientists have warned us will result in a greater than 2 degree global temperature increase and potentially catastrophic climate change.

The IEA reports that, “If action to reduce CO2 emissions is not taken before 2017, all the allowable CO2 emissions would be locked-in by energy infrastructure existing at that time”. Keep in mind that the IEA serves as a policy advisor to its member states, which includes Canada. It is not an ad hoc environmental advocacy group.

We really do need to ask ourselves if a carbon intensive development that fails to consider the IEA’s warnings will be viable in future decades.  We must certainly exercise caution in making investments that are out of step with what will be an inevitable world-wide consensus on reduction of carbon emissions, one that will be with us as early as 2017.

This is not to suggest that we should reject the pipeline outright or ignore the potential benefits that may come with it in the short run and we shouldn’t arbitrarily interfere with Alberta’s need to get its resources to market.  It is worrying, however, to see a growing parade of politicians endorse a concept that has implications for this province’s future before the risks and benefits are critically assessed by experts and through the lens of a more sustainable future.

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Heritage Energy – Bold New Concept or the Reprise of an Unwise Idea?

In His report The Path Forward, Dr. LaPierre made some useful suggestions regarding the regulation of New Brunswick’s fledgling petroleum industry. However, he also proposed that some of our Natural Gas production be reserved for the exclusive use of New Brunswick consumers. He used Alberta to make his case. His report states, “Like the highly successful Alberta ‘Heritage Pool’ of oil and gas, the reserved portion of shale gas would provide home-based users with a guaranteed, affordable and readily available supply of gas that is independent of foreign market price fluctuations“. Others, including the local newspaper have gone further, suggesting that this Heritage Pool should be available to New Brunswick at “preferential rates” to encourage economic activity. The New Brunswick Minister responsible, has made encouraging noises in support of the idea.

However, if support for a Heritage Pool stems from the the notion that,  it’s good for Alberta so it should be good for us, then we should be concerned because The “Alberta Heritage Pool” as described in Dr. LaPierre’s report does not exist and as far as can be determined, has never existed. Alberta has, instead, wisely set aside a $15b “Heritage Savings Trust Fund”. It holds a portion of resource revenues, not gas molecules, as a rainy day fund for future generations.

Nevertheless, thanks to Dr. LaPierre’s recommendation, New Brunswick now has another solution of sorts for its economic problems. We will spend value contained in our province’s nonrenewable natural resources to subsidize consumption. Of course, in doing so, we may well be throttling our goose before it lays the golden egg.

Using Crown revenues from natural gas production to subsidize consumers is rather like cashing in family treasures to buy a carton of smokes or for a trip to Vegas. It encourages wasteful consumption of energy and subsidizes inefficient or declining businesses. If we are going to profit from the development of our nonrenewable resources, conventional wisdom suggests it has to be in a way that maintains their current value for future generations. Yes, Like the “highly successful” Alberta Heritage Savings Trust Fund!

Clearly, selling resources today at any discount from the full market price doesn’t do what the Alberta Fund was designed to do. Natural Gas and the revenues it brings to government are not ours to spend or squander. On a rainy day, we may need to consume some of the wealth earned by these resources, the interest if you will. But we should never consume the principal.

What is a New Brunswick Heritage gas pool and how might it work?

We remember all to well the last time a “Heritage Pool” made headlines. It was the Graham Government’s plan to provide NB consumers with up to 14-terawatt-hours of electrical power at less than market rates. The subsidy in that case would have been paid for out of the residual value of NB Power as it was sold off to Quebec. There was nothing in the NB Power deal for future generations and the public made its displeasure known at the ballot box.

There are troubling similarities between holding the line on price for a Heritage Pool of electricity and reserving a Heritage Pool of natural gas at “preferred prices”. Inevitably, the difference between these preferred rates and the higher market rate has to be made up by somebody. Sadly, as with the NB Power deal, that is likely to be you and me and future generations. The beneficiaries, of course, will be the big power users.

Taking back gas that has been found and produced under license by a private natural gas company is tantamount to nationalizing petroleum production. That would be somewhat out of character for a Tory blue government promoting the benefits of private enterprise and free markets.

The Alward government hasn’t given us any details about how they might go about creating this pool of cheap gas or how they would actually manage the market for it. The devil, of course, is always in the details.

There are practicalities to setting aside a share of ongoing production. Gas has to pass physically from the producer to a local distributor and marketer to New Brunswick end users. How these transactions would occur or would be regulated, wasn’t contemplated in the LaPierre report.

If the Government simply directs a producer to sell the gas here in New Brunswick and that results in the producer getting less than full value, then that producer would have to be compensated, either through a direct subsidy or by the Province foregoing royalties on production for as long as it had to subsidize consumers or until the gas runs out.

If the Government takes a share of gas production in lieu of royalties, then production sharing agreements (PSA’s) would form part of the royalty regime of the province. PSA’s are used by some oil producing countries in Asia, the Middle East and Africa. Usually those countries have national oil companies with the expertise to receive the product and volumes are high.

In our case where volumes are likely to be quite small, the Government would have to consider an agreement with the gas producer to manage our interests, albeit for a fee. The alternative would require the province getting into the natural gas marketing and distribution business through a Crown corporation, with all the risks and challenges that entails. Either way, the government would have to hire additional expertise it currently doesn’t have.

Government Hasn’t Done its Homework

What ever the option, subsidizing today’s consumers is still a shortsighted and inefficient and inequitable way to redistribute our province’s resource wealth. No where in the unfolding statements from proponents of subsidized gas is there any indication that the practicalities or the wider implications of creating this NB Heritage Pool have been fully thought through and no indication that the underlying principles of wise resource stewardship and sound economic principles are guiding deliberations.

We might have had a little more confidence in this idea, had it been presented as part of a wider strategy to capture benefits for all New Brunswickers from the development of our natural resources, a discussion missing from the government’s policy-making  thus far. Instead, it’s beginning to look more like some of the kid’s arguing about how they are going to spend an inheritance while their healthy, but horrified, parents look on. Forgoing royalties and subsidizing prices benefits consumers at the expense of non-consumers and that’s not a good way to keep peace in the family.

Bandwagon or Busted Bus?

It will be interesting to see if the opposition parties regard this as a bandwagon gaining momentum or just another bus about to loose its wheels. In the meantime, the Goose, with its eggs, would be well advised to hide in the bushes until this political hunting season is over.

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The Insiders Club – or how Our Government does privilige

First Class Travel perks include preferential access to government border servicesLast December when most Canadians were doing their last-minute shopping, Conservative MP’s were beginning a pre-Christmas blitz to promote the perimeter security deal that had been recently announced by Prime Minister Harper and US President Obama.

The pre-emptive timing likely meant focus groups had given the government bad news. Canadians didn’t believe greater integration of US and Canadian law enforcement would bring sufficient benefits to compensate for what might be a loss of national sovereignty and personal privacy.

One of those sent out to spin the deal’s benefits was Steven Fletcher, Minister of State for Transport. Fletcher really didn’t have much of a Christmas present for Canadian travellers. At his press conference, he tried to frame the border deal around two benefits.  First, special lines would speed pre-approved, trusted travellers on their way through airport security and second, removal of a state-side baggage check for those with onward connections in the US, would reduce travel time.

From Fletcher’s carefully scripted speaking points we learned that having “trusted” status, with the privilege of access to those shorter airport lines, comes at a price. That price is meeting the requirements of the “Trusted Traveller” program, a members-only club for those who qualify for the Government issued Nexus identity cards.The requirements to obtain a NEXUS card are substantially more stringent and more intrusive than those required to get your Canadian passport.

To qualify for Nexus, you must pay a $50 fee, complete a detailed application, and attend an interview with US authorities who will decide if you pose a risk and have a good enough reason to get the card. There is no point in applying if your youth was misspent, even if you were pardoned for your juvenile behaviour. If you studied or worked outside Canada during the last three years, you are not eligible either, unless you were a diplomat, soldier or a member of their immediate family.

A description of the Nexus process on the US Homeland security website explains, with a touch of irony, that all applicants, “must voluntarily undergo a thorough background check against criminal, law enforcement, customs, immigration, agriculture, and terrorist indices to include biometric fingerprint checks…”.

Unfortunately, in this brave new world non-Nexus types will remain “distrusted” travellers. Minister Fletcher had nothing to offer us except a suggestion to get with this program or continue to face long lines and missed flights.

No action will be taken any time soon to reduce challenges faced by the majority of ordinary travellers, yet solutions abound. Anyone who has been through London’s Heathrow or any of the other European Airports, has experienced a system that, Olympics aside, works effectively with very large volumes of international travellers and without the intrusive process associated with the US-Canada NEXUS identity card program.

Britain tried a national biometric based identity card that could be used for travel purposes. The “Identity Cards Act” of 2006 was passed despite heated national debate and concerns raised by human rights lawyers, politicians, and even the former head of Britain’s MI5 security service. Part way through a troubled implementation process in 2010, newly elected Prime Minister David Cameron leader of the Conservative-Liberal Democrat Coalition Government killed the controversial legislation citing cost, security, and privacy concerns.

Britain had used identity cards during the first and second world wars. However, they were considered unnecessary in peacetime. Recognising a growing public backlash, Cameron scrapped the national identity card with little fanfare. Our Government should not ignore the significance of this for Canada.

Canadians remember that Mr. Harper’s Government killed the Canadian firearms registry over similar concerns about costs and the collection of intrusive information on law-abiding citizens.

The Harper Government is broadening its use of the Nexus identity card to obtain security screening for travel within Canada. This goes well beyond its original purpose to get access to cross-border services. Can this mission creep be a step along the road to the national identity card that Britons rejected?

Harper and Obama were supposed to be fixing the thickening border between Canada and the US. However, beyond some hype, there is little substantive change. Tinkering with the NEXUS program to include special lines at airport security is tacit admission that the border and airport bottlenecks won’t be “thinned” any time soon.

If they want any relief, frequent travellers will have to accept the indignity of fingerprinting, mug shots, and interviews to get into those shorter lines. And they’d better hope that not many join them or the Nexus lines will be just as long as the regular ones.

It will be interesting to see how Canadians, who have grown up with the expectation of equal treatment under the law, react to this new world of the trusted and the less trusted. NEXUS is not just an identity card. It’s about being a “member”, a trusted insider with privileges.

As a former frequent flyer, I understand the resentment of fellow passengers when an airline moves its VIP’s to the front of the line. Canadians are an egalitarian lot and dislike open displays of preferential treatment. While they may grudgingly accept a private company rewarding its loyal customers, privileged access to public services like airport security and customs and immigration is another matter.

I expect this will surely offend many as they see preferential treatment by government border and security agencies rolling out from coast to coast. Providing public services to Canadians on the basis of their qualifying for a members-only club is divisive and smacks of entitlement.

When a murky system of deferential privilege comes from a government that came to power with a populist message of making government less intrusive, more transparent, and fully responsive to ordinary Canadians, it isn’t smart politics. When it is a substitute for dealing with the underlying problems of an inefficient border and an unequal relationship with our biggest trading partner, it is very poor public policy.

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Government shale gas policy disappointing for what it omits

Government Policy is a knee-jerk reaction to percieved shale gas development risks

The following appeared as an op ed article in the Saint John Telegraph Journal on June 28th, 2012:

NB on verge of loosing an industry

Once again, New Brunswick is on the verge of seeing our potential as a leader in energy slip through our fingers. This will come as no surprise to those of us who follow resource and energy matters. Successive governments have mishandled energy policy through ad hoc efforts that have been crisis-driven rather than forward-looking. Regardless of political stripe, our governments have shown an inability or reluctance to articulate a cohesive vision that we can all understand and support.

This unfortunate pattern is playing out in the latest attempt to produce a framework around our nascent unconventional oil and gas industry. What we have seen from government after two years, is a new environmental review process that has no discernible beginning or end; a discussion paper focusing on technical operating issues culled willy nilly from other places; and a bizarre royalty and revenue sharing regime that would make New Brunswick one of the least competitive places to produce natural gas in North America. None of these answer the fundamental questions of what kind of industry we want and need. They don’t answer the critical questions of what we have to do to get it and keep it, and how we will realize maximum benefits for New Brunswick.

The energy hub was a catchy slogan; a wish list of major projects with limited thought and limited strategy behind it. There was no comprehensive vision of what should be done to enable development or what the outcomes would or should be for the province. The attempted sale of NB Power was another desperate move to fix a political problem and provide subsidies to consumers paid for from the power corporation’s equity, owned by all New Brunswickers. These were not integral to any articulated plan or vision and it showed in their eventual failure to launch.

The energy debate has not been a debate at all; just a series of shortsighted single issue squabbles. Political parties have been more interested in positioning themselves within the four year election cycle than in preparing for the future. Environmental groups with a natural enmity toward technology have been quixotically tilting at windmills and vilifying anything that might compete with their high cost vision of green renewables. Energy consumers who just want cheap energy regardless of the consequences haven’t helped the discussion either. We should, however, be even more concerned that investors and industry have not obtained the promise of continuity and transparency implicit in a well articulated policy and long range plan for energy and resource development. In every other part of the planet, these are prerequisites for creating and sustaining prosperity.

Ironically, an indication of the future may be right under our noses. If politicians and their advisors would step back and ask the right questions, they might actually articulate the vision we need. The same is true for those lobbying government from a single issue perspective. If we actually considered our energy needs through technological, economic, and societal trends, we might see abundant methane not as a threat, rather, as a economical source of hydrogen for non-emitting fuel cells or as an alternative to coal and heavy oil. We may also see the reduced requirements for certain fuels from changing patterns of consumption as indicators of where public or private investments should and should not be made.

Unfortunately, with our track record on policy development, I am not convinced that the will or the capacity exists to get the broad vision we so badly need. With the proposed royalty sharing agreements, the government appears ready, once again, to use our own money to buy our support for development when a comprehensive and well argued energy policy would give them all the public support they need. It would also provide a clear road map for those who must navigate forward. If we don’t get our act together in short order, industry will leave us for places where the political uncertainty and business risks are more manageable. If this happens, those responsible will be left to explain what happened on their watch.