By Ken Coates, May 22, 2020
Governments, and Canadians, are working extremely hard to protect citizens from a pandemic of frightening proportions. Appropriately, governments’ priority has been getting money into the hands of the unemployed and of businesses facing financial ruin due to lockdown measures. Governments have so far done reasonably well at keeping people in their homes, covering essential needs, and supporting the health care system against an enemy of unknown power and impact. Yet the economic and social costs have been enormous.
While the nation’s attentions are focused on the immediate crisis, actions taken in the early months of the pandemic will have long-term consequences for this country. Deficit spending in early 2020 will become long-term debt for the 2020s and likely beyond. Income redistribution programs launched to address immediate and urgent crises could, if opportunistic social engineers have their way, become permanent fixtures in the Canadian policy landscape, with unpredictable long-term financial implications.
If we are to recover as quickly as possible from the massive economic harm caused by pandemic lockdown measures, it is the private sector that will need to lead the way to create employment opportunities, wealth and economic growth. And given its outsized importance to Canada’s economy and the prosperity of Western Canada in particular, the survival of the oil and gas sector is vital.
The Government of Canada continues to consult with industry organizations and provincial governments on a rescue plans for the Western oil and gas sector; the fact that work continues on the TransMountain pipeline and the Coastal Gaslink pipeline augers well for the medium-term prospects for the energy sector. There is no doubt of the need for urgent action. Hundreds of thousands of oil and gas workers have lost their jobs. Alberta Central has forecast the loss of 25,000 Alberta jobs in 2020 alone, on top of a three-year-long skid that hammered employment in the sector. Hundreds of companies report that they are on the verge of closing or have sharply reduced employment and operations to stay solvent. Government revenues have tanked, putting provincial public services in Alberta and Saskatchewan at serious risk.
In February 2020, a month before the COVID-19 pandemic hit, Alberta forecast a $6.8 billion deficit, a number that is ballooning through the first moths of the crisis and will certainly more than triple. Non-renewable resource revenues in Alberta had already fallen from almost $9 billion in 2014-2015 to less than $5.5 billion in 2018-2019.
Major companies have been pulling out of Western Canada, cancelling or delaying major projects or downsizing their Canadian operations. Teck Resources’ massive Frontier oil sands project was pulled from consideration just before the federal cabinet was to rule on its applications; Murphy Oil closed it Calgary office with a loss of 110 jobs, joining firms like Nine Energy which moved out in 2019.
Major initiatives remain cancelled or stalled, including the slow-moving pipeline projects, and numerous large LNG projects. Billions of dollars in investment have already been lost, with obvious implications for regional businesses and employment.
The Liberal Cabinet’s half-hearted support for major infrastructure projects has kept much of Canada’s energy supplies land-locked and, as a consequence, unable to command world prices. Exacerbating the domestic situation, in a tragically ill-timed move this spring, Saudi Arabia responded to Russia’s refusal to cut oil production by flooding the international market, resulting in a fall in the price by two-thirds in less than a month. In mid-April, the two rogue countries agreed to withdraw 10 million barrels a day from the market, which improved prices somewhat.
And so, the industry-wide crisis is complicated by a pre-existing decline in the sector over the past few years that has been substantially policy-induced, driven by Ottawa’s reluctance to embrace the sector whole-heartedly, its preference for climate change action that disproportionately impacts the industry, and an inexorably tightening administrative and regulatory environment. To this point, the government has not provided a clear and unequivocal statement of support for the oil and gas industry.
The complications go further. Since their election in 2015, the federal government has brought in legislation to ban oil and gas exploration in the Arctic, blocked efforts to ship oil out of Northwest British Columbia ports (Bill C-48) and expanded the geographic and conceptual range of regulatory oversight in a manner that will likely add considerable time and difficulty to the environmental assessments of proposed resource developments (Bill C-69). The Canadian mining sector found the legislation workable, but the oil and gas sector saw it as extremely problematic, as do many Indigenous communities that depend on energy revenues and employment in the sector.
In December 2019, the government announced plans to reintroduce legislation to implement the United Nations Declaration on the Rights of Indigenous Peoples (UNDRIP) as Canadian law, following the death of private member’s Bill C-262 in the Senate. The latter legislation, which contained valuable elements of pathways to reconciliation with Indigenous peoples, had many substantial implications for the natural resource economy and for relations with Indigenous peoples and should not have proceeded. No less an authority than the Indian Resource Council, representing some 130 First Nations, has asked the government not to move too fast on UNDRIP to avoid further problems in the energy sector at a time of general industry uncertainty. While the extractive industry and most Canadians support most elements of UNDRIP, great care must be taken not to negatively impact the regime of consultation and accommodation with Indigenous communities that has developed over the last few decades in Canada.
Although the Liberal government has hinted at a softening of its energy stance in recent weeks, the stronger support for an aggressive climate change agenda has relegated the industry to the second or third tier in terms of government support. Western Canadians have had access to national programs for the unemployed and businesses at risk, in the amount of $1.6 billion, mostly in loans, to assist business peoples, and $1.7 billion to address the problem of cleaning up the “orphan” wells in Western Canada. The government has made some contributions, including funding for the cleanup of old wells, wage subsidies and access to inexpensive loans, but Western patience is wearing thin as they await signs of real commitment to the sector.
The oil and gas industry – including research, exploration, development, processing, shipping and site remediation – is a major contributor to the Canadian economy. In Western Canada, the sector is vital to employment, business and overall well-being. There is recognition that global energy demand, post-pandemic, will continue to be strong for several more decades, even as the shift to renewable energy supplies accelerates.
If Canada continues along a path of economic self-harm, it would be almost alone among energy-producing nations. Canada’s approach is odd in this regard; Eastern Canada imports almost $19 billion a year in foreign oil, almost two-thirds from the United States. In an ironic twist that has attracted little attention, New Brunswick’s Irving Oil recently got permission to ship Western Canadian oil through the Panama Canal to the Saint John refinery, a move that the construction of the now-cancelled Energy East pipeline would have made unnecessary. So much for the environmental benefits of scrapping pipeline projects. Ironically, the best chance the country probably has to expand renewable energy likely rests with the revenues produced by a vibrant oil and gas industry, which governments and enterprising industry could allocate to the nation’s energy transition. Energy hypocrisy abounds.
In the next few months, the Government of Canada will make decisions on the energy sector of decades-long importance to the country. If infrastructure projects proceed, new projects are authorized, and regulatory over-reach slowed, the energy industry could lead and support the revitalization of the Canadian economy. The rebound may take time, as energy demand is tied directly to the strength of the global economy and lingering effects of the 2020 Russia-Saudi Arabia oil and gas market manipulation, but the impact could be – will be – considerable.
If the government continues with its go-fast approach on UNDRIP and other regulatory measures, acquiesces to project delays that will slow or kill infrastructure projects, and holds back on support for the oil and gas sector, the crises of 2020 will be only the beginning of a sharp decline in the regional and national economies. Alberta’s economy, already reeling from the problems of recent years, will collapse. Even more workers will lose their jobs, more businesses will close, energy-dependent communities will contract, and the crisis will have ripple effects across the Canadian economy.
In the short-term, Canadians have a simple decision: support the oil and gas industry or shut it down. Half measures are unlikely to satisfy defenders of the sector and the multi-billion-dollar investors needed to keep the industry strong, or those who oppose Canadian oil and gas regardless of the immense harm to the economy or to the many people who are dependant on Canadian energy for their prosperity and their livelihoods.
Ken Coates is a Munk Senior Fellow with the Macdonald-Laurier Institute and Professor and Canada Research Chair in Regional Innovation in the Johnson-Shoyama Graduate School of Public Policy at the University of Saskatchewan.