In 1969, Prime Minister Pierre Trudeau told a U.S. audience, “Living next to you is in some ways like sleeping with an elephant. No matter how friendly and even-tempered the beast … one is affected by every twitch and grunt.”
Forty-eight years later nothing has changed. For oil, Canada remains inexorably linked to the U.S. Not just as a customer but also for investment. With Donald Trump committed to “make America great again,” Washington is introducing policies that business channel CNBC credits with stimulating free-market “animal spirits.”
The elephant is not merely awake. It is up and moving around. Look out!
In March, the White House introduced policy changes Trump called a “new energy revolution,” effectively undoing much of the anti-carbon policies introduced by his predecessor. This included ending “the war on coal” by opening federal lands to mining and eliminating the “social cost of carbon” analysis of energy projects, buildings and consumer products.
Through other legislation Trump has committed to streamlining and reducing regulations for energy development including reviving Keystone XL, which Trump calls “incredible.” U.S. energy developers believe they once again have a friend in “D.C.”; not an adversary.
While rarely recognized as such, America is the largest oil and gas producing jurisdiction in the world on a barrel-of-oil-equivalent (boe) basis at 28 million boe/day in 2015. That’s double Saudi Arabia at 14 million boe/day. But Alberta, including natural gas and liquids, is a global player at about 5.2 million boe/day. Alberta helps make Canada the third-largest natural gas producer in the world and number five for crude oil production. This is also rarely mentioned.
The differences between how the world’s first and fifth hydrocarbon producers are approaching the future is breathtaking. Trump wants to expand coal. Alberta is phasing it out and borrowed $2.2 billion to compensate generators. Washington is indifferent to the energy efficiency of appliances. Alberta is handing out free energy-efficient lightbulbs. America is stimulating its energy sector. Edmonton legislated an oilsands carbon emissions cap. Trump is making U.S. energy producers more competitive. The NDP has raised corporate taxes and introduced carbon taxes.
A massive expense for Alberta will be meeting the provincial commitment to reduce methane emissions by 45 per cent by 2025. Trump instructed his team to review the policy.
Alberta’s geology is favourable but geography is not. Land locked, Alberta’s extreme seasonality also causes activity to decline significantly during each spring thaw. Alberta’s higher costs were recognized in the 1990s when Alberta cut royalties and corporate taxes and partnered with Ottawa to create special incentives for the oilsands including an accelerated capital-cost allowance (ACCA) on investment. The ACCA is gone and Alberta has introduced higher taxes and emission caps.
The flight of capital from Alberta to places where oil companies can make more money is underway. Shell, ConocoPhillips and others are selling Alberta assets to finance investment in more profitable jurisdictions like the U.S. Many Canadian companies have major and growing investments in America. Alberta’s fading competitiveness is regularly discussed in investment circles but ignored or denied in Edmonton.
Saving the world through climate change policies is a noble gesture, widely supported until people actually have to pay for it. The U.S. energy elephant has stirred. On its current trajectory, Alberta’s oilpatch is already injured. Will the province ensure it isn’t trampled?