- JMBR
Making Sense of Canada’s Energy Crisis
By Roman Melzer
The year 2018 was a dizzying one full of significant news and issues. From new trade deals to global trade wars, from the emerging cannabis industry to the struggling auto industry, Canada was at the centre of several headlines that make the future economic health of our nation seem rather uncertain. However, no issue should be more important to Canadians than the significant hardships being faced by Canada’s petroleum industry. The issue is a complex one that spans many themes including infrastructure projects, climate change, equalization payments and politics. It has even pitted a hole between eastern and western Canada and unearthed separatist sentiment in the province of Alberta. In an election year, it is critical that all Canadians understand the real facts regarding this issue, what it means for our wealth and well-being, and how environmentalists and the petroleum industry must work together if we are to secure both a healthy environment and economy.
As one of the most developed and wealthy countries in the world, the well-being of all Canadians is largely a function of our country’s abundance of natural resources – at the centre of which are oil and gas. In 2017, Statistics Canada reported that the energy sector accounted for nearly 10% of Canada’s gross domestic product, contributing $175 billion. But more than just GDP, Canada’s energy sector provides many well-paying jobs and opportunities for all Canadians.
As of 2017, it was estimated that the energy sector was the source of 533,000 jobs nationwide and that 3,400 Canadian companies outside of Alberta contributed goods and services to the petroleum industry. This debunks the common misconception that Albertans are the sole beneficiaries of oil and gas in this country and when oil taxes, royalties and equalization payments are considered, that conception couldn’t be further from the truth. With the 3rd largest proven oil reserves of any country in the world at 170 billion barrels, Canada is in a strong position to be an ethical source of petroleum for decades to come. That being so, why are we not seeing the full benefits of our assets? And how can Canada secure these benefits in the age of increasingly visible climate change?
In the 3rd quarter of 2014, a global oil supply glut sent prices plummeting and turned Canada’s oil industry upside-down. For years, the industry has had to face the harsh reality of low oil prices and the losses in jobs and revenues that come with them. But as companies have improved processes and efficiency to become more profitable and resilient in an era of low oil prices, an entirely new problem threatens the industry outside of global economic factors – our own inability to construct pipelines.
From coast to coast, a lack of pipeline capacity and a lack of national support for 3 critical infrastructure projects has left the Canadian economy and our petroleum industry bleeding. As a result, 99% of our oil exports continue to be sent south to the United States at prices far below the global price of oil. While this has been occurring, the United States has ramped up its own oil production to become a net exporter of oil for the first time in 75 years. Canadians are essentially subsidizing energy use and booming economic growth in the United States. We send them our oil at bargain prices, which they then refine into useable petroleum products and sell them back to us and the rest of the world for top dollar. Meanwhile, here in Canada, an underperforming economy and overspending has our own government racking up $20+ billion deficits that can hardly stimulate 2% growth.
While Canadian oil typically sells for less than the global price of oil, the differential reached record highs in 2018 as the result of excess supply, limited pipeline capacity and near-full storage facilities. Canadian oil prices are reflected by the Western Canada Select (WCS) index, whereas global oil prices tend to reflect the West Texas Intermediate (WTI) index. WCS naturally sells at a discount of $10-15 per barrel compared to WTI as the result of quality and transportation factors. Whereas WTI is considered “light sweet crude”, WCS is “heavy sour crude” meaning that it is denser, has a higher sulphur content, and is therefore more difficult and costlier to process by refineries into useable petroleum products. A Scotiabank economic report suggests that quality factors have typically accounted for about $5 of the WCS discount. The other $5-10 portion of the discount relates to the transportation variable and the fact that the Alberta Oil Sands are rather isolated in northern Canada. To reach refineries, the oil must travel thousands of kilometers by pipeline or rail to the Vancouver area or the US Gulf Coast, with the trip by rail costing significantly more money, releasing significantly more emissions and causing a significantly greater risk of a serious oil spill. Compared to rail transportation, moving oil by pipeline can reduce greenhouse gas emissions by up to 77% and costs 3 times cheaper.
With stalled pipeline projects in every direction out of Alberta and the inability of rail to make up for a lack of pipeline capacity, storage facilities reached twice their normal usage level at 35 million barrels in December 2018. Having no other option but to give away our oil, the WCS-WTI price differential spiked to US$55 per barrel. Around its worst point on October 11th, Canadians were receiving just US$15.97 per barrel while WTI was trading at US$70.97. While estimates differ widely, BNN Bloomberg reported that the WCS discount was costing the Canadian economy as much as $50 million every day. Sweeping measures were taken by the Alberta government to try and remedy the situation. An 8.7% industry-wide production curtailment, equating to about 325,000 barrels of oil per day, came into effect on January 1st to deal with the excess oil supply. At the same time, Premier Rachel Notley announced that the Alberta government would be purchasing 7,000 rail cars in 2019 to help deal with the lack of transportation capacity. While these initiatives were welcomed by the majority of the petroleum industry and Albertans, they are short and mid-term solutions for a problem centered around insufficient pipeline capacity. So what pipeline infrastructure projects are available to Canadians and what is stopping them from being undertaken?
At the forefront of the pipeline options is Energy East, a $15.7 billion-dollar mega-project that was cancelled by TransCanada Pipelines in October 2017. The project would have upgraded an existing natural gas pipeline between Alberta and Ontario and then extended the pipeline through Quebec to carry 1.1 million barrels of oil per day to refineries in Montreal, Quebec and Saint John, New Brunswick. TransCanada decided to withdraw their application to head the project after the National Energy Board (NEB), a government regulatory agency for the energy sector, declared that it would fulfill the Liberal government’s election promise and begin considering both upstream and downstream emissions when evaluating energy projects.
The problem with this is the reality that 70-80% of the greenhouse gas emissions associated with a barrel of oil occur during the combustion stage. Therefore, the NEB is penalizing energy projects that would reduce the transportation emissions related to Canadian oil because of end-user consumption. That is a fuel consumption issue, not a pipeline issue.
What is most frustrating is that, believe it or not, a lack of pipeline capacity across our country means that eastern Canada must instead consume oil that has traveled 9,250 kilometers from Saudi Arabia. In 2017, Canada imported and consumed oil from foreign countries like Saudi Arabia, Venezuela and Nigeria to the tune of $17 billion. Despite Canada having more than enough oil to sustain itself, pipeline opponents and some provinces in eastern Canada firmly believe that rejecting oil from western Canada makes them more environmentally friendly. In reality, protesting Energy East creates nothing more than a perception of being green because, with or without Canadian oil, eastern Canada will still need the same amount of fuel for transportation and heating homes. And when the foreign oil they do use comes from the other side of the world on a diesel-burning ship with little to no emissions regulations, that is causing greater harm to the environment.
The Canadian Energy Research Institute (CERI) estimates that Canadian greenhouse gas emissions could be reduced by a carbon dioxide equivalent of 2 million tonnes per year if eastern Canada began using Canadian oil rather than importing foreign oil. That sounds like a pretty simple way for a country that produced 704 million tonnes of carbon dioxide in 2016 to make some real strides towards its emission reduction targets set forth in the Paris Agreement. At the same time, Energy East would support the Canadian petroleum industry, benefit our entire economy and give us the funds needed to build a greener Canada.
Representing more than just positive environmental and economic implications, support and approval of Energy East would tame the widening divide splitting resource rich western Canada from the east. While Premiers in the Maritime provinces are begging for Energy East to be reconsidered, the province of Quebec stands as another major roadblock in any effort to make Canada a self-sufficient energy nation and to allow Canadian oil to reach new markets from the east coast.
For years the former mayor of Montreal, Denis Coderre, rejected so-called “dirty” oil from Alberta’s oil sands, a legacy that is now being continued by Quebec’s new Premier, François Legault. At a recent meeting of Canadian Premiers, Legault went as far as saying that there is “no social acceptability” for Alberta’s “dirty energy” in the province of Quebec. This comment spurred outrage from Albertans who are still considered a “have” province in Canada’s equalization program, which exists to share wealth across provinces in an effort to provide Canadian citizens with similar services and standards of living across the entire nation.
Alberta’s “have” status still exists despite the 3 years of economic hardships, high unemployment and budget deficits the province has faced. The province has paid into the federal equalization program every year since 1963, while Quebec on the other hand has received hundreds of billions of dollars in equalization payments from the program. Even at the climax of Alberta’s oil crisis in late 2018, it was announced that Alberta would still have to pay significant funds into a program that will see Quebec receive $13.1 billion of the $19.8 billion distributed to the “have not” provinces in 2019. Essentially, “dirty” Alberta energy has funded Quebec’s famous $7/day child care program, its heavily subsidized university tuition, its hospitals, its infrastructure, its recent budget surpluses and its ability to transition from coal-fired electricity to 100% renewable hydroelectricity.
If any energy is “dirty” in this entire situation it’s the energy that instead must be imported by tanker ship from some of the most corrupt and dysfunctional regimes in the world. In addition to the emissions that are released in the transportation of oil from these countries, their environmental track records and the regulations they have on their oil production are virtually non-existent. And the dirtiest variable of them all is the fact that Canadians, in one of the freest and most desirable democratic societies in the word, would rather buy oil from regimes that suppress women and murder journalists than from western Canada. The protest and cancellation of energy east magnifies the extreme dysfunction in how our own country is being operated and is both a logical and an ecological disaster.
The purpose of this article is not to argue that the petroleum industry has no contribution to climate change, but rather to bring to the attention of Canadians the extreme self-harm and flawed thinking we exhibit when we protest Canadian oil. The fight against climate change is undoubtedly the most critical challenge facing mankind, but it is impossible in every sense for global infrastructure and human activity to become completely carbon-free overnight.
In a world with growing energy demands that already consumes over 100 million barrels of oil per day, Canadian oil is one of the most ethical and environmentally regulated sources of oil we have. A report on corruption by Transparency International of Berlin shows that of all the oil producing countries in the world, Canada ranks second only to Norway as most ethical. In 2014, it was oil companies themselves who contributed $6.5 billion of the $11.8 billion spent by Canadian businesses to protect the environment. Additionally, the Canadian petroleum industry is both a large investor in renewable energy and behind some of the most innovative carbon capture and efficiency technologies in the industry.
Some Canadian oil executives are even global advocates of sustainability and leaders in the charge towards a greener future. Steve Williams, CEO of Canada’s largest petroleum company Suncor Energy, supports the Paris Climate Agreement and speaks regularly on climate issues as an advocate of renewable energy, carbon pricing mechanisms and energy efficiency. At a panel discussion on energy policy last spring, Williams called out climate change deniers who politicize climate science and admitted that fossil fuels are definitely a contributor to the problem.
Since the early 2000s, long before climate change had become such a pressing issue, Suncor began investing hundreds of millions of dollars in wind energy and biofuels. Additionally, the company has been awarded on numerous occasions for its sustainability initiatives such as land reclamation, water use reduction and recycling, and emissions reduction. It is highly unlikely that oil producers in the Middle East, Venezuela or Russia have environmental track records anywhere near those in Canada. Canadians should be proud and supportive of Canadian oil.
Finally, it is critical for Canadians and the entire world to understand that, at its root, climate change is a human behavior problem. Greed, over-consumption and the idea that we live on a disposable planet with infinite resources are destroying our only home. Protesting Canadian oil and pipelines is an easy way to feel like we’re making a difference, but the reality is that the problem is so much more complex.
Everything we do contributes to global warming. If we all started worrying more about the greenhouse gas emissions associated with the goods we buy and less about the price, we could make a real positive difference right now. That means thinking about where the goods we purchase are sourced and manufactured, how they are manufactured and how they are distributed. But more than just emissions, we must also consider the other environmental impacts of our actions. It’s obvious that oil production and mining leaves a significant scar on the natural environment, but what gets less attention are the landfills overflowing with waste in every city and town across the country and around the world. If we thought more about the life-cycle and disposal of the goods we buy, we could make real changes right now to building a healthier planet.
Easy answers to that problem are consuming less, recycling and composting. At the same time, if Canadians championed Canadian oil, we would have an incredible revenue tool providing us with the funds needed for investment into more sustainable infrastructure. Now more than ever, it is critical for environmentalists, the petroleum industry and all Canadians to work together to build a healthier, more diversified and sustainable country.
