Troubled waters ahead for Canadian energy development

Canada’s potential to develop energy is immense. Canada has the third largest reserves of oil in the world, and large reserves of natural gas.

These large reserves have the potential to contribute greatly to the economic prosperity of Canadians and their families. Consider the National Energy Board’s (NEB) recent production projections. The NEB projects that oil production, mostly from the oilsands, could grow from 1.52 billion barrels per year to 2.43 billion barrels per year in 2040, a growth of 60 per cent. Natural gas production is projected to grow from 0.92 billion barrels of oil equivalent in 2015 to 1.12 billion barrels of oil equivalent in 2040.

Unfortunately, government policies are putting some of Canada’s future resource production at risk. To make matters worse, these policy changes come at a time when Canada’s energy industry faces deep economic hardships.

Let’s take a look at a few areas of policy and some of the recent changes that could hurt resource development.

Beginning in Alberta, investor confidence in the province has deteriorated. In the Fraser Institute’s Global Petroleum Survey, Alberta slipped from the 16th (of 156) most attractive jurisdiction in the world for oil and gas investment in 2014 to the 38th (of 126) most attractive jurisdiction in 2015. And although Alberta’s royalty review, which contributed to the large increase in investor uncertainty in the province, resulted in little change, other policies such as the 100 megatonnes (Mt) annual cap on oilsands emissions could significantly constrain future oilsands development.

To put this into perspective, given that the oilsands currently produce about 2.3 million barrels per day, with emissions of about 70 Mt a year, some analysts note that this leaves room for additional production of about a million barrels of oil per day, or a total of roughly 3.3 million barrels per day of production based on current efficiency levels. By 2040, the NEB projected that output from the oilsands could reach about 4.76 million barrels per day. That’s a lot of lost production from one policy.

Federal policy isn’t helping things either. In January, the federal government announced that it will require that the environmental reviews for liquefied natural gas (LNG) terminals and pipelines consider the direct and upstream greenhouse gas (GHG) emissions that will result from these projects.

These new climate tests are unnecessary since the effects of pipelines and LNG terminals on climate change are negligible at worst and positive at best, based on their ability to actually reduce GHG emissions. The climate tests will thus just add to the regulatory barriers and compliance costs that Canadian energy companies already face.

In addition, as part of the Transportation Minister’s mandate letter, the federal government plans to establish a “moratorium on crude oil tanker traffic on British Columbia’s North Coast.” For a government committed to heeding evidence-based policy, it’s curious then why the government wants to ban oil tankers off B.C.’s North Coast, effectively ending the prospects of the Northern Gateway pipeline, when the evidence points to a high degree of safety that has continued to improve over time.

The above paints a bleak future for Canadian energy development.

This is something that the International Energy Agency (IEA) highlighted in their recent medium term oil outlook. In their assessment of Canada, the IEA said that:

“[h]eightened environmental concerns, a lack of pipeline access to new markets and the unknown impact of the victory by the New Democratic Party in Alberta’s elections last year are causing companies to slow development.”

The trend in policy should be concerning, for as C. Peter Watson, the Chair and CEO of the NEB, recently noted:

“As long as there is demand for energy, markets will function to provide the supply, whether from domestic or international sources, with little consequential impact on global energy use and the associated emissions.”

Global demand for energy will remain strong well into the future. The question is, how much of this demand will be satisfied by Canadian energy? Increasingly, it looks like Canada won’t meet its potential.