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Canada grapples with its energy strategy

As an emerging energy superpower, Canada’s disparate provinces must agree a united approach to energy policy

Canada’s federal and provincial energy ministers sat down in July to try to do something they have never done before – develop a co-ordinated energy strategy. It might seem odd that an important energy-producer like Canada, which sits atop the world’s second-biggest deposit of oil, lacks a formalised energy plan, but for Canadians the only policy that works seems to be none at all.

Alberta’s energy minister, Ron Liepert, played host to the annual gathering in Kananaskis, an isolated spot in the Rocky Mountains southwest of Calgary, and there is no doubt they needed the quiet time to ponder some of the political and economic changes that have taken place in Canada over the past 18 months.

After back-to-back minority governments, in May, Conservative prime minister Stephen Harper was re-elected with a majority government that assures a freer hand for at least the next four years – the first real stretch of political stability in Canada in almost a decade. In keeping with a strengthened mandate, he has vowed to assert greater regulatory oversight over Alberta’s oil sands, while promoting their development as a national economic interest.

But this is where things start to get sticky under Canada’s federal system: a loose collection of provinces that enjoy a high level of political and economic autonomy under the central parliament in Ottawa. In accordance with the British North America Act that serves as the basis of Canada’s constitution, the provinces own all their natural resources and have exclusive jurisdiction to develop and administer them as they see fit. Consequently, each province has its narrowly defined interests that reflect the political and economic diversity of the country.

While Canada is a significant oil producer, it’s also a big consumer in its industrial heartland of Ontario – the country produced 3.34m barrels a day (b/d) last year, and consumed 2.28m b/d. So while the oil-rich western regions benefit from higher oil prices, they hurt the manufacturing sectors that have been the historical engines of Canada’s economy. Conversely, lower oil prices hurt the energy-producing regions while helping the consuming ones.

Redressing this fundamental disparity has long been the goal of the central government in Ottawa. But if finding the right balance isn’t easy in purely economic terms, it’s made even more difficult by the inherent differences in the political system.

Under Canada’s electoral model, the consuming regions with the highest population densities enjoy a sizable vote advantage over the less-populated energy-producing provinces. Alberta, for instance, accounts for almost a fifth of Canada’s economic output, but controls less than 10% of the seats in the House of Commons. So Alberta gets leery when Ottawa tries to assert a greater role in energy policy. Federal government strategies are seen as benefitting vote-rich provinces over wealthier ones with considerably weaker representation.

It tends to make for hazy policy. Andrew Leach, a resource economist at the University of Alberta, says the lack of a clear policy direction is defined by Canada’s competing economic interests and that the benefits of oil production are not evenly spread through the country.

Finding a balance between the producing and consuming regions is also difficult to reconcile in the broader national interest, he says. Although high oil prices are a net benefit for producing provinces such as Alberta and Saskatchewan, it places a financial burden on consumers in the more densely populated eastern centres such as Ontario and Quebec. This, in turn, has led to animosities that have fuelled regional grievances and exposed rifts in Canada’s political federation, already weakened by the decades-old separatist movement in Quebec.

Let the Eastern bastards freeze in the dark

The very term national energy policy is sure to spark disdain in oil-rich Alberta, which has found itself in bitter conflict with the national government in Ottawa over what it sees as attempts to seize its oil wealth.

The National Energy Program (NEP) of the 1980s was an attempt by former prime minister Pierre Trudeau to assert Canadian control over oil and gas, although critics complained it amounted to outright nationalisation of the industry. Trudeau created Petro-Canada as a state-owned oil producer and imposed caps on multi-national – mostly US – ownership of resources with punitive taxes and monetary transfers from Alberta to other parts of the country through legislated equalisation payments.

Almost predictably, Alberta’s government responded by threatening to shut off oil production to the rest of Canada. A topical bumper sticker of the day read: Let the Eastern Bastards Freeze in the Dark. Trudeau himself infamously responded to protesters of his policies by flippantly brandishing his middle finger. (Petro-Canada’s filling stations became known in western Prairie towns by a longer name: Pierre Elliott Trudeau Rips Off Canada.)

Although that was more than 25 years ago, the ghost of Trudeau still haunts any Canadian energy-policy discussion. The former prime minister may have been within his power to impart such an interventionist approach, but the doctrine of the NEP, which would have imposed domestic price controls on oil, has long been discredited.

As part of his rapprochement with the oil industry, Trudeau’s successor, Brian Mulroney, moved the National Energy Board from Ottawa to Calgary and scrapped the NEP under the aptly named Alberta Accord. But the level of mistrust has remained high and Alberta’s politicians continue to flog the NEP as a rallying cry against the federal government – an easy way to garner votes during election campaigns.

Ted Morton, a candidate to replace outgoing Alberta premier Ed Stelmach, has threatened to fight any attempts by the federal government to regulate the oil sands. Morton, who was previously the province’s minister of finance, is considered a front-runner in the race to replace Stelmach, who steps down later this year.

Morton understands the contribution of oil and gas to Alberta’s treasury and the national economy. But his antagonistic approach is sure to clash with the government in Ottawa and reopen old wounds. Where previous battles were focussed on issues such as revenues and taxation, Canada’s new energy wars are likely to be waged on environmental issues – one area where Ottawa clearly has the upper hand.

Environment drives energy policy

Probably the biggest development of the past 18 months is the emergence of the oil sands as a target of international criticism, becoming a lightning rod for the anti-oil movement. Canadians, used to squabbling among themselves, were shocked by blackened ducks whose images spread globally as environmentalists sought to derail the oil industry’s growth agenda.

They were also stunned by the level of hostility shown in countries such as the UK and the US, where groups like San Francisco-based Corporate Justice took out newspaper advertisements questioning Canada’s self-image. Suddenly, the happy-go-lucky Canucks were the bad guys on the world stage – and they didn’t like it.

Once again, Alberta was the bullied kid of the confederation as politicians in Quebec and Ontario called for a crackdown on the oil industry. The activists were quick to exploit the divisions in Canada. “The point is that we don’t have a unified front,” Leach says. “And they know it.”

Nonetheless, there is a sense that environmental policies will dictate federal energy policy. Alberta might own the oil, but Ottawa owns the air and the water and has the right to set binding pollution standards – and enforce them. It also has exclusive authority to negotiate and execute international treaties, including potential agreements with the US to harmonise emissions rules.

But it’s still not clear what an environment policy would entail and what effect it would have on the oil industry. While it’s true the Harper government has indicated that it wants to take a more hands-on approach to enforcing air- and water-quality standards in the oil sands, nobody knows exactly what that means.

Harper himself is considered friendly to the oil industry – his Commons seat represents a district in Calgary, Alberta’s oil-patch capital, and he was an outspoken advocate of provincial resource rights while in opposition. Environmental critics complain that’s the main reason Canada has been slow to act on its emissions-reduction goals. To be fair, Harper was hampered by successive minority parliaments and may not have been able to drum up support for pro-industry policies without weakening his political position in Ontario.

So Canada has effectively been without a coherent energy strategy for almost six years. In a new report, the Conference Board of Canada said years of delay by the federal government has led to the emergence of a patchwork of legislation in each of the different provinces that provides a national policy – albeit one with often divergent and contradictory aims.

British Columbia has an outright carbon tax, while Quebec is claiming credits for its clean sources of hydro-electricity, credits it expects to come from penalties and levies on Alberta’s carbon-intensive oil sands. Ontario has extensive nuclear power generation that also offsets greenhouse-gas emissions, although it is by far the country’s largest consumer of all forms of energy, not just oil and gas.

In the midst of it all, Harper has maintained that Canada must harmonise with its main trading partner, the US, on environmental standards. And that has added a whole new wrinkle to the energy agenda, if only because the federal government has the exclusive authority to negotiate cross-border agreements. Even under Canada’s murky jurisdictional puzzle, that much is clear.

Russ Girling, head of pipeline firm TransCanada, says the lack of a co-ordinated energy strategy in Canada becomes even more apparent on issues such as the controversial Keystone XL oil pipeline from Alberta to the Texas Coast. In addition to facing regulatory review by Canadian authorities, TransCanada must undergo a separate review for the US portion of the link – essentially the same process twice, Girling says. In a perfect world, such a project would be jointly reviewed on both sides of the border simultaneously.

Given the level of integration that already exists between the countries, it would make sense to have some form of bilateral commission to examine big infrastructure projects, given that safety standards and operating practises in the two countries are virtually identical. Similar regulatory structures were put in place when TransCanada negotiated the right of way for the Trans Alaska pipeline, which were formalised through treaty.

But while the US State Department and the Environmental Protection Agency wage their own turf battles over who should have final say on XLs US leg, Girling says the unneeded duplication has delayed the C$7 billion ($7.2 billion) project for almost a year and created bottlenecks at the main oil-trading hub in Cushing, Oklahoma, the conduit for Canadian oil deliveries to the Gulf coast.

Industry demands clarity

Ironically, the biggest proponents of a national energy policy appear to be the oil and gas producers themselves. Although politicians have been reluctant to touch the energy file, that’s changing as climate-change issues come to the fore. Oil-sands producers in particular, are reluctant to commit billions of dollars to expansions without knowing what future rules around issues such as emissions reduction will be.

Suncor chief executive Rick George has repeatedly called for a national energy strategy that recognises the importance of the oil sands as a national interest. Last year, the Canadian Council of Chief Executives, led by former TransCanada boss Hal Kvisle, released a policy paper that called for just that.

Shell Canada country chair Lorraine Mitchelmore raised eyebrows in March when she called for a national energy policy on the eve of Shell’s 100th anniversary in the country. “Canada’s emergence as an energy superpower hinges on its ability to develop a truly national approach to energy,” she said. “Canada has all the hallmarks of an energy superpower, but we don’t have the right strategy to get us there.”

Janet Annesly, vice-president of government affairs at the Canadian Association of Petroleum Producers, an industry body, agrees that most producers, specifically oil-sands operators, want more clarity from Ottawa on issues such as emissions reduction. “Canada needs a coherent national framework that sets out a long-term direction on energy and related economic, environmental, social, and energy security and reliability considerations ... to align interests within Canada, and to represent a more cohesive and aligned position outside Canada,” she said.

But the politicians are reluctant to cede authority, even in the common good. As the energy ministers gathered, Alberta’s Liepert says he supports a framework that recognises Alberta’s lead role as the resource owner without committing to a formal policy that ties its hands over future expansion – such as a binding cap-and-trade system.

A unified voice among provinces and industry would provide more clarity for projects such as the 500,000 b/d Northern Gateway export line to the west coast, which is vital for Alberta to tap new markets in China and beyond. Earlier this month, Liepert warned Alberta would become “land locked” in bitumen without new outlets to the US and Asia.

Self interest

But, argues Leach, the producers’ sudden enthusiasm for a national strategy is motivated by self-interest. Oil companies will support the idea if they think it will deflect criticism from their operations and provide new growth opportunities. That’s a world away from the view of environmental groups, which see an energy policy as a way of cracking down on pollution and curbing oil-sands development altogether.

The lack of any willingness to compromise will prove to be a formidable obstacle in the short term. But eventually, Alberta will have to cede some control if it wants federal support to expand the oil sands’ international markets and find workable climate-change initiatives. Says Leach: “At some point we’re going to realise we can’t do it alone.”

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