A pledge by Ottawa to ratify the Kyoto Protocol on Climate Change by yearend is the No. 1 issue facing Canadian independents.
Other concerns include rising costs for finding and development and for production and problems of land access.
Kyoto threat
Canadian oil industry executives say the Liberal government of Prime Minister Jean Chretien is moving to ratify the Kyoto Protocol with no clear plan for implementation or analysis of the economic consequences. Chretien announced at an international conference in Johannesburg in September that Canada will ratify Kyoto before yearend (OGJ Online, Sept. 19, 2002). The protocol calls for Canada to reduce emissions by 6% below 1990 levels by 2012. The majority Liberal government has the strength in Parliament to carry a ratification vote. Environmental groups support Kyoto, and recent opinion polls indicate a majority of Canadians support Kyoto.
Alberta, Canada's leading petroleum province, has launched a major advertising campaign to sway public opinion against ratification and is proposing its own made-in-Canada solution for reduction of greenhouse gases (GHG), similar to US policies. Other producing provinces and major business organizations, such as the Canadian Chamber of Commerce and the Canadian Manufacturers & Exporters Association (CMEA), also oppose Kyoto and warn of a severe negative economic impact.
Alberta Premier Ralph Klein says Chretien's pledge to ratify Kyoto is already costing Alberta millions of dollars in lost investment.
Alberta estimates Kyoto could cost the Alberta economy up to $5 billion (Can.)/year and 70,000 lost jobs. CMEA says that ratifying the treaty could cost 450,000 jobs nationally and substantially increase energy costs. On the other hand, the David Suzuki Foundation, a leading environmental group, says Kyoto would pave the way for $4 billion in economic benefits.
The Canadian Association of Petroleum Producers (CAPP), which represents a majority of large producers, says the industry is willing to do its part to reduce GHG emissions. But, it says, the real problem is not production but consumption. It says end-use consumption is responsible for 80% of GHG emissions that come from the production and use of oil products.
"As we understand it, the federal government's implementation plan for Kyoto does not address consumption in a meaningful way," CAPP says. "Public education and action are critical and must address the misperception of production as the problem' To truly reduce GHG emissions, public policy needs to engage households and commercial operations in actions to reduce their consumption."
CAPP says Canada's oil industry is more energy-efficient now than it was in 1990, but overall GHG emissions will go up because demand for energy will increase along with population and economic growth and because Canada is now supplying a greater proportion of North America's energy needs.
CAPP Vice-Pres. Greg Stringham notes that if the protocol is ratified Canada will be the only country in the Americas with a Kyoto commitment.
"When we compete to supply energy products to the US, we are competing directly against Mexico, Colombia, and Venezuela, none of which have Kyoto targets," Stringham said. "Faced with a policy risk of an extra cost of doing business in Canada, many high-risk or large-scale projects may be deferred or canceled in favor of investment in supply regions outside Canada."
The Small Explorers & Producers Association of Canada (SEPAC), says the uncertainty created by Kyoto is affecting the ability of its members to obtain financing.
George Fink, chair of SEPAC's environment committee, says financing has dried up because there is so much uncertainty.
"Things are getting tougher all the time. Banks just want to wait and see," he said.
Fink has written to federal environment minister David Anderson outlining the problems small producers are experiencing and asking him to explore a number of options before ratification. They would include exempting some small companies from some restrictions and dividing responsibility for emissions reduction according to the size of companies.
Independents speak out
The CEOs of several large independents have also spoken out against Kyoto ratification.
Gwyn Morgan, CEO of EnCana Corp., Canada's largest independent, says Kyoto ratification would have a devastating impact on the Canadian economy.
Morgan said in a letter to Chretien that Kyoto would devastate the country's most productive industries, force new costs on consumers, send capital abroad, and have little impact on emissions.
"Signing the Kyoto Protocol would go down in history as one of the most damaging international agreements ever signed by a Canadian prime minister," Morgan said.
"Signing Kyoto in its present form would reverse the economic progress achieved under your leadership while doing little or nothing to improve our environment," Morgan told Chretien.
Morgan said a made-in-Canada strategy is needed to cut emissions that may contribute to global warming. He said a national program would be a better solution than Kyoto to cut carbon dioxide emissions and preserve the country's competitiveness.
Morgan said Kyoto would hurt not only the oil and gas industry but also Canada's industrial heartland in the province of Ontario.
The EnCana executive added that the company's major natural gas project off Canada's East Coast, Deep Panuke, is cost-sensitive, and increased costs related to Kyoto ratification could kill it.
Ron Brenneman, CEO of Petro-Canada, said that Kyoto ratification should be shelved and that approving it would force oil companies to scrap billions of dollars in investment plans for projects such as oil sands mines and refinery upgrades.
Brenneman noted his company is currently standing by its plans for $5.25 billion in investments but said the company has not committed to the spending.
Charlie Fischer, CEO of Nexen Inc., also opposes Kyoto and noted his company is planning a $1.5 billion oil sands plant and upgrader in northern Alberta and plans to make an investment decision by the end of 2003.
"If we don't understand the decision or the cost structure—because all of this is still up in the air—then we won't make a decision," Fischer said. "If the costs go up a little bit, can we withstand that? Probably. If the costs go up a lot, we won't make the investment. If we don't know, we'll delay the decision until we have some certainty."
Canadian Natural Resources Ltd. (CNRL), a large independent, says ratification of Kyoto could threaten plans for a $4 billion heavy oil production project and a related $4 billion upgrader. CNRL executive Murray Edwards said the company is looking at the impact of Kyoto on the projects, and the upgrader could be moved to the US.
Other major producers, such as Husky Energy Inc. and Imperial Oil Ltd., also oppose Kyoto ratification.
Rising cost concerns
Canadian independents faced rapidly rising finding and development costs in 2001, with the trend continuing into 2002.
A recent study by Ziff Energy Group reported that F&D costs rose by 46% in 2001 to $12.50/boe from $8.60/boe in 2000. Contributing factors included rising power and natural gas prices and a strong demand for natural gas from the US. A shortage of rigs and skilled labor also increased costs for E&P companies.
Gentry Resources Ltd., a smaller independent, reported F&D costs in 2002 in Alberta are $11-13.50/bbl.
Operating costs for oil and gas also are on the rise, according to a Ziff study. The research group said an industry survey showed that production costs rose to $6.50/boe in 2001, compared with $6.10/boe in 1990. Repair and maintenance costs and service costs rose for both oil and gas production.
Ziff CEO Paul Ziff said costs have declined in 2002, but continued volatility is expected in producer costs over the next several years.
Lands access issues
Another current concern for producers, CAPP says, is uncertainty over access to land and resources. The association says that much of Canada's resource development is now taking place on lands that have outstanding land claims or unresolved treaty-related issues. The ongoing failure to resolve those issues, CAPP says, has led to growing industry frustration. As a result projects have been stalled through regulatory or legal means, or through direct action such as roadblocks.
CAPP says its producer members are committed to working with governments to address outstanding aboriginal issues, but the leadership of public policy-makers, both federal and provincial, is needed to make meaningful progress.
Another concern for companies, CAPP says, is the increase in the number of stakeholders with conflicting interests on public lands—ranging from recreational to small business to large industry—who wish to use the same areas. It said government must develop mechanisms to promote appropriate development activity and reconcile competing resource uses while protecting regional economic and ecological integrity.
CAPP says there is also increasing concern in the industry that there are changes in policies in both Canada and the US that in the past have kept government out of the marketplace and focused on ensuring that investment policies are as attractive as possible. The association said recent signs from both countries that this paradigm may be shifting are "extremely" troubling to the petroleum sector.
