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Tossing free trade carries risks NAFTA protects energy flow from Canada to Lower 48; Deutsche Bank study highlights political, economic advantages of open border Gary Park For Petroleum News
A bipartisan group of U.S. lawmakers is seeking backing for a bill to scrap the North American Free Trade Agreement, and with it guarantees of U.S. access to a share of Canada’s oil and natural gas production.
At the same time a major European bank made its case that the U.S. is better off relying on Canada’s oil sands crude at a time of rising global tensions.
The anti-NAFTA bill, sponsored by 28 Democratic and Republican members of Congress, is the crest of a wave of protectionist sentiment gathering momentum on Capitol Hill, as the focus of November’s midterm elections turns to job losses.
Rep. Gene Taylor, a Mississippi Democrat, said the 10 percent unemployment rate in the U.S. is motivation to end the trade pact with Canada and Mexico.
Taylor opposed NAFTA in 1993 and blames the agreement for a 29 percent drop in U.S. manufacturing over the past 17 years.
“Timing is everything in life and it’s the right time to pass this legislation,” he said when introducing the bill. “Proponents have had more than enough time to make NAFTA work and they haven’t.”
Tough fight in DC Backers of the bill come from a broad political spectrum, representing both parties and both the political left and right.
But they face a tough job swaying a Congress that is immersed in a health care debate and President Barack Obama, whose state of the union address in January championed free trade as the route to economic recovery.
Canada’s International Trade Minister Peter Van Loan took a low-key view of the trade threat.
“We are closely following this bill, of course,” he said. “Our evaluation is that this is certainly inconsistent with the direction that the Obama administration has chosen.”
The bill has been introduced only a month after the U.S. and Canada reached an agreement that Van Loan described as a “demonstration of the Obama administration’s commitment to free trade.”
Maryscott Greenwood, executive director of the Canadian American Business Council, said there is a lack of awareness in Congress about the important role the U.S. and Canada play in each other’s economies and a “fundamental misunderstanding about how integrated our supply chains are.”
When anti-NAFTA voices have been raised in the past, the Canadian government has responded by pointing out that a NAFTA provision commits Canada to export a proportional share of its production, even in times of supply shortages. Currently that amounts to more than 60 percent of both Canada’s oil and gas volumes, which meet more than 16 percent of U.S. demand — bolstering the argument that Canada is the most secure, reliable source of U.S. energy.
International tensions In a separate study, Deutsche Bank pointed to gathering storm clouds over the Middle East, where tensions between Israel and Iran and a sharp disagreement between Israel and the U.S. underscore the dangers of continued U.S. reliance on crude supplies from the Organization of Petroleum Exporting Countries.
Although the U.S. now buys only 18 percent of its oil from the Middle East, OPEC countries account for a 41 percent share.
Deutsche Bank analysts Paul Sankey, David Clark and Silvio Micheloto concluded that the answer to avoiding these political flashpoints and shoring up U.S. energy security is to promote expansion of the Alberta oil sands.
“We believe oil producers in Canada face a much lower geological and political risk than operators in most other oil-producing zones,” they said. “The resource is vast ... the decline rates are effectively zero, there are no Straits of Hormuz or Malacca (vital sea passages for crude tankers in the Persian Gulf and between Malaysia and Indonesia) and Canadian heavy oil continues to outgrow virtually every other major hydrocarbon in the world.”
Oil sands growth
The study noted that oil sands growth was running at 10-12 percent a year before the recession-induced slowdown, causing Deutsche Bank to lower its increase to 6-8 percent over the next 10 years, helped by the recent revival of some projects.
The bank estimates oil sands production will rise from 3 percent of non-OPEC oil supply in 2009 to 6 percent by 2020, allowing Canada to claim a large slice of the U.S. market, with much of the crude destined for U.S. Gulf Coast refiners, where there is excess capacity because of the downturn in shipments from Mexico and Venezuela.
The study said the marginal, imported barrels that are displaced by Canadian oil sands production come from countries less friendly to the U.S., meaning a shift to Canadian oil “keeps revenue out of the pockets of potentially hostile governments.”
In addition, Deutsche Bank noted that the money the U.S. spends on Canadian crude often makes a fast turnaround through Canadian purchases of U.S. goods and services, unlike the petrodollars that head to the Middle East, where they remain.
By hiking its imports of Canadian crude, the U.S. can start to eat into its global trade imbalance, the analysts said.
Environmental efforts Deutsche Bank also gave a positive assessment of efforts within the oil sands sector to tackle the environmental issues that have been used to tar the industry.
It said advances in recycling water will lower consumption from the region’s Athabasca River and aquifers and improvements are being made in the use of tailings ponds to handle toxic wastes, but it conceded there is still uncertainty over what steps the Canadian government will take, in concert with the U.S., to reduce greenhouse gas emissions, along with possible steps by U.S. state governments to restrict imports of oil sands-derived crude.
The study said campaigns being waged against the oil sands by environmental groups, such as ForestEthics, represent a major public opinion battle that could affect shipments from the oil sands.
In addition, the analysts noted that Alberta government royalties — 2.5 percent (before capital costs are paid off) and 28 percent (post-payout) based on US$65 per barrel oil prices — have “meaningfully reduced the expected returns for producers,” putting pressure on the province to introduce more forgiving economics.
Less Saudi crude More fodder for Canada’s case has come from Greg Priddy, an analyst with Washington, D.C.-based Eurasia Group, who said the heavy reliance by the U.S. on crude from Saudi Arabia “just doesn’t make sense any more” now that Saudi crude is increasingly being targeted at the fast-growing Asian economies, while U.S. imports from the kingdom dropped 40 percent in 2009, partly because Saudi production was trimmed by 1 million barrels per day as OPEC defended prices.
“It is clearly an opportunity for Canada,” he said. “It doesn’t make sense geographically for (Canadian exports) to go anywhere else.”
The U.S. Energy Information Administration doubts U.S. oil consumption will return to pre-recession levels for many years, while China and India are forecast to experience dramatic growth.
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