CALGARY, AB—With Canada and the United States seemingly awash in natural gas, a combination of increased demand and flagging production in Mexico would appear to present many opportunities for North America’s natural gas sector.
But unless governments work to reduce existing market barriers that inhibit investment in natural gas production and transportation facilities, opportunities for future growth and job creation will be lost, warns a new study released today by the Fraser Institute, Canada’s leading public policy think-tank.
“Natural gas accounted for roughly one quarter of the continent’s total energy use in 2007. Through technological advances and the potential for recovering natural gas from tight sands and shale formations, North America is well positioned to become entirely gas self-sufficient,” said Gerry Angevine, Fraser Institute senior economist in the Global Resource Centre and author of North American Natural Gas: Reducing Investment Barriers.
“Unfortunately, existing barriers to investment are hindering development of this extensive resource base, much to the detriment of all North Americans.”
Canada is the only one of the three North American countries that is a net gas exporter and the natural gas industry supported almost 600,000 Canadian jobs in 2008 and contributed more than $106 billion to the nation’s GDP.
Angevine said Canada could maintain gas exports at 2010 levels and benefit from investment and employment growth if barriers to investment are reduced or eliminated.
North American Natural Gas: Reducing Investment Barriers is the third instalment in the Fraser Institute’s Continental Energy Strategy series of reports. It points out that many obstacles are limiting investment and are making it difficult for the natural gas sector to compete for investment with other industries and with natural gas industry opportunities overseas.
The study makes eight policy recommendations that would make investment in the development of North America’s natural gas resources more attractive:
- Ensure that natural gas royalty regimes throughout North America are globally competitive. A universal, flat, net revenue tax regime would enable the elimination of royalties.
- Reflect in royalty regimes the higher cost of producing gas from unconventional sources. Governments must be mindful of the differences in the cost structures between conventional natural gas production and production from unconventional and frontier sources such as coal bed methane, tight sands, shale formations, the deepwater outer-continental shelf, and the northern frontier. The ideal solution is an across-the-board, flat, net revenue tax.
- Reduce uncertainty surrounding environmental policy changes. A cloud of uncertainty hangs over the gas industry and major gas consumers, including power generators, because of the potential costs of more stringent carbon emissions regulations. For this reason, governments should implement as soon as possible any new environmental regulations related to CO2 emissions reductions that affect natural gas production, processing facilities, and pipelines.
- Remove barriers to offshore development. Moratoria on petroleum exploration and production in offshore areas such as the Queen Charlotte Basin and the U.S. Pacific offshore should be lifted once authorities are satisfied that environmental risks can be mitigated. This will open new areas for potential discoveries, and the communities directly involved will benefit from the employment and income generated by exploration activity.
- Streamline regulatory processes pertaining to pipeline construction permits. Additional pipeline capacity will be needed to transport natural gas to market hubs from the shale formations being developed throughout North America and from other new gas supply sources, including the northern and offshore frontiers. Regulatory processes and procedures for obtaining construction permits need to be reviewed to ensure that unnecessary obstacles do not prevent regulators from making timely decisions. Ensuring that regulatory processes and procedural roadblocks are removed will allow projects to be approved more readily and therefore, at less cost. This will benefit gas consumers by avoiding unnecessary additions to delivery charges and ensuring that new gas supplies can be marketed to meet growing demand.
- Develop more efficient yet fair procedures for resolving aboriginal land claims. Approaches for settling native land claims issues in an expeditious and fair manner need to be found in order to help prevent such claims from delaying pipeline construction and saddling eventual users with inappropriately high transportation costs.
- Defuse and prevent disputes over the conditions by which petroleum operators have access to land. Where disputes over the settlements being offered arise frequently or are prolonged because of mistrust of petroleum operators and project developers, the results of recently negotiated settlements in the region should be made publicly available, as they are in real estate transactions. Improvements in the quantity and quality of available information would help speed up the negotiating process and lead to fewer cases being referred to public tribunals.
- Remove constraints on foreign investment in Mexican natural gas exploration and development. Development and production of Mexico’s natural gas reserves is severely hampered by the inability of foreign petroleum companies to participate, other than via subcontracts awarded by PEMEX, the Mexican state-owned petroleum company. A much-needed influx of capital and expertise would occur if foreign companies were allowed to explore for natural gas in Mexico, to develop and operate production facilities there, and to market gas in the country, subject to market conditions and a globally competitive royalty structure and taxation framework (or preferably a flat-tax mechanism).
“Government must avoid intervening in energy investment decisions. Allocation of resources is best left to those who are motivated by market forces, have an in-depth knowledge of the technologies involved, and are prepared to take risks based on their understanding of how energy requirements are likely to change,” Angevine said.