CANADIAN ECONOMY’s RESTORATION: TIME RUNNING OUT, CANADA NEEDS TO ACT FAST

There were some important nuggets to be picked up from Bank of Canada Governor’s address to the Saskatchewan Trade and Export Partnership in the last week of April:

·       One of the most important forces powering Canada’s economy currently is the long-term strength in global prices for resources; and, for Canada, oil stands out. 

·       As people earn more, they spend more and, as this work force grows, they need more of everything - from Tim Hortons to pickup trucks. This leads to more jobs and higher wages in other sectors and other regions of the economy, so everyone benefits.

·       Diversifying Canada’s export markets is important to future growth and resilience.

·       Canada’s is an export-driven economy. Canadian economy needs to shift gears and for exports to lead again.

A new report from the Conference Board around middle of May put Canada's three oil rich provinces on top of the world in terms of economic performance. The report places Alberta, Saskatchewan and Newfoundland -- the three oil producing provinces -- in that order as the top performers with A-plus scores across indicators such as per capita income, economic growth, unemployment and productivity. They are the only jurisdictions rated to have A-plus economies. Alberta is "class leader," says the report with 2013 per capita income that was $10,000 higher than Norway, the top-ranked country in that indicator. For the rest of the country the news was not so stellar.

What the above narrative clearly suggests is that while the 31 subsectors (of Bank of Canada) of the non-energy export sector need to be promoted with suitable strategies, the increase in production and export of the energy resources, i.e., oil and gas is vital from the point of view of Canadian economy’s restoration to good health in near term and sustaining it in the long term.

However, the growth of the aforementioned two energy resources appears to be getting bogged down in an endless loop of consultation, opposition and procrastination. As Leo De Bever, chief executive of Alberta Investment Management Corp., the largest wealth fund in the country with assets under management of $63-billion, says, “We find it easier to pay somebody not to build something rather than actually build it. There has been a shortage of resolve to build projects.”

De Bever was alluding to opposition to various pipeline projects and oil sands projects. To compound issues there is tardiness is formulating policies that the investors need to know urgently to firm up their investment decisions. For example, investors (Petronas, Shell, Chevron et al) are eagerly waiting on British Columbia’s final decision on the tax regime. As well, the investors are concerned about wage inflation, the tax environment and about Canada’s ability to actually deliver in a timely fashion on environmental assessments.

Besides cost-competitiveness of doing business in Canada (e.g. British Columbia) being crucial, time is of the essence as investor companies are mulling similar projects in Australia, East Africa and the United States. Petronas led consortium is hoping to set sail its first shipment of LNG by 2019 before a number of Australia’s brownfield projects start ramping up. Analysts say that some South Korean investors are already gravitating towards U.S. projects.

Then there is the proposed long term multi-billion dollar oil and gas agreement between Russia and China which Russia’s president Putin is going to pursue aggressively. If this agreement gets concluded, it would mean China’s financial capacity and need to import these resources from other countries like Canada would get that much reduced. Which would in turn mean the companies intending to invest in Canada may like to change their minds.

On the flip side, the Ukraine crisis has got the Europeans to clearly articulate their desire to source their long term energy needs from Canada (and US). This is a godsend opportunity for Canada to latch on to and expedite the necessary approvals process associated with oil and gas and pipeline projects.

Just to give an idea on negative impact of ‘endless cycle of consultations’, as oil sands projects stall and crawl, Canadian producers have lost as much as $30-billion annually due to discounts on their blend of crude in the past few years. While spreads have narrowed over the past 12 months there is much more at stake. According to energy consultancy IHS CERA if oil sands production reaches 3.8 million barrels per day in 2025, the bitumen’s contribution to Canadian GDP could nearly double, and a third more jobs could be expected.

“Between 2012 and 2025, oil sands’ contribution to Canadian GDP could grow from $91-billion to $171-billion,” the IHS estimated in a report published this year. “This would be like adding an economy the size of Saskatchewan today to Canada by 2025. Oil sands could also add over one-quarter of a million more jobs, contributing to 753,000 jobs in Canada in 2025.”

To address the concerns around environmental impacts of oil sands development, Alberta already has in place stringent measures and more are expected. This should blunt criticisms brought forth by the environment-activists. As regards carbon emission issue, an independent group of scientists/experts are challenging the White House National Climate Assessment (NCA) issued in early May. In their view, the foundation of the NCA is a "masterpiece of marketing" that crumbles like a "house of cards" under the weight of real-world evidence.

And, in regard to the issue of opposition by the aboriginals to the various oil and gas and pipeline projects, the legal experts say that as for aboriginal communities, they need to recognize that their right to be consulted doesn’t negate the government’s power to make decisions.

Summary: Energy (oil and gas) is a vital component in the context of restoration and sustainability of Canada’s economy and standards of living associated with this first world country. The companies in Canada, who wish to implement the various oil and gas and pipeline projects, and the Federal and the Provincial governments must expedite the approvals’ process. The window of opportunity for Canada is NOT going to be there for ever, therefore, it would be a criminal folly if they fail to capitalize on the opportunities presented to Canada by the global situations.

KEYSTONE XL DELAY – A LESSON LEARNED FOR CANADA TO OVERHAUL ITS THINKING, POLICIES AND TO BE SELF-DEPENDENT

On 18 April the US Administration displayed yet again how pusillanimous and spineless it is on Keystone XL pipeline approval issue by punting it further down the road – any final decision is not expected before the congressional elections this year in November.

The media reports suggest following commentary from both Democrats and Republicans:

New Hampshire Democratic Sen. Heidi Heitkamp blasted the delay, calling it "absolutely ridiculous," while Sen. Mary Landrieu, D-La., called the delay "irresponsible, unnecessary and unacceptable".

From the other side of the aisle, Republican House Speaker John Boehner said “this delay is shameful"; Alaska Sen. Lisa Murkowski, the top Republican on the Senate Energy and Natural Resources Committee, called the delay "a stunning act of political cowardice".

Canada’s Prime Minister Stephen Harper expressed frustration over the snail like pace of the administration’s decision-making. Harper's office was "disappointed that politics continue to delay a decision," his spokesman said. Canadian ambassador Gary Doer reportedly said the State Department should focus on the international crossing between Alberta and Montana and leave it to the state of Nebraska to figure out the precise route there. Incidentally, the U.S. State Department said Friday it needs to assess the impact of a court battle in Nebraska that could force a change in the pipeline’s route.

Notwithstanding whichever way the political circus pans out on Keystone, there is one most important lesson for Canada – it’s federal and provincial politicians, the top corporate executives, the First Nations and the general public: Canada and the Canadians got to diversify, and also be self-dependent. Canada’s policy of putting all eggs in one basket (i.e. depending on US) is past its expiration date. So, what actions should follow from this lessons learned?

·       The pipeline companies in Canada must find alternative pipeline route within Canada to get the bitumen to refineries within Canada and outside;

·       In regard to alternative pipeline routes, conclude negotiations with stakeholders, namely, First Nations, the Provincial Governments ASAP;

·       The Federal and the Provincial governments got to shove aside all politics and come together to make decisions based on win-win formula – a solution that ensures the stakeholders, like, the First Nations, the Province(s) get a reasonably fair deal out of the pipeline projects;

·       The companies in Canada must think about setting up an upgrader within Canada as a complimentary/ supplementary solution, to process the bitumen from Alberta (and potentially from Saskatchewan) and selling the synthetic crude oil (light crude) to US, refineries within Canada (if they have spare capacity to process) and refineries outside Canada;

·       The refinery companies in Canada should think about expanding and/or retro-fitting their refineries in Canada in alignment with production of additional amount of bitumen and/or synthetic crude oil;

·       Align increased gas production from gas fields in BC for use in oil sands production and the refineries and LNG production;

·       Think about putting up petrochemicals complex downstream of Canadian refineries; and

·       Put in place ASAP policy frameworks, tax regimes that are required for decision making on LNG projects and oil sands industry.

Canada may be justified in being utterly frustrated with US on Keystone, but it cannot absolve itself of the pathetically slow progress on pipeline projects within Canada, LNG project in BC and so on. It’s time Canada found solutions toward harnessing its massive natural resources within Canada itself rather than depending on US.

The political parties of Canada – Federal and Provincial both – must understand the basics of Canadian economy (GDP) – the components of the GDP – and must realize the importance of natural resources like oil sands and oil and gas in Canada’s GDP and the service sectors they support. Only then they would realize the futility of having divergent opinion on oil sands and LNG development and squabbling amongst themselves. Only then some political parties would not make irresponsible, ludicrous statements about environmental record of Canada and thereby cause damage to Canadian interests.

The political parties and their leaders must understand clearly that the first world like standard of living and wellbeing of Canada, which Canada is proud of, will be in absolutely serious jeopardy if Canada fails to appreciate the nature’s blessings and harness the nature’s bounty given to it. The delay in Keystone pipeline is nature’s way of warning and providing a wake up call to all Canadians to change its old ways of thinking, policies and working. Now, it is up to the Canadians whether they pay heed to nature’s warning!

CANADIAN PIPELINE PROJECTS IN LIMBO? NO WORRIES, HERE IS AN ALTERNATIVE SOLUTION!

All logically minded and technically well informed people know that the Keystone XL pipeline is:

·       Good for both US and Canada from various standpoints (economic, political, technical);

·       Not a villain, by any logical stretch of imagination, in the climate change dynamics;

·       A safer way to transport bitumen to the US refineries which have been retrofitted at hundreds of millions of dollar to process this Western Canadian Select crude.

However, the US administration is playing football with this project for more than five years – one does not even know whether any decision would at all be taken never mind the timeline.

So, the POTENTIAL alternatives folks are talking about in regard to transportation of bitumen:

-     Transport by rail cars: TransCanada is thinking about it. But this mode of transport is under cloud due to recent accidents, e.g., Lac-Megantic disaster, bsides, there are other constraints too;

-     Northern Gateway Pipeline (ENBRIDGE): This project was not exactly conceived as an alternative to Keystone XL – this project officially started in 2004 (as per the project website). At any rate, however, this project is expected to face serious challenges from the First Nations and the environmental groups resulting in inordinate delays;  

-     West to East Pipeline (TRANSCANADA): Again, this proposal too is likely to run in to rough weather and delays due to involvement of various provinces (through which the pipeline is proposed to pass through).

-     Line reversal (ENBRIDGE): This project too is facing obstructions from various groups.

Is there no other solution that can circumvent all the above issues? Well, there is provided the concerned parties - namely, the Province, Industry (TransCanada and Enbridge) - and some others who are supportive toward harnessing Canadian resources for development of Canada, its people and its economy come together.

SO WHAT’S THE PLAN?

Preamble:

We know that Saskatchewan Premier Brad Wall is very supportive of oil sands developments in a sustainable manner as is Alberta Premier Allison Redford. We also know that West Coast newspaper mogul David Black is interested in setting up a refinery in BC (but apart from money constraints the main bottleneck for this project is the pipeline transporting Alberta bitumen to BC – again, the same issues that bedevil Northern gateway Pipeline). We also know that potential buyers of bitumen in Asia are all asking one question: What is the high tide exit point from Canada? Have all issues in regard to the exit point been resolved? If not, what is the definite timeline?

OUTLINE OF THE PLAN:

Form a consortium of following parties:

Ø  Province of Alberta

Ø  Province of Saskatchewan

Ø  TransCanada

Ø  Enbridge

Ø  David Black (who would bring on board the investors he says are willing to pony up money)

Project:

Ø  Set up an Upgrader facility to process bitumen from Alberta and Saskatchewan in future (from its Bakken formation)

Location of the project:

Ø  In Saskatchewan at some optimized site closer to Alberta-Saskatchewan border such that it should facilitate transport of bitumen from Alberta via pipelines and from Saskatchewan oil sands producers in future. Why Saskatchewan? First, to share the investment; second, tight oil is going to come from this province apart from bitumen from oil sands.

Estimated cost of the project:

Ø  $10-15 Billion depending upon extent of upgrading facilities installed, length of pipelines and associated tankages.

Products from the Upgrader:

Ø  Synthetic crude oil (SCO).

Pros of this project based on the proposed consortium:

Ø  Bitumen transport pipelines’ approval will be within Alberta and Saskatchewan jurisdiction: This means much lesser hassles in terms of approvals from the various authorities;

Ø  Product would be synthetic crude oil which can then be:

-     Piped to various refineries within Canada (Central Canada or East Coast); alternatively,

-     Piped to US or to Asia through BC coast – the opposition to pipelines is for bitumen transport, it will be much less for synthetic crude oil.

Ø  Investment will get shared and hence investment on the part of each party will be within manageable limits – TransCanada and Enbridge are already prepared to invest billions (>CDN$5.0 Billion). Both the provinces could also possibly fork out 2-3 of billion dollars each, Mr. Black can bring his investors’ billions too on the table. And, may be Ottawa might chip in with some billions (much less than 8 billion dollars Mr. Black requested for from Ottawa);

Ø  The project will produce value-added products in Canada – this will silence the critics who allege that by transporting bitumen to US or Asia, Canada is throwing many jobs away down the pipeline;

Ø  The refinery can be expanded later to process more bitumen produced in Alberta and Saskatchewan;

Ø  This project would minimize potential accident hazards (of rail car) and longer pipelines carrying bitumen;

Ø  The project would avoid litigations and consequent delays that the proposed pipeline projects are facing/expected to face;

Ø  The project would assure the international investors and buyers (of SCO) about the definitiveness of the project and availability of the product, and Canada would be able to take advantage of the window of opportunity;

Ø  There would be definitiveness for the large, medium and the small oil sands producers who are wondering how they will get their product (bitumen) to some market. Because of this uncertainty many projects are on hold, consequently, work load for EPCM companies in Alberta is moving toward a cliff, soon there will be a spike in folks seeking EI in Alberta unless there is some miracle;

Ø  There would be synergy between the two pipeline companies instead of unnecessary rivalry and competition;

Ø  BC can be persuaded to chip in with some investment in future for the pipeline from the Upgrader to BC coast for shipment to Asia. If they don’t, well, TransCanada, Enbridge and Mr. Black could possibly pool together money for such a pipeline (these companies could hopefully manage and adjust their cash flows suitably) – some new investors may also come on board sensing the opportunity;

Ø  Canada would not be hostage to decision making of others.

Timeline of the project:

Ø  From concept to commissioning: Maximum 60 months, in other words, by end of 2019/beginning of 2020 if the parties agree and get going this year (2014). This pretty much comes close to the realistic timelines of the Northern Gateway and West to East Pipeline project completion dates.

Well, if Google-X team can think of out-of-box solutions, so can the folks in Canada. It’s high time the concerned parties thought out of the box and gave a serious thought to the above proposal and brought some touch of finality to projects in Alberta (and Saskatchewan).