We Can Learn from Canada

The United States should start taking lessons from Canada regarding oil development and its relationship to a pro-growth regulatory and tax structure. Canadian production of oil sands in northern Alberta is expected to reach 4.1 million barrels a day by 2020, up from last year’s production level of 1.6 million barrels per day. This area in Canada is the world’s third largest crude oil resource.[i] Unlike the United States, Canada’s budget treats its energy resources as assets that should be used for the public good.

Equally important, unlike the United States, the Canadians understand that the regulatory review process is too convoluted, too long, and too expensive.  The United States is headed in exactly the opposite direction. Their latest budget proposes firm review time lines and the removal of multiple reviews by the national and provincial governments. Canada’s Finance Minister, Jim Flaherty, has a catch phrase—“one project, one review.”[ii]

Canada’s Government Direction

Canada’s provincial governments, led by Alberta in the 1990s, cut taxes, slimmed government and created a stable investment climate in order to encourage energy development. Saskatchewan, British Columbia and Ontario followed. In 2006, when the Harper government took control of the nation, Canada started to cut national taxes, trim government employment and secure free-trade agreements. Its corporate tax rate dropped to 15 percent, which compares to the U.S. rate of 35 percent.

The government has pledged to balance the budget by 2015 without raising taxes. That compares with four consecutive years of U.S. deficits of $1.3 trillion. Canada’s federal debt as a share of GDP is falling while that of the United States is rising, heading toward 70 percent. Canadian Finance Minister Jim Flaherty explained that policies to “raise taxes, increase government spending, and shun new trading opportunities” would “kill jobs, impose crushing deficits, and cripple our economy.”

Canada’s Oil and Pipeline Development

One of the largest positive forces driving Canada’s economy is oil production and a recent oil production forecast from an analyst at CIBC World Markets captures show just how much oil production could increase. This latest forecast of Alberta oil sands production of 4.1 million barrels per day by 2020 is higher than the forecast made by the Canadian Association of Petroleum Producers (CAPP) that expected a more modest increase of 1.4 million barrels per day, reaching a total of 3 million barrels per day by 2020. But, just using the CAPP forecast, industry and government analysts expect Canadian oil production to bump up against current pipeline capacity by 2015 or 2016.

Thus, three  proposed pipelines, TransCanada Corp’s Keystone XL pipeline to Texas, Enbridge’s Northern Gateway pipeline to the Pacific Coast, and Kinder Morgan’s Trans Mountain Project are needed to transport the crude to buyers. Due to opposition to pipeline construction from environmental organizations, the national government is revamping legislation on environmental assessments for major energy projects.  The government has concluded that existing laws have granted too much power to delay needed infrastructure by groups simply opposed to energy production.

Besides the Northern Gateway project, Enbridge is planning to spend C$3.2 billion ($3.15 billion) on pipeline expansions, mostly to get oil from Alberta and North Dakota to refineries in the U.S. Midwest and in Eastern Canada. East coast refineries are currently fed by foreign oil , which are more expensive than U.S. benchmark prices. According to Stephen Wuori, the head of Enbridge’s liquids pipeline business, “Refineries in Ontario and Quebec are paying premiums of $20 per barrel or more to obtain crude oil from the foreign sources they are currently largely dependent on. Access to Canadian and U.S. Bakken production will help level the playing field for these refineries, protecting their long term viability and safeguarding jobs.” The expansions are expected to be completed in 2014.[iii]

Currently the United States is Canada’s largest export market for oil and Canada is America’s largest single source of imported oil. However, because President Obama “delayed’ the Keystone XL pipeline decision despite three years of study and subsequently found that the pipeline was not in the national interest, Canada has decided to ship more oil to China and other Asian countries. It intends to press forward with a pipeline to Asia.

A May 3 poll conducted on behalf of the Canadian Chamber of Commerce found that the vast majority of Canadians believe they need to broaden their  markets beyond the United States and that developing Alberta’s oil sands is more positive than negative.  Three-quarters of those surveyed agree it is important for Canada to build the infrastructure needed to reduce its dependency on the United States for hydrocarbon exports.[iv]  It is clear that the president’s decisions to postpone and reject the Keystone XL permit have had a profound impact on the way Canadians view the United States.

According to Canadian Prime Minister Harper, the United States under President Obama has become too unreliable an energy partner; leaving no doubt who will be to blame for rising prices in the United States in the years to come. Harper indicated that until now the United States had been receiving oil at a discounted price from Canada, but that would end. In the future the United States will have to pay full price – no more breaks. Harper said, “Look, the very fact that a ‘no’ could even be said underscores to our country that we must diversify our energy export markets.”[v]

Policy and Data on U.S. Oil Development

The United States government is operating in sharp contrast to the Canadian government with more taxes, more regulation, and more red tape on energy industries.

According to a report by the Energy Information Administration, using Interior Department statistics, oil production on U.S. public lands is down 14 percent from last fiscal year, an outcome largely due to the moratorium and permitting delays that the Obama Administration put into effect after the oil spill accident in the Gulf of Mexico.[vi] Recently, the Obama Administration moved even further backward when it produced its draft offshore leasing plan for 2012-2017. It removed from leasing the offshore areas that President Bush and Congress had opened to drilling in 2008 when oil and gasoline prices hit a record high.[vii]  The effect of the 5 year plan is that through 2017, U.S. policy will be no different than if the moratorium was never lifted.

Delays are rampant under the Obama Administration. According to Garret Graves, director of coastal activities for the state of Louisiana, “There have been intentional efforts to slow down new production by slowing the permit approval process.”  For example, operators submit plans to the government before they can apply for permits, a process that used to take 50 days but now takes, on average, 212.[viii]

In the Western states of Colorado, Utah and Wyoming, the U.S. Interior Department reduced the available lands for oil shale production by 75 percent. Further, the administration is promoting new environmental requirements that will negatively affect oil production on parcels already leased. And while the Trans Alaskan Pipeline System is moving less than a third of the oil it was built to move, which is currently produced on private and state lands, the Obama Administration is not opening Federal lands in Alaska to oil development that would sustain the life of the pipeline and provide domestic oil to the lower 48 states.

Conclusion

Unfortunately, President Obama’s debacle with the Keystone XL pipeline has left a bad feeling in Canada and the country is moving forward with plans to develop Asian markets for their oil sands that will just lead the United States further away from a stable oil environment in the future. While Canada is moving toward less regulation and debt reduction, the United States is doing just the opposite. Canada believes less regulation, less taxes, and less debt will boost its economy, while the United States is doing just the opposite with little progress towards a better economy.