Government policy hampers Canada’s oil industry as U.S. industry accelerates

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Appeared in the Calgary Sun, February 2, 2018
Government policy hampers Canada’s oil industry as U.S. industry accelerates

While Canada faces regulatory uncertainty and low oil prices, U.S. states are reaping the benefits of increased investment and higher prices. As the U.S. oil industry booms, Canada remains stuck in an uncertain storm that’s restricting economic opportunities. The result—fewer jobs for Canadians and less resource revenue for governments.

So why is this happening?

Even as the West Texas Intermediate (WTI) oil price surges past $60 per barrel, Canada is unable to realize the full benefits of higher prices due to pipeline obstructionism and regulatory uncertainty from the Trudeau government in Ottawa and key provinces including Alberta and British Columbia, which recently proposed new regulations aimed at limiting oilsands bitumen shipments through B.C.

As a result, Canadian oil and gas producers are unable to reach new Asian markets, costing the Canadian economy billions of dollars. Studies show that barriers to building pipelines mean that Canadian oil producers must sell their products to the U.S. at dramatically discounted rates, 20 to 30 per cent below the world price of West Texas Intermediate (WTI).

In fact, the deep discount for Canadian heavy crude is only expected to grow larger in 2018 as Canada’s oilsands output grows but there are no additional transportation options to get crude to market. Export pipelines are already running close to their limits and no new export pipelines are expected to be built before late-2019. Rail companies are also reluctant to expand capacity due to concerns that demand for their service is short-term.

Sadly, while Canada is stuck on the sidelines, the United States is becoming one of the world’s largest oil producers. Sources predict the U.S. Permian Basin, which extends from Texas to New Mexico, will be one of the world’s “hottest oil plays” in 2018. In fact, spending is expected to increase by more than US$5 billion this year. Meanwhile, spending in Canada’s oil patch is expected to stay largely flat. As reported by Reuters, a number of foreign oil majors sold more than $23 billion in Canadian assets in 2017, and invested in more profitable U.S. shale plays.

To make matters worse, the Trump administration is implementing sweeping energy-sector reforms including cutting taxes, suspending regulations, opening additional lands, and dropping international greenhouse gas obligations. Meanwhile, Canadian governments impose harsher regulations, increase carbon taxes, cap oilsands emissions, ban tanker traffic on the West Coast, and change regulatory requirements for major projects.

It sure seems sunny south of the border for the oil and gas industry, and investors are paying attention. The U.S. advantage over Canada is reflected in the Fraser Institute’s latest Global Petroleum Survey, which allows investors to evaluate policies that govern the oil and gas industry (royalties and taxes, duplicative regulations, etc.) and make jurisdictions attractive—or unattractive—to investment.

In this year’s survey, six of the world’s top 10 jurisdictions are in the U.S., compared to only two in Canada (Newfoundland and Saskatchewan). The spending influx in the U.S. isn’t surprising given the 2017 survey results, where Texas (the most attractive jurisdiction in the world based on policies) and New Mexico (23rd) rank well ahead of Alberta (33rd). While the U.S has an abundant and low-cost shale industry, policies still matter and investment dollars flow to jurisdictions that encourage investment.

This raises a key question for Canadian policymakers to consider: Why would investors put their money into Canada as opposed to U.S. states, if governments in Ottawa, Alberta, British Columbia and elsewhere insist on increasing taxes and regulations?

As U.S. states ramp up efforts to attract investment, and succeed, Canada must also become competitive. The U.S. oil and gas industry is creating jobs, growing the economy and lowering GHG emissions with advancements in technology, without imposing costly policies and onerous regulations on its industry. Canadian governments must change direction before investors close the door on Canada.