German chancellor Olaf Scholz, left, and the Prime Minister of Canada, Justin Trudeau, right, give a statement during their bilateral meeting on the sidelines of the G7 summit at Castle Elmau in Kruen, near Garmisch-Partenkirchen, Germany, on Monday, June 27, 2022. THE CANADIAN PRESS/Kerstin Joensson/Pool Photo via AP
There is a chasm of disagreement separating climate-concerned policy makers in Ottawa and supporters of the oil and gas sector on the prairies. Each side behaves like they’re playing a zero sum game. One can support the environment or oil production but not both—one side has to lose. Yet, there is a growing minority of finance and investment consultants who think they’ve found a way to change that. There is a win-win strategy gaining traction which states that maximizing Canadian oil and gas production and exports over the medium-term can contribute to reducing CO2 emissions over the long-term. We might refer to this as the production maximization strategy—or maximization for short.
Admittedly, proponents of maximization are facing an uphill battle. Their opponents in the environmental movement and federal government can be expected to claim it sounds like a drink your way to sobriety delusion. Nevertheless, a reasonable case can be made for the claim that we can simultaneously expand the oil and gas production and make progress toward net zero emissions. It helps that there is at least one real life example of the strategy out there that is actually working.
Supporters of maximization have used Norway’s petroleum, gas and green energy transition policy mix as an example to illustrate the concept. Norway has indeed been using fossil fuel revenues to finance its green energy transition.
A 2023 report by National Bank Financial Markets (NBFM), a Montreal-based financial consultancy, describes how Norway has used oil and gas revenues to build a sovereign wealth fund worth USD $1.3 trillion. In 2022 alone Norway’s natural gas and oil exports totaled USD $161 billion.1 The NBFM report explains that access to revenue on this scale has allowed Norway to, “massively finance its transition to green energy.” Case in point: in 2022 the Norwegian government provided every citizen who purchased a new electric vehicle with a whopping USD $25,000 subsidy. Eighty percent of new vehicles sold in Norway in 2022 were either full electric or hybrids.2
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The NBFM report contends that Canada could do well adopting the Norwegian model. Morningstar, a US-based financial services firm, has also studied Norway’s system and agrees. Stephen Ellis, Morningstar’s Energy Strategist has similarly recommended Canada consider adopting Norway’s system of maximizing oil and gas revenues in support of its green transition. Ellis claims, “It would certainly be a more thoughtful model for the Canadian government to adopt.”3
Norway has had considerable success in reducing its domestic greenhouse gas (GHG) emissions. Climate Watch International, an organization that assesses the performance of 63 countries for limiting GHG emissions, renewable energy development and climate change policies, ranked Norway as the world’s 8th most effective country in those three areas for 2022 (Canada came 58th).4
Johan Sverdrup oil field off the North Sea is shown on Oct. 9, 2018. Europe’s frantic search for alternatives to Russian natural gas has dramatically increased the demand — and price — for Norway’s oil and gas. (Carina Johansen/NTB Scanpix via AP)
Ironically, despite Norway’s progress in combatting GHG emissions, it is currently the world’s eighth biggest oil exporter. Though, its ability to sustain current levels of production is under threat. Older North Sea fields like the Brent are playing out. If new offshore oil fields aren’t developed the flow of oil for export could be reduced to a relative trickle in less than two decades.
The CEOs of Norway’s two biggest oil companies, Aker BP (a publicly traded company) and Equinor ASA (67% state owned) have cautioned that without significantly increasing oil production Norway will have trouble financing green transition initiatives and adhering to its domestic emissions reduction timetable.5 To sustain export revenues, Aker BP and Equinor ASA have committed to spending USD $19 billion to develop a series of fields in the North and Norwegian Seas. Norway is striving to maximize exports in part to help sustain its green energy transition.
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If large petroleum reserves and big oil export revenues are all that is required to finance a successful green energy transition, Canada should be leaving Norway in the dust. Canada exports more than twice as much oil as Norway (but less natural gas). Our petroleum producers pumped CAD $139 billion worth of crude oil into international markets in 2022, making this country the world’s third biggest petroleum exporter. Canadian natural gas exports earned only CAD $13 billion in 2023. But, with large new LNG facilities coming on stream, the value of gas exports is poised to increase. Canada ranks fourth in the world for proven oil reserves with 170 billion barrels still in the ground and available for development – estimated to be enough to allow for another 94 years of production. Norway ranks 41st in the world, as of 2022 it had just 8 billion barrels of proven oil reserves which is estimated to be enough to last just another 12 years – hence the urgency in getting new offshore oil fields into production.6
The contribution of oil to the Canadian economy is massive. Crude oil is Canada’s single most valuable export product, averaging 14.34% of Canada’s total exports over the past 14 years (2010-2022).7 On average oil exports contributed 4.7% annually to GDP from 2014-2022. Approximately 90% of Canada’s oil exports come from Alberta and 80% of that oil is bitumen from the oil sands. The Canadian Association of Petroleum Producers (CAPP) estimated that in 2022, a record high of $34 billion in royalties and fees were collected by Canada’s oil and gas producing provinces.8
Croverro Energy drilling a few miles to the southeast of the Lloydminster Upgrader on Sept. 10. Photo by Brian Zinchuk
In addition, the oil and gas sector is a big employer. In Alberta and Saskatchewan there are approximately140,000 people directly employed in primary oil and gas production.9 CAPP conservatively estimates that an additional 10,000 workers are involved in primary crude production in other provinces. According to CAPP, “every direct oil and gas job creates two indirect jobs in businesses that sell to oil and gas producers, and three induced jobs, where oil and gas workers spend their money.”10 When indirect and induced employment are included, Canada’s oil and gas sector accounts for approximately 900,000 jobs. There would be a huge economic hole to fill if Canada rushed to mothball its petroleum industry without ensuring we have developed other ways to generate national income.
Due in large part to its oil wealth, Alberta has been a major net financial contributor to Ottawa and to Canada’s “have-not provinces.” A September 2024 study published by the Fraser Institute concludes that from 2007 to 2022, Alberta contributed $244.6 billion more to Ottawa in taxes and other payments than it received in transfers. In 2022 alone, “Alberta contributed $14.2 billion more into the federal revenue pool than it received back in federal spending.”11 Alberta’s contributions have made it the biggest contributor to Canada’s $24 billion equalization program. CAPP claims that if Alberta made no more than the average provincial contribution to federal government revenues for 2022, Ottawa would have had an additional $16 billion hole in its budget.
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None of Canada’s non-renewable resource royalties or taxes are earmarked by governments for specific purposes. Those revenues become part of the provincial and federal governments’ general revenue pools to be used for all and sundry government expenditures. This was not always the case. In Alberta, from 1976 to 1987, the provincial government was required to annually deposit a mandated percentage of non-renewable resource revenues into the province’s Heritage Savings Trust Fund.
Under current practice, if maximization results in an increase in oil and gas royalty and tax revenues, the new revenues would also become part of governments’ general revenue pools. But that does not have to be the case. Governments could determine a portion of tax revenues earned on increased production and exports facilitated by new pipelines be devoted to green energy transition initiatives. The amount of money available from such a fund could potentially be quite large. Ideally, the progress made through investments in low emissions energy systems would reduce the need to tax consumers—measures such as the carbon tax would simply be redundant.
Policy makers could establish a green energy transition fund based on the pre-1987 Alberta Heritage Fund model. Norway borrowed ideas from Alberta when it set up its celebrated sovereign wealth fund and things have worked out well for them. As is the case with the Alberta fund, the enabling legislation could specify limits on the types of investments fund managers could make.
Notwithstanding its large reserves of oil and the importance of oil and gas to the Canadian economy and government revenue streams, efforts to increase production and exports have been constrained by a collection of federal government policies linked to environmental protection and climate change mitigation. The principal barrier has been the effect of those policies on building new oil export pipelines from the prairies to tidewater terminals.
Prim e Minister Justin Trudeau in Regina in January, 2019. Oilfield protests took place during his visit. Photo by Brian Zinchuk
Following the election of the Justin Trudeau Liberals in October 2015, federal policy related to fossil fuel production came to reflect many of the goals of the international environmental movement. The environmental movement waged a well-financed, politically influential anti-Alberta oil campaign from the early 2000s until shortly after the Biden administration cancelled the Keystone XL pipeline in 2021.
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One of the environmentalists’ main complaints with the oil sands is that more energy is required to extract, transport and process oil sands bitumen than is the case for conventional, lighter types of crude oil. This means more CO2 emissions are produced than with conventional crude. However, that criticism is likely much less valid today than it was a decade ago. Over the past several years oil sands producers claim to have achieved considerable success in reducing the energy they consume and emissions produced.
The legislation supporting Ottawa’s constraints on oil production and exports include the Byzantine environmental approval process for new pipelines, embodied in the Impact Assessment Act and Canadian Energy Regulator Act (Bill C-69). Another pipeline-killing piece of legislation is the Oil Tanker Moratorium Act (Bill C-48) which banned oil tanker traffic on British Columbia’s northern coast. These two pieces of legislation contributed to the cancellation of Enbridge’s Northern Gateway pipeline in 2016, Trans Canada’s 2017 decision to abandon the Energy East pipeline project, and years of delays in getting the government owned Trans Mountain pipeline completed (proposed in 2013; not completed until 2024).
Energy East map. National Energy Board/Canada Energy Regulator
Federal oil policy extends beyond legislation. Ottawa purportedly supported the completion of the US portion of Trans Canada’s Keystone XL pipeline. The prime minister did indeed register his disappointment with the Biden Administration when it cancelled the project in January 2021. However, to supporters of the oil industry on the Canadian prairies Trudeau’s expression of disappointment paled in comparison to the battle Ottawa waged to protect cost of production guarantees for Quebec dairy farmers in the negotiations leading up to the signing of the US-Canada-Mexico free trade deal.
The pipeline cancellations occurred in the midst of an eight-year depression in world oil prices that ran from late 2014 to early 2022. By 2019, 33,060 primary oil production jobs had disappeared in Saskatchewan and Alberta. Another 8,500 manufacturing jobs associated with the oil industry had vanished. And, due to the cancellation or postponement of new oil sands facilities combined with the overall decline in the economies of both provinces there were 35,000 fewer construction jobs than there had been prior to the price collapse.
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Approximately $292 billion in additional export revenues could have been earned had the Trans Mountain, Northern Gateway and Energy East pipelines been up and running at full capacity from 2015 up to 2022. The size of the revenue estimate includes the benefit of lower discounts charged against Canadian bitumen in international markets than is currently the case in the US (which accounts for 97% of Canada’s bitumen exports). The additional export revenues under this scenario amount to a 48% increase over actual export earning over the period. The size of lost revenues would have been even higher if world oil prices had been higher—closer to what they were just prior to and following the price depression.11
Many (but not all) potential investors in Canada’s oil and pipeline businesses have been understandably reluctant to put money into new export pipelines following the spate of project cancellations between 2016 and 2021. It is noteworthy that despite those cancellations Canada’s oil producers have still been able to increase production and exports. From 2010 through to 2023 Canadian oil production grew each and every year except for 2020 – the worst of the COVID-19 years. Exports increased from 2.6 million barrels per day in 2010 to 4.8 million barrels per day in 2023 – an 85% increase.12
Several factors have facilitated the increase in production and exports. At least two major pipelines to the US were approved by the Harper Conservatives prior to 2015. After 2015 additional exports were further facilitated by the construction of links between existing lines running from Canada to the US and within the US which accommodated more Canadian oil. New technologies have been adopted that allow for higher flows on existing pipelines and more oil has been moving by rail. The Trans Mountain expansion has allowed for the first shipments of oil from a Canadian port to new customers in Asia and much more will follow over the course of the next couple of years. But there is only so much additional production that these types of solutions can support. Without the construction of new pipelines to Canadian tidewater or the US, exports will cease growing.
Supporters of the oil and gas sector understand that the window of opportunity for maximizing exports and revenues won’t be open forever. There is a reasonable likelihood that at some point later this century an effective green energy transition will actually be underway and that global demand for oil and natural gas will decline accordingly. When this occurs there is a chance that a portion of Canada’s proven oil reserves will never be developed. The sooner new export pipelines can be built, the greater the likelihood more of Canada’s reserves can be produced and sold as opposed to remaining forever stranded.
Estimating the pace of the shift to low emissions energy sources is a challenge confronting potential investors for new pipelines and the various developments required to increase production. Decision making is complicated by the possibility governments alarmed by climate change will take even more drastic action than they have in the past to restrict or curtail fossil fuel production and consumption. Events such as the 2023-2024 warming anomaly have the potential to trigger rash decisions. No less troubling, if safe and reliable low emissions sources of energy do not come on stream in time frames that are well coordinated with declines in fossil fuel supplies things could get ugly. Insufficient energy supplies would adversely impact households and industry—they could be economically ruinous.
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Before any more export pipelines and port facilities are built in Canada investors will require assurances that the approval process will be far less onerous and much faster than has been the case under the Impact Assessment Act and Energy Regulator Act (still referred to on the prairies as Bill C-69). In addition, there would have to be guarantees in place to ensure new pipelines are licensed to operate for a reasonable period of time. No one will invest if there is no hope of recovering development and construction costs and receiving a decent return on their investments.
Opponents of the maximization strategy might well contend de-emphasizing the role of measures such as carbon taxes, threatens to derail progress toward achieving national and international emissions reduction targets like the net zero emissions by 2050. Actually, many prominent international observers have already written off any reasonable hope of reducing to the required level by 2050. A recent report, published by the Fraser Institute, found that Canada’s green energy transition will be a much longer and more challenging process than politicians and environmental activists have been telling Canadians, “Suffice it to say the transition away from fossil fuels as the predominant source of energy consumed in Canada will be a lengthy and arduous journey and is sure to encounter more and bigger obstacles than most of Canada’s political class understands or cares to acknowledge.”13
The club of net zero by 2050 pessimists includes oil industry analysts working for organizations like OPEC and a growing minority of oil and gas producers and pipeline companies. They see oil and natural gas consumption rising steadily for the next several decades despite the best efforts of climate-concerned governments. This past August, Greg Ebel, CEO at Enbridge, told Bloomberg that he expects the demand for oil to grow for decades. He said that by 2050 the global demand for oil will be “well north of 100 million barrels a day and possibly exceed 110 million daily barrels.”14
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Enbridge is backing up that opinion with big investments in new US pipelines, a new export terminal and additional storage and loading facilities on the Texas Gulf coast.
The company is looking at adding another 100,000 to 150,000 barrels a day of capacity on its Mainline oil pipeline system by 2027 (the Mainline system extends into Canada).
Enbridge Line 3 Replacement crews in southeast Saskatchewan several years ago. Photo by Brian Zinchuk
Supporters of Canada’s oil industry contend that if the global demand for oil is going to rise until 2050 and potentially beyond, as much of that oil as possible should be Canadian oil. Yes, Canadian bitumen does indeed require marginally more energy to produce and process than conventional crude but it is hardly the most harmful oil available to international customers. Canada’s oil export revenues, unlike Russia’s, aren’t used to finance a war of aggression and the commission of war crimes in Ukraine. Unlike Iranian oil, Canadian oil isn’t subsidizing terrorists. And, Canadian oil, unlike Venezuelan, won’t help bankroll the Maduro dictatorship.
Despite having the third highest oil export revenues on the planet Canada hasn’t been able to match Norway’s success in reducing greenhouse gas emissions while at the same time expanding oil production. The missing ingredient is the political will to overcome the entrenched positions of key stakeholders, some of whom haven’t been getting along all that well lately.
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As they say, the devil is in the details in regard to negotiating. Canada has not been very good at negotiating grand, national bargains in the field of non-renewable resource policy (or constitutional reform for that matter). The infamous National Energy Program (1980-1985) remains the prime example of the failure to create a lasting national consensus regarding oil policy. Further complicating matters today is that coming to a consensus will involve a much larger cast of stakeholders than was the case in the early 1980s. There will need to be seats at the table for the provincial and federal governments, oil and gas industry leaders, First Nations and environmentalists. This threatens to be a witch’s brew of contrary views and interests that won’t easily be reconciled.
Notwithstanding the challenges described above, investment advisors like NBFM and Morningstar contend Norway’s maximization model is a good fit for Canada. The NBFM report’s authors, Angelo Katsoras and Baltej Sidhu, argue that, “The Canadian government should follow Norway’s lead and make it a priority to support oil and gas production using the highest environmental standards to finance the decades-long transition to green energy.”15 Morningstar Energy Strategist Stephen Ellis agrees, stating “It would certainly be a more thoughtful model for the Canadian government to adopt.” Although Ellis also concedes that the current federal government’s attitude to oil is clearly not aligned with maximizing production and exports.16
In the final analysis, Ellis cautions that the adoption of a Norwegian style maximization alternative by Canada is unlikely “It would require a major shift in thinking.”17 He is correct on that count. It will take Damascene level conversions to get some of the politically influential stakeholders onside with maximization. Even though the adoption of a maximization type strategy for Canada may be a long shot, discussing it at least involves looking for a solution to what has been a highly divisive national argument.
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Footnotes
1 Energy Now. (2024, August 26). Norway Oil Output, Renewable Push Go Hand-in-Hand, Aker BP Says https://energynow.ca/2024/08/norway-oil-output-renewable-push-go-hand-in-hand-aker-bp-says/
2 Lundgre, K. (2024, June 7). ‘Norway’s emissions fell last year on EV boom, metals output fall.’
3 Barcelo, Y. (2023, September 19). Can Canada Follow Norway’s Energy Transition Example? https://www.morningstar.ca/ca/news/239165/can-canada-follow-norways-energy-transition-example.aspx
4 Climate Change Performance Index. (CCPI), (2024). Rankings and Results.
and Faculty of Environmental and Urban Change (2021, February 10). ‘5 reasons Norway leads and Canada lags on climate action.’
https://euc.yorku.ca/news-story/5-ways-norway-leads-and-canada-lags-on-climate-action/
There is disagreement over how oil sands emissions should be calculated. Many of the oil industry’s detractors in the environmental movement like to include the energy required and emissions generated to extract, transport and process bitumen plus the emissions generated when the oil is burned by the people from other countries who buy it. On the other hand, some analysts believe it is incorrect to include both types of emissions in the same country’s emissions totals if the oil is exported to second or third etc. party end users. Double counting can occur if the rules are not applied equally to all countries. Sometimes environmentalists assess producers in one country who export to a user in another for all resulting emissions. Hypothetically, if the importing country, China for example, is assessed for the emissions it produces by consuming oil from various sources including Canada, the emissions generated by any bitumen they purchased from Canada would be counted twice. And, China’s domestic emissions would be reduced. According to this accounting method China would not be responsible for reducing its emissions for all the oil they consume. Canadian producers would be held responsible for reducing emissions in a country where they have no authority.
5 Energy Now. (2024, August 26). Norway Oil Output, Renewable Push Go Hand-in-Hand, Aker BP Says EnergyNow Media https://energynow.ca/2024/08/norway-oil-output-renewable-push-go-hand-in-hand-aker-bp-says/
6 BP Statistical Review of World Energy 71st Edition.
7 Author’s data table 1 and supporting sources available on request
8 CAPP. (2024, September 17) Canadian Exports of Oil and Natural Gas 2023.
https://www.capp.ca/wp-content/uploads/2024/03/Canadian-Exports-of-Crude-Oil-and Natural-Gas.pdf
9 Warren, J. (2024, July 13). In defense of populism: It’s a timeless prairie tradition to defend the prairies and the energy industry against federal assault.
This article includes tables and sources describing employment and job losses in Alberta and Saskatchewan during the late 2014 to early 2022 global oil price depression.
10 CAPP. (2024, September 17) Canadian Exports of Oil and Natural Gas 2023. https://www.capp.ca/wp-content/uploads/2024/03/Canadian-Exports-of-Crude-Oil-and Natural-Gas.pdf
11 Author’s data table 2 and supporting sources available on request
The most significant revenue opportunity of generating higher oil revenues lays in the construction of new pipelines to tidewater. US Gulf Coast refiners buy approximately 97% of Canada’s bitumen exports.The US refiners have been able to charge significant discounts on Canadian oil. Between 2005 and 2022 the average discount applied to Western Canadian Select crude was 27% of the West Texas Intermediate crude benchmark price. The Trans Mountain expansion was the consolation prize awarded by Ottawa in light of the cancellation of the Northern Gateway, Energy East and Keystone XL. The Trans Mountain expansion will allow for sales to US west coast and Asian customers. However, the loading capacity at the Burnaby terminal will probably be insufficient to handle anywhere near the additional 590,000 bpd that the pipeline expansion is capable of transporting. Nevertheless the opportunity to market a portion of Canada’s oil in to the international markets beyond the US is expected to encourage higher prices for oil shipped to the US Gulf coast. The Northern Gateway and Energy East systems would have added another 520,000 and 672,000 bpd respectively (totaling 1,192,000 bpd).
12 Ibid.
13 Finlayson, J. (2024, September 11). A Dose of Reality: Energy Transition Will Be Much Longer and More Arduous Than Politicians & Activists Are Telling You.
14 Energy Now. (2024, August 21). Enbridge CEO Sees Strong Oil Demand in 2050, With U.S. Supply Growing.
https://energynow.ca/2024/08/enbridge-ceo-sees-strong-oil-demand-in-2050-with-u-s-supply-growing/
15 Barcelo, Y. (2023, September 19). Can Canada Follow Norway’s Energy Transition Example? https://www.morningstar.ca/ca/news/239165/can-canada-follow-norways-energy-transition-example.aspx
16 Ibid.
17 Ibid.
© Copyright Jim Warren Sept. 25, 2024