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Natural gas faces NAFTA test 'Proportionality' clause will determine how much gas Lower 48 gets Gary Park For Petroleum News
The periodic spats that have threatened over the years to fray landmark North American free-trade deals that have created the world’s largest trading bloc, could pale into insignificance if Canadian natural gas production and domestic needs continue on their present collision course.
Exports from Canada slipped from their peak of 10.1 billion cubic feet per day in 2005 to 9.7 bcf per day last year and could spiral down to 5.9 bcf per day in 2015, Ziff Energy Group forecasts.
Over the same period, Canadian consumption seems destined for a sharp increase.
In an executive report to clients, Ziff projects that Alberta demand alone will grow from 2.9 bcf per day in 2005 to 4.7 bcf per day in 2015, driven largely by oil sands expansion.
In addition, the Ontario government’s phasing out of coal-fired power generating plants could require another 500 million cubic feet per day for gas-fired facilities by 2015, while just normal economic growth across Canada will boost demand for residential and commercial users.
Countering that, Ziff projects that Canada’s supply will be 16.8 bcf per day in 2015, down 1.2 bcf per day from a decade earlier.
The consulting firm pins the best hopes of major new supplies on the Mackenzie Gas Project, due to come on stream by late 2014 at a possible 1.2 bcf per day, while offshore Newfoundland, which has the potential for trillions of cubic feet, could be delivering 300 million cubic feet per day by 2018 using compressed natural gas storage technology.
Ziff is also counting on three new liquefied natural gas projects to be in service — the Irving Oil/Repsol Canaport terminal in New Brunswick at a rate of 700 million cubic feet per day in 2010 and two Quebec terminals, one of which is expected to average 400 million cubic feet per day in 2011.
U.S. seems unaware But, for all of this juggling of numbers, there has been little sign that the United States is aware that declining supply and growing internal demand in Canada will eventually take a bite out of exports.
The Conference Board of Canada, in its own 2007-11 outlook, warned in August that Canada’s gas producers will “have no choice but to export less,” as domestic output slides, starting with a decline of 3.7 percent in 2006 and expected to lose an average 2.4 percent annually until 2011.
While the Canadian and U.S. governments continue to trumpet the virtues of NAFTA and the role Canada plays as the leading exporter of oil and gas to the U.S., what will happen if the gas trends follow their current course is carefully ignored.
But the trade pact is explicit about the terms and conditions under Article 605, which allows Canada to reduce export volumes only if domestic needs are cut by a proportional amount, leaving no apparent room for Canadians to use more of their gas at the expense of U.S. customers.
The issue has never surfaced during the 13 years of NAFTA’s existence, when exports have multiplied by more than 200 percent, lining the pockets of producers and gas-producing provinces.
However, the warning signals have been out ever since NAFTA was negotiated and, more obviously, in the last couple of years when bold forecasts of Canadian production reaching 7 trillion cubic feet in 2010 faltered after output peaked at about 6 tcf in 2005.
Expected to take hard line While the U.S. has been portrayed by Canadian government and industries for its bullying ways in ignoring softwood lumber rulings by trade panels, there is little doubt in the minds of anti-free traders in Canada that Washington will take a hard line if the “proportionality” clause covering gas is tested.
Gordon Laxer, a professor of political economy at the University of Alberta, pointed to trouble ahead in a Globe and Mail article in 2005 when he said that Canada is the only NAFTA partner prevented from looking after its own energy security by provisions in NAFTA.
Noting that the U.S. has adopted its own national energy policy, emphasizing national security, self-sufficiency and support for domestically owned firms, and Mexico, in gaining exemption from the energy provisions of NAFTA, has a policy of oil independence and Mexican public ownership, Canada has been blissfully unaware of the threat to its own resources.
Laxer said that oil and gas companies operating in Canada, many of them U.S.-owned, lobbied in 1993 for inclusion of the “proportionality” clause, which favors the “short-term interests of exporting corporations and producing provinces, to the detriment of using Canada’s raw resources to make other things and for long-term energy security for Canadians.”
When Mexico was brought into the free-trade club five years after Canada and the U.S. signed their own two-way deal, concerns were raised, but effectively stifled by the energy industry’s hunger for NAFTA, that the U.S. was opening the door to the largest energy commodity market in the world in return for a ticket to Canada’s energy riches.
Those voices were drowned out by industry and government leaders who proclaimed the economic windfall that would flow from soaring gas exports and new markets for oil sands production, making Canada the vital cog in North American energy security.
First crack two years ago The first crack in that facade appeared two years ago when it was realized that Canada had relinquished control over long-term supplies of gas for use in value-added sectors, such as petrochemicals, by removing preferential pricing for domestic gas use and abandoning export taxes, impact assessments for export permits and traditional rules ensuring a 25-year supply of gas before exports were allowed.
Contravention of those rules allows the U.S. government and private corporations to initiate legal proceedings.
Only fleeting attention was paid to one of the early victims. Celanese Canada closed its petrochemical plant employing 300 near Edmonton when it figured out that it could do business much more cheaply in Mexico and China.
The Parkland Institute, co-founded by Laxer, said the Alberta and Canadian governments were party to the Celanese closure by supporting policies that gave priority to the export of raw resources over value-added manufacturing.
The institute accused the Alberta government of disregarding the “impacts that these policies are having on highly skilled jobs and value-added manufacturing in general. …”
The Celanese story had a short lifespan, but the central issue in its disappearance underpins the debate being waged in Alberta over the shipment of oil sands production to the U.S. for upgrading and refining.
It will seem like mere shadowboxing if the market mechanisms enshrined in NAFTA ever cut into what Canadians would regard as a birthright — guaranteed access to their natural gas resources.
So far, some of the official response from Washington has been evenhanded.
Tom Huffaker, the U.S. Consul General in Calgary, told the Financial Post in July that the U.S. is aware that “if Canadian supply availability is going to decline, we have to address that demand from elsewhere,” such as imported LNG.
But that sidesteps the deeper question: Will Canada get a green light to meddle with the “proportionality” clause?
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