- July 29, 2019
Despite challenges in Canada’s energy and resource sector, future holds opportunities
The outlook on Canada’s energy and resources sector in 2018 was surprisingly optimistic. With population and the demand for energy growing worldwide, there was endless potential for Canada to be a fierce global competitor. And while Canada’s gas and oil sector continues to grapple with challenges, it’s on the cusp of promising growth. And some of the country’s alternative energy markets such as electricity and green energy are experiencing steady growth, creating increased opportunities for Canadian manufacturers.
In 2018, the oil and gas industry was particularly encouraged when the federal government announced its investment in the Trans Mountain Pipeline project. However, the regulation, stringent assessment and wavering policies game still continues, making any movement forward bleak in the coming year.
“It was nice to see the federal government purchase the TMX. It was important that they did,” says Ben Brunnen, the vice president, operations and fiscal policy for Canadian Association of Petroleum Producers (CAPP). “But the fact that they had to is a signal of how big of a challenge our industry is faced with in terms of attractiveness for investment and our ability to get our product to market.”
Brunnen points out that on a federal level there are a series of legislations and proposals that are being advanced that potentially have big risks for Canadian petroleum producers. Bill C69, a review of the environmental impact assessment process, will create more red tape around Canadian oil getting to market, as well as potentially delaying any pipeline projects. Alberta’s Premier Jason Kenney recently dubbed it as the “no more pipelines” bill. And then there’s Bill C48 or the Oil Tanker Moratorium Act, which intends to ban ships from B.C.’s northern coast that hold over 12,500 metric tons of oil.
In June, the Senate passed C69 and C48, which are being processed and will become law. Albeit, the advancement of these bills is more than disappointing to the oil and gas sector, they will likely be hot topic when the Liberals and Conservatives get on the campaign trail for the election this fall.
“And the development of the clean fuel standards, which is effectively double taxation on our sector, which could put us in a very uncompetitive position,” adds Brunnen. “From a federal perspective we are in a negative situation relative to a year ago. Last year we saw capital decline in investment. And we expect to see that decline continue in 2019.”
Though all of these challenges, Brunnen says that the announcement of Imperial Oil’s new Aspen project was a huge investment decision and very promising. “This is the first greenfield oil sands project announced in five years,” he says. “However, soon after this announcement came out and that the Aspen project will apply steam displacement technology to reduce emissions and decrease operating costs, the Alberta government announced its curtailment program, and we continue to see pipeline delays from the federal government.”
As a result, Imperial Oil revised its project timeline and the capital spend as a result of those two factors. “If you’re limited in terms of production, limited in terms of market access and limited to actually getting projects going, it’s very difficult for any investor to want to put their money here,” says Brunnen. “If you look at Canada, it’s a particularly challenging place for anyone to want to put any amount of investment at this point in time.”
In terms of the Trans Mountain delays, Allan Fogwill, president and CEO of the Canadian Energy Research Institute, says, “as of right now there were two elements delaying the expansion. One was additional work that needed to be done by the National Energy Board related to marine impacts. That’s been completed and submitted to the government. The second aspect was the appropriate consultation with indigenous groups. The federal government completed working on that and have given their final approval. Based on these two developments, the project has all the approvals required to proceed.”
On June 18, the federal government once again approved the TMX project, stating it will begin this year. Fogwill says it was “a significant test for the Trudeau government to show support and actually get shovels in the ground.”
As well as approving the project, the federal government also said in a press release that it would direct all funds it earns from the pipeline, which is estimated to be about $500 million a year in federal corporate tax revenue, and invest it in clean energy projects.
CERI produces countless studies that provide transparent and neutral analysis dealing with economic and environmental impacts on the energy sector. This information is intended to provide decision makers in industry, government and other stakeholders the facts and analysis they need to make informed decisions.
Regarding the state of the energy sector, Fogwill says, “We’re in a bit of a state of uncertainty. It relates to how policies, both in terms of environment and economy, are working together, and how to balance those two competing perspectives. In terms of the oil and gas industry—because of that uncertainty—we’re seeing the industry being hesitant of significant investment. They’re uncertain whether they’re going to have market access or how new provincial or federal policies related to oil and gas activities are going to change the environmental requirements or cost profile of different activities.”
In a recent study, CERI explored the move to electric vehicles as well as moving toward higher Corporate Average Fuel Efficiency (CAFE) standards—the energy efficiency of gasoline vehicles. “In fact, over the next 20 years, the pathway for [energy efficient gasoline vehicles] has a greater possibility of reducing emissions. It’s only in the later stages of our analysis, after 2040, that electric vehicles will actually have lower emissions in terms of the overall transportation sector. This is primarily due to how many vehicles of each are assumed to penetrate the market,” explains Fogwill.
He continues, “in a range of scenarios by the International Energy Agency, petroleum products will still be in demand past 2040. And even in the agency’s most stringent policy scenario, achieving the 1.5-degree warming goal, where they’re moving towards all countries reducing carbon emissions, you’re still looking at a demand of about 77 million barrels per day for petroleum and petroleum products. So the question is whether we want Canadian oil and gas to be part of that market.”
CERI also recently looked at itemizing the economic benefits by province and U.S. state for oil and gas activities in Canada. “What we found surprising out of that was the province that has the second highest benefit was Ontario—a province that has a lot of support activities, such as legal firms, banks, manufacturing and manufacturing services, which are relied on by the oil and gas sector,” says Fogwill. “So it’s really an economic activity that broadly impacts the Canadian economy, not just western Canada.”
Newfoundland, for example, is also seeing some significant benefits as a result of offshore oil activity.
Surely, uncertainty created by policy debate is creating challenges for companies to secure foreign direct investment. For oil and gas, it will continue to be the challenge of accessing markets through pipelines. In the case of the natural gas sector, the issue is more of an evolving North American market. “The U.S. is producing a lot more natural gas and doesn’t need Canada’s export,” says Fogwill. “Canada is losing a portion of its export market to the U.S. If the industry is to grow, Canada needs to find other markets.”
According to Fogwill, the first thing that Canada needs to do is become fully involved with the carbon credit framework that’s been developed under the Paris Agreement to allow oil and gas companies to get credit for zero or low emissions or offset additional carbon emissions in Canada to offset carbon reductions elsewhere when the country considers its energy export projects. “It’s very much an export market. We produce much more than we need domestically, therefore any way these companies can balance their economic opportunities with the ability to meet its Paris Agreement targets will be advantageous for Canada’s economic development going forward.”
Winning with wind
On a more positive note, Canada’s wind energy sector is maintaining its growth and remaining competitive—it’s moved up a rank from 9th largest in the world in 2018 to 8th this year. “We’ve been crunching the numbers and it’s been about an average of 1,000 Megawatts of new wind energy added each year for the past 10 years,” says Phil McKay, director of operations and maintenance program for Canada Wind Energy Association (CanWEA). “There have been some political ups and downs that have proven challenging, but it’s still very positive.”
Political challenges have specifically been coming from the provincial level for Canada’s wind energy sector. “The new government in Ontario cancelled a number of projects that were slated and being constructed. We are still optimistic about work in Saskatchewan and Alberta. We are able to compete with other forms of energy generation when there is a need for new electricity,” says McKay. “Like any industry, we face challenges and have work to do to prove the validity of the industry. The good news for us is that we have a lot to back that up, and we have established industries that can vouch for themselves.”
In 2018 a large Alberta wind project was announced. “Both Alberta and Saskatchewan put out bids for new wind energy and they got prices back that were lower than any other form of new energy in the country,” says McKay. “That was a feather in our cap that we can now say wind energy is the lowest cost option for new electricity in the country.”
The Alberta projects are starting to break ground. But what’s most interesting is the evolution of wind turbine technology and the opportunities for Canadian manufacturers.
Wind turbine towers are taller, the blades are larger, and designed to take advantage of lower wind areas in broader geographies. Core machinery is still being manufactured elsewhere, but given the size of the towers and blades, manufacturing must be close to the installation location. That said, as these large fleets of wind turbines age, there is opportunity for parts refurbishment. McKay explains that if a gearbox fails and needs to be swapped out, that replacement needs to be done quickly. But then you have this gearbox that might have a failed bearing or a chipped gear. There will be a need for shops that can repair them. “There are shops already working on that and replacing those parts or upgrading them to stronger materials.”
McKay says that there are also some really interesting initiatives coming from individual companies as well. “There have been a number of projects in the last year that are in partnership with Indigenous communities. Being able to collaborate on that level means that it’s not only a benefit for Indigenous communities, but it demonstrates the applicability of wind energy in a distributed nature. It’s spread out in these rural spots and offering jobs and employment in some hard to reach places.”
Without a doubt, Canada is rich with energy and resources. But without the proper government support, there is going to be continued missed opportunities.
CERI found a curious perspective when looking into fuel decarbonization policies, for example, in different jurisdictions. Where other international jurisdictions are focused on liquid fuels, Canada is looking at fuel standards that include solids, liquids and gas. CERI looked at California, British Columbia and the EU, which were all roughly the same. As a country, Canada is planning to do more to manage fuel emissions than other jurisdictions. But what was most intriguing about California is that it continuously evolves its policy. In an age of climate change, Fogwill says that flexibility may be needed as our understanding evolves with regards to interactions between our economic and environmental objectives.
It’s clear we need established policies that work for Canadian companies to remain competitive, but perhaps we should take a note from California by having our policies always evolving and adapting as the market changes. SMT