This guest blog post was written by Glen Hodgson, Senior Vice-President and Chief Economist for the Conference Board of Canada. It originally appeared in the Globe and Mail, Wednesday November 19, 2014, and on the Conference Board of Canada website.
It is abundantly clear that expanding U.S. oil and gas production is constraining the ability of the Canadian energy sector to sell into the American market. It has already happened in natural gas and much the same could happen in the oil market. U.S. oil production is up 80 per cent since 2010, reaching nine million barrels a day – at a time when U.S. oil demand is actually declining.
Moreover, transportation bottlenecks are limiting Canada’s ability to move oil within – and beyond – North America. Approval of the Keystone XL pipeline project, which seems to have garnered new momentum since the U.S. midterm elections, would at least give Canadian oil suppliers enhanced access to the U.S. market. However, the inability to reach global customers is costing Canada’s energy suppliers billions in revenues due to the difference between world prices – whatever their level – and Canadian prices. The loss in energy revenues is felt by all parts of Canada and many sectors of the economy through the energy industry’s value chain. Federal and provincial governments are losing billions in royalties and corporate tax revenues every year.
Oil producers have responded to the transportation bottleneck by increasing shipments by rail, but rail is not a realistic primary or long-term option. The Conference Board of Canada estimates that rail capacity for shipping oil would have to triple from its current potential to accommodate the projected increase in oil production. Without adding significant new rail capacity, rail lines across Western Canada will be choked. This bottleneck would put pressure on rail infrastructure and other industries relying on bulk shipment – notably agricultural products – while raising serious public safety concerns, such as those brought into tragic view by the events in Lac-Mégantic in July 2013.
Increased pipeline capacity, on the other hand, would provide significant economic gain, and all provinces and many sectors stand to benefit from enhanced access to global energy markets. Importantly, new pipeline capacity would lead to higher prices or “netbacks” for oil producers. With U.S. oil production continuing to climb, Canada cannot afford to be shut out of growth markets for energy, even in the face of uncertainties in global pricing.
Four pipeline projects – Keystone XL, Trans Mountain Expansion Project, Energy East, and Northern Gateway – are being proposed for development. The Conference Board has assessed in detail the economic and financial impact of the Trans Mountain Expansion Project, which would run from Edmonton to Burnaby, B.C. In our analysis, which uses well-established methodologies for gross domestic product and employment impacts, 108,000 person-years of employment would be created nationally over a 25-year period if the project proceeds. Total oil producer revenues and profits are projected to be $45-billion higher as a result of the TMEP, and governments would capture a third of the financial benefit of increased higher netbacks. Thus, TMEP would provide $14.7-billion in fiscal benefits over 20 years (combined royalties, provincial and federal corporate taxes), with federal income taxes alone accounting for $6.1-billion of that total.
These benefits would arise regardless whether oil production or investment increases beyond what is currently expected; the higher prices available in global markets alone would be enough to drive positive economic impacts for the Canadian economy.
It must be noted that despite the potential significant economic benefits, there have been objections and protests against the development of Canadian energy production and shipping capacity. It is clear to us that Canadian suppliers need to earn and maintain a social licence to operate by investing continually in better technology and processes to reduce greenhouse gas emissions and mitigate other negative environmental impacts. It is also evident that the environmental impact of energy production and consumption is a global challenge, and solutions need to be found globally – including policies and incentives that promote energy efficiency and encourage the development of energy sources with lower environmental impacts and GHG emissions.
The hard truth, (one often ignored by critics of Canadian energy) is that someone will supply oil to meet global energy demand, even if Canada does not. In our view, it is to Canada’s advantage to find ways to capture its fair share of the global energy market.
In short, pipelines appear to be the most viable way to get Canada’s oil to global markets. The economic benefits are shared across all regions and sectors. If oil pipeline capacity is not added that would allow Canadian producers to access blue water, and thus global energy markets, Canada will not capture the full economic and financial benefits associated with exploiting our non-renewable oil resources.
