Lauerman: Canada’s Golden Energy Opportunity, Part 2 – Feds To The Rescue?

In Part 1 of this two-part series, I provided a thumbnail sketch of the possible composition of trading blocs under the New World Economic Disorder, as implied by U.S. Secretary of the Treasury Janet Yellen in a speech to the Atlantic Council in mid-April. I also discussed the economic impacts of global economic de-integration, including how it will lead to a less vibrant technological future.

Here, in Part 2, the potential size of the old and new energy prize for Canada will be discussed in a world of extreme trading blocs, as well as probable impediments for Canadian producers and exporters of crude oil, LNG, blue hydrogen and green energy metals.

The federal government has been an impediment to resource development in Canada in the recent past. But with the Trudeau government apparently considering its importance for the energy security of Canada and the democratic bloc since Russia’s invasion of Ukraine in late February, I’m quite optimistic that the Feds will be more supportive of resource development moving forward.

Crude oil, LNG and blue hydrogen

As can be seen in Figure 1(source for figures 1-4: BP Statistical Review of World Energy 2021), an extreme democratic bloc as suggested by Yellen had an extreme shortfall of oil in 2020, with member exports accounting for only about a quarter of member imports. Canada was the largest oil exporting country in the bloc, and has by far the largest proved reserves (see Figure 2).

The situation was not nearly as extreme for natural gas, with exports accounting for almost two-thirds of imports in the democratic bloc (see Figure 3). Canada was only the fourth largest gas exporter in 2020, trailing Norway, Australia and the U.S., and the only one without LNG export capacity. As can be seen in Figure 4, Canada has the second largest proved gas reserves in the bloc, trailing the U.S. by a long shot.

In Part 3 of the Putin’s Massive Ukrainian Blunder series, published in early March, I wrote:

“[O]ver the next several years the Canadian industry has the potential to ramp up oil and gas production, assuming it’s creative. The reason creativity will be required is because it will be difficult to justify investments in long-life — 30 years plus — production and infrastructure projects, such as new oilsands mines and in situ operations, LNG liquefaction plants and oil and gas pipelines, in our New Cold War world.”

I went on to argue that the Canadian oil industry should consider rapid development of fast-decline short-life tight oil resource such as the Duvernay, combined with crude-by-rail to export facilities on the U.S. Gulf Coast or possibly a newbuild at Prince Rupert. On the gas front, I wrote we should see some additional LNG liquefaction projects move forward, in addition to Shell-led LNG Canada’s phase 1 and 2, but they would likely have to show payout in substantially less than 30 years or have a way to extend the life of the project as the world moves towards net-zero emissions.

In retrospect, I should have made mention of debottlenecking activities requiring relatively small capital investments and quick payouts to increase capacity of major oilsands projects and crude oil and natural gas pipelines, as well as 590,000 bbls/d of new capacity to be added in the next few years by the TMX project.

In addition, since writing Part 3 of that series, I’ve come to learn that there presently is no technically feasible way to convert an LNG regasification plant into one to re-gasify hydrogen, given hydrogen molecules are so much smaller and harder to contain, let alone an LNG liquefaction plant.

On the bright side, proponents of the Hanseatic Energy Hub in Stade, Germany have indicated there’s “no risk” of their LNG regasification plant becoming a “stranded asset” as they are planning to switch over to synthetic LNG, assuming global supply grows in the future, or import green ammonia, if need be — at an estimated capital cost relative to a newbuild of zero and 15 per cent, respectively.

In terms of the future economics of clean hydrogen, the IEA has been projecting that green hydrogen could become cost competitive with the blue variety as early as 2030 in regions with the lowest cost renewable power (see Figure 5), although with an important caveat:

“The projected cost of hydrogen production after 2030 is therefore very uncertain and will depend on the impacts of scaling up, learning by doing and other technological progress.”

Fig 5:

A slower pace of innovation and technological advancement under the New World Economic Disorder, as discussed in Part 1, is bound to push back this already uncertain timeframe, leaving Canadian gas producers with even a wider window to bring world-scale clean hydrogen projects online.

Green energy metals

Houston, we have a problem. Based on estimates by the IEA, we will need massively more green energy metals if the world is to achieve net-zero emissions by 2050. And at the present time, production and processing of these pivotal metals is highly concentrated in a few countries, especially China, one of the two leaders of the authoritarian bloc. A nightmare for the democratic bloc as a whole, but a potential bonanza for Canada, despite exploration for such metals being at a relatively early stage in our country.

As can be seen in Figure 6, the IEA is projecting demand for clean energy technologies to expand by four times between 2020 and 2040 under its Sustainable Development Scenario (SDS) — net zero is achieved by 2070 under this scenario — and to expand six times by 2040 under its net-zero emissions by 2050 scenario (NZE). This translates to lithium consumption skyrocketing by 42 times over the period under SDS — and obviously significantly more under NZE — rare earths consumption by seven times, and growth in other key green energy metals graphite, cobalt and nickel falling in between these two extremes.

Fig 6:

In terms of present production and processing of green energy metals, it is much more concentrated than for oil and natural gas (see Figure 7). Countries outside the democratic bloc tend to dominate production of these metals, with Australia the sole exception for lithium. China tends to dominate the processing of all green energy metals, including lithium and especially rare earths.

Fig. 7: 

It is still early days for exploration of green energy metals in Canada, but the same could be said for most of the world. The Canadian Shield in central Canada is widely viewed as highly prospective for these metals, as are parts of Australia and the U.S., two more members of the democratic bloc with plans to become major producers and processors of these resources.

Feds to the rescue?

Strangely, I’m quite optimistic about Canada taking advantage of this golden energy opportunity, despite the federal government hindering resource development in the recent past. The Conservative Harper government’s policies and actions proved too permissive, ultimately causing the National Energy Board (NEB) to lose credibility and the Federal Court of Appeal to toss out the Feds’ initial approval of the TMX project in August 2018.

On the flip side, the Liberal Trudeau government has generally been too restrictive, either directly or indirectly thwarting two major crude oil pipeline projects — Enbridge’s Northern Gateway to the West Coast and TC Energy’s Energy East to the east coast — and culminating in passage of Bill C-69, the Impact Assessment Act, in June 2019.

In September 2018, I wrote the following about the upcoming bill (see Bill C-69 – An Economy And Energy Security Killer): “The Trudeau government’s Bill C-69, currently undergoing second reading by the Senate, is one bad piece of regulatory legislation. It has been universally panned by resource industry-types for being a business killer. In fact, it’s much worse. It’s a piece of legislation suited for the old world order … with nary a thought towards energy security.”

It should be noted that my relative optimism isn’t at all due to Alberta’s Court of Appeal recently ruling the Impact Assessment Act unconstitutional, on the basis of provincial jurisdiction over natural resources. The Alberta court also ruled the Feds’ carbon tax unconstitutional, a ruling not supported by court decisions in Saskatchewan and Ontario, and ultimately tossed by the Supreme Court of Canada in March 2021. I’m no legal expert, but my hunch is that the recent Alberta ruling will be tossed by the Supreme Court for the same sort of reasons.

Rather, moving forward, the federal government, whether led by the Liberal or Conservative parties, is likely to streamline the regulatory process, either through substantive changes to the Impact Assessment Act or simply a gentler regulatory hand, with the re-emergence of energy security as a key driver for federal energy and related policies.

The core reasons for my relative optimism, several post-Ukraine invasion policies and actions by the Trudeau government supporting both new and old energy in our great country. These include: the new investment tax credit for carbon capture, utilization and storage projects, benefiting numerous high-emitting industries in Canada including the oil and gas industry; and the first meaningful steps towards prioritizing the development of green energy metals in the country through an enhanced Critical Minerals Exploration Tax Credit.

More importantly, and possibly more telling, Reuters recently reported the Trudeau government is attempting to fast-track development of two proposed LNG export projects on the East Coast to allow Canadian gas to flow to Europe to help end its dependency on Russian gas.

"We are looking at Goldboro and Repsol's projects and discussing these with the proponents and with German and European counterparts," Natural Resources Minister Jonathan Wilkinson told Reuters on May 6. "We are looking at whether there are things we can do to expedite one or more of the projects in a manner that's consistent with environmental considerations and a long-term transition to a lower-carbon future."

Repsol’s Saint John LNG project in New Brunswick and Pieridae Energy’s Goldboro LNG project in Nova Scotia have the added benefit of being relatively quick to bring online; the former a conversion of the former Canaport LNG import terminal and the latter to use a pre-fab floating LNG liquefaction plant.

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