Gattinger: Canada Needs To Think Differently About Bilateral Energy Relations
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After a tense few days, Democrat Joe Biden has been declared president-elect of the United States. While the results will no doubt be contested by President Donald Trump in the weeks and months to come, it seems clear that Biden is headed for the White House.
What will a Biden presidency mean for Canadian energy? What bilateral objectives should governments pursue?
A Biden administration represents both opportunities and challenges for Canadian energy, but to be successful in its relations with Washington, Canada needs to think differently about how it approaches the U.S.
Over the last two decades, relations between Canadian and American federal governments over energy have died a slow death. Gone are the days when the U.S. looked to Canada as a pivotal energy supplier and crucial pillar of national energy security. Likewise, gone are the days when the two countries pointed to Canada-U.S. energy relations as a shining example of bilateral relations at their finest.
What happened? In two words: shale and climate.
The shale revolution transformed the U.S. from hydrocarbon poor to hydrocarbon rich, and energy security dropped off the U.S. policy agenda. This has steadily chipped away at Canada’s ability to get Washington’s attention.
In the early 2000s, concerns over U.S. energy security reached a high point. The 1980s and 1990s saw American dependence on foreign oil and gas climb, and there were grave concerns about pending natural gas shortages in North America. Energy security was a top policy priority for President George W. Bush and Vice President Dick Cheney. Strengthening relations with Canada figured prominently in their thinking. It’s hard to fathom now, but fully one-third of the one hundred and fifty recommendations in the 2001 Bush-Cheney National Energy Policy mentioned Canada.
Fast-forward 20 years and the U.S. is now the largest oil and gas producer in the world. Technological developments enabled the profitable production of tight oil and shale gas. Between 2008 and 2018, proved oil reserves in the U.S. doubled to 44 billion bbls. Proved gas reserves more than doubled to 505 trillion cubic feet (tcf). Production climbed at a remarkable clip: between 2005 and 2019, U.S. oil production jumped from five million bbls/d to over 12 million, handily exceeding the 10 million per day production peak of the early 1970s. Gas production likewise skyrocketed from 18 trillion cubic feet in 2005 to 34 in 2019. The U.S. became a net gas exporter in 2017 — the first time since the 1950s. Looking forward, recent declines in investment in the U.S. are not likely indicative of major production declines — especially not in the long term.
American production growth has had a major impact on imports. U.S. oil imports declined from 13.7 million bbls/d in 2005 to 9.1 in 2019, with most of the decline edging out OPEC producers. Canadian petroleum exports to the U.S. doubled in this period from 2.2 to 4.4 million bbls/d. Canada represented about half of U.S. oil imports in 2019. But discounts between the price of a barrel of West Texas Intermediate and Western Canadian Select, low prices for WTI and a lack of adequate reliable access to U.S. markets have challenged producers in Canada. In natural gas, imports to the U.S. from Canada are down from 3.7 tcf in 2005 to 2.7 tcf in 2019 and floor gas prices in North America make LNG exports to markets beyond the U.S. a compelling alternative.
U.S. imports of electricity from Canada are also down in recent years, as fuel switching to cheap natural gas, increasingly low-cost wind and solar generation, and barriers to electricity trade reduce power imports. This has significantly reduced greenhouse gas emissions in the U.S. power sector.
Which brings us to climate.
Climate change was on policy agendas well before the 2000s, but in the last 20 years it has taken on unprecedented prominence and salience. Successive Intergovernmental Panel on Climate Change reports documenting rapid changes in the global climate, the emergence of well organized and financed campaigns lobbying governments to take climate action and the continued climb in global GHG emissions have all combined to make climate an overriding energy policy and political imperative in the U.S.
Climate policy has mainly been the preserve of the Democratic Party — think former Vice President Al Gore’s movie An Inconvenient Truth, President Obama’s Clean Power Plan, or more recently, Rep. Alexandria Ocasio-Cortez’s Green New Deal. But even for administrations that pay less attention — even no attention — to climate policy, climate change is an incontournable with lots of traction in American politics. The fact that President Trump’s commitment to the Keystone XL pipeline did little to move the yardsticks on the project is a case in point.
Concerns over climate have changed U.S. views about Canada. Canadian energy — notably oil from the oilsands — has gone from being a source of enthusiastic U.S. interest to a source of concern or ambivalence, even outright disdain. U.S. environmental campaigns against the ‘tar sands,’ American policies and pronouncements — including by President Obama — against so-called ‘dirty oil’ and widespread opposition to the Keystone XL pipeline, the poster child for anti-oilsands sentiment, are all emblematic of this shift.
Both of these changes have had a major impact on Canada-U.S. energy relations: the need for the White House to collaborate with Canada on energy has withered. Security of supply has evaporated from the U.S. policy agenda — the U.S. no longer has a desperate need for Canadian product. And climate politics make fossil fuels a polarizing aspect of American energy policy. Trips to Washington to extol the virtues of Canadian oil and gas risk falling on deaf ears. Instead, for the Democratic Party, it is easier — if not outright desirable — to prohibit a pipeline that’s become a potent symbol in partisan polarized debates over energy and climate.
So how should Canadian governments approach the U.S. on energy?
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They need to think about things differently. This is not about a sales pitch for product. It’s about an invitation to collaborate on shared energy and environmental policy priorities in the long term.
Canada and the United States have the largest interconnected and interdependent energy system in the world. They are also among the largest hydrocarbon reserve holders and are both major energy producers. Both countries are also federations in which subnational governments possess substantial energy powers. In addition, with Joe Biden in the White House, they both have ambitious commitments on climate. But energy and climate debates are divisive if not outright polarized in both countries. For Canada and the U.S., perhaps more than for any other two countries in the world, figuring out how to successfully chart their energy futures in an age of climate change is essential, but fraught.
And therein lies the opportunity: collaborating on the grand energy and climate challenges for the short and long term benefit of both countries. It’s about making the case that Canada and the United States stand a better chance of meeting the energy and environmental challenges of the years ahead if they collaborate, not compete or go it alone.
A Biden presidency represents opportunity for Canada. Biden is a moderate Democrat, more prone to be pragmatic than dogmatic. While much was made of his fumbled remarks on oil and gas in the last presidential debate, he walked them back in short order and made clear on the campaign trail that he would not ban fracking.
A close look at the Democratic Party’s campaign commitments on energy and climate suggests a Biden presidency might be open to this sort of collaboration. Biden committed to bring the U.S. back into the Paris agreement and to achieve net zero emissions by 2050. This aligns with the government of Canada’s commitments on climate. Biden also committed to aggressively reducing the carbon intensity of the electricity sector, which also aligns with government policies in Canada.
More than anything, though, Biden’s commitments on energy and climate signal an ‘all of the above’ approach, defining ‘clean energy’ in an inclusive way that extends well beyond a narrow focus on wind and solar energy, to include support for carbon capture, utilization and storage, small modular nuclear reactors and methane reductions. Collaborating on these issues, which are also priorities for Canada, would advance both countries’ energy and climate objectives.
A shared Canada-U.S. approach should not only encompass energy at home, but also energy abroad. Oil and gas will remain a major staple in global energy markets in the decades ahead, but increasingly, it will have to be cost and carbon competitive. Canada and the U.S. could work together to reduce the carbon content of their oil and gas exports, whether through methane management, CCUS or next generation products like hydrogen. And with the U.S. back in the Paris Accord, they could work together internationally on mechanisms to obtain carbon credits where exports displace higher emitting energy in other countries.
But none of this will be easy. The two countries won’t agree on everything. The most obvious example is Keystone. The Biden campaign committed to quashing the presidential permit for the pipeline, a move that would be consistent with the Obama administration’s opposition to the project. Prime Minister Trudeau and Alberta Premier Jason Kenney have committed to working together to avoid this outcome. Given the symbolism of Keystone, however, they are likely to face an uphill battle. A Biden presidency would have more political capital to lose than gain by reversing this position.
Instead of making Keystone the centrepiece of Canadian bilateral energy relations, governments would do better to make it part of a broader engagement, one that approaches the White House with a long term vision of how the two countries could work together to mutual benefit. A proposal to partner, not a sales pitch. This could even pave the way for Biden support for Keystone — and for the Alberta government to secure a return on its investment in the project.
A broader discussion of energy would help to raise U.S. awareness of environmental, social and governance performance and gains in Canadian energy, including emissions reductions in the oilsands, clean LNG and clean power. Reframing bilateral energy relations would put focus on the ability for collaboration to deliver stronger economic, environmental and security performance in both countries. Given that president-elect Biden will have a hard time getting the legislation and budget he wants from Republicans in Congress, collaboration with Canada could give the administration an attractive platform for progress on energy and climate. For Canada, it would help to further long term trade, environmental, security and fiscal objectives.
All of this hinges on Canadian governments being willing to refresh their thinking on bilateral energy relations. If there ever was a time, it is now.