CAPP should focus on helping solve Canadian oil/gas industry’s biggest problem: lack of pipeline capacity
On Monday, Canadian Big Oil released the first of seven “economic reports” outlining industry’s public policy issues and its “four-part vision for the oil and natural gas sector that creates jobs for Canadians and national prosperity.” Frankly, the Canadian Association of Petroleum Producers needs to try harder. This isn’t so much a report or vision as a laundry list of complaints tarted up in a glossy brochure.
What this document does make clear is that CAPP really, really doesn’t like the current Canadian approach to energy development.
CAPP presumably does like American President Donald Trump’s “Energy Dominance Doctrine,” which mostly consists of federal deregulation, enormous tax reductions, and every scrap of support the Administration can provide for the oil and gas sector, which is beginning an enormous bull run that has already made the US the most powerful energy nation on the planet – and the envy of every Canadian energy executive.
The new report doesn’t mention Trump by name, but it doesn’t have to.
When one of the four points of the proposed vision is, “Any climate plan must be comparable to other jurisdictions competing for the same global capital,” and then goes on to say that the US has become Canada’s “No. 1 energy
competitor,” it’s not hard to do the math.
The United States is where Canadian oil and gas companies get a lot of their annual $20 billion-plus capital from American investors and there have always been strong ties between Texas, the epicentre of the American industry, and Calgary.
The problem with this document is that the Canadian industry does have legitimate complaints, like an overloaded pipeline system that is the principal cause of low prices for Canadian producers even while world prices are well over $60/b, that need to be addressed in short order.
Impediments to market access are costing oil producers a lot of money and should be CAPP’s highest priority.
Ben Dachis of the CD Howe Institute examined the policy costs a representative producing well would face in various jurisdictions within North America. His findings were instructive.
“Canadian energy producers are at a competitive disadvantage relative to producers in the United States. Much attention has been paid to carbon taxes, but a lack of market access for oil and taxes on investment – not emissions prices – are the main policy-induced competitiveness problems for conventional energy producers in Western Canada,” said Dachis.
Industry saw the differential between US oil prices and those received by Canadian producers widen from its historic $10 to $15 level to over $35/b after the Nov. shutdown of the Keystone pipeline after a leak.
I interviewed Dachis about his research and asked him to rank the top five policy-induced costs for Canadian producers. Number one was obviously pipelines, by a long shot.
Number two would be corporate income taxes, number three would be royalties, and number four would be [municipal] property taxes.
“Number five would be emissions taxes. A distant five,” he said.
Then why the obsession with climate policies, like carbon tax?
“When it comes to a price on carbon … we really stand alone,” he said. “If you look at the world’s top 10 energy producers, none of them have a price on carbon,” CAPP President Tim McMillan said at the Ottawa press conference to release the “vision,” as reported by the Financial Post.
“If we put policies here that are so inconsistent with our competitors, we will achieve nothing other than loss of jobs and investment in Canada, only to see that production increase in Iran and Venezuela and Saudi Arabia. We are not talking about what could happen, we are talking about what is happening.”
McMillan conveniently ignores that production in Venezuela has declined dramatically as its national economy implodes and the Saudis have cut back as part of the pact with OPEC and Russia to rebalance global oil markets. So, no, we are not talking about what “is happening.”
Is CAPP arguing for no carbon pricing? asks Dennis McConaghy, a former vice-president of TransCanada Pipelines and author of “Dysfunction: Canada after Keystone XL,” and an advocate for carbon pricing.
“What CAPP should have done is accept unequivocally carbon pricing as the sole instrument for Canadian carbon policy, but insist that the stringency of that carbon pricing over time cannot be higher than the carbon price imposed directly or indirectly by Canada’s major trading partners,” McConaghy said in an email.
“And to be blunt about that formulation, it distills down to the US.”
Ed Hirs is an energy economist with the University of Houston and the managing director of Hillhouse Resources, an oil and gas producer. He brings both an academic and industry perspective to carbon pricing, which he studies within the American context.
While there is no national US carbon tax, dozens of states already have cap-and-trade carbon pricing regimes in place, he says, and more are likely in the coming years.
At this point, the American focus is on lowering the carbon-intensity of regional electrical grids and much less on pricing carbon for the upstream and midstream oil and gas sectors, which mostly produce light sweet crude oil with relatively low greenhouse gas emissions.
But some states, like California, are regulating the carbon-intensity of gasoline and diesel by requiring refineries to blend light sweet crude oil with heavy crudes to meet a state-defined carbon-intensity benchmark, which declines over time.
Hirs point out that even though the United States is taking a very different approach to carbon pricing, that doesn’t mean there is no carbon pricing.
But Hirs does agree with CAPP that, in theory, Canadian carbon pricing could affect Canadian access to capital.
“To the extent that the carbon price reduces the rate of return for Canadian producers, that will be factored in just like any other cost, and if the carbon tax causes diminished returns relative to shale plays like the Bakken or the Permian or the Gulf Coast, then we will expect to see less capital flowing to the Canadian industry,” he said in an interview.
This is essentially CAPP’s argument.
“Canada is falling behind other countries in attracting oil and natural gas investment to create job and national prosperity for Canadians,” CAPP president Tim McMillan said in a press release.
But the key qualifier for Hirs is “to the extent.” If Dachis is right, and carbon pricing of emissions is a trivial cost to Canadian producers, then CAPP’s argument is weak and we should expect to see Alberta-based companies continuing to invest.
Suncor CEO Steve Williams illustrates how the Canadian industry tries to have it cake and eat it, too.
Just a few weeks ago, he was in the news saying that Suncor was “having to look at Canada quite hard. The cumulative impact of regulation and higher taxation than other jurisdictions is making Canada a more difficult jurisdiction to allocate capital in.”
“Absent some changes and some improvement in competition, you’re going to see us not exercising the very big capital projects that we’ve just finished,” he told the Financial Post.
Ok, then how does Williams explain Suncor’s decision, as reported Tuesday in Energi News, to spend $920 million to buy another five per cent of Syncrude? Suncor acquired a controlling interest in Syncrude in 2016 following a hostile takeover.
The same press release announced an application will be submitted to the Alberta Energy Regulator for the 160,000 b/d Lewis in situ project, which will no doubt cost many billions.
And last year, Cenovus and CNRL paid a combined total of over $32 billion for oil sands assets from departing majors, financed in part by capital raised in the market.
Can we blame those energy ministers for raising a skeptical eyebrow at CAPP’s claims the Canadian industry is having trouble raising capital when the big oil sands producers seem to be drowning in it?
What about companies that aren’t drowning in capital?
Natural gas producers, for instance, are struggling with historically low prices and are trying to fend off the low-cost American shale gas companies from encroaching on their traditional markets in Eastern Canada.
These companies are legitimately struggling with increased costs, including regulatory compliance.
And what about juniors, once the backbone of the industry? The old model of a management team raising a few million bucks from family and friends, developing some leases, and eventually selling out at a healthy profit for all concerned is almost dead, replaced by medium-sized companies that need scale to secure financing and capital.
“Scale matters and is of strategic importance,” says Kevin Birn of IHS MarkIt. One can imagine these companies are probably having trouble accessing capital at reasonable rates.
The problem with CAPP’s report is that it treats all issues as equally a problem and doesn’t differentiate between those industry players that are genuinely suffering from policy-induced non-competitiveness and those that are not.
CAPP would be better served to spend less on shiny marketing materials and more on policy analysts capable of crafting recommendations Canadian policymakers can work with.
CAPP can expect a sour response from energy ministers in Edmonton and Ottawa if it doesn’t do a better job over the next six reports. The Trumpian model of deregulation, no national carbon pricing regime, and low taxes is not the Canadian model.
If CAPP’s strategy is to tough it out and hope Jason Kenney and the United Conservative Party replace Rachel Notley and the NDP in 2019, then industry is gambling that the Canadian government’s carbon price and environmental regulations would be less onerous than Alberta’s.
I wouldn’t take that bet.