Keep­ing Canada Com­pet­i­tive: A Pe­tro­leum In­dus­try Per­spec­tive

Policy - - Contents - Tim McMil­lan

The world is cur­rently fac­ing a sig­nif­i­cant chal­lenge in meet­ing grow­ing de­mand for safe, re­li­able and af­ford­able en­ergy while re­spond­ing to the need for lower car­bon emis­sions over the next sev­eral decades. Canada can and should seize this op­por­tu­nity and con­tinue to play an im­por­tant role in meet­ing this de­mand and re­duc­ing en­ergy poverty in emerg­ing economies.

Re­new­able en­ergy is not on track to dis­place tra­di­tional forms of en­ergy in the next two decades. In­stead, an evo­lu­tion of ever-cleaner forms of oil and nat­u­ral gas will meet global de­mand, es­ti­mated by the International En­ergy Agency to be the dom­i­nant form of fuel to at least 2040. Canada can be­come the world’s en­ergy sup­plier of choice—re­spon­si­bly pro­duc­ing oil and nat­u­ral gas, re­duc­ing GHG emis­sions at home and around the world, while con­tin­u­ing to gen­er­ate eco­nomic ben­e­fits across the coun­try.

Yet, much needs to be done to make this a re­al­ity. There is an im­me­di­ate need for in­dus­try and gov­ern­ments to ad­dress sig­nif­i­cant com­pet­i­tive­ness gaps rel­a­tive to other oil and nat­u­ral gas pro­duc­ing re­gions, par­tic­u­larly the United States.

While the U.S. re­mains Canada’s big­gest cus­tomer, we can’t be com­pla­cent in this re­la­tion­ship or for­feit the spirit of com­pet­i­tive­ness and pro­duc­tiv­ity that drives our eco­nomic growth. The U.S. is ag­gres­sive in its drive to be a net en­ergy ex­porter by 2022, ship­ping a sig­nif­i­cant amount of oil and nat­u­ral gas to the same emerg­ing mar­kets Canada is seek­ing to serve. In­creas­ing shale gas pro­duc­tion in the U.S. has re­sulted in less re­liance on Cana­dian nat­u­ral gas ex­ports and the more favourable reg­u­la­tory and tax sys­tem in the U.S. has re­duced the amount of in­vest­ment di­rected to­ward Canada’s en­ergy sec­tor. While cap­i­tal in­vest­ments in oil and nat­u­ral gas in­creased glob­ally in 2017, in­vest­ment in Canada was lag­ging. The Cana­dian As­so­ci­a­tion of Pe­tro­leum Pro­duc­ers (CAPP) es­ti­mates to­tal cap­i­tal spend­ing in 2017 was $45 bil­lion—a 44 per cent de­cline com­pared to $81 bil­lion in 2014. Mean­while, cap­i­tal spend­ing in the U.S. rose about 38 per cent to $120 bil­lion in 2017.

Rec­ti­fy­ing this im­bal­ance through reg­u­la­tory re­form will en­cour­age long-term in­vest­ment in en­ergy in­fra­struc­ture and in the type of re­search and tech­nol­ogy de­vel­op­ment that is key to the sus­tain­able growth of the in­dus­try. This vi­tal link be­tween sus­tain­abil­ity, in­no­va­tion and in­vest­ment is out­lined in the Com­pet­i­tive Cli­mate Pol­icy re­port re­leased ear­lier this year by CAPP.

The lens through which all poli­cies are viewed in the re­port sees the econ­omy and the en­vi­ron­ment as global ecosys­tems that need to func­tion ef­fec­tively to­gether to meet sus­tain­abil­ity goals.

Du­plica­tive and inefficient poli­cies in Canada are one of sev­eral fac­tors driv­ing global en­ergy cap­i­tal to places where it can get a bet­ter fi­nan­cial re­turn. Yet ad­just­ments to the emerg­ing pol­icy en­vi­ron­ment can still be made to im­prove Cana­dian com­pet­i­tive­ness.

In CAPP’s vi­sion, Canada is—now and in the fu­ture—a global en­vi­ron­men­tal leader po­si­tioned to re­duce GHGs on an international scale if the right poli­cies are put in place to main­tain com­pet­i­tive­ness, spur in­no­va­tion and at­tract in­vest­ment.

Cen­tral to this vi­sion is the pre­ven­tion of car­bon leak­age, the cir­cum­stances that see high costs in one re­gion drive in­vest­ment, jobs and GHG emis­sions from one highly-reg­u­lated coun­try to one with weaker rules.

Cur­rent poli­cies in Canada have al­ready kick-started this phe­nom­e­non, with en­ergy in­vest­ment redi­rected from Canada to places with lower en­vi­ron­men­tal stan­dards and costs—Saudi Ara­bia, Rus­sia and big oil- and nat­u­ral gaspro­duc­ing dis­tricts such Texas, Ok­la­homa and North Dakota in the U.S.

For ex­am­ple, Al­berta’s im­ple­men­ta­tion of the Car­bon Com­pet­i­tive­ness In­cen­tive has not been ef­fi­cient and is al­ready im­pact­ing in­vest­ment de­ci­sions, chal­leng­ing the eco­nomic vi­a­bil­ity of ex­ist­ing projects and lim­it­ing in­vest­ment in new de­vel­op­ments. In ad­di­tion, multi-na­tional firms with op­por­tu­ni­ties out­side of Canada are choos­ing to grow their pro­duc­tion in other parts of the world. In 2017, sev­eral com­pa­nies di­vested hold­ings in Canada and made cap­i­tal al­lo­ca­tions else­where,

although this is not at­trib­ut­able solely to cli­mate poli­cies.

Du­plica­tive and inefficient poli­cies in Canada are one of sev­eral fac­tors driv­ing global en­ergy cap­i­tal to places where it can get a bet­ter fi­nan­cial re­turn. Yet ad­just­ments to the emerg­ing pol­icy en­vi­ron­ment can still be made to im­prove Cana­dian com­pet­i­tive­ness.

CAPP presents four key rec­om­men­da­tions in its com­pet­i­tive­ness re­port to en­able the oil and nat­u­ral gas in­dus­try’s com­mit­ment to in­no­va­tion and tech­nol­ogy be­fore other sup­pli­ers—with weaker en­vi­ron­men­tal stan­dards—cap­ture global mar­kets with­out ad­dress­ing en­vi­ron­men­tal con­cerns.

The first in­volves bol­ster­ing Canada’s oil and nat­u­ral gas sec­tor as an emis­sions-in­tense, trade-ex­posed (EITE) in­dus­try to bal­ance ef­fec­tive en­vi­ron­men­tal pol­icy and com­pet­i­tive­ness.

Pro­tec­tion mech­a­nisms for EITE sec­tors are key to min­i­miz­ing car­bon leak­age—with­out them EITE in­dus­tries such as the up­stream oil and nat­u­ral gas sec­tor may choose to leave Canada or de­crease in­vest­ment.

Cur­rently, many dif­fer­ent GHG man­age­ment regimes around the world, in Cal­i­for­nia and the Euro­pean Union, for ex­am­ple, use an EITE method­ol­ogy to pro­tect in­dus­tries’ com­pet­i­tive­ness.

A CAPP anal­y­sis es­ti­mates that Canada’s up­stream oil and nat­u­ral gas sec­tor will pay $25 bil­lion over the next decade to the com­bined cur­rent provin­cial and fed­eral poli­cies de­signed to mit­i­gate the im­pacts of cli­mate change.

The fed­eral gov­ern­ment is it­self rais­ing the alarm about en­vi­ron­men­tal pol­icy im­pacts to the econ­omy over­all. In April, the Par­lia­men­tary Bud­get Of­fice (PBO) re­leased its Eco­nomic and Fis­cal Out­look, which says the fed­eral car­bon tax will gen­er­ate a head­wind for the coun­try’s econ­omy over the medium term as the levy rises to $50 per tonne in 2022. Based on anal­y­sis con­ducted by Canada’s Ecofis­cal Com­mis­sion, the PBO projects that real GDP will be $10 bil­lion lower in 2022. Im­prove­ments to the EITE mech­a­nism, along with a recog­ni­tion of the cu­mu­la­tive bur­den of other poli­cies, reg­u­la­tions and taxes, will help re­duce emis­sions while still al­low­ing for con­tin­ued growth of the sec­tor.

CAPP’s sec­ond rec­om­men­da­tion ap­plies to the pro­posed Clean Fuel Stan­dard (CFS). This new pol­icy seeks to es­tab­lish life cy­cle car­bon re­duc­tion re­quire­ments to all fu­els com­busted for the pur­pose of cre­at­ing en­ergy, in­clud­ing ve­hi­cles, home heat and ma­jor in­dus­trial pro­cesses.

In our view, the CFS pol­icy is highly du­plica­tive, over­lap­ping with ex­ist­ing poli­cies cre­ated to drive emis­sions re­duc­tion. In its cur­rent form, it of­fers no pro­tec­tion for EITE sec­tors such as the up­stream pe­tro­leum in­dus­try.

Lim­it­ing the scope of the CFS to ex­clude up­stream oil and nat­u­ral gas, in­clud­ing off­shore pro­duc­tion avoids this du­pli­ca­tion and im­proves in­dus­try com­pet­i­tive­ness.

A third pil­lar of the CAPP com­pet­i­tive­ness re­port rec­om­mends the cre­ation of do­mes­tic and international off­set pro­grams. Such pro­grams would al­low in­dus­try to in­vest in al­ter­na­tive com­pli­ance op­tions that en­able low-cost emis­sions re­duc­tions.

Awell-de­signed off­set sys­tem pro­vides high-qual­ity com­pli­ance op­tions to reg­u­lated sec­tors and in­cents non-reg­u­lated sec­tors to par­tic­i­pate in project-based emis­sions re­duc­tions. Vi­tal to the suc­cess of any off­set pro­gram is to have an open, flex­i­ble sys­tem with ro­bust, cred­i­ble mar­kets and flex­i­ble com­pli­ance mech­a­nisms.

Nor­way is an ex­am­ple of a coun­try that uses United Na­tions-ap­proved international off­sets to cre­ate cred­its that can then be used to meet do­mes­tic GHG re­duc­tion goals. An­other ex­am­ple of international off­sets is the po­ten­tial for us­ing Cana­di­an­pro­duced liq­ue­fied nat­u­ral gas (LNG) in­stead of higher car­bon in­ten­sity fu­els in China, In­dia and other mar­kets —es­sen­tially a car­bon off­set.

Fi­nally, CAPP ad­vo­cates for turn­ing a sub­stan­tial por­tion of car­bon pric­ing rev­enues from oil and nat­u­ral gas to­ward en­abling in­no­va­tion within in­dus­try. This could sig­nif­i­cantly boost the over­all im­pact of car­bon pric­ing on long-term emis­sions re­duc­tion while mit­i­gat­ing the ef­fects of car­bon leak­age and re­duced com­pet­i­tive­ness.

Fur­ther, a rev­enue-re­cy­cling ap­proach is an ex­cel­lent ba­sis for es­tab­lish­ing a car­bon pric­ing re-in­vest­ment strat­egy that elim­i­nates the ef­fects of short­term po­lit­i­cal pri­or­i­ties. Ul­ti­mately, en­sur­ing car­bon pric­ing rev­enues from the up­stream sec­tor are paid into a gov­ern­ment fund that re­turns rev­enue to en­able GHG abate­ment specif­i­cally in the sec­tor is key to cre­at­ing ef­fec­tive, long-term ben­e­fits from car­bon pric­ing.

In­vest­ment is a crit­i­cal com­po­nent of the re­search and in­no­va­tion needed to re­duce the car­bon footprint of ev­ery bar­rel of oil pro­duced. This work is al­ready in over­drive in the sec­tor. Through Canada’s Oil Sands In­no­va­tion Al­liance (COSIA), com­pa­nies have in­vested more than $1.4 bil­lion to de­velop and launch nearly 1,000 new in­no­va­tions and tech­nolo­gies in the last five years. These com­pa­nies are cre­at­ing and har­ness­ing new tech­nolo­gies to help en­sure the Cana­dian in­dus­try can com­pete in a car­bon con­strained world.

We live in a grow­ing, ur­ban­iz­ing world that will need more en­ergy in ev­ery form, in­clud­ing more Cana­dian oil and more Cana­dian nat­u­ral gas. In this global fu­ture, in­vest­ment to im­prove en­vi­ron­men­tal per­for­mance makes sense. Other re­gions have rec­og­nized this and are putting poli­cies in place to en­sure their eco­nomic and en­vi­ron­men­tal poli­cies work hand-in-hand.

Canada needs poli­cies that en­able the in­dus­try’s com­mit­ment to in­no­va­tion and tech­nol­ogy be­fore other coun­tries—with weaker en­vi­ron­men­tal stan­dards—cap­ture global en­ergy mar­kets with­out mean­ing­ful ac­tion to achieve our en­vi­ron­men­tal goals.

Tim McMil­lan is Pres­i­dent and CEO of the Cana­dian As­so­ci­a­tion of Pe­tro­leum Pro­duc­ers.

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