National Post (National Edition)
ENERGY SHOCK
Canada needs to become more secure by becoming more self-sufficient.
In a new series — Strong & Free: Shockproofing Canada — the Post examines how a country made wealthy by globalization and trade can also protect itself against pandemics and other unknown future shocks to ensure some of our immense resources and economic power are reserved for our own security.
Two weeks before TC Energy Corp. and Alberta Premier Jason Kenney announced the $7.5-billion deal to begin construction on the long-delayed Keystone XL pipeline, crews were entering quarantine at work camps along the Canada/United States border to ensure everyone was healthy in preparation for a get-towork order.
Building a pipeline during the coronavirus pandemic will not be an easy task, but TC Energy spokesperson Terry Cunha said the company is taking pandemic-related precautions such as checking workers for fevers and illness, increasing social distancing on construction sites and enhancing cleaning protocols in vehicles and at camps.
In a somewhat unfortunate turn for the pipeline, which has become a symbol of the frustrations of energy-rich Alberta, after 10 years of planning, innumerable delays and legal battles on both sides of the border, shovels at long last went into the ground on Wednesday amid one of the worst environments for oil in decades.
But Keystone and the other pipeline projects Alberta is still banking on — the Trans Mountain expansion and Line 3 — are less about combating the current energy crisis than they are about setting the province and the rest of the country up to weather the next one.
“We’re not prepared to bet a huge part of our economic future on one project,” Kenney said in an interview with the Financial Post this week. “This is our hedge that we get at least one major project built. That will ensure the flexibility for our shippers and the future for the Canadian energy sector.”
A mothballed Keystone XL — a real possibility last summer when the company told the province it was having trouble raising the money needed to complete the project — was not a risk Kenney was willing to take. As a result, the province ponied up $1.5 billion in preferred equity financing, representing 80 per cent of project spending for 2020.
As Kenney is using Alberta’s balance sheet in an attempt to protect the export supply chains out of his province, there are growing calls for the federal government to take similar steps on a national level.
Oil and gas remain the country’s top export and the current coronavirus pandemic has exposed glaring vulnerabilities in Canada’s ability to cope with the type of market shocks currently battering the economy, including the combination of an oil-price war between Russia and Saudi Arabia and a complete collapse in oil demand as commuters stay home.
The problem, experts say, is there are no redundancies or fail-safes built into Canada’s energy system. Analysts also bemoan the fact that Canada does not have a strategic petroleum reserve like the U.S. has, and that the country is completely tied to its southern neighbour, which makes it nearly impossible to avoid a recession as the coronavirus pandemic wreaks havoc on North American health-care systems.
The current collapse in oil prices has also exposed weaknesses in Canada’s export pipeline network relative to competing countries. This week, spot prices for Western Canada Select plunged below US$5 per barrel, while the price of a comparable barrel of Maya heavy crude from Mexico traded for US$19 per barrel, just US$5 less than the West Texas Intermediate benchmark price.
One reason domestic oil prices have tumbled so sharply is that there are fewer options for storing oil in Canada than there are in the U.S.
“The U.S. has its Strategic Petroleum Reserve. We don’t, to my knowledge, have anything like that. As a country, we’re going to pay a big price for not having that kind of option around,” said Richard Masson, executive fellow at the University of Calgary School of Public Policy and former head of the Alberta Petroleum Marketing
Commission.
Right now, major U.S. refineries are gearing down as commuters across that country stay home and flights are grounded around the world. Oil producers in both the U.S. and Canada have been scrambling to put their barrels into storage, waiting for a time when the market for their product will rebound.
Canada’s largest storage terminals — in Edmonton, Hardisty, Alta., Kerrobert, Sask., and Sarnia, Ont. — are almost completely full, while U.S. President Donald Trump is allowing oil companies there to rent storage from the federal government’s Strategic Petroleum Reserve.
Moreover, U.S. producers and other oil-producing countries also have access to floating storage. For example, Saudi Arabia and other member countries of the Organization of the Petroleum Exporting Countries are renting oil supertankers to store oil.
Masson said Canada does not have that option, because of its inability to build pipeline infrastructure to the country’s coasts. If pipelines such as Northern Gateway or Energy East had been built, “we would have the option of doing that,” he said. “Right now, we really don’t.”
Instead, the options available for Canadian oilfields in both Alberta and Saskatchewan is less desirable. “There’s been talk of people filling rail cars and then just parking them,” Masson said.
The coronavirus pandemic and Saudi/Russian oil price war may be highlighting Canada’s lack of energy self-sufficiency, but its deficiencies were also exposed earlier this year when rail blockades cut off Quebec and Eastern Canada’s propane supplies for heating in the middle of winter.
“Those are longer-term problems that we’ve known about for a long time,” said
Marla Orenstein, director of the Natural Resources Centre at the Canada West Foundation.
“One of the things being shown by this crisis is we don’t have clarity on what our national objectives are for energy. We don’t have a clear objective of what we want for our energy future. This crisis has shown, in high relief, the importance of getting this right.”
Orenstein said she believes there’s a role for all forms of energy in Canada, but the country needs to drive toward a broader strategic goal, which the federal and provincial governments have yet to fully define. Last year, the premiers agreed that building new LNG plants was of strategic importance, but a fully formed strategy was never put in place.
She said there may now be more support for energy projects — which can employ a lot of people — in the near term given the country faces an economic crisis in the middle of a health crisis.
Orenstein expects continued opposition to major natural resource projects after the coronavirus crisis ends, but public support for that opposition may wane as governments post large deficits and huge numbers of unemployed people look for work.
“When I look at Maslow’s hierarchy of what people are going to need, the economic effects of this COVID-19 pandemic are going to be enormous,” she said. “The economic need and the need for jobs is going to be absolutely huge.”
Former Saskatchewan premier Brad Wall, who is now with Osler, Harcourt & Hoskins LLP, said governments across Canada have had their hands full in these “extraordinary times” with helping people who have lost their jobs.
Nevertheless, he said governments should begin forming panels to plan what an economic recovery will look like, and how to prepare various sectors to exit the current crisis in the strongest possible shape.
“This is not the time for ideology, but for prompt action,” Wall said. “We need a very bold short-, mediumand long-term plan.”
NOT THE TIME FOR IDEOLOGY, BUT FOR PROMPT ACTION.
In the short term in both Alberta and Saskatchewan, the country’s two largest oil-producing regions, the former premier said companies need liquidity to survive the current collapse in oil prices. In the long term, he said, the Keystone XL pipeline project and other ways to support more infrastructure builds will be necessary.
In that regard, it sometimes pays to look at what has worked in the past, said Adam Waterous, chief executive of the Waterous Energy Fund LP, a private-equity firm that recently bought Pengrowth Energy Corp. though privately held Cona Resources Ltd.
“What we’re going to be experiencing is a severe recession,” he said. “When you think about a severe recession, we do have to think about what has worked in the past as a guide point.”
Waterous said governments in Canada should look to what former U.S. president Franklin Roosevelt did in the 1930s when the Public Works Administration built new tourism infrastructure such as the Timberline Lodge in Oregon, transportation infrastructure like New York’s Lincoln Tunnel and energy infrastructure including the Hoover Dam in Nevada.
“To address the shock to the economy from COVID-19, the Canadian federal government should create a new sustainable deal for Canada that would focus on infrastructure that is both economically and environmentally sustainable,” Waterous said.
In the same way that Roosevelt prioritized projects for the Public Works Administration, he said Canada should include a focus on tourism, building out commuter rail networks across the country and, importantly for the energy sector, liquefied natural gas (LNG) projects.
“If you could do one thing in the world, if you were king of the world and you wanted to fight climate change and reduce GHGs, you would replace the Chinese coal-fired power plants with natural gas,” Waterous said.
This week, Conservative MPs Pierre Poilievre and Shannon Stubs wrote in National Post that $20 billion in private-sector stimulus is awaiting approval — which they argued should be immediately granted — for multiple natural gas projects, including LNG export projects in Quebec and British Columbia.
However, many analysts see a clear pattern that has emerged when governments are forced to step in to support pipelines that have been saddled with huge political risk. In May 2018, the federal government spent $4.5 billion to buy the existing Trans Mountain pipeline and expansion project with the expressed intention of building the expansion and then de-risking it to the point where it could sell it back to the private sector.
“I do think the government supporting them is the only way they can move forward. It’s difficult to get the capital because of the level of risk,” Jackie Forrest, senior director of the ARC Energy Research Institute, said of the Trans Mountain expansion and Keystone XL projects.
Forrest cited other recent examples of large strategic investors being “slapped in the face” by unexpected risks, including Alberta Investment Management Corp. and KKR & Co. Inc., which invested in the $6.6-billion Coastal GasLink pipeline project through northern B.C.
Opposition to that project sparked a series of country-wide rail blockades earlier this year and delayed work on the pipeline to connect Alberta to an LNG project under construction in B.C.
Following those rail blockades, Berkshire Hathaway Inc., founded by billionaire countercyclical investor Warren Buffett, pulled out of a planned investment in a major liquefied natural gas project in Saguenay, Que.
In Kenney’s office, there’s an awareness that continued opposition to Keystone XL and further attempts to derail it are likely, including court injunctions and further litigation.
However, the government also believes it’s more difficult to stop a project that’s employing 10,000 people at a time of record-setting unemployment.
Keystone XL is expected to create 1,400 direct and 5,400 indirect jobs in Alberta and contribute $30 billion in provincial revenues over the life of the project. The province also expects it will be able to recover the $1.5 billion in preferred equity and $6 billion in loan guarantees it has made once the project is built in 2023 and TC Energy is able to refinance a completed project.
Talks between TC Energy and the province began last June, but developed into full-scale negotiations in November, culminating in a term sheet that both sides signed at the end of January, according to a source with direct knowledge of the matter. Throughout the negotiations, the Alberta government was adamant that construction should begin on Keystone XL, first proposed in 2008, this year.
“Most importantly for me, it’s a real, concrete vote of confidence in the future of the Canadian energy sector. We’re in a crisis environment with a crash in prices, but the pandemic will end and global demand will return,” Kenney said.
“When we reach that point, we absolutely must have a major pipeline in commission. That’s what this is about.”