From Peak Oil to Peak Uncertainty: The New Above Ground Risks

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1 From Peak Oil to Peak Uncertainty: The New Above Ground Risks Niagara Institutional Dialogue June 20-22, 2017 Dr. F.L. (Ted) Morton Senior Fellow, School of Public Policy Senior Fellow, Manning Centre Calgary, AB

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3 What a Difference a Decade Makes Oil $145 $50 Gas $7 $3 Oilsands $200 billion $37 billion sell off in new investments AB Gas Royalties $8.4 billion $236 million Supply and demand: 2008 Recession New technology: Horizontal drilling and fracing

4 Short Term Optimism Lots of Good News Supply-Demand balance best since 2014 Price of oil has doubled from under $30 to +/- $50 Global growth demand: 25% increase by 2040 Wells being drilled have doubled in Canada and US Mostly horizontal with multi-stage fracing shale oil and gas an industry that didn t exist a decade ago Montney production in 6 years from 100,000 BOE/day to 1 million Service companies more work than they can handle Oilsands production increase from 2.5 million b/d to 3.3 million by Alberta fastest growing provincial economy Trump s approval of the Keystone pipeline Trudeau s approval of Kinder Morgan s TransMountain expansion and Enbridge Line 3 Renovation

5 Medium to Longer Term Uncertainty for Canada Issues of COMPETIVENESS and the energy sector s ability to attract new INVESTMENT especially foreign investment, Related issue of MARKET ACCESS specifically the approval and construction of NEW EXPORT PIPELINES to get Canadian oil and gas to global markets at global prices NEB reforms to correct REGULATORY DELAY and UNCERTAINTY These are largely a function of government policy Yergin s above ground risks

6 Above Ground Risks

7 Capital Flight: Exit of International Investment from Western Canada Seller Buyer Price Statoil [Norway] CNRL $7.25 billion Total [France] Suncor $310 million Shell [Anglo-Dutch] CNRL $17.7 billion Marathon [US] CNRL $1.25 billion Conoco-Phillips [US] Cenovus $10.6 billion Apache [US] Cardinal $330 million Centrica PLC (UK) Maple Felix $722 million Chevron [US]?? ~ BP [British]?? ~

8 Competitiveness/Foreign Investment Once considered a safe bet, Canada s vast deposits are emerging as among the first and most visible reserves at risk of being stranded by a combination of high costs, low prices and tough new environmental rules. Wall Street Journal, February 17, 2017 The longer-term economic risk of the project is further burdened with the regulatory uncertainty around the Climate Leadership Program and its potential impacts from the carbon tax to the emissions cap, both recently legislated by the Alberta Government. Koch Energy re cancellation of its Muskwa SAGD project, December 2016.

9 Canadian Policies Taxes/Alberta: Notley hikes corporate tax 20% Personal Marginal Tax Rate of 48% Alberta/Notley: Hard Cap on oilsands emissions Alberta/Notley: Greening the Grid = more expensive electricity Carbon Taxes: Both Federal and Provincial starting at $20 in 2018 and rising to $50 by Risk of Carbon Leakage Trudeau vetoes Northern Gateway AFTER NEB approval Taxes: Federal Budget 2016: elimination of favourable tax deductions for oil & gas exploration: Canadian Exploration Expense (CEE) and Flow-Through Shares Risk of repeat of 1980 NEP Fed-Prov conflict: Trudeau vs. Saskatchewan (&Alberta?) BC: NDP/GREEN obstruction of Kinder Morgan pipeline Risk Alberta retaliates by cutting gasoline exports to BC BC NDP/Greens threaten development of Montney O&G (fracing) and planned LNG export terminals

10 American Policies Positive for Canada Approval of Keystone XL Pipeline Trump continues/expands oil exports from the USA Trump continues/expands LNG exports from USA

11 American Policies Negative for Canada Trump repealsobama-era climate change/carbon-reduction policies Trump withdraws USA from Paris Climate Change Accord Carbon Leakage: Alberta now less competitive than US oil producing states Problem: USA no longer just our largest customer but also our strongest competitor for investment in oil and gas development

12 Carbon Leakage Energy Intensive, Trade Exposed Sectors This means that, for these sectors, unduly aggressive actions taken to reduce emissions in Alberta may not lead to real emissions reductions. Instead, they could lead to emissions leakage, with production and the prosperity and employment it brings simply shifting to other jurisdictions without stringent GHG policy, and continuing to produce emissions. This would negatively affect Alberta s economy, but not make an impact on global greenhouse gas emissions. Gov t of Alberta, Climate Leadership Report (2015)

13 Best Jurisdictions to Invest in Oil & Gas Fraser Institute, 2016 Global Survey 1. Oklahoma 2. Texas 3. Kansas 4. Saskatchewan 5. Wyoming 6. North Dakota 7. Mississippi 8. Utah 9. Montana Alberta

14 Market Access/Export Pipelines Keystone XL Northern Gateway Kinder Morgan TransMountain Enbridge Line 3 Expansion Energy East

15 Reform of National Energy Board Regulatory delay and uncertainty Northern Gateway: 6 years & $500 million third world economic suicide Liberal Panel Report: Abolish NEB and move its successor to Ottawa Necessary Reforms: Two Stage Process to deal with national interest/climate Change and aboriginal consultation first.

16 Take-Aways Good for now Peak Uncertainty mid- to longer-term Reform of NEB? Carbon Leakage or tax harmonization? Kinder-Morgan? Energy East?

17 Above Ground Risks to Canada s Oil & Gas Sector

18 Above Ground Risks to Canada s Oil & Gas Sector

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20 Post-Script: Natural Gas The Hydrocarbon of the Future? Base Load back up for Wind and Solar TransCanada Mainline to Ontario = 70% market share Oilsands SAGD growth: already consumes 30% Replacement of Coal-fired Power Plants in Canada and US New PetroChem Plants on Gulf Coast and Alberta LNG Exports from US and BC to Asian Markets