WARNOCK: The Future of Oil and Gas in Saskatchewan

[Oscar]

The Future of Oil and Gas in Saskatchewan

by John W. Warnock
November 17, 2008

http://www.actupinsask.org

The Johnson-Shoyama Graduate School of Public Policy at the University of Regina hosted a mini-symposium on Saskatchewan energy policy last Friday. However, the afternoon meeting only considered oil and gas policy.


Appropriately, the first speaker was Pierre Alvarez, former president of the Canadian Association of Petroleum Producers (CAPP), the industry lobby group. Alvarez cited the newly-released report by the International Energy Agency (IEA) which emphasized that if current production and consumption trends are to continue, we will need a massive new injection of capital in the industry. The IEA estimates this at $26 trillion between now and 2030.

Continental energy integration

Canada is to continue as the most important source of U.S. imports of oil and gas. This explains the new pipelines being constructed to ship bitumen from the Athabaska tar sands (and perhaps Saskatchewan) to Chicago and Louisiana for refining.

North American energy security has been improved due to the development of new technologies which make possible the economical extraction of natural gas and oil from coal and shale deposits. Horizontal wells and fracturing have revived the natural gas industries in Alberta, Wyoming, Montana, Colorado and Texas. The new drilling techniques have also enabled the exploitation of the Bakken play in Saskatchewan and the Northern United States, reviving the light oil industry.

A member of the audience argued that Canada has no sovereignty in this area because of the North American Free Trade Agreement (NAFTA) which requires Canada to ship oil and gas south even when it is against the public interest. This policy has blocked the development of a national energy policy which would allow western Canadian oil to replace the supply of oil eastern Canada now imports. Alvarez was vehement in his rejection of any national energy policy. He further argued that “shipping Canada’s oil and bitumen to Chicago and Louisiana is simply a matter of economics. The distance is shorter than shipping to eastern Canada.” No one questioned whether this was actually true.

The need for low royalties and taxes

Alvarez stressed that the key to this essential development is government financial incentives and regulatory frameworks which assist the industry to grow. To no one's surprise, he strongly attacked the decision of the Conservative government in Alberta to raise the royalties on the oil and gas industry. Praise was heaped on recent governments in Saskatchewan who lowered royalties and taxes on the industry.

In response to a question on what is a fair return to investors in the oil and gas industry, Alvarez stated that the historic rate of 12% “will not come close” if the industry is to attract sufficient investment. He denounced the Alberta government’s new royalty system which increases the rate of return to the province as the price of oil increases. The new tax policy “removes the risk premium which is at the top.” Investors in the oil industry in Canada have come to expect a far greater return on their investment than they could find elsewhere.

The approach of the new Obama presidency

Bruce Bulloch, Director of the Maguire Energy Institute, Southern Methodist University in Texas, outlined what we could expect from Barrack Obama in the field of energy policy. He started by saying that “No one really knows what Obama is going to do.” His policies are not well developed. Furthermore, as the new president he will be greatly constrained by the financial and economic crisis and the huge deficit in the budget that he will inherit from the Bush administration.

In the presidential campaign Obama proposed a cap-and-trade system to deal with greenhouse gas emissions, spending $150 billion on “green energy,” emphasis on energy efficiency, and a windfall profits tax on the oil companies. The last policy is “simply off the agenda,” Bulloch argued. Furthermore, it is clear that Americans will never accept any form of a carbon tax. He noted that Obama has expressed skepticism of nuclear power. In contrast, Bulloch argued that nuclear power would be necessary if the U.S. were to reduce greenhouse gas emissions.

Bulloch suggested that we should look at the research done by Matt Simmons, the Texas banker who specializes in oil and gas. Energy supply, as the IEA finally admitted this year, is in decline. Peak oil is here

Environmental problems with natural gas extraction

Natural gas drilling is expanding across North America, using the new technologies. Bulloch stated that wells are being drilled within 300 feet of people’s homes in Texas.

In response to a question from the audience, he admitted that there is an environmental downside to the new drilling technology being used to extract natural gas. Wherever the high pressure extraction process is used, which induces fracturing of coal and shale deposits, it is leading to natural gas contamination of water aquifers and wells. The chemicals used in the process are often very toxic, including benzene, a strong cancer-causing agent. This contamination has resulted in grass roots opposition everywhere. Bullock said a recent court decision for damages in Texas has caused a major ripple in the industry.

Canadian energy policy

Keith Brownsey, from the Department of Policy Studies, Mount Royal College, Calgary, presented an overview of energy policy in both Canada and the United States. Basically, Canada has had no policy since the reversal in 1985 of Pierre Trudeau’s National Energy Policy. All subsequent governments have emphasized devolution of policy to the provinces, private corporate development of the industry, and the international market. There has been no effort to develop a national strategy or address the issue of sustainability.

The policy priority of Stephen Harper’s government, he stressed, is to protect the oil and gas industry and to guarantee the continuation of continental integration.

In contrast, the Bush administration established a national energy policy in the Cheney Report of May 2001, the U.S. Energy Act of 2005, and the Energy Security Act of 2007. Goals have been set to develop alternative energies, support new technology, but always relying on private corporations and the market.

Brownsey concluded by arguing that in his opinion the two countries have a common approach: “lack of action, obstruction, avoidance and retrenchment.” Nothing was said at the symposium on the overall U.S. policy set forth in the Carter Doctrine of 1980: using the U.S. military to defend U.S. corporate access to oil around the world.

The problem of climate change is ignored

It was expected that Adam Wellstead, of Natural Resources Canada, would focus on the issue of climate change and greenhouse gas emissions. He was one of the authors of the the NRC study, Climate Change: Impacts and Adaptation (2008). It has a section summarizing the scientific research on the impact on Saskatchewan. However, Wellstead’s presentation concentrated on the lack of co-ordination of policy makers on the issue. He did note that for Saskatchewan and the prairies the central issue is “where is the water.”

In contrast to the symposium, the new World Energy Outlook by the IEA also stresses the serious question of greenhouse gas emissions from the burning of fossil fuels. Under the present business-as-usual approach of the past ten years, fossil fuel consumption continues to increase as does greenhouse gas emissions and the average temperature. The IEA argues that if the world continues to refuse to seriously deal with this issue, the end result will most likely be a six degree increase in the average global temperature by the end of the century.

The present course of action is in reality a suicide policy for the world as we know it. The scientists with the U.N. Intergovernmental Panel on Climate Change have argued that we need a 70% reduction of fossil fuel consumption to stabilize greenhouse gas emissions and prevent the increase in average temperature by two degrees. There was nobody at this symposium who wanted to deal with this issue.

John W. Warnock is a Regina political economist.

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Profits from the Alberta tar sands
“Taking into consideration operating costs, the discount given to low-quality oil sands crude, the falling Canadian dollar and other factors, Suncor would be able to earn $28 on each barrel of oil at a West Texas Intermediate price of $60 (U.S.).”
Rick George, CEO, Suncor Energy, October 29, 2008