Days of fossil fuels aren’t over, but for Canada they are shrinking

TORONTO—As the International Energy Agency says, “the global oil industry is experiencing a shock like no other in its history.” The collapse in prices and dramatic cuts in demand, with ongoing production having no place to go, has devastated Alberta and Newfoundland, prompting desperate cries for federal help. The question of what governments should do is far from resolved. The most immediate challenge is to support the workers and their families who have been affected. Albertans whose jobs are linked to the oil industry will qualify for the various federal programs already announced. On top of that, the federal government has announced close to $2.5-billion in federal subsidies that will create jobs for oil industry workers—$1.7-billion in Alberta, Saskatchewan and British Columbia to clean up inactive or orphan wells and $750-million to cut emissions of methane, a serious form of greenhouse gas emissions. These are costs that should normally be paid by the industry itself. To what extent the industry will recover is far from clear. But if investors and financial markets are any guide, attracting fresh capital will be difficult. Oil prices and demand will pick up as economies return to some kind of recovery towards the end of the year. But it will be a different kind of future. Prices will rise, but will they rise enough to make oilsands oil production profitable? That is far from certain. Taxpayers are already making big bets on projects that the private sector will not fund because they are too risky and financial returns are not assured. One example is the federal government’s purchase of the Trans Mountain Pipeline for $4.4-billion and a commitment of $12.6-billion to construct its expansion. Alberta is doing something similar. It is putting up US$1.1-billion in equity and guaranteeing a $6-billion loan— roughly 85 per cent of the costs—to build the Keystone XL Pipeline, which is owned by TC Energy Corp. of Calgary. In fact, investors for some time have been wary of putting up capital for oilsands and other oil projects. Oil stocks had been the worst stock market performers even before the pandemic hit. One reason is that while there will still be an ongoing demand for oil over the next 20 years, oil demand is not expected to show much growth as the world transitions to a low-carbon energy future. Oil producers will be competing for market share—that is what the Russians and Saudis are doing with their oil strategies. The Russians, in particular, are taking aim at U.S. shale oil production, which has been taking market share from other producers. The current oil price war is already pushing shale oil producers into bankruptcy, undercutting the U.S. goal of energy independence and, if prolonged, could do the same for some Canadian producers. The Western Canada Select, the price Canadian oil producers get for exports to the U.S. (and roughly 80 per cent of what we produce goes to the U.S.) temporarily slipped into negative territory and is currently below $12 a barrel, compared to about $54 a barrel a year ago. No oilsands producer can cover its costs at that price, which is why some companies are cutting back production even though the costs of cutting back are also high. In many respects, we are paying the price for the vision of Canada, first set out in 2006-07, as an energy superpower, based on the vast size of Canada’s oilsands reserves. Canada set out to attract investment from around the world to build oilsands plants, with plans for two big pipelines to the B.C. Coast, the Keystone XL Pipeline to take oil to Texas, and even a pipeline to take oil sands oil right through to the Atlantic Provinces. Little attention was paid to the economics of oil, the assumption apparently being that oil would be in the $80-$100 range and that the world was facing a shortage of oil. Nor was much attention paid to the threat of climate change; the oil industry supported groups that dismissed climate change as a threat or dismissed the science as just a theory. Even as recently as February of this year, Alberta Premier Jason Kenney was banking on rising oil prices to balance the province’s budget. Kenney’s March budget, assumed oil prices averaging US$62 a barrel this year and US$63 a barrel next year. These were higher than private-sector forecasts. Oil sands oil, in particular, is both high-cost and represents some of the world’s dirtiest oil in terms of greenhouse gas emissions. If the market for oil is levelling off and is projected to decline over the next two decades, then oil sands oil will be one of the casualties. There will be more calls for help by the industry—as Derek Burney, our former ambassador to the U.S. and more recently a director of TC Energy, argues, “we should abandon the ostrich-like mentality that assumes the age of fossil fuels is over” and aim for 100 per cent use of Canadian oil in Canada by building a pipeline from Alberta to the Atlantic Coast. But he does not address the economics of such a project or what oil price would be necessary to make it pay—or what federal subsidies would be needed. But should we be putting even more money into costly and polluting oil projects or using the capital to advance our transition to a low-carbon economy. The real ostriches are those who want to ignore the huge and costly threats to human life if we fail to deal with climate change—including the risk of more pandemics. When the pandemic is over the climate change thereat will still be here. Ottawa’s role should be to help Western Canada make the transition to a low-carbon economy, and that should be Kenney’s role as well. The days of fossil fuels are not over. But for Canada they are shrinking. David Crane can be reached at crtane@interlog.com. The Hill Times

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Days of fossil fuels aren’t over, but for Canada they are shrinking

Ottawa’s role should be to help Western Canada make the transition to a low-carbon economy, and that should be Jason Kenney’s role as well.

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