On March 17, 2016, Trevor McLeod, Director of the Centre for Natural Resources Policy, gave the following presentation to the Arctic Oil & Gas Symposium in Calgary, Alberta
Canada is a northern nation, right? 40% of Canada’s land mass is north of 60
We are part of the Arctic Council, along with Russia, Greenland, Iceland – truly northern nations. But, Canada doesn’t really think of itself as a northern nation. Partly because there are only 120,000 people in the Territories. Partly because three-quarters of Canada’s 35 million people live close to US border – this creates a very strong bias.
This southern bias distorts our sense of the North. Somehow Sault Ste Marie qualifies as northern Ontario – though it is farther south than Paris, France.
I’m from a small town in northern Saskatchewan – Meadow Lake – it is half way up the province (and southerners think it is in the middle of nowhere). Southerners don’t think much about places like Meadow Lake and they think even less about north of 60.
And it will continue to matter as long as government policy and investment dollars flow primarily from the South.
But, the North also spends an inordinate amount of time thinking about the South.
We should start looking West to Asia!
Here’s why. This is a fascinating chart which I stole from The Atlantic. It’s not to scale.
The left side is the first 1900 years AD and the right side is recent times. Red is China and orange is India. Here’s the thing. For most of human history, China and India have been the dominant economic powers of the world, primarily because they had the most people.
The industrial revolution changed that because it disconnected economic power from population size. Today, for example, the U.S. accounts for 5% of the world population, but 20% of its GDP.
What is happening now is with the industrialization of Asia, we are seeing a correction of that temporary asymmetry. Rather than being threatened by this, we should see it as a tremendous opportunity. An opportunity that is knocking at our door – yet it is not clear we will answer.
Here is why Canada and the North should answer.
Global population is widely expected to increase from approximately 7 billion people today to 9 billion by 2050. Asia is going to drive growth. The population of Asia is more than four times the size of North America and the EU combined (NA: 357 million; EU: 742 million; Asia: 4,397 million)
Between now and 2040 the population of Asia is expected to grow by more than all the Americas and the EU combined [IEA, World Energy Outlook 2015]
Low oil and gas prices will not last forever AND Asia wants the hydrocarbons, minerals and fish that the North has!
Asia isn’t going away and the North needs to be ready to capitalize on growing markets.
BUT, Asia is a long ways from Canada’s North, right?
If you look at a regular world map, like this one, you’d think so.
This map makes Northern Canada and China look like they are on the opposite sides of the world. Mercator projection – makes poles look bigger than they actually are.
But, this map shows just how close we are to Asia.
Of course, I showed this to my 8 year old daughter and she told me it doesn’t look very close to her. And she said China didn’t look very North to her – and she’s right.
China isn’t a northern nation. But, it sure wants to be.
Officials in Beijing make a point of calling China a “near Arctic” state. They have official observer status on the Arctic Council – so they can monitor and influence pan-Arctic policy. The Chinese ice-breaker – the Snow Dragon – has crossed the Arctic Ocean and touched Canadian waters at Tuktoyaktuk.
Think about this: It takes less time to ship from Tuktoyaktuk to Shanghai than it does from Los Angeles to Shanghai. Of course, L.A. has an existing deep water port and Tuk shipping lanes aren’t open year round – of course that is changing Tuktoyaktuk port is also very shallow and would have to be dredged at significant cost. But it is doable.
All of this is to say that it isn’t crazy to think that the North is a viable alternative for getting goods to Asia. Helps to remember that China is planning to ship 15-20 % of its goods to Europe via the Northeast Passage (over Russia) by 2020.
It also helps to remember that Novotek is planning to send 2 LNG tankers per day from the Yamal Peninsula through the Bering Straight.
So, what do we do?
We can continue to rely on Southern governments and investors to invest in the North. I suppose it makes sense to continue with this strategy – but I’m skeptical that it will ever really change.
I work at the Canada West Foundation – a place where the primary goal is to advance the interests of western Canada. The West and the North have shared history.
There is very little in our shared history to suggest that distant governments will make policy to advance our interests.
The British Empire forced the regions to sell their resources cheap and buy manufactured goods at exploitative prices. This policy was continued in Canada under the National Policy and then later under the National Energy Program
The Canadian hinterlands – west and east – grudgingly accepted the tariffs that protected central Canadian manufacturing – on two conditions
(1) That we would have the ability to exploit our natural resources as a source of regional wealth; and
(2) That federal transportation policy would allow them to get their products to market outside the region and to get the manufactured goods they needed into the region.
Indeed, resource rich British Columbia came into Confederation on the promise of the Canadian Pacific Railway. And, resource rich Alberta and Saskatchewan joined because the C.P.R. was built;
Our inability to get oil to new markets shows just how shattered this deal is today (more on that in a moment).
But the same deal never really existed for the resource rich North.
While the prairie provinces finally got control over natural resources in 1930, it wasn’t until recently that Yukon and NWT gained control
This devolution of economic powers from Ottawa to the Territories will help overturn the lingering effects of the National Policy – and give the Territories the tools they need to determine their own future.
But devolution is not a panacea…
There was no truly Northern railway – and a lack of effective and efficient transportation networks continue to discourage investment in the North.
Indeed, it may be the North’s biggest challenge.
My point is that we are likely to be disappointed if we wait for the South to invest in major infrastructure in the Territories.
That said…Southern dysfunction – particularly when it comes to selling our crude oil – creates a window of opportunity to make the South care about investing in the North.
Let’s talk a bit about that dysfunction.
• Our only crude oil customer (the United States) is now our biggest competitor and it no longer wants to pay full price for our oil.
• 4M bpd in 5 or 6 years
• Built 12,000 miles of pipe in 5 years – but no KXL
• no oil export restrictions (can now buy our oil for cheap while selling oil on the world market at higher prices).
So, we have no choice but to diversify our markets.
Asia is the natural choice.
But, oil isn’t going west to Asia (the shortest route) because B.C. is blocking the way.
The discussion has centred on two major pipeline projects – Northern Gateway and Trans Mountain Expansion. Northern Gateway was approved by cabinet in June 2014 but most bet it will not be built. It has a sunset clause which says construction must start before the end of 2016 – have applied for an extension (just as Imperial Oil has applied for an extension on the Mackenzie Valley Pipeline).
The original Trans Mountain was built in 1953 from Edmonton to Burnaby, BC. The NEB recommendation will be made to GIC by May 20, 2016.
But, the new federal government created additional process for Trans Mountain and TransCanada’s Energy East project.
The 4 month political process (to be concluded by December 2016) starts after the regulator has reviewed the evidence and will include:
• Deeper consultations with First Nations (through an appointed Ministerial Representative – who should be appointed next month), and
• An assessment of upstream oil and gas emissions (I’ll try not to get all worked up about the constitutional implications of this).
The federal government’s plan was designed to assuage environmental and Aboriginal consultation concerns. It probably hit the mark on consultation – although I’m not clear on how this differs from Conservative government’s appointment of Doug Eyford to do this work a few years ago.
Aboriginal opposition is concentrated on the coast, though there are pockets of opposition in the interior as well.
But, it probably missed the mark on the environment, at least in BC.
The debate in BC is not so much about upstream GHG emissions (especially since AB gov’t took action). It’s not about pipeline safety (a recent Ekos poll says that about 70% of British Columbians believe pipelines are safe).
To the extent that it is not about an off-oil agenda, it is about tanker safety and protecting the fish.
• Less than 45% of British Columbians think tankers are safe.
• Contrast that with 65% on the East coast.
The narrative advanced along the BC coast is simple: bitumen bad, refined product good.
David Black – an old newspaper guy who is trying to build a refinery in BC – has done a masterful job of making that message stick. If you travel on the BC coast you’ll hear his narrative everywhere. The message has given a boost to three refinery projects.
• Kitimat Clean (David Black – north of Kitimat)
• Pacific Future Energy Corp. (Day, Atleo, Mercredi, Marisen – north of Kitimat)
• Eagle Spirit (upgrading in northern AB or northeastern BC – then pipeline to Grassy Point (north of Prince Rupert).
There are also rumblings that a dormant Aboriginal-owned refinery project is being discussed again.
The refinery option has been favoured by BC gov’t from the beginning – because it meets BC’s stickiest condition ($ for BC). Yet these projects haven’t gained much traction mostly because no one in the energy sector thinks they make financial sense – would probably need subsidies.
The BC government strategy on the 5th condition may be shifting to selling hydroelectric power to Alberta. Sent Minister Bill Bennett out to be conciliatory – recognizing that Premier Clark isn’t well loved in Alberta.
Then we have the federal government’s attempt to “formalize” the moratorium on shipping oil off the north coast of BC.
The Trudeau government is finding out just how tough this file is.
(1) Some First Nations are complaining that Trudeau undercut them – took away their leverage (APG)
• What happened to Nation to Nation relationship?
• Put moratorium in mandate letter without consultation.
(2) Will most likely meet US – primarily because it would open unresolved issues, including:
>Canada’s historic claims to some of these waters;
>the unresolved Alaska Panhandle boundary;
>freedom of navigation and
(3) Because it is unclear what the scope is. Would it include refined product or just dilbit? Refineries are proceeding on the assumption that it doesn’t apply to them.
So, it looks ugly out west – so we try to go east.
We wrap pipelines in the flag and make the energy security argument. Make the argument that dilbit will feed Canadian refineries with less expensive, more responsible Canadian oil, jobs for Canadians, etc.
Yet, the simple reversal of Enbridge Line 9 continues to face opposition. The line returned to service in November but, as of last week, the SCC granted the Chippewa of the Thames First Nation leave to appeal the reversal.
- TC’s Energy East
- Ontario and Quebec follow BC lead by attaching conditions to their support of pipelines crossing their territory.
- Atlantic provinces voice strong support (Irving refinery would benefit).
Again, the fight is really about 3 things:
• Money, the environment (local and GHG) and First Nations issues.
Ontario – has come on board with the election of Trudeau government and Alberta government taking action on climate change.
Quebec – Not so much.
There are three issues: Money, environment and Aboriginal consultatation.
Montreal Mayor Denis Coderre voiced environmental concerns but made it plain that Montreal was seeking economic benefits. Grand Chief Simon of the Mohawk, for example, has voiced strong opposition to the pipeline. Premier Couillard recently announced that Quebec will do an environmental assessment on Energy East – on the familiar principle that provinces have jurisdiction over environment.
We should give Couillard the benefit of the doubt – we know that political realities in Quebec require him to make the provincial jurisdiction argument.
But, it is tough to explain why Quebec was silent when the federal government infringed on provincial jurisdiction by making upstream oil and gas emissions part of the national interest test that will be applied to determine whether pipelines should go forward.
A cynic could be excused for believing that the federal government gave itself a hammer to make Alberta and Saskatchewan do more on climate change.
What about the Northern Options?
The Mackenzie Valley Pipeline casts a long shadow. As you know, the attempt to link Beaufort Sea natural gas to southern markets gained NEB approval in 2011, after 37 years of negotiation.
The big question on investors’ minds will be: do Northern people support development?
I heard a lot of positive messages yesterday. Devolution and resource revenue sharing seems to have dramatically improved support for development in the North. That story needs to be shouted from the rooftops – I don’t think it has penetrated into boardrooms in the South or into consciousness in Asia. If that story becomes well-known, investors will take a serious look.
Then it will be a matter of cost.
We all know the North needs roads, airports, sea ports and other infrastructure to bring down costs and to connect to markets (both export and import).
We all know that transportation infrastructure has been built in an incremental and ad hoc fashion.
It is very encouraging to see all the effort to “move beyond the economics of individual projects” and to focus on corridors – or in the words of the CTA review – “build multi-user legacy infrastructure that the North could not otherwise afford.”
I look forward to seeing the results of the work that CanNor is doing along with Yukon, NWT and Alberta. But, I get a sense this is still very much a side of the desk initiative.
It needs to be a priority.
I’ve heard a lot of talk about access Valdez, Alaska. In some ways that makes sense.
• It is an existing blue water port that doesn’t freeze;
• the Jones Act doesn’t apply; and
• it is clear water to Asia.
But, for Territories that have just wrestled control over natural resources from Ottawa, it doesn’t make a hell of a lot of sense to hand that control to Washington, D.C.
Think big, think long term.
The United States is trying to pivot its trade policy to Asia – but domestic politics are proving very tricky.
The Trans-Pacific Partnership would increase our competition in the US market (table for 3 to table for 12)
But, it would also give us a strong foothold in Asia.
Japan would eliminate 7.9% tariffs on petroleum products within ten years; Vietnam’s tariffs of up to 30% would also be eliminated in that timeframe. Immediate duty-free market access for fish and seafood products, including halibut, frozen arctic char and shrimp.
If the TPP doesn’t work, we’ll be back to bilateral agreements.
Remember, this chart?
The Territories should be pushing Ottawa to sign a free trade agreement with China.
China is practically begging us to sign such a deal. Their public terms include allowing them to invest in Canada and letting them buy our oil (i.e. building a pipeline to the coast). Canada has been cool to the idea. Trudeau just postponed a trip to China in favour of going the U.S.
As Trudeau and Obama cozied up to talk about an Arctic climate strategy, China was chomping at the bit to pour investment dollars into the North.
The U.S. no longer wants our oil and gas.
We need to pivot to Asia and the North needs to lead the way.