Is the Canadian energy industry approaching a tipping point?

Trans Mountain construction. Image: Kinder Morgan

Can Canada afford to be unique among energy producing countries and not use, or export for its own benefit, its hydrocarbon resources? Such questions and challenges extend to the very heart of the Canadian national interest.

In announcing the final federal cabinet decision on the Northern Gateway Pipeline project—after years of consultations and hearings and hundreds of millions of dollars expended by the proponent and court rulings that effectively excoriated the federal government’s role in aboriginal consultations—Canada refused to permit a 1,200-kilometre pipeline.

The decision favoured environmentalists’ arguments to protect the westernmost reaches of the Great Bear Rain Forest and make permanent a tanker moratorium along the northern coastline of B.C. It also overruled the science, evaluations and conditions previously set by the joint National Energy Board (NEB)–Canadian Environmental Assessment Agency panel in approving the project.

The decision to reject Northern Gateway sent shock waves through industry and investor boardrooms while the parallel approvals of Enbridge’s Line 3 and Kinder Morgan’s Trans Mountain Expansion were, in turn, met with dismay by many environmental activists.

Such a convoluted decision process was the culmination of changes made by the previous Conservative government that gave the cabinet the final decision on major pipeline projects. Under this system created in 2012, the NEB recommends a course of action after its environmental and regulatory process, and the cabinet has full discretion to accept, reject or modify that recommendation. Inevitably, this process has led to the politicization of a quasi-judicial, fully integrated environmental and regulatory process designed to adjudicate the national energy applications. Accordingly, one would be right to question if this history, and the subsequent decisions made by successor cabinets, constitutes balanced decision making that reflects the national interest and provides clear rules for proponents and the public.

Canadian political attentions will now turn to Kinder Morgan’s Trans Mountain Pipeline expansion. Current political leaders in BC after the narrowest of election victories have vowed to use “every tool available to stop” the project, starkly in the face of project approvals by the NEB and the Federal Cabinet.

These are not just political or regulatory issues; they extend into material questions of constitutional rights and the rule of law. The latest unique decision by the novice NEB Energy East panel to require a review of upstream greenhouse gas emissions associated with the project may yet lead to a fundamental re-examination of constitutional powers for resource development between provincial and federal governments.

It may also lead to further questions about the NEB’s mandate. In such circumstances, many would consider it unlikely there could be any regulatory certainty or even determinations of the national interest in a house so divided. The regulatory and political certainty required by international investors for major projects has been significantly eroded just when Canada’s energy industry is struggling to maintain its competitiveness in an era of reduced prices and limited exports.

Is it possible for Canada and its energy sector to become greener and more innovative while enduring lower profitability, restrictions to market access, significant capital flight and major project cancellations?

The regulatory authority of the NEB, previously affirmed by the Supreme Court, has been undermined to the extent that a host of jurisdictions, ranging from the federal government down through to municipalities, now presume, if not demand, a final say in Canadian energy development and transportation. The consequential erosion of the pre-eminence of the regulatory powers of the NEB is creating fundamental uncertainty and makes problematic any determinations that reflect the national interest. The federal government’s initial intentions to restore public confidence in the NEB by modernizing the regulator has increasingly been eclipsed by far more pressing concerns of the economy, the national interest and, perhaps, the ability of the Canadian energy sector to survive such disparate, concerted regulatory assaults from so many sectors.

The Supreme Court has been thrust into the mix as a direct result of a federal government that has consistently demurred from issuing clear rules for aboriginal consultation and accommodation. Worse, governments appear content to hide behind the skirts of the NEB when issues related to consultation are concerned.

While the Courts have been forced to balance individual and aboriginal rights in arbitrating contested developments, Ottawa appears unable, or at least unwilling, to address the uncertain regulatory environment that has arrived. Fortunately, the latest ruling by the Supreme Court suggests that it does not equate the constitutional duty to consult with a veto over development—a useful legal clarification, but it perhaps constitutes one in a long series of decisions that may be viewed by some as being too little and far too late.

The real casualties of this regulatory morass are investors, shareholders and Canadians.

Proponents have expended hundreds of millions of dollars in a complex Canadian political, legal and regulatory environment only to find that final decisions are made at the political level behind closed doors using rules and standards previously undisclosed. Such decisions made so late in the regulatory process fundamentally affect how investors view Canada and this directly influences future corporate investment decisions.

Previously, while corporations may have voiced concerns about the length of time of Canada’s regulatory approval processes, many were prepared to invest millions, if not billions, of dollars to complete balanced, fair regulatory processes. The development of the intense fractionation of Canada’s regulatory processes has been paralleled by a staggering flood of capital out of Canada’s resource development sector. Competing claims and demands from numerous levels of government, unresolved aboriginal claims and the outright hostility from well-organized opponents have undermined even the most determined efforts of applicants.

The subsequent collateral damage to Canada includes aboriginal communities who have negotiated benefits agreements in their favour. Can Canada truly afford such a callous disregard of the capital markets and ignore the realities of a highly competitive international natural resource marketplace?

There are other ironies. Proponents are subjected to gruelling regulatory and public examinations of their project proposals. By contrast, the political decisions and policies advanced by the cabinet are not subject to any substantive analysis of their regulatory impacts. Instead, single-issue determinations of policy are unveiled by governments with little or no apparent understanding of the social or economic consequences of the long-term impacts of these policies. The developing attitude appears to be that Canada is prepared to accept virtually any cost or penalty to save the globe. This is a remarkable situation whereby Canadians are increasingly subjected to the global aspirations and ideologies of the elected establishment, which may be far more attuned to the expectations of international agreements than to the immediate interests of its own citizens.

Recall that, historically, the energy sector has ranked first as a contributor to Canada’s overall positive trade balance. The energy industry is estimated annually to contribute $15 billion to government coffers. However, Canada has no choice but to export oil and gas to U.S. buyers at greatly diminished prices, handicapped by a captive-market discount that has been estimated to provide a daily subsidy of $US38 million to U.S. producers who are free to sell or export that same oil at international market prices. These forces explain the Canadian Association of Petroleum Producers’ recent forecasts that Canadian oil and gas capital expenditures will decrease to $44 billion in 2017—half the $81 billion expended in 2014.

These Canadian political and regulatory uncertainties arrive precisely when the U.S., rightly or wrongly, has set out to undertake significant rollbacks to the Obama administration’s legacy, including material changes to Environmental Protection Agency (EPA) regulations and the the Clean Power Plan, a withdrawal from the Paris Agreement, and a renegotiation of the North American Free Trade Agreement.

Canada’s largest single-energy market is increasingly becoming its biggest competitor as it implements measures to diminish federal regulatory authorities and restore sweeping powers to individual states. Such aggressive measures are evidence of a controversial determination by the U.S. to reduce regulatory and tax burdens just at a time when Canada appears headed in a significantly different direction. In short, the U.S. political and regulatory environment has swung wildly from the Obama era of heightened regulatory intervention to the Trump era of deregulation. At the same time, Canada has taken a markedly divergent path from the U.S., its largest single market and one that is changing dramatically.

Scott Pruitt, the EPA’s administrator, recently remarked “the regulatory assault [on the mining industry] is over.”

Irrespective of political or environmental views, especially in light of continuing Canadian regulatory commitments, clearly Canada and the U.S. have diverged in their approaches to the regulation of their resource industries—and in their respective competiveness in the global marketplace. The Canadian Chamber of Commerce recently warned that the federal climate change plan combined with regulatory measures for emissions and a minimum carbon price could seriously undermine Canada’s competitiveness.

In response, Catherine McKenna, the minister of environment and climate change, asserts that “the strongest economies of the next century will be those that nurture business transition and attract companies that want to invest in climate-committed jurisdictions.” She adds that she speaks with those “who don’t see this global shift as a competitiveness problem, but rather a cutting-edge responsibility.”

While many Canadians may prove willing to endure the 83 years until the next century to confirm McKenna’s highly ideological, largely unsupported assertions, it is doubtful that the energy industry or its investors will be so patient. Using as an example the massive energy policy interventions in Ontario, the real costs of such unilateral policy and regulatory commitments may increasingly be marked by few tangible environmental gains but be accompanied by material negative economic, financial and social consequences.

China constitutes another example of the global shift in energy policy. China aggressively stepped in to the void created by the U.S.’s withdrawal from the Paris Agreement and has trumpeted its determination to become a major exporter of solar

panels and wind turbines with accompanying construction initiatives such as the Quaid-e-Azam Solar Park, one of the world’s largest, in Pakistan.

China, with much credulous international environmental acclaim, has been forced to halt the construction of 100 new in-country coal-fired power plants—driven not so much by international concerns for global warming but by national concerns over severely diminished air quality from local smog and pollution. It is less reported that China will be responsible for the construction of almost half of the new international coal generation coming online in the next decade.

The New York Times cites reports of 1,600 coal plants currently under construction or planned in 62 countries. This will result in a 43 per cent expansion in the global coal-fired power base. Developing countries are relentlessly being drawn into a cycle of coal-generation dependency. Chinese firms have plans to construct coal-fired power plants internationally with a capacity of 6,285 megawatts—almost 10 times the 660 megawatts planned within China. The China Development Bank and the Export-Import Bank of China have provided in excess of US$43 billion for overseas coal financing. This investment is paralleled by the National Power Corporation of India’s plans to build 38,000 megawatts of new coal capacity in Bangladesh and India.

Simple mathematics probably provides the best guide to understanding the political rhetoric and international posturing associated with the climate debate. With burgeoning international emissions that effectively defeat even the most stringent Canadian national efforts at emissions control, one could question if Canadians should be subjected to the monumental economic burdens resulting from a plethora of carbon-reduction strategies. The recently announced plans to implement a Canadian national carbon tax and to phase out coal-fired power is estimated to achieve respective 18-megatonne and five-megatonne reductions in emissions by 2030—figures that are dwarfed by the growth in international emissions. In sum, Canadian hydrocarbon production will quickly be filled by other international producers, as will any reductions in Canadian greenhouse gas emissions.

Canadians need to understand comprehensively just what is at stake. Decisions that will determine the future social and economic well-being of the country surely require a balanced, informed debate that builds a coherent national strategy for energy and natural resources. Regrettably, many are increasingly concerned that we eroding the rule of law and political unity within the Canadian federation to a degree that will make objective definitions of the national interest unattainable.

What is certain is that Canadians are faced with the immediate consequence of a significantly altered energy future with a rapidly diminished international investment capital base.

When a federation dissolves into narrow definitions of federal, provincial and local government interests the number of hands in the pot increases the complexity of issues for everyone. Such jurisdictional complexities also expand the amount of time needed to navigate all the interconnected issues through competing jurisdictions that increasingly include First Nations and local governments. The result is a complex, often contradictory and competing web of legislative and regulatory tools whose resolution should not be achieved by continuous references to federal courts. The urgent responsibility for resolving these challenges is with all Canadians, especially its leaders, who may soon be confronted with undesirable economic and social consequences of current actions and decisions.