Opinion: Lament For A Nation – Where There's A Will There's A Way – Part 3

This is the third and final instalment of a bulletin trilogy exploring the current crises in Canada-US relations. Part 1 provided some historical context for nationalism in Canada and the current political movement driving nationalism in the United States that is posing threats of annexation. Part 2 discussed the history of Canada's will to develop its resources to remind Canadians of how they achieved energy independence and economic strength to address past fiscal and unity crises. Part 3 assumes that Canadians will manifest a strong will to return to our natural resource advantage by rapidly developing our oil reserves and points out the way this can be done at speeds many don't think possible.

The way Canada can become an energy super power

The only viable path for Canada to become an energy superpower is to rapidly develop our oil resources, which are almost entirely derived from Canada's oil sands. The math is simple: Canada's proven oil reserves are many times larger than our proven natural gas reserves and oil is many times more valuable than natural gas on an energy equivalent basis. The reason is that oil is extremely energy dense, easily transported and can be exported to markets across the globe. A barrel of oil is currently worth approximately $100 (CAD), while an energy equivalent amount of natural gas trades in a wide range of between approximately $5 and $25 (CAD). The result is that Canada's oil exports generate well-over $100 billion per year in revenue, relative to natural gas at around $20 billion and electricity at approximately $5 billion. The only viable export market for electricity is the United States. Canada has no realistic way to materially increase its electricity production, renewable or otherwise, to come anywhere near the value of its current oil production. Although Canada has the natural gas reserves to materially increase its natural gas production that can be converted into liquefied natural gas (LNG) for export, natural gas also generates economic value if it is used domestically to produce oil sands, petro-chemicals, fertilizer/ammonia, hydrogen or data from data centres supporting AI, all of which can be readily exported globally.

The only way for Canada to become an energy superpower is by materially increasing its oil production and by shipping the vast majority of this increased production to global markets outside the United States.

Trade routes – The direction of travel

Canada has well-established trade routes for expanding its oil and gas exports to the United States. These trade routes will continue to be highly utilized. Although the United States currently produces more oil than it uses, its refineries need heavy oil that can be most economically and sustainably provided by Canada. It would be extremely costly and time consuming for the United States to reconfigure its pipelines and refinery infrastructure to displace Canadian oil sands production. It would make no sense for the United States to do so in reliance on its own proven reserves, which are a fraction of Canada's and will be rapidly drawn down once US oil production peaks again, as it did in 1970, and goes into decline. The existing pipeline capacity to the US, including low cost increases in that capacity from debottlenecking, should be highly utilized for decades. The fact is that the United States needs Canadian oil and this need is likely to increase.

Canada recently established the physical capacity to export a limited amount of oil to global markets through a pipeline connected to the Port of Vancouver. However, this is not a viable trade route for diversification of Canada's oil market beyond the United States. The Port of Vancouver can only accommodate small oil tankers that are best suited to shuttling oil to California. The economics of global oil trade requires oil tankers that handle approximately four times more oil than those capable of accessing the Port of Vancouver. Further, the pipeline serving the Port of Vancouver has limited expansion capacity. The federal government picked this route and ultimately undertook its construction because it would not establish an energy corridor that could be used to expand future oil production.

There was an attempt to use an existing energy corridor established to take western Canadian gas to eastern Canadian markets, by converting an underutilized natural gas pipeline to oil service. This window of opportunity has closed because this capacity has refilled and is again needed to serve eastern Canadian natural gas markets. Further, it makes little sense to try to build new pipelines to access global markets off Canada's east coast. It is five times the distance to get to Canada's east coast from western Canada. Although an energy corridor to the Port of Churchill on the Hudson's Bay would reduce the pipeline distance to access these markets, the current and future need for oil and natural gas is predominately in the Pacific Basin, which is one of the reasons that the Panama Canal is in such high demand. Oil and LNG from the Atlantic Basin, much of which is American being shipped through the Panama Canal to access global markets that primarily exist in the Pacific Basin. Following energy corridors to Canada's Pacific northwest coast minimizes cost and maximizes the financial benefit of exporting oil and gas. A north western oil and gas trade route gives Canada a significant competitive advantage over the United States. The direction of travel for an energy corridor for oil and gas exports is west by northwest, not east.

Establishing energy corridors and infrastructure: The speed of travel

In a recent article entitled Unlocking Canada's mining potential, my colleagues David Hunter, Mary Su and I canvassed the changes that are required to bring capital investment back to Canada's resource industry. The focus of the article was upstream regulation. It did not address the equally important issue of transporting the resources we produce to export markets, which necessarily involves the federal government because of its responsibility for inter-provincial and international works and undertakings.

There are examples of major Canadian pipelines getting approved and constructed at speeds many did not think possible. They involved cooperation with the United States in response to emergencies caused by global events. The first, and most extreme example, is the Canol Project that was conceived in the weeks after an attack on Pearl Harbor, which destroyed much of the American Pacific naval fleet. The United States Army decided that it needed to secure fuel supplies for the defence of the west coast of North America by delivering fuel to Alaska through Canada. The Canol Project was grandiose, rivalling the engineering challenge and cost of building the Panama Canal. The plan was to expand production from Imperial's Norman Wells oilfield; construct a 1,000 km pipeline from Norman Wells, Northwest Territories over the Mackenzie Mountain Range to Whitehorse in Yukon; build an oil refinery at Whitehorse; and then build 1,600 km of refined product pipelines to Alaska. The entire project, from conception to completion, took approximately two years. Neither Canadians nor Americans will likely know about the Canol Project. It only operated for a little over a year. For the Canadian government, it marked a low point of Canadian sovereignty. The US Army commenced construction of the pipeline in Canada before getting Canadian approval. For the American government, the project went five times over budget and before being completed, the Japanese were all but defeated, so the Canol Project ended up never being needed. The Canol Project provides an example of not only how quickly pipelines can be built, but also how vulnerable Canadian sovereignty can be when Americans are responding to a crisis of their own.

The more recent example of expeditious pipeline approval can be found in Canada's 1978 Northern Pipeline Act that implemented the 1977 Canada-United States Agreement on Principles Applicable to a Northern Natural Gas Pipeline (Northern Pipeline Treaty). The context for the legislation was the 1973 Arab Oil Embargo discussed in Part 2. The United States wanted to connect natural gas reserves in Alaska to its lower 48 states. Pursuant to the Northern Pipeline Treaty, Canada and the United States passed legislation to provide for the expeditious construction of the Alaska Gas Highway Pipeline. The Northern Pipeline Act included a deemed Certificate of Public Convenience and Necessity (CPCN) following a preferred route that had been selected by the National Energy Board (NEB). The Act created the Northern Pipeline Agency to oversee a one-window approach for all federal approvals to ensure expeditious construction of the pipeline. By 1982, an 800 km pipeline, known as the "pre-build," constituting approximately half the pipeline approved by the CPCN, was completed and in operation. The NEB established the corridor for the pipeline, which Parliament declared to be in the national interest by way of the deemed CPCN. The Northern Pipeline Agency then conducted consultation and environmental and socio-economic work as part of a detailed routing process that allowed for CPCN conditions to be amended to address issues and concerns as the project proceeded.

The Northern Pipeline Act is an example of how essential infrastructure found to be in the national interest can be constructed using an identified corridor. The University of Calgary School of Public Policy has been discussing a similar approach for the last decade. A recent article from the Macdonald-Laurier Institute proposed the enactment of a federal Trans-Canada Corridor Act (TCCA). Essentially, the proposal would take a Northern Pipeline Act approach that would be applied to establish energy corridors across the country to facilitate the construction of linear infrastructure critical to inter-provincial and international trade at speeds we currently don't think possible, but which has been achieved in our past.

There are a number of existing corridors that are well established that could be deemed on the enactment of TCCA legislation. Most of the existing corridors go to the South to connect Canada to markets in the United States. However, there is one corridor that runs from Edmonton to Canada's Northwest Coast on the Pacific Ocean. Hundreds of millions of dollars were spent over a decade validating the feasibility of this corridor for an oil pipeline project. Ultimately, the federal government denied the project based on a marine shipping policy that resulted in an oil tanker ban, but no issue was ever taken with the feasibility of the corridor. In fact, this corridor has been followed by natural gas pipelines serving two LNG projects that have been approved and are under construction. Also, this is the same corridor that is being proposed for the North Coast Transmission Line that would electrify LNG-related energy infrastructure to reduce emissions. The economics associated with this electrical transmission project could likely be significantly improved if it were constructed within an energy corridor that included not only natural gas pipelines, but a crude oil line. Natural gas liquids pipelines, ammonia and hydrogen pipelines could also benefit from following in this corridor.

Indigenous economic reconciliation – Essential to finding our way

In my article "Reconciling the Irreconcilable: Major Project Development in an Era of Evolving Section 35 Jurisprudence" (2018) 83 SCLR (2nd) 169, I address the potential for, and critical importance of, economic reconciliation with Indigenous Canadians in developing natural resources and linear infrastructure projects. The federal and provincial governments have started advancing this idea by setting up various loan guarantee programs to facilitate indigenous equity participation in such projects. This approach advances the critical need for reconciliation. Just as importantly, however, it facilitates project financing in which governments assume risk on behalf of indigenous equity participants. Indigenous equity financing displaces the need for direct government investment in projects. The risk associated with relying on indigenous equity can be mitigated by requiring minimum thresholds of non-indigenous private capital to be invested along with government-backed indigenous equity. The other advantage associated with supporting growth of indigenous equity is that it keeps capital in Canada for reinvestment. Any return of capital associated with indigenous equity is unlikely to leave Canada. It is far more likely to be reinvested here.

The pivot to producing Canada's oil and gas resources – The risk to Canada of not finding its way

For the last decade Canada's oil and gas producing provinces have been engaged in a constitutional war with the federal government over its powers to impact the production of oil and gas in an effort to meet federal emission reduction goals. This included a challenge to the federal Impact Assessment Act (IAA) that provided for the federal regulation of new oil sands production in the absence of a provincial cap on oil sands emissions.

In striking down the IAA, the Alberta Court of Appeal made a very candid observation, stating:

As I pointed out when discussing this case in the context of the federal government's continued insistence on imposing an oil and gas emissions cap, the solution to our disagreements as a country cannot be resolved in the courts. A solution that everyone can live with must be found. The alternative would, in the words of the Alberta Court of Appeal, "unwind federalism."