Unintended Consequences of Trade Agreements

The North American Free Trade Agreement (NAFTA) is generally viewed as making a positive contribution to the Canadian economy. With a relatively small population our standard of living most certainly would not be what it is without the benefits of excellent trading relations with the US.

Prior to the 1980s, western Canadian crude was shipped by pipeline to Ontario and Quebec where it met most of crude oil demand in these provinces. Canadians musing about why we are not using our oil resources to meet all of Canada's needs first may be unaware of the unique clauses in NAFTA that basically shifted the West to East flow of energy resources across Canada to a North-South flow into the US market.

The Proportionality Clause in NAFTA

The energy export provisions in NAFTA have encouraged the development of the tar sands and the rapid growth in the export of energy (notably crude oil and natural gas) to the United States. NAFTA is why Canada is the number one supplier of oil to the US and one could go further and say that the expansion of the oil sands has been (until lately) due to US demand.

The proportionality clause - the only one of its kind in all the world's trade agreements - requires Canada to make two-thirds of its domestic oil production available for export to the U.S., even if Canadians experience shortages. It kind of makes one think about that phrase "With friends like this...." It hasn’t dawned on most Canadians that their governments have signed away their right to have first access to their own energy supplies. For some inconcievable reason Canada is also the only member of the International Energy Agency (IEA) that does not keep a ninety day emergency supply of oil on hand.

A decade before NAFTA, Canada had a National Energy Policy that limited exports to the U.S. and a Foreign Investment Review Agency, which tried to reduce U.S. direct investment in Canada (including the energy sector).

Until recently, Canadian oil producers (unlike their brothers in the softwood lumber industry) have not had a problem with NAFTA. Unanticipated events like: US oil consumption dropping, new Bakken shale oil on the market and refinery shutdowns causing a glut of supply of crude oil in Cushing Oklahoma, where most of Alberta oil goes have changed everything. Now, Canadian oil producers have a problem. The price for raw bitumen is low. There has been rapid expansion of oil sands production. Suddenly having only one customer for Canadian crude isn't working out so well.

The low prices for bitumen in the US Midwest is a short term problem. Oil sands production is so expensive, that even a short term drop in price is problematic. Meanwhile, Canadian oil producers see a ready market for their product, at a better price, in Asia.

As the Canadian supply of bitumen to Asia increases, the proportionality clause may come into play. It may be argued that the reason for the rapid expansion of oil sands production (which Canadians concerned about the environment are raging against) is to maintain US supply according to NAFTA and meet demand in China. Canadian reserves are sufficiently large to keep Canada the main source for U.S. oil imports for years to come.

China's investment in the Canadian oil sands presents a new factor in Canada-U.S. relations.The era of oil diplomacy has come to Canada.

While I suspect the Government of Canada has been well aware of the delicacy of this situation, it is obvious that once again, they have not given due consideration to the rest of Canada who do not want their wilderness and the livelihood and culture of their First Nations to be sacrificed to satisfy Big Oil's need for continued growth and profits.

The situation is as bleak and sticky as that gooey black tar that is the source of it all.

The National Energy Board Hearings

One of the most compelling aspects of the Enbridge Northern Gateway Pipeline (NGP) application is the public input piece. Done correctly, this “open, fair and transparent process” could go a long way to re-establish trust in government. 

The Joint Review Panel for the Enbridge NGP is an independent body, mandated by the Minister of the Environment and the National Energy Board. The Panel will assess the environmental effects of the proposed project and review the application under both the Canadian Environmental Assessment Act and the National Energy Board Act.

The three member panel is saying all the right things: “Our job is to make sure that everyone who wants to talk to us about this project has an opportunity to be heard. We personally read and listen to all the information that's on the public record. This is the only information that we use when we reach our decisions. That's why it's so important that people become involved in this process."

It is here where the voices of Canadians, whose lives will be directly affected by the NGP are heard. Many of the voices are those of Canada’s First Nations. I have learned more about their history, culture, and daily lives listening to this testimony than from any curriculum, documentary, book, or newspaper.

It has become clear that the NGP is a symbol for the tension between two things Canadians value. There is a reason why Tim Horton’s commercials show kids on outdoor ice rinks in rural Canada, Toyota sells Hybrids driving through the forest, and we all long to travel to Newfoundland. Canadians have rocks, trees, nature, lakes, rivers in our blood. We are also as addicted to our cars and the mobility they give us as the rest of the world. We have now reached a time when these two values are in direct conflict. I’m sure Enbridge never saw it coming but the NGP has become the lightening rod for multiple complex modern dilemmas.

Hopefully, the Panel will take their concerns as seriously as all other stakeholders in the project. Failure to do so will force compliant Canadians few options for fighting the pipeline. We do value peace, order and good governance, but if the governance is perceived as not good, peace and order will not fall into place.

The decision we need to reach is whether or not this project is in the Canadian public interest. That means that we're asking ourselves whether or not Canadians would be better off with or without this project. Safety and protecting the environment are the top two goals of the National Energy Board.

The key question we need to debate is whether Canadians will be better off with or without this project.  How does one define “better off?” Will all Canadians be better off? What are the "Terms of Reference" for defining 'better off'?

The Business Piece for Pipelines

 Two of Canada’s most powerful energy companies, Kinder Morgan (KMP-N85.50-0.20-0.23%) and Enbridge (ENB-T37.84-0.16-0.42%) are laying competing plans to pipe and ship massive volumes of crude to Asia. Their projects could, for the first time, free the Canadian energy industry from its dependence on the U.S. market while at the same time fattening profit margins.

Enbridge like any other corporation has a vision: we want to be the leading energy delivery company in North America. We deliver energy and we deliver value to shareholders.This is reflected in our growing portfolio of oils sands pipeline projects…to diversify and sustain growth in the longer term in order to maintain Enbridge’s historical growth rate.

And they continue to grow. For the last 10 years Enbridge shareholders have enjoyed increased dividends year after year. Same for Kinder Morgan. If you own this stock, you have received an increase in dividend value year after year. This is the twelfth consecutive year the Board of Directors has raised the dividend. Pretty amazing considering the economic turmoil we've been experiencing.How do they do it? A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases.I guess that means more and more pipelines.

Who buys the crude in the pipelines flowing out of Alberta now? Some makes its way to a few Canadian refineries, less gets to the Port of Vancouver and is shipped to Asia but most goes to the US for refining for their use or onto the world market (via the Gulf).

There is a short term glut of oil heading toward Cushing, Oklahoma which is a hub for oil activities. The glut has occurred because the market is being flooded with Bakken shale oil, rapid expansion of the oil sands, and the shut down of some pipelines and refineries. At the same time North American demand for oil is dropping, while Asian demand is rising even faster.  Asia demand will be there for a long, long time.

How could they anticipate the 2008 meltdown,the end of the Iraq war, or refinery shutdowns?  Any good business has 5, 10, even 15 year strategic plans. Oil companies have planned badly and created the sudden need to get their product to Asia.

Well, it is the job of business to anticipate all kinds of scenarios. If they don't they soon find themselves out of business.This has played out in the solar industry, as prices for panels, cells, etc. have plummeted more than 50% in the past five years due to a number of unplanned for scenarios. Solar companies are going belly up faster than the fish in the Kalamazoo River did after the recent spill there. But that doesn't happen to oil companies. Business continues unabated, shareholder value increases, the subsidies roll on, executives receive their bonuses, lobbyist continue to lobby, and governments defend them.

Why continue to flood the market with oil sands products when there is a glut? Instead of doing the logical thing and slowing things down they cast there eyes to oil hungry Asia and come up with what any average person would consider a crazy scheme to disregard history (First Nations rights to their lands), disregard the fragile BC rainforest,the commercial fisheries, disregard a moritorium on tanker traffic, and disregard the possibility of shipping oil to Eastern Canada to deal with a short term problem. Apparently our reliance on the oil economy means that any slow down will have serious consequences.

How many pipelines is too many pipelines?

A few years ago the names TransCanada, Kinder Morgan and Enbridge would not have meant much to most North Americans. Where Middle Eastern Wars, high oil prices, economic collapse, devastating oil spills (Exxon Valdez, Gulf of Mexico) failed to stir more than water cooler conversation with your average citizen, recently proposed pipelines have ignited a fuse that will not be stomped out.

Pipelines are not at all like the "canary in a coal mine". Afterall, most of us don't have close relations with canaries and we have never set foot in a coal mine. But pipes, we are all very familiar with. If your're living under a roof, you eventually become intimately acquainted with pipes, usually pipes that have burst, leaked, frozen, or cracked and left you with a mess. So when there is talk about pipelines, we intuitively know that things go wrong.Telling us anything different just won't cut it.

Pipeline companies appear to have not taken this natural defensiveness seriously enough, because ultimately this is where the battle about bitumen will happen.

After the Keystone XL rejection?/delay, pipeline companies are battling back. They have a big task ahead of them. The fact that pipelines have been around for a very long time, means there is lots of evidence regarding the behaviour of pipeline companies. Take a look at their websites and witness the worst kind of soothing, father knows best, drivel about how much they care. Then go to YouTube and search pipelines. Actions speak louder than words and there is no industry that suffers from a more complete disconnect here than the oil industry.

Enbridge's Values

We operate with integrity, honesty and transparency in all of our dealings with stakeholders. We operate to the highest ethical standards with our customers, shareholders, employees, partners, landowners, regulators and others. We communicate openly and honestly.

The Big Oil Picture - One Puzzle Piece at a Time

When I was an undergrad one of my favourite ways to decompress was to do a jigsaw puzzle. I bought a new one each term and there it would sit until I needed the distraction. (ok, sometimes it was a major way to procrastinate too!) It has recently dawned on me that the entire oil market is one huge puzzle with most of us focused on just a few pieces: the price we pay at the pump, easy access and maybe, the pollution we cause when we burn it. Depending on your outlook, you may also be concerned about various foreign wars/interventions in oil producing areas.

With each passing decade more of the world increasingly functions on the use of gasoline and diesel. The amount of conventional oil in the Middle East far outstrips what is available anywhere else on the Earth.We don’t know exactly how much oil there is in the Middle East because they are not transparent about anything. Conventional oil flows through a well without stimulation and through a pipeline without processing or dilution. It’s a relatively cheap process.

Global oil production appears to have leveled off. Our economies are based on continued access to cheap oil. There is not enough cheap conventional oil to go around these days.

World demand for oil continues to grow. China is experiencing a large-scale transition away from bicycles and mass transit toward private automobiles.So desperate has our need for oil become, and so willing are we to pay the necessary high price, we are now producing more and more oil from the difficult spots like the deep waters in the Gulf of Mexico, Alberta’s oil sands and shale oil deposits. The oil sands are a thick, viscous mixture of bitumen hydrocarbons combined with water, sand, heavy metals and clay. Not only is this a very expensive way to fill our tanks, it has opened a Pandora’s Box of associated hazards to our natural world and populations that depend on the largess of that natural world. We have a problem.

 China also needs to provide lots of jobs to its citizens. Not interested in just importing ready to use oil and gas China wants to do the upgrading and refining within its’ borders. This means the bulk of the jobs, and the profits from oil production will go to the Chinese. The international corporations who are gaming the oil and gas sector have no particular loyalty to any nation, other than the nation of shareholders and executives they represent.

The Keystone XL and Northern Gateway Pipeline applications are providing an opportunity for Canadians to decide how best to deal with the land locked resource we have.

Regardless of how the Harper government tries to dominate and (re?)direct the oil conversation Canadians will collaborate like no other time in history to have a say in this new oil dilemma. We all want to build the puzzle together. What remains to be seen is how responsive our business and political leaders will be to this new era of engagement.