99 Problems but Reserves Ain’t One…

Torys Quarterly: The Future of Business in Canada

Home to the world’s third-largest proven oil reserves1 and sitting on some of the world’s best (and largest) deposits of natural gas, Canada is uniquely positioned to supply domestic and international markets with safe, secure and reliable energy.

However, the country faces a growing number of challenges which are affecting Canada’s energy industry. Lack of energy infrastructure, pipeline capacity, access to new markets, regulatory uncertainty, and industry competitiveness are some of the many reasons why investment in Canada’s oil and gas industry has fallen and these challenges are expected to continue in the years to come. As the prosperity of Canada depends on the nation’s ability to compete on the global energy stage, action will need to be taken to secure Canada’s energy future.

Role of Canadian Oil and Gas in Global, Future Energy Mix

The International Energy Agency estimates that global demand for energy is expected to grow by approximately 30% by 20402 and that, even with the rise of renewable energy, oil and natural gas will continue to play a major role, if not remain the most dominant source of supply, in the world’s future energy mix. This growing demand, coupled with rising production and a natural decline of conventional resources,3 signals a global, long-term need for steady investment in safe, secure and reliable sources of hydrocarbons to avoid volatility and higher-cost energy in the years to come.

Not only is Canada home to the world’s third-largest proven oil reserves, Canadian oil production is forecast to increase to 5.1 million barrels per day by 2030.

Canada’s vast oil and gas reserves present the country with a unique opportunity to fulfill much of the world’s future energy needs. Not only is Canada home to the world’s third-largest proven oil reserves, but with global demand on the rise, Canadian oil production is forecast to increase to 5.1 million barrels per day (b/d) by 2030, compared to 3.9 million b/d in 2016;4 growth which is primarily driven by a 53% increase in forecasted oil sands production. In addition, Canada has approximately 77 trillion cubic feet of proven reserves of natural gas,5 equating to enough marketable resources6 to sustain current production levels for up to 300 years.7 This coupled with Canada’s political stability and commitment to sustainable practices, innovation, responsible energy development and ethical production help rank the nation as the future global energy supplier of choice among 32 countries.8

Key Issues Affecting Canada’s Oil and Natural Gas Industry

While there’s no doubt that Canada is well positioned to supply the world with sustainably produced oil and natural gas, the country continues to be without broad access to the global market for such commodities. Limited pipeline infrastructure combined with strong growth in U.S. oil and natural gas production has highlighted the need for Canada’s oil and natural gas producers to emphasize the need for expedient infrastructure expansion to provide access to current and emerging markets.

At present, Canada’s 3.9 million b/d oil pipeline network is operating at near maximum capacity, and will face increased constraints by 2030 when Canadian oil supply is expected to grow.9 Such pipeline constraints, coupled with rising production, are key drivers behind the current and widening differential between West Texas Intermediate (WTI) and Western Canadian Select (WCS) commodity pricing, which has greatly reduced the price that Canadian oil producers are, and will foreseeably be, receiving for their products.

Although several pipeline projects proposing to deliver western Canadian oil to U.S. markets have received regulatory approval from the Canadian government, including Enbridge’s Line 3 replacement and TransCanada’s Keystone XL, each have been faced with opposition, regulatory uncertainty and legal delays that continue to prevent the projects from proceeding.10

Markets for western Canadian natural gas have been troubled by delays in the development of Canadian liquefied natural gas (LNG) export projects,11 which are largely attributed to unfavorable politics, increasing regulation and high-project costs, along with intense competition from increasing U.S. shale gas development and production.

Not only are Canada’s oil and natural gas producers facing uncertainty due to lack of market access and regulatory hurdles to expanding pipeline capacity and energy infrastructure, but the introduction of federal and provincial carbon-pricing regimes, high corporate income taxes and royalties and rising property and other municipal taxes on energy producers, especially in light of recent tax reforms under the Trump administration in the U.S., are creating further uncertainties, resulting in additional costs that are negatively affecting Canada’s ability to attract capital.

Next Steps

It is important that the challenges facing the country’s oil and natural gas industry are addressed quickly in order for Canada to continue to play a key role in the world’s future energy mix.

Representatives in Canada’s energy sector must work collaboratively with governments to develop an agenda which benefits all Canadians by promoting economic growth, creating jobs for citizens and generating prosperity for future generations.

While Canada prides itself as a nation with a robust political, social and regulatory framework committed to achieving environmental goals, maintaining unparalleled safety standards and promoting collaboration, innovation and responsible energy development, these objectives must work together with the country’s oil and natural gas industry. Representatives in Canada’s energy sector must work collaboratively with governments to develop an agenda which benefits all Canadians by promoting economic growth, creating jobs for citizens and generating prosperity for future generations. Balancing the country’s political, social and environmental goals with thoughtful policies that modernize and streamline regulatory frameworks, provide predictability and avoid unnecessary burdens will help in alleviating market access issues, pipeline constraints and lack of energy infrastructure and encourage growth and investment in the energy sector. Moreover, recent tax changes in the U.S. highlight the need for Canadian governments to examine the overall cost of taxation on energy producers in order to ensure the country remains competitive with other energy-rich jurisdictions.

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97% of which is oil sands. Natural Resources Canada (NRCan), end of 2015. Crude Oil Facts. Online: http://www.nrcan.gc.ca/energy/facts/crude-oil/20064#L6, retrieved March 5, 2018.

2 International Energy Agency, 2017. World Energy Outlook 2017. Online: https://www.iea.org/weo2017/, retrieved March 6, 2018. [IEA WEO 2017]

3 Ibid.

4 Canadian Association of Petroleum Producers (CAPP). Crude Oil Forecast, Markets and Transportation 2017. Online: https://www.capp.ca/publications-and-statistics/publications/303440, retrieved March 12, 2018. [CAPP Crude Oil Forecast]

5 NRCan, end of 2016. Natural Gas Facts. Online: https://www.nrcan.gc.ca/energy/facts/natural-gas/20067#L2, retrieved March 12, 2018. [NRCan Natural Gas Facts]

6 Referring to natural gas after the removal of impurities and after accounting for any volumes used to fuel surface facilities, using existing technologies and based on geological information.

7 Supra, note 5. [NRCan Natural Gas Facts]

8 Ipsos, 2017 Global Energy Pulse. Online: https://www.globalenergypulse.com/, retrieved March 12, 2018.

9 Supra, note 4. CAPP Crude Oil Forecast

10 Moreover, two major oil pipelines—namely TransCanada’s $15.7-billion Energy East and Enbridge’s $7.9-billion Northern Gateway pipelines—have been cancelled indefinitely.

11 Despite more than 20 LNG export projects initially being proposed on the B.C. coast, to date, only three are making progress – LNG Canada, led by Royal Dutch Shell PLC with partners PetroChina, Korea Gas Corp. and Mitsubishi Corp. of Japan, Woodfibre LNG, owned by the RGE Group of companies based in Singapore and Kitimat LNG, a joint venture between Chevron Corp. and Australia’s Woodside Petroleum Ltd.

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The Authors

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