As US President Donald Trump moves to deregulate the US energy industries, will Canada’s environmental concerns in oil and gas hurt or help our competitiveness?
SELDOM, SAYS VIVEK WARRIER, has there been a more interesting — or challenging — time to be a corporate lawyer working in Canada’s oil and gas sector. Put aside, for a moment, that oil prices shrivelled from a 2014 high of US$112 to, at the time of this writing, US$49.50, putting a severe revenue crimp on the Canadian oil and gas sector.
In North America’s energy sector, the only thing more volatile and unpredictable than fossil fuel prices has been US President Donald Trump’s protectionist rhetoric and his promises to strip away environmental and other regulatory regimes burdening the US energy sector. President Trump — whose rhetoric is different than that of Prime Minister Justin Trudeau’s on climate change — has often tweeted his skepticism about global warming.
He stated as much in 2012 when he tweeted, “Record setting cold and snow, ice caps massive! The only global warming we should fear is that caused by nuclear weapons - incompetent pols.” As a result, the gap in the philosophical and regulatory factors shaping US and Canadian energy policies have been widening rapidly since the respective elections of President Trump and Prime Minister Trudeau.
President Trump’s concerns over the weight of environmental regulations on US energy productivity and profitability is clear: between 2009 and 2015, according to Vox magazine, Trump texted about his climate change skepticism 115 times on Twitter. As president, he has done much more: he signed an executive order approving the Obama-delayed Keystone XL pipeline; placed a similarly-minded administrator in charge of the Environmental Protection Agency; and, going against the global grain, pulled the US out of the Paris Agreement on climate in June.
Meanwhile, Canada’s government and many of its provinces, including Alberta, BC and Ontario, have brought more stringent environmental policies and regulations to bear on their oil and gas industries. “It is a fascinating time, for sure,” says Warrier, a partner and head of oil and gas private mergers and acquisitions at Bennett Jones LLP in Calgary. “From the oil and gas perspective, there is obviously a lot going on in the policy and regulatory front, both north and south of the border.”
North of the border, to name a few developments, are Canada’s climate-change plan, which will put a minimum price on carbon emissions in 2018, and Alberta’s $20-per-tonne carbon tax and oil sands green-house gas (GHG) emissions cap. Then, aside from other provinces’ regulatory measures, there have been the Supreme Court of Canada’s rulings in July reaffirming and clarifying the duty of companies to consult with Aboriginal groups when it comes to resource development. In Clyde River v. Petroleum Geo-Services, 2017 SCC 40, the court writes, “Where the regulatory process being relied upon does not achieve adequate consultation or accommodation, the Crown must take further measures to meet its duty.”
Shifting provincial political landscapes have also brought environmental policies to the fore. On August 10, BC’s new NDP government, propped up in minority power by the Green Party, announced it was seeking intervenor status and hiring outside counsel in a legal challenge — along with nearly two dozen conservation groups and First Nations communities — to overturn the federal government’s approval of Kinder Morgan’s $7.4-billion Trans Mountain pipeline project.
Many energy-sector participants see these developments as damaging to Canada’s competitiveness in the global energy marketplace. Perrin Beatty, President of the Chamber of Commerce of Canada, put it in a letter to Canadian premiers this past July, asking Prime Minister Trudeau to find ways to help business offset the cost of intensified regulatory burdens. Not doing so, warned Beatty, would seriously undermine Canada’s competitiveness. He added that the “concern becomes even more substantial when we see the determination of the US administration to dramatically cut both regulation and business taxes in that country.”
That widening gap between Canadian and US energy policy, at least on the face of it, seems to have triggered a significant outflow of capital and investment from the Canadian energy patch to the US and other jurisdictions. “You see this particularly in the consolidation in the oil sands business,” observes William Jenkins, a co-lead of Dentons Canada LLP’s mergers and acquisitions team. “Ownership has been winnowed down significantly. The oil sands has become much more of a domestic industry.”
In the past year alone, several major US and other multinational companies have sold off their Canadian oil and gas assets. Cenovus bought Houston-based ConocoPhillips’s assets in Western Canada, including interests in an oil sands venture in Northern Alberta, for $17.7 billion. Canadian Natural Resources signed deals worth $12.7 billion to buy oil sands assets of Royal Dutch Shell as well as other assets from Marathon Oil. Apache completed its staged exit from Canada with the sale of its Alberta and BC assets to Calgary-based Paramount Resources for $459.5 million.
A report this past summer by the Canadian Association of Petroleum Producers (CAPP) estimates that, together, provincial and federal government policies and rules were costing our oil and gas industry between $450 million and $760 million annually. And there are more coming. CAPP forecasts that capital spending in Canada in 2017 will have dropped by $44 billion from $81 billion in 2014. Meanwhile, spending in the US will have risen by 38 per cent to $120 billion.
The question is, are federal and provincial policies pushing companies and investments out of the Canadian energy patch, or are President Trump’s policies reeling them in? In Warrier’s view, it may be neither. “It is a mischaracterization to suggest that capital is fleeing Canada,” he suggests. “At the end of the day there are a lot of people trying to score political points by suggesting that the reason this capital is departing because, from a political perspective, things like carbon taxes and more rigorous environmental approval standards have been introduced. I don’t think that’s it at all. These are global companies who have the ability to deploy their capital where it makes the most sense at any given time. And the incremental production costs in Canada are higher,” he stresses, “independent of the regulatory regime, simply because of our very difficult topographical, geological situation.”
In the United States, says Warrier, with production costs under pressure from low commodity prices, it’s easier, for instance, to produce oil and gas from the Permian Basin in Texas and New Mexico than it is from the more remote reserves in Canada. In the US, he says, you get “much more bang for your buck at this time.”
So has anything changed with US energy politics under President Trump’s administration? “Initially at least,” says Jenkins, who has been an advisor to Enbridge Inc., the election of Donald Trump “was a bit of a psychic boost.” For decades, he explains, the North American energy industry has faced stiff opposition from different segments of society as it developed infrastructure. But when President Trump quickly signed an executive order approving Keystone XL after his November election, and appointed former Exxon Corp. CEO Rex Tillerson as Secretary of State, “it felt like it would be more socially acceptable to support the oil and gas business now.”
In the months after Trump was inaugurated on January 20th, says Jenkins, foreign companies operating in Canada did seem inclined to head for the US. “I think while that was the case when he first came into power, but now there is a mixed message. Business is certainty and clarity. And so far that hasn’t been the cases in the US. Trump’s policies haven’t resulted in legislation yet.”
His conclusion for what’s behind the exodus of companies such as Apache and ConocoPhillips? Where once there was significant international interest in investing in and developing Canada’s fossil fuel reserves from about 2002 to 2010, says Jenkins, “that has cooled quite dramatically. There’s a whole range of reasons for that. The most important, obviously, is the international price of oil.” Compound that with “eye-catching” levels of capital expenditures that must be locked in on a long-term basis, where you need certainty about social and government consensus, and, Jenkins adds, “I do think the whole regulatory regime has contributed significantly to the loss in appetite for oil sands projects by non-Canadian companies.”
But could the Canadian oil and gas industry eventually recover despite, or perhaps because of, our more rigorous environmental regulations matrix governing energy production? While Miles Pittman, a partner in Borden Ladner Gervais LLP’s energy law practice group in Calgary, says there is evidence the Trump administration is more business-friendly to oil and gas, Canada just “needs to get out of its own way a bit” to compete. Canada needs “a process where timelines are more identifiable and the results are predictable. In the circumstances where there is uncertainty about such things, it is difficult for investors to look at this environment and say, yes, I will make an investment.”
To that end, the Supreme Court of Canada’s latest landmark rulings on the Crown’s duty to consult Indigenous communities on energy resource projects — the aforementioned Clyde River along with Chippewas of the Thames First Nation v. Enbridge Pipelines, 2017 SCC 41 — have been helpful, says Pittman. On July 26, the SCC blocked seismic testing for off-shore oil and gas in Baffin Bay near Clyde River, Nunavut, ruling that the local Inuit community had not been properly consulted when the National Energy Board approved the testing by a Norwegian consortium. At the same time, however, the court outlined why it found that Enbridge had properly consulted with the Chippewa of the Thames reserve near London, Ontario, when it applied to reverse the flow of crude in its Line 9 pipeline.
“My view,” says Pittman “is that the Supreme Court of Canada decisions are very helpful to project developers.” He says if the Crown’s duty to consult is performed in a “robust way before approval” then the chances of project success are increased as a result of the court’s decisions. “I think that’s welcome certainty. The cases provide a road map on how to satisfy the duty.”
Another factor that might eventually favour Canadian oil and gas production and competitiveness over the United States, suggests Lisa DeMarco, could be the vacuum created by President Trump’s lack policy around climate change. When he announced on June 1 that the US would pull out of the Paris climate agreement, there was an international backlash — some of that even coming from American oil companies (159 countries of the 197 that signed the accord in 2016 have so far ratified it).
“In the longer term, in many ways,” says DeMarco, a senior partner and co-founder of DeMarco Allen LLP, a boutique Toronto firm that specializes in climate change and responsible resource law, President Trump’s “backward move was a gift to not just Canadian producers, but American producers who are progressive.” Canada’s carbon caps and carbon pricing, along with other regulatory approaches, DeMarco says, is forcing oil and gas companies operating here to be not only greener, but more efficient, producing “more output bang for less input bucks.”
She can see a point where “greener” Canadian oil and gas products could have an advantage in the global marketplace compared to fossil fuel pumped out in a deregulated United States. “I honestly think you should see a market distinction between efficiency and productivity in Canada that will result from what’s going on, in contrast, to the US, which is an anti-innovation play not likely to be conducive to an increase in productivity.” Moreover, says DeMarco, if the US chooses not to impose carbon pricing on oil and gas production, jurisdictions that do may apply taxes on US energy imports.
Over at Bennett Jones, Warrier sees something positive going on as well as Canadian energy companies contend with the widening policy gulch between Canada and the US. Our harsher operating environment, combined with low commodity prices and our intensifying regulations, is spurring even greater technical innovations among Canadian producers. As that progresses, the ability of Canadian companies to exploit plays such as the Duvernay and Montney formations will attract more attention from investors.
“In each case where these international companies have left, you have seen Canadian capital step up to jump, quite frankly, at the opportunity to take over these assets,” says Warrier. “It’s fantastic to me and exciting, the fact the CNRLs, Cenovuses and Athabascas of our world have stepped up and obtained the capital and want to develop these assets, because they’re the ones that know these assets the best. They are more nimble than most of these international companies and able to more quickly deploy technologies to reduce costs and make the Canadian barrel much more internationally attractive.”
Quoting Peter Tertzakian, a well-known author and Chief Energy Economist at the private-equity firm ARC Financial Corp., Warrier says the last incremental barrel of oil ever produced in the world should be a Canadian one.
“Why? Because we have the most rigorous environmental standards on earth. We are doing as much as we can to reduce emissions and to put a price on emissions. And so, when you look around the marketplace of oil barrels around the world, why wouldn’t you continue to produce the ones that are subject to those strong regulations and producing the most environmental and sustainable way possible, as opposed to barrels with lesser regulation.”