If adopted, CAPP’s climate policy recommendation would be a major departure from current approach, align Canada more closely with Trump “innovation, not regulation” strategy

Canada’s normally cautious oil and gas producers are rolling the dice. Judging by CAPP’s recent climate policy study, they’re betting that the benefits of new climate policies that would require conservative governments in Edmonton and Ottawa will outweigh the current “pipelines for climate policy” deal between Rachel Notley and Justin Trudeau. That’s one heck of a gamble.

Are Canadian climate policies driving energy companies out of Canada to set up shop in countries that make little or no effort to reduce greenhouse gas emissions? Are those policies “inefficient and duplicative”? Are they a major contributor to Canadian oil and gas producers’ declining competitiveness in the global marketplace?

Tim McMillan, Canadian Association of Petroleum Producers.

The Canadian Association of Petroleum Producers tried to make those arguments in its latest study on climate policies, released June 5.

According to the economists and industry experts interviewed for this story, CAPP failed, in rather spectacular fashion.

Canadians should be concerned because it’s pretty clear the oil and gas industry’s biggest trade group isn’t singing from the same song sheet as the federal and Alberta governments, which are busy implementing policies designed to lower emissions from producing and consuming petroleum products in hopes of hitting Canada’s Paris climate accord targets. Whatever some Albertans’ opinion of that objective, the federal government has committed to it and most provinces are on board, to a greater or lesser degree (witness Ontario and newly minted Premier Doug Ford).

Never mind the climate change debate or partisan politics, as a matter of practical industry strategy CAPP and its members need the support of Ottawa and as many of the provinces as possible to build new energy infrastructure to accommodate the additional 1.7 million to 2 million barrels a day of crude oil Canada will produce by 2035 (that’s roughly four Trans Mountain Expansion pipelines), according to CAPP’s own supply forecast.

Prime Minister Justin Trudeau has repeatedly said over the past 18 months that he would not have approved Trans Mountain Expansion without Alberta’s Climate Leadership Plan.

CAPP’s climate policy study is arguably a repudiation of the “climate policy for pipelines” deal, an agreement supported by a large majority of Canadians, according to public opinion polls.

How many more pipelines will the Canadian government approve without effective climate policies in the energy-producing provinces, especially Alberta? The question is rhetorical because the answer is, obviously, zero.

And Canadians should be really clear what CAPP is asking for. The study’s recommendations are not policy tweaks, but in many cases wholesale revisions inspired by strategies currently being pursued by the Trump Administration in the United States. Suggesting government dilute or eliminate regulations in favour of innovation and new technologies, for instance, is straight out of Energy Secretary Rick Perry’s playbook.

But a competing vision about how to reduce GHG emissions isn’t the only problem with this study. Canadians expect industry to defend its interests. Policymakers and regulators seldom get it right the first time around and oil and gas producers have every right – in fact, they have an obligation on behalf of their shareholders – to suggest how policy and regulations can be made as efficient as possible.

Dale Beguin, executive director, Canada’s Ecofiscal Commission.

The biggest problem with the CAPP study is that so much of its argument is wrong or misleading. As economist Dale Beguin noted, “there’s a lack of real evidence here that makes the case that CAPP is making. They’ve laid out some cost numbers in this report but they haven’t really shown how they came to those costs and they haven’t really put those costs into context in terms of what those costs will mean for changes in production or changes in investment.”

The CAPP study simply doesn’t stand up to reasonable scrutiny.

But it gets worse. With elections looming in Alberta (May 2019) and nationally (fall, 2019), a good argument can be made that the study is designed to provide ammunition for conservative politicians – particularly UCP leader Jason Kenney – who oppose carbon taxes and emission-reducing regulation. In fact, several industry veterans interviewed for this story say as much.

This study matters, especially for Alberta.

The CAPP case for a different approach to climate policy

CAPP argues that “inefficient and duplicative climate policies” are driving oil and gas investment out of Canada – both lowering new investment and prompting companies to move existing operations – to “countries with little or no emissions-reduction programs thus increasing future global emissions,” according to Competitive Climate Policy: Supporting Investment and Innovation.

Source: CAPP.

This is a concept known as “carbon leakage” and it’s a legitimate concern for policymakers, according to Beugin, executive director of the Ecofiscal Commission: “It’s not good for the environment or for the economy if emissions are just migrating to jurisdictions with weaker policy.”

CAPP President Tim McMillan says that Canada has already gone too far.

“We operate in one of the world’s most stringent regulatory environments. It’s important we have a robust regulatory framework that meets environmental goals, but we must pay attention to added costs, delays and inefficiencies so we do not risk falling further behind,” he said.

The better approach, according to CAPP, would be climate policy “that assesses all costs and recognizes the cumulative burden of all policies and regulations, corporate tax increases and royalty changes.”

The objective would be to bolster capital investment in the oil and gas sector, which in turn would support and encourage innovation. Falling investment “curbs industry development of innovation and technology” that are critical to breaking the link between economic growth and rising emissions, according to McMillan.

The CAPP study sets out five recommendations:

  1. Specific protections for the emissions-intense, trade-exposed (EITE) upstream oil and natural gas sector
  2. Exclude the upstream sector from the upcoming federal Clean Fuel Standard
  3. Implement an offset program (e.g. giving credit to industry for planting trees in northern Alberta)
  4. Recycle all “carbon-related revenue” back to industry to fund innovation
  5. Allow oil and companies to deduct 100 per cent of oil and natural gas investment as an expense

The ultimate goal of these recommendations is to increase the Canadian industry’s “competitiveness.”

CAPP has consistently argued in other studies that Canada places too great a regulatory burden on oil and gas producers, which are already disadvantaged because they operate in the Western Canadian Sedimentary Basin, where costs are high relative to other jurisdictions, like the United States.

Dave Collyer.

Former CAPP CEO Dave Collyer, who led the association from 2008 to 2014, agrees that competitiveness is a pressing issue for specific producers (e.g. natural gas-focused companies) and a concern for the industry in general.

“There is no question that it’s more difficult to get things done in Canada than it is in some other countries with whom we’re competing. Not all, but some,” he said in an interview.  “Competitiveness clearly matters. It’s what drives investor views, it’s what drives the movement of capital, and ultimately it’s a significant factor in creating jobs and driving the economy. So, there’s no question the industry and governments need to pay attention to it. And capital is mobile, as we all know.”

But industry is often too quick to blame government for its problems, says Collyer.

“They always point the finger at government. This is not solely government’s issue,” he said. “They need to take responsibility for those things that industry needs to take responsibility for and understand the linkage between different elements of policy and how what might be perceived by some to be a burden in fact can be a lever to accomplish our objectives.”

The former Shell Canada executive – who is a leading industry proponent for carbon pricing – says carbon policy can be a lever to open or expand markets. The big oil sands producers certainly believe that “carbon-competitiveness” will be a key competitive advantage in the near future.

“It’s evident that to remain a central part of the energy equation, oil and gas producers need to be carbon-competitive and cost-competitive,” Suncor CEO Steve Williams said in a 2017 Energi News story. “We are moving aggressively towards the goal of harnessing new technology that transforms the GHG footprint of our operations and our impact on the life-cycle of our product. Technology and innovation are taking us there.”

Thus far, CAPP and its critics share a belief that Canadian oil and gas producers face a number of competitive challenges in the near to medium-term and that both federal and provincial climate policy must be sensitive to industry cost structures.

Where the two camps diverge is around carbon pricing and regulations, which Canadian governments are using aggressively, while industry would prefer a light regulatory hand with more emphasis on government financial support for new technologies that would cost-efficiently lower emissions.

CAPP and carbon pricing

While writing this story, I asked CAPP for its position on carbon pricing. At first I was referred back to the climate policy study, which mentions carbon pricing a few times, mostly in the context of giving back all revenue to fund industry innovation, but very carefully avoids taking a position.

CAPP “equivocates on its support for carbon policy and is not very specific when it talks about support for carbon policy – not very specific about what that actually means,” says Collyer.

When I insisted on a answer from CAPP – Carbon pricing, yes or no? – I received this reply:

CAPP believes climate leadership is critical for Canada’s oil and natural gas industry to become a global supplier of choice. Such policies must be developed with a balanced approach to attract investment, spur innovation, grow jobs and the industry while reducing greenhouse gas emissions. CAPP recommends a climate policy approach that assesses all costs and recognizes the cumulative burden of all policies and regulations, corporate tax increases and royalty changes. In particular, we believe in an ongoing commitment to invest funds from carbon pricing into technology and innovation to allow substantial progression in a lower emission energy system that will generate more revenue for government, communities and industry.

As that comment illustrates, much of what CAPP is demanding requires carbon pricing even though the organization refuses to explicitly support it.

“They never call for carbon pricing or endorse the existing policy, but they do want revenue and they do want an offset system. So implicitly, they’re actually calling for carbon pricing policies, which is really interesting,” says Beugin.

Dennis McConaghy.

Dennis McConaghy, former VP with pipeline company TransCanada, says CAPP is confused about competitiveness as a short-term cash flow problem and competitiveness as a strategic issue.

“Some CAPP members want Tim McMillan to fix their competitiveness problems. Those members are saying, ‘Get to the governments and get them to do something to help restore our competitiveness, we’re having trouble raising capital’” he said. “You look at most of what CAPP wants to talk to governments about, it’s reduction of regulatory and other fiscal burdens on them. Really practical things.”

But the oil sands companies have accepted the business reality that lower emissions also lowers operating costs and the strategic necessity of pricing carbon as the means to win government support for future expansion, especially more pipelines. Which is important because almost all of the increased supply in CAPP’s own forecast comes from the oil sands.

“The oil sands producers know you have to have federal policy that is aligned with industry growth. CAPP can’t get there without carbon pricing, at least for the oil sands,” McConaghy said.

Without a consensus among its members about carbon pricing and climate policy, CAPP is continually tap dancing around the issue.

“What you’re really seeing is the inability of McMillan to say as CAPP that we accept and endorse carbon pricing. Until they do that, they are incoherent,” said McConaghy.

He says that those who pay the bills in CAPP are overwhelmingly oil sands producers. The ones that are barely hanging on are generally natural gas producers and the smaller companies.

“The oil sands group is willing to accept carbon pricing, the others see it as an unreasonable or unnecessary cost,” says McConaghy.

Bill Gwozd an engineer and founding member of The Centre for Gas and Liquids Monetization, points out that companies producing oil, natural gas liquids from the same well can afford to absorb climate compliance costs better than those producing “dry gas,” which has none of the more profitable oil or NGLs to offset those costs.

“A pure gas producer who’s struggling, challenged, just barely making ends meet may not be as receptive to any additional financial burden that may be placed upon them,” he said in interview.

Ben Dachis, CD Howe Institute.

Energy economist Ben Dachis of the CD Howe Institute says that even within the oil sands industry producers will have different kinds of emissions profile that will determine how they perceive the carbon pricing (and the output-based allocation system tied to it).

“Some are going to love it, some are going to hate it. Just a matter of where they are on that curve,” he said in an interview.

Collyer, now a consultant who advises governments on energy and climate policy, says the mixed messages in the study are indicative of the different perspectives on climate change held by oil and gas executives.

“I think it reflects, frankly, the broader tension within the industry. There’s different perspectives on the needs for climate policy, period. The report is relatively clear about support for climate policy but not very specific about what that actually means,” he said in an interview.

Collyer agrees that those producers feeling the pinch from low natural gas prices (AECO, the Alberta natural gas benchmark, was recent trading under $1) or are small and can’t absorb compliance costs as easily, are unhappy about the extra climate regulations, even if they won’t feel the effect for a few years.

“There is an additional cost burden that arises from climate policy, although to a large extent I think that’s mitigated by either the exemption to 2023 for the conventional oil and gas sector by the OBA process for large emitters,” he said.

“It’s viewed as an incremental cost burden that cuts into the bottom line and impacts the viability of the individual companies that are impacted. And if you’ve got a shorter-term view of things, that’s going to be an issue.”

Economist Kent Fellows of the School of Public Policy said in an interview that even though emissions regulations may not come into effect for two to five years, producers are making 20-year investment decisions and are already calculating compliance costs into their analyses.  

Alberta, where everything energy is politicized

With a provincial election slated for May 2019, Collyer says politics can’t help but creep into reports like these.

“There’s a political dimension, too, I think, in terms of what portion of the industry is supportive of Jason Kenney (United Conservative Party leader) and opposed to the current government (NDP Premier Rachel Notley). I think that influences it,” he said.

Jason Kenney, leader, United Conservative Party.

McConaghy says conservatives can imagine a world in which Andrew Scheer is the next prime minister, Kenney wins Alberta, adding to Premier Ford in Ontario, and maybe that right-wing party takes over in Quebec, and just like Trump made it his mission to roll back every possible Barack Obama law and regulation, carbon pricing in Canada would be history.

“There’s an expectation that Jason Kenney is going to be the next premier and that Kenney is going to contribute to the carbon pricing conundrum that the federal Liberals are going to have,” he said.

“In which case, you’re still going to have Canada doing the same old thing that it did under Harper. We still would have a Paris target but even less credibility about how we would ever achieve those targets.”

By not explicitly accepting carbon pricing, CAPP appears to be sending a pretty clear message.

“They may be for zero carbon policy, really, because if all you ever invoke is innovation and technology improvement, there are real limitations about how quickly that’s going to happen and at what cost,” he said.

Critiquing Competitive Climate Policy: Supporting Investment and Innovation

Some of the experts’’ critiques were of substantive issues, while others were less substantive but constituted egregious misinterpretations or manipulations of data and policy.

CAPP “can put these numbers out there and draw strong conclusions, but the evidence in this paper doesn’t connect those dots sufficiently for economists like us to really understand the case that’s being made,” says Beguin.

“That applies to even the scale of the competitiveness problem. They’ve pointed out these massive changes in investment from 2014 to 2017, but obviously carbon pricing is not the biggest driver of those changes.”

#1 – Falling capital investment

“As the cost of doing business increases – resulting from policies such as carbon pricing, and compounded by other policies and regulations – investment is decreasing – or leaving Canada altogether,” the CAPP study argues on P. 4.

“In 2014, capital spending in the Canadian upstream sector was about $81 billion. CAPP estimates capital spending in 2017 to be about $43 billion, a 47-per-cent decrease from 2014.”

Ignoring altogether the impact of global oil prices – and implying that climate policy is at least partly responsible, when in fact very little policy or regulation had been enacted until last year – appears to be deliberately misleading. 

brent

Source: U.S. Energy Information Administration, Short-Term Energy Outlook

The price of West Texas Intermediate fell from over $100 a barrel in mid-2014 to under $30 in early 2016. As a consequence, global oil and gas capital expenditures (excluding exploration) plummeted from a high of $519 billion/year in 2014 to just $197 billion two years later, just over a third of its high point, and by 2017 had recovered to only $246 billion, according to McKinsey data.

The decline in Canadian capex was actually less than the global average, yet this inconvenient fact isn’t deemed worthy enough to include in the study.

Ignoring the effect of global oil prices on capital investment levels wasn’t the only misleading statement in the study. On P. 4, “CAPP notes that in 2017 several companies divested holdings in Canada and made capital allocations elsewhere, although this is not attributable solely to emissions-reduction policies.”

CAPP is alluding to the combined purchase of oil sands assets by Cenovus and CNRL from Shell, ConocoPhillips, and Marathon Oil for $32 billion. The sale by the three multinational companies had nothing to do with “emissions-reduction policies.” Shell was selling assets across the world to pay down the $30 billion of debt it assumed to buy the BG Group, as well as beginning a pivot away from oil (especially high carbon-intensity reserves like the oil sands) toward natural gas and other low-carbon forms of energy. Conoco was under a great deal of pressure to repair its balance sheet, according to economist Ed Hirs of the University of Houston.

CAPP provides no evidence that the sale was caused by Big Oil was fleeing from high emissions compliance costs because there is none – unless you count salacious Postmedia reports and partisan industry gossip as evidence.

#2 – Protection of Energy-Intense Trade Exposed (EITE) oil and gas industry

How to incent export industries with carbon pricing while protecting against carbon leakage is a seriously policy design issue, according to Kent Fellows. Carbon pricing imposes a cost on industry and if the cost is too high, then the regulating jurisdiction risks losing companies to jurisdictions that don’t price carbon, like the United States.

The solution is “output-based allocations.”

Here’s how they work: Imagine oil sands production separated into quartiles based on crude oil carbon intensity. Now, the Alberta government establishes a carbon-intensity (e.g. of milligrams of carbon per barrel) threshold. Production in the first quartile will be at or below the threshold and will pay no carbon levy or, in most cases, actually receives credits that companies can sell. The second quartile’s carbon-intensity is above the threshold, so producers pay the lowest carbon levy. The third quartile pays a higher amount and the fourth quartile, with the highest emissions, pays the most.

The idea is to reward efficient producers and motivate inefficient ones to reduce emissions by innovating. Economists argue a straight carbon levy without OBAs, as they are known, would raise costs too high for the inefficient producers, causing them to invest elsewhere.

A carbon levy with OBAs is the foundation for the Alberta government’s Carbon Competitiveness Incentive Regulations (CCIR), introduced in Dec.

Prof. Kent Fellows, School of Public Policy.

Fellows told Energi News that “the devil is kind of in the details,” which is why he and several School of Public Policy colleagues published a 2017 paper, The Ground Rules for Effective OBAs: Principles for Addressing Carbon-Pricing competitiveness Concerns Through the Use of Output-based Allocations.

Every economist I have interviewed or talked to about Alberta’s CCIR remarks upon how the policy is very well designed.

“While the extent to which it will achieve the government goals of emissions reductions and mitigating negative economic consequences depends on the level of the tax and the amount of the per unit of output subsidy, as designed, it will achieve both policy goals,” Prof. Jennifer Winter, one of Fellows’ co-authors on the OBA paper, said in an interview.

CAPP never acknowledges that Alberta has already incorporated EITE protection (in the form of OBAs) into the CCIR to do the very thing it demands. In fact, CAPP says that  CCIR “is already impacting investment decisions, making some existing projects uneconomical and limiting investment in new projects. In addition, multi-national firms with opportunities outside of Canada are choosing to grow their production in other parts of the world.”

Oh? CAPP provides no evidence showing the link between CCIR and multi-national firm investment decisions.

“I found the discussion around EITE and CCIR odd. The report argues Alberta and Canada need to pay special attention to EITE sectors, yet this is exactly what the Alberta Carbon Competitiveness Incentives Regulation (CCIR) does and the federal government has a comparable program in their backstop,” says Blake Shaffer, University of Calgary economist.

“I’m puzzled why the report both calls for special attention on EITE sectors yet dismisses the policy that does just that (CCIR).”

Shaffer notes that by providing output-based allocations at a sector level, it ensures firms retain the full incentive to reduce emissions intensity, but face a smaller hit to average costs of output and thus less incentive to cut emissions by simply cutting output (with the logic being that that would be an ineffective method of emissions reduction if simply replaced elsewhere).

“For existing production, CCIR creates a strong incentive to make improvements where possible to lower emissions-intensity. For new projects, it incents investment in lower GHG projects. Both these things are what we want. A pure carbon tax would do this too but come at a much higher average cost and be more prone to (valid) leakage concerns,” he said.

“But overall it is protecting against simply migrating production to an unregulated jurisdiction (ie. the United States). And it incentivizes what we want.”

Oil sands producers have generally supported the CCIR. When the program was announced, Cenovus Energy spokeswoman Sonja Franklin told Reuters, “This plan is an important step forward in addressing climate change as it will incent those facilities with the lowest emissions intensity,” which not coincidentally includes many of her company’s operations.

They are behind the CCIR for two reasons.

One, marketing heavy crude oil with a low carbon-intensity will give companies like Cenovus a competitive advantage in Asia and other new markets as carbon pricing expands over the next decade or two.

Two, producers are convinced carbon pricing is now a permanent feature of Canadian policy.

“They want to be robust to Canadian climate policy whether it’s now or in the future, whether it’s weak or strong, they want to be able to still be competitive in the face of carbon prices or other policies that come down the pipe,” said Beguin. “Better to improve performance gradually and slowly and get going on it now than delaying and trying to catch up later.”

#3 – Government support for innovation

This is an area where CAPP and the economists mostly agreed.

“The CAPP report really nails the importance of government support for innovation. And let’s go back to sort of how the money is being used from carbon levies in Alberta,” said Dachis.

“We at the (CD Howe) institute have shown that the best bang for your buck for finding ways to reduce emissions long-term from government spending isn’t in adoption, isn’t in these kinds of subsidies to consumers, it’s in early-stage innovation.”

But the report gives governments no credit for the billions of dollars they have already committed to innovation.

CAPP illustrate the support governments should provide early stage technologies with the example of partial upgrading, which turns bitumen into a medium or heavy crude (instead of into a synthetic light crude with full upgrading).

“Partial upgrading also has potential to reduce overall emissions, because partially upgraded bitumen requires less diluent (if any) to make it flow. By reducing diluent requirements, less liquid volume must be transported in order to get bitumen to market,” the report says. “This decreases the energy required for transportation and, by extension, GHG emissions. Emissions reduction from partial upgrading can range from five to 12 per cent from existing wells-to refinery bitumen emissions, depending on the reduction of diluent.”

Partial upgrading is still five to 10 years from full-scale commercialization, but the Alberta government thinks so highly of its potential that in late Feb. $1 billion over eight years was committed to help the 10 companies working on prototypes get their technology to the finish line.

Rachel Notley, Alberta premier.

“As we fight for new pipelines and a better price for our oil, we must also create the right conditions for investment and jobs in oil and gas processing and manufacturing,” Premier Notley said at a press conference to announce the new program.

How did CAPP overlook a billion dollars of support for innovation, when the organization claims innovation is the key to lower emissions?

Well, it turns out they missed more than just a billion dollars for partial upgrading.

As a complementary piece to the CCIR the Notley government is providing $1.4 billion over seven years to the Energy Innovation Fund.

A full $440 million is earmarked to “help large emitters upgrade facilities and update processes to reduce emissions and thrive in a carbon-competitive global market.”

Much of the remaining funding will be available to the oil and gas sector to invest in R&D and new technologies ($225 million), industrial energy efficiency ($240 million), bioenergy ($63 million), and loan guarantees ($400 million)

These are just two major provincial sources of innovating funding available to help the oil and gas sector reduce costs, increase efficiency, and lower emissions. The federal government also provides funding, such as the $2 billion clean innovation fund. And on top of direct funding, both levels of government help support a very robust energy technology innovation ecosystem.  

Apparently, that’s not enough.

“The innovation commitments made by government do seem to be short-term in nature. I think folks are potentially looking for some longer-term certainty on what we can see and making sure that those dollars should be investment in getting to the most cost-effective reductions,” said MacDonald.

So, it appears CAPP is arguing that innovation is key to lower emissions and demanding that 100 per cent of carbon levy revenue be recycled to support innovation, then ignoring billions of dollars in government support for that very objective.

#4 – Cost of emissions regulation compliance

“The cost burden of the combined climate initiatives is estimated to be an average of about $1.40 per barrel for the in situ oil sands sector. The combined effect of these policies could reduce the net present value of a new steam-assisted gravity drainage (SAGD) project by as much as half.”

This one’s a bit of a head scratcher.

The Canadian Energy Research Institute (CER) and last month released its annual estimate of oil sands supply costs, which included “emissions compliance costs” of just $.67. That’s right, 67 cents.

This number was checked with several other energy economists, who asked that their names not be used, and they agreed with the CERI estimate.

I asked Patrick MacDonald, CAPP’s director of climate change and innovation, about the discrepancy.

“The intent of this study was to look at all climate policies and how they are all layering together and impacting the industry,” he said, noting that the calculations included fugitive methane regulations (45% reduction by 2025), carbon pricing, and the federal clean fuel standards.

“I think that that’s one thing that folks aren’t really transparent in and attuned to all the time is that we need to start looking at all these policies in conjunction with each other because when we look at them in isolation, they do seem to be not as impactful. We need to take these as a package.”

Economists took issue with the CAPP approach to calculating emissions.

“Their analysis is static, based on current emissions intensities and current technology. But the whole point of these policies is to drive innovation, to adopt different technologies that allow them to produce a barrel of oil at lower carbon-intensity,” said Beguin.

“So over time this is going to drive those costs down. Producers are going to be able to find ways to avoid paying the carbon price that’ll make the cost lower than just paying the carbon price straight up. And, again, that’s the point of the policy.”

But let’s assume for a moment that CAPP’s number is correct.

Collyer asks, which is the greater cost? $1.40 per barrel for emissions compliance or $5 or $10 or even $20 a barrel more due to higher than average differentials between Western Canadian Select and West Texas Intermediate caused by ever worsening pipeline system constraint?

The differential’s historic average is $10 to $15 a barrel, but on Monday it closed at $31.23 and has risen has high as $38. Without more pipelines to handle the growing heavy crude supply from the oil sands, the differential will remain high, and that represents a huge loss for producers, says Collyer.

Far more than the $.67 to $1.40 a barrel in emissions compliance costs.

#5 – Forget climate policy, lack of market access is industry’s biggest cost by far

If pipelines – or “market access” as the industry refers to it – are the bigger issue for producers, just how big is the problem?

Earlier this year Ben Dachis wrote a study that examined policy costs a representative well would face in a number of North American jurisdictions (e.g. Alberta, Texas, California, etc.).

He found that policy costs differed between the various jurisdictions for a variety of reasons, including the inherent differences between the resource (bitumen vs. light sweet crude vs. California heavy, for instance) and, as CAPP has claimed, Canada comes out on the wrong end of the stick.

Unfortunately for CAPP’s climate policy paper, the disadvantage had nothing to do with climate policy.

“Canadian energy producers are at a competitive disadvantage relative to producers in the United States. Much attention has been paid to carbon taxes, but a lack of market access for oil and taxes on investment – not emissions prices – are the main policy-induced competitiveness problems for conventional energy producers in Western Canada,” said Dachis.

He ranked the Top 5 policy costs like this:

#1 – market access (pipelines) by a long shot.
#2 – corporate income taxes
#3 – royalties
#4 – [municipal] property taxes.

“Number five would be emissions taxes. A distant five,” he said.

He called emissions compliance costs “trivial.”

Blake Shaffer says the implied causal link between climate policy costs and final investment decisions is overstated.

“While carbon costs may be higher in Alberta than the United States, other costs are in many instances lower. As CAPP says themselves, we need to consider the overall picture. Carbon costs are a small component of overall costs,” he said.

Dave Collyer agrees there is a hierarchy of costs and emissions compliance is at the bottom.

“The biggest single competitiveness issue the industry is dealing with at the moment is not climate policy, it’s the fact that we can’t get access to markets either for oil or for natural gas and as a result we’re selling both those products at a significant discount,” he said.

“My personal view is that we’re in a much better position to get TMX built with carbon policy in Alberta and the approach that’s been taken by both the Alberta and federal than we would be otherwise.”

#6 – Trump-style tax policies

The influence of changes made by President Donald Trump and their attractiveness to Canadian oil and gas executives can’t be understated:

As Canada enacts stringent GHG emissions-reduction policies, many competing jurisdictions are not following similar emissions-reduction programs. In particular, the current U.S. administration has aggressively streamlined regulations, re-adjusted tax rates, and relaxed emissions reduction rules. – P. 11

oil price

President Donald Trump.

“The reality is is that other jurisdictions are moving in the opposite direction as far as regulatory policy and costs and we’re being bombarded a bit by a number of new policies,” says MacDonald.

See if you can hear the echoes of MacDonald’s comment and the CAPP study in these excerpts from a March speech by Trump’s Energy Secretary Rick Perry about “the new energy realism”:

We don’t have to choose between growing our economy and caring for our environment. By embracing innovation over regulation, we can benefit both. And THAT is the heart of our New Energy Realism…[Trump] has cut taxes and reduced regulations by historic numbers, putting Washington squarely on the side of innovators and investors.

Innovation over regulation, the new rallying cry for CAPP and most of its members that don’t have oil sands production in their portfolio.

Sure enough, one of CAPP’s recommendations is lifted right out of Trump’s recent business tax cuts:

The amortization of capital is the most efficient fiscal lever available to governments to promote investment in large value-added and innovation technologies. This approach, known as ‘immediate deductibility’ or ‘immediate expensing,’ rewards new investment. This fiscal tool is especially effective for industries with high up-front capital costs and long lead times until projects are cash-flow positive.

Now, economists recognize that immediate deductibility can be an effective policy tool to encourage capital investment. Given the high capital costs faced by oil sands producers, this may be a policy change the federal government wants to consider.

But arguing as CAPP does that immediate deductibility is needed in Canada so that Canadian producers can afford to innovate seems like a stretch. 

CAPP itself tries to argue that innovation in Canada is largely industry-funded. If industry invested in new technologies before, why does it need immediate deductibility to continue innovating, especially since both the Alberta and Canadian government have stepped up with billions of innovation funding dollars?

Arguing that Canada needs it because the United States has it, thanks to Trump, is a losing argument with voters because around 80 per cent of Canadians loath the American president – and that’s according to Abacus Data surveys undertaken long before he slapped punitive tariffs on Canadian steel and aluminum and publicly insulted the Prime Minister.

CAPP study is a “back to the future” approach to climate policy

If I were to sum up CAPP’s argument around emissions-reductions policy and regulations, it would be a demand to reduce compliance costs as close to zero as possible while recycling 100 per cent of carbon levy revenue back to industry. Oh, and let’s not forget tax reform, and a list of other demands too lengthy to address in this report (e.g. exclusion from the federal Clean Fuels Plan, create a system of offsets for emissions offenders).

CAPP hasn’t made its case for three reasons.

One, a lack of evidence.

“They’ve laid out some cost numbers in this report but they haven’t really shown how they came to those costs and they haven’t really put those costs into context in terms of what those costs will mean for changes in production or changes in investment,” says Beguin.

“So many factors driving competitiveness. Like, exchange rates, like supply of labor and capital and tax rates. You can’t let climate policy be the scapegoat for every and all competitiveness concerns.”

Two, confusion about what constitutes the most pressing issues.

“I would argue that the biggest single competitiveness issue facing industry is not climate policy. It’s the fact that we can’t get access to markets either for oil or for natural gas and as a result of that are selling both those products at a significant discount,” says Collyer.

“So if the package of climate policy and other actions can help to enable market access – which is fundamentally the position of the Canadian and Alberta governments – then that equation makes a lot of sense and the upside for market access far exceeds the cost of the climate policy burden.”

Three, CAPP is way offside with Trudeau and Notley.

“CAPP it is not prepared to say the kinds of things that Collyer and I would say, which is that carbon pricing is legitimate and the most efficient way to reduce emissions, notwithstanding the fact it adds to your cost structure,” says McConaghy.

“If CAPP and industry refuse to embrace carbon pricing, then they face the prospect of more severe and less adaptable policy, such as the Clean Fuel Standard.”

CAPP’s climate policy study is so far outside today’s energy and climate policy norms that it only makes sense under one scenario: CAPP members and management believe there is a dramatic swing of the political pendulum under way and conservatives will be governing Canada and Alberta by the end of 2019.

Alberta certainly appears winnable. Kenney is far ahead in the public opinion polls and is already doing victory laps on Twitter. 

But federal politics are much more uncertain for the Conservative Party of Canada and leader Andrew Scheer, who consistently trail Trudeau and the Liberals in the polls.

Winning Alberta and losing the federal government next year would be a disaster for oil and gas producers because Trudeau is making sure there is a federal backstop for all of the Alberta climate policies, including the CCIR. And it is the Trudeau Liberals who control market access issues, not the provinces, as Notley has long known and BC Premier John Horgan is slowly learning in the battle over Trans Mountain Expansion.

A Premier Jason Kenney in Alberta doesn’t change that reality.

And if Kenney follows through with his promise to kill the Alberta carbon tax and replace CCIR with a pale version of the old Special Gas Emitters Regulation, he will essentially nullify the “pipelines for climate policy” deal with Alberta.

How, then, will Alberta oil and gas producers secure federal approval and support for the four to five new pipelines needed by 2035?