A squeeze on Canada

March 6, 2017
Canadian oil and gas companies find themselves caught between push-and-pull policies from north and south of their country's southern border. With every gain comes a setback.

Canadian oil and gas companies find themselves caught between push-and-pull policies from north and south of their country's southern border. With every gain comes a setback.

Canada's government late last year broke a transport logjam by approving two pipeline proposals for moving upgraded and blended bitumen out of the oil sands region of Alberta. New capacity is needed for the 1.5-million b/d of additional heavy-oil production the Canadian Association of Petroleum Producers expects during 2015-30. Kinder Morgan's newly approved Trans Mountain pipeline twinning will increase takeaway capacity to the Pacific, while Enbridge's Line 3 replacement will boost movement to the US Midwest.

Climate responses

To secure the approvals, however, affected provincial governments agreed to support federalization of Canadian responses to climate change. Ottawa next year will impose a minimum price on emissions of carbon dioxide reaching $50/tonne in 2022. Several provinces with programs already in place to control greenhouse gas emissions feel usurped.

The federal program caps emissions from oil-sands work, although possibly not enough to choke production soon if oil prices stay near recent levels. But another part of the federal effort looks troublesome. Late in February, Environment and Climate Change Canada published a discussion paper on plans for a clean-fuel standard aimed at trimming annual emissions of carbon dioxide by 30 megatonnes by 2030-beyond cuts achieved through existing programs. The standard would apply to a broad range of fuels and cover industries, homes, and buildings as well as transportation.

Canadian refiners will shoulder much of the burden. It's a load not shared by their competitors in the US. And that looming disadvantage is just one reason Canadian oil and gas companies have to worry about politics to the south.

US President Donald Trump's memorandum supporting the Keystone XL pipeline is welcome but raises problems. The project itself represents an important expansion of pipeline capacity between the oil sands and high-conversion refineries on the US Gulf Coast and an onward link to seaborne trade. Trump was right to try to revive it by inviting TransCanada to reapply for the border crossing and instructing agencies to expedite decision-making.

As an article on p. 32 reports, however, legal vulnerabilities might mire the project yet again-largely because of Trump's rushed approach. And in a separate memorandum, the president directed the Department of Commerce to develop requirements that US pipelines be built with domestically produced steel and equipment. How that might affect Keystone XL, about half the steel of which was manufactured in the US, is unclear. But the implicit protectionism worries oil and gas companies in Canada.

Well it should. Trump also wants to renegotiate the North American Free Trade Agreement. And he broadly supports Republican Party ambitions for tax reform, a proposed element of which is border adjustment to corporate taxation favoring US exports and punishing imports. The prospect, according to analysts quoted recently in the Canadian press, is discouraging investment in oil and gas producers based in Canada.

Lowering oil price

Protectionism might not be border tax adjustment's only threat to Canadian oil companies. Respected US economist Martin Feldstein, who supports the measure as a way to increase government receipts and compensate for rate reduction, says the adjustment with a 20% corporate tax would increase value of the US dollar by 25%. That, he argues in a Feb. 27 article in the Wall Street Journal, should dispel worries by American importers, including many refiners. Because oil is sold in dollars worldwide, however, oil producers wouldn't be so lucky. "The basic price of oil would have to be reduced-including the price of oil produced and sold in the US," he writes.

Feldstein's views on border tax adjustment aren't shared by all economists, whose expectations about the effects vary widely. But his prediction about lower oil prices adds to a growing list of hazards facing Canadian oil and gas companies, who must wonder if any allies remain in Ottawa and Washington, DC.