Samantha Lucy

Are More Pipelines in the Public Interest?

 

David Hughes says no.

We are repeatedly told by the Trudeau government that we must meet our Paris climate change commitments and at the same time ramp up oil and gas production and build more pipelines in order to strengthen the economy. To this end, the federal government has gone so far as to buy the Trans Mountain pipeline (TMX). But how realistic is this rhetoric?

Royalties from the sale of non-renewable oil and gas assets are a major source of government revenue. But despite hype about how critical oil and gas is to government well-being, data from the Canadian Association of Petroleum Producers show that royalties paid by industry fell by 44 per cent from 2000 to 2017, even as production increased by 77 per cent. And although industry’s take—defined as revenue from sales after exploration, development, capital, operational and royalty expenses—declined from $20.2-billion in 2000 to $17.4-billion in 2017, owing to lower commodity prices, the percentage return on expenses was still a healthy 19.5 per cent in 2017.

The average effective Canadian royalty rate shrank from 18.3 per cent on $65.1-billion of revenue in 2000 to 6.2 per cent on $107.1-billion in 2017. The situation in Alberta is even worse, with effective rates decreasing from 19.5 per cent to 5.1 per cent from 2000 to 2017. This amounts to a selloff of valuable non-renewable assets for minimal (and declining) returns to the Canadians who own the resources and face the environmental consequences of their extraction and use. Although Canadians will need oil and gas for the foreseeable future, over half of current production is for export. We’re liquidating the highest-quality portion of our remaining resources, which provide a backstop for future generations, at rock bottom prices.

The Notley government’s Climate Leadership Plan allows for a 40 per cent increase in oil sands GHG emissions from 2016 levels. This will require the rest of Canada’s economy to shrink emissions 48 per cent by 2030 and 88 per cent by 2040 to meet Paris targets—an unlikely prospect, barring economic collapse. And since Canada is a mature exploration region for conventional oil and gas, the only significant production growth can be from high-environmental-impact oil sands and fracked oil and gas.

Trudeau’s and Notley’s rhetoric about TMX ignores the fact that the Line 3 and Keystone XL pipelines will eliminate existing bottlenecks before TMX’s forecast 2022 completion date. They will provide double the export capacity of TMX and access prices on the US Gulf Coast equal to or higher than can be obtained in Asia. The federal purchase of TMX will cost taxpayers at least $13.8-billion. This is an investment in trying to shore up political support, not action in Canada’s long-term interest. We need a credible energy plan if we’re serious about climate commitments and long-term energy security.

Martha Hall Findlay says yes.

Unfortunately the concept of public or national interest is too often used these days either to defend or attack specific activities and has therefore lost much of its meaning. Despite the depressing polarization in politics and social discourse, I am, however, confident that most Canadians agree on some basic things: Economic prosperity benefits all of us, as does what I call social prosperity—equality of opportunity for all, individual freedoms, respect for others and the law. And most people now realize that both economic and social prosperity not only include, but depend on, a healthy environment. Regardless of political leaning, most Canadians would agree that all of these are in the “public interest.”

But protesting against pipelines misses the point. Pipelines are merely a mode of transport. Canadians need to ask whether exploiting our oil and gas resources is in the public interest—does it enhance our economic and social prosperity, recognizing the imperatives of climate change? The answer is an overwhelming yes. True, the world is using more renewable energy such as wind and solar power, and its costs are falling, which is great. But renewables won’t replace fossil fuels anytime soon. Given efficiency gains and the world’s rapid population growth, fossil fuel demand will increase for several decades. So then the next question is whether the world should use Canadian oil and gas or oil and gas from other places. This is where recent innovations are so important. GHG emissions for new Canadian oil sands extraction are now less than the average for North American oil, and less than those of some of the oil that Canada imports.

If, therefore, Canadian oil comes with fewer GHG emissions than some of the alternatives, such as Venezuelan or Californian heavy crude, isn’t it time Canada started promoting its oil to the world instead of blocking it? We import almost as much oil as we buy from ourselves—and we export far more than that to other places. There is no doubt that extracting and selling Canadian oil and gas—and therefore building pipelines—contributes to both our economic and our social prosperity. Our oil and gas sector contributes more to Canada’s GDP than the auto sector, forestry, mining or aerospace sectors. It also invests a great deal in R&D, particularly in environmental innovation—high-tech, well-paying jobs.

Social attitudes about what is important, and corresponding expectations for governance, change over time. Thanks in part to protests by people passionate about social and environmental issues, Canadian mining practices are now world-leading. Similarly, Canadian forestry practices are far better than they used to be. We didn’t stop extracting, cutting, processing—we simply exploit our mineral and forest resources in better ways. Our oil and gas sector is responding to these forces in much the same way through technical innovations in water recycling, reclamation, GHG reductions and more.

David HUGHES responds to Martha Hall Findlay

Of course “economic prosperity” benefits us all. But this is not achieved only by expanding oil and gas production and building pipelines. A healthy environment and long-term energy security are likewise hard to argue with—but both are being compromised by a reckless ramp-up of oil and gas production. There are environmental impacts of producing and consuming oil and gas. Also, these resources are finite and precious.

Canada exports more than half of the oil and gas it produces, and these non-renewable resources are being sold off at rock bottom prices. Citizens own these resources and it bears repeating that even with a massive increase in hydrocarbon liquids production from 2000 to 2017, oil and gas royalties to the Canadian public have declined steeply over that time. In other words, we citizens are selling more of our resources but getting far less in return.

I agree that renewable resources are unlikely to soon replace fossil fuels. The selloff of finite, non-renewable energy assets for minimal and declining returns therefore makes little sense. Future generations of Canadians may need these resources.

Ms. Findlay writes that “we import almost as much oil as we buy from ourselves,” which is incorrect. Eastern Canada imports are much less than Canada buys from itself. The latest statistics available show that Canada refined 1.2 million barrels per day from its own production and imported 0.7 million barrels per day, half of which came from the US. And Canada exports 2.9 million barrels per day.

Nothing in Ms. Findlay’s opening argument acknowledges that increasing oil and gas production to the level projected by the National Energy Board will make it virtually impossible for Canada to meet its greenhouse gas reduction targets. Instead she writes: “GHG emissions for new Canadian oil sands extraction are now less than the average for North American oil.” But according to a 2017 analysis by ARC Energy Research Institute, existing upstream oil sands emissions are up to 204 per cent higher than the US refined average.

The oil and gas industry is not going away any time soon. But growing production as aggressively as possible doesn’t make any sense.

In Ms. Findlay’s world, oil and gas are infinite resources with which to promote “economic and social prosperity”—technology will prevail and there are no physical limits. Unfortunately, as an earth scientist who has studied oil, gas and coal for four decades, I can assure you that these energy resources are finite. Canada is a well explored region, and most of what’s left are high-impact resources such as oil sands and fracked oil and gas. Canada’s conventional oil production peaked in 1973 (i.e., production reached its maximum rate) and natural gas peaked in 2001.

Yet these resources are extremely valuable. They have a very high energy density compared to renewable resources, and they are dispatchable—they can be turned on and off on demand—unlike intermittent renewable resources such as solar and wind. But they have a serious downside in emissions and the environmental impacts of extraction. Producing them as fast as possible to promote “economic prosperity,” as in Ms. Findlay’s world, is a recipe for disaster.

We’re selling these resources off for declining returns and at great expense in terms of our ability to meet emissions reduction targets.

Ms. Findlay asks, “Isn’t it time Canada started promoting its oil to the world instead of blocking it?” The answer is a resounding no if Canada is serious about meeting its climate commitments and providing an energy backup for future generations. We’re selling these resources off for declining returns and at great expense in terms of our ability to meet emissions reduction targets. Doing so in the name of “economic prosperity” is not in the public interest today and is a crime against future generations, who will have to bear the brunt of energy scarcity, climate change and the environmental aftermath of the extraction blitz.

There’s no doubt that achieving Canada’s targets of reducing emissions 30 per cent by 2030 and 80 per cent by 2050 will require major changes in average citizen’s energy consumption. It will also require wise government policy. Promoting increased oil and gas production in order to reduce emissions, as advocated by the Trudeau and Notley governments, is the antithesis of what’s needed to meet energy security and environmental goals.

Similarly, we should not justify the purchase of a pipeline with false claims that Asian markets will provide higher prices. The US Gulf Coast has the world’s largest concentration of the complex refineries needed to optimally refine heavy oil. Alberta’s specialty, Western Canadian Select, has been trading there from parity up to a $3 per barrel premium compared to Asian markets. Two new pipelines under development—with double the capacity of TMX—will access US Gulf Coast prices and eliminate capacity constraints before 2022, the earliest completion date for TMX. Transport costs to the US Gulf Coast are also lower than sending oil to Asia via TMX and tankers. Factoring in transportation raises the total price premium compared to Asian deliveries by up to $5 per barrel.

Canadians need a credible energy plan to meet climate commitments and provide long-term energy security, not ad-hoc pedal-to-the-metal oil and gas production growth as advocated by industry, governments and Ms. Findlay.

Martha Hall Findlay responds to David Hughes.

David Hughes’s arguments against building more pipelines (and specifically the Trans Mountain pipeline) are emblematic of my original point—that many arguments against pipelines often miss the main issue and are proxies for other policy debates.

Mr. Hughes makes two main points. Citing declining royalties, he first argues that petroleum producers are not paying enough for the right to develop public resources. Second, he argues that oil sands development is antithetical to Canada’s climate commitments.

Let’s start with royalty payments. Failing to build more pipelines will not have any positive impact on any real or perceived deficiencies of royalty regimes. If anything, inadequate pipeline capacity is a major factor behind reduced royalties, because it drives up Canadian oil companies’ transportation costs and reduces profitability. Royalty payments are a function of the revenue per barrel earned by oil producers, and today, even as global oil prices are surging, Canadian oil is trading at its largest price discount in history.

In early October, West Texas Intermediate (the US benchmark oil price) traded above US$75 per barrel. Western Canadian Select, priced at US$35 per barrel at Hardisty (to reflect its lower quality and eventual transportation and refinery costs), languished at a 53 per cent discount. Far less money is coming into Alberta, and we are therefore seeing far less tax revenue, royalty revenue and other spillover benefits from that revenue, in part because we just don’t have enough pipeline capacity.

Even if there are problems with our royalty regimes, pipelines aren’t the issue, but rather how royalty rates are structured and applied.

In terms of reducing GHG emissions, protesting pipelines again misses the mark. Concern about increased emissions from oil sands production is exactly why Alberta’s 100 Mt cap on oil sands emissions was established. The method of transport is not the issue. In recent months exports of bitumen to China have increased dramatically, but it has all had to get to the sea by rail—which is worse for the environment than a pipeline, is more expensive and can create real capacity problems when grain and other harvests need to be shipped.

Global oil demand will continue to rise in the foreseeable future whether Canada can get its oil to market or not. Market forecasters around the world predict oil demand will increase for decades. The International Energy Agency predicts the world will consume an additional 11 million barrels of oil per day by 2040. The production and use of renewables is going way up and getting less expensive. But they’ll feed only a small part of the world’s still increasing energy demand. Therefore, curbing Canadian oil production just means some other country will reap the economic benefits of supplying oil demand. Oil will still be burned and the emissions associated with its production will still be created, while Canada feels the economic pain.

The failure to build more pipelines will not have any positive impact on any real or perceived deficiencies of royalty regimes.

I am an environmentalist, and I want to help reduce global emissions, not just meet Canadian targets. Top industry analysts such as IHS Markit believe oil sands production will, over the next decade, reduce emissions significantly using existing commercial (or near-commercial) technology. Even more exciting is that future transformative technology breakthroughs currently under development may reduce emissions by far larger amounts—possibly 80 per cent, according to CERI. Even now, the GHGs emitted for a barrel of new oil sands production are lower than they are for California crude oil and a couple of Venezuelan types. The more we reduce our own GHGs per barrel, the more Canadian oil sands oil is better for the environment than some alternatives. To the extent that this trend continues, and to the extent that such Canadian production can displace “dirtier” alternatives, Canadian oil sands can in fact help reduce global emissions—which is what really matters.

This is why many environmentalists support Canada’s production and export of liquid natural gas (LNG) to places such as China. LNG production and consumption is not GHG emissions-free, but it reduces emissions dramatically when it replaces coal to generate electricity—a net reduction of GHG emissions. Exporting LNG to China doesn’t help Canada meet its Paris targets, but it does help reduce global emissions. Again, that’s the real goal.

Using pipeline development to argue for or against other, disconnected policy preferences is not effective. It means we often talk past each other and never actually resolve the issues we truly care about. Lack of pipelines means parts of Canada rely on oil from Saudi Arabia—where human rights and environmental protections are abysmal—all the while Western Canada exports over three-quarters of the oil it produces. In 2017 Eastern Canada imported 100,000 barrels of oil from Saudi Arabia a day, while 3.3 million barrels a day were sent outside of Canada, primarily to the US. This dependency is the result of decades of decisions around oil and pipelines, of which the failed Energy East pipeline is a part.

Pipelines are in the national interest, just as receiving a fair return on public resources and reducing GHG emissions are as well. But we need to talk about them directly, with all of the related facts and consequences of our actions—not in the confines of a single project.

David Hughes is an earth scientist and former research manager at the Geological Survey of Canada. Martha Hall Findlay is the president and CEO at the Canada West Foundation.

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