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Vol. 11, No. 6 Week of February 05, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Energy moves to front row in Canada

Pressure on new prime minister to elevate resource sector; U.S. relations, Kyoto, labor shortages figure large on agenda

Gary Park

For Petroleum News

One of the sharpest political swings in Canadian history ended 12 years of Liberal party rule on Jan. 23 and raised hopes in Western Canada’s energy stronghold that the industry will attain new stature on the national stage.

When Conservative leader Stephen Harper is sworn in Feb. 6 as Canada’s 22nd prime minister he is expected to name one of his high-profile Members of Parliament to the energy post in cabinet and move quickly to tackle issues that languished during the 18-month tenure of Prime Minister Paul Martin.

But with that tenuous hold on power comes the tricky job for Harper of also avoiding the pitfalls that could lead to an early or unintended defeat.

Even though Harper, like Martin, does not hold a clear-cut majority in the House of Commons, he is being urged by followers to waste no time implementing a program of change on the assumption that the other parties will be reluctant to topple the Conservative government and force Canada’s third election in less than two years.

The Conservatives won 124 seats in the election against 103 for the Liberals, 51 for the Bloc Quebecois (whose primary objective is to see Quebec separate from Canada), 29 for the left-wing New Democrats and 1 independent.

Thus Harper is in the same position as Martin, needing the support of opposition parties and Members of Parliament to implement legislation.

Alliance could be needed on energy front

On the energy front, that could require an alliance of the Conservatives and the Liberals — bitter foes during Martin’s term of office and the election campaign, but stronger supporters of the energy industry than the New Democrats and Bloc Quebecois.

Pierre Alvarez, president of the Canadian Association of Petroleum Producers, is among business leaders who are counting on cooperation by the two major parties on issues of the “greatest concern” to avoid an early return to the polls.

For the two major parties to work closely might require some delicate dealing on a complex agenda that embraces conflicting views on the Kyoto climate change treaty, but some common ground on matters of tax and regulatory reform, shortages of skilled labor, research and development and the opening of Canada’s Arctic to natural gas development.

Caught up in that mix is a clash of philosophies when it comes to Canada-U.S. relations that offers no assurances of a Harper government endorsing development of the Arctic National Wildlife Refuge — which the Martin administration flatly opposed — or accelerating decision-making on how to proceed with the Canadian portion of an Alaska gas pipeline.

Issues where trades possible

The list of horse-trading possibilities between the Conservatives and Liberals, while almost endless, could include:

• A shift from Canada’s outright ratification of the Kyoto treaty to join the Asia-Pacific Partnership of the United States, Australia, China, Japan, South Korea and India to develop a voluntary agreement to achieve clean resource development.

• Scrapping restrictions that limit any person or group from holding or controlling more than 20 percent of Petro-Canada’s voting shares or that prevent Petro-Canada from selling all or the bulk of its assets.

• Closer cooperation with provincial governments on environmental regulation, climate change policy and labor issues, with British Columbia’s case to allow exploration of its offshore high on that list.

• Sticking with Liberal government policy changes to reduce taxes on dividend-paying stocks to make them more competitive with income trust units.

• Amendments to immigration laws allowing for fast-tracking of applications from skilled foreign workers.

• A warming of the chilly relations with the U.S. that could see Canada take a lead role in opening trilateral discussions with the U.S. and Mexico on a continental energy policy.

Western Canada vs. Ontario and Quebec

In the midst of this diverse, complex line-up, Harper will also have to walk a fine line between catering to Western Canada – which accounts for 65 of his 124 seats – and Canada’s major population bases in Ontario and Quebec, the crucial battlegrounds if ever Harper is to win a majority government.

Although the Conservatives made strong headway in those two provinces — winning 40 Ontario seats and a stunning 10 in Quebec — it would not take much to reverse the gains, given the concerns in Eastern Canada about the West’s fast-rising economic clout.

The Royal Bank of Canada, the Bank of Montreal and the Conference Board of Canada stoked those fires on Jan. 26 when they said the explosion of activity in Alberta’s oil patch is driving up labor and raw materials costs and skewing economies in the rest of Canada and even within Alberta.

The most immediate topic on the table and likely the most contentious is Kyoto, with the treaty strongly favored in Eastern Canada, despite what many see as the impossible goal of cutting greenhouse gas emissions to 6 percent below 1990 levels by 2012.

In Canada’s case, given the rapid expansion of the resource sector since Kyoto was signed in 1997, that now means at least a 24 percent cut in emissions.

Kyoto strategy shift possible

Bob Mills, the Conservative spokesman on the environment, has suggested the Harper government will shift its strategy from trying to reach Kyoto targets to two other options — aligning itself with a Group of Eight Plus Five nations led by British Prime Minister Tony Blair and the Asia-Pacific Partnership.

Arguing that by 2012 the U.S. China, India, Brazil and Mexico will account for 75 percent of the world’s greenhouse emissions, leaving Kyoto signatories to cover the remaining 25 percent, he said Canada should join the majority and pursue technological solutions, such as clean-coal and the underground storage of carbon dioxide, rather than engaging in global emissions trading.

Mills said Canada would be better off spending billions of dollars on new technologies than buying foreign carbon credits.

Harper has pledged to develop a climate change policy in consultation with the provinces, which allows him to drive a politically-charged wedge between the regions of Canada and his federal opposition.

“The Kyoto accord will not succeed at achieving its objectives and the (Liberal) Canadian government cannot achieve its objectives,” he told reporters during the campaign.

Petro-Canada also an issue

Although the Conservatives have not taken a public position on the future of Petro-Canada, Scotia Capital analyst Greg Pardy said it is increasingly likely the new government will abolish the 15-year-old Petro-Canada Participation Act which blocks a takeover of the former state-owned company.

He said repeal of the 1991 legislation is “well overdue” and would see a surge in share values.

James Rajotte, the Conservative industry spokesman, said a Harper government will not allow takeovers that put Canada’s national security interests at risk, especially if it involved a bid by a foreign state-owned firm, but he was less concerned about bids from private companies operating in a free market.

On the future of income trusts, Conservative finance spokesman Monte Solberg said the Liberal plan to make dividend-paying companies competitive with trusts has been proposed by his party “so we’re very supportive of that approach.”

He told the Globe and Mail “we are supporters of income trusts and we oppose tax measures that would raise taxes on income trusts,” a view echoed by Mills.

With Alberta’s economy under a full head of steam — Calgary alone is forecast to need 90,000 new workers over the next five years and 158,000 by 2015 — business leaders are calling for federal action to remove obstacles that prevent immigrants from easing a critical labor shortage.

They want to lower language barriers, accept the professional accreditations of immigrants and set up networking opportunities to help new arrivals find jobs.

In the upstream oil and gas sector, the Petroleum Services Association of Canada has identified the lack of skilled rig hands as the major factor stopping last year’s well completions from surpassing 24,800.

David Hyman, an analyst with Raymond James, said that at “some point it is going to be harder (for drilling contractors) to take the next step.”

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Can’t we just get along ....

For a congratulatory call, the 20 minutes President George W. Bush spent on the phone with Stephen Harper on Jan. 24 was widely interpreted as more than just perfunctory.

Although details of the exchange were kept private by both sides, the “very good conversation” was a signal from Bush that he hopes to thaw the increasingly chilly relations between himself and outgoing Prime Minister Paul Martin.

But within 24 hours a spat erupted that mystified some and had others applauding.

Without even being asked at his first post-election news conference, Harper rebuked U.S. Ambassador David Wilkins, who told university students on Jan. 25 that the U.S. does not recognize Canadian sovereignty over the Northwest Passage.

“We agree to disagree,” Wilkins said.

Those little-reported comments prompted Harper to declare his government has significant plans for “national defense and the defense of our sovereignty, including Arctic sovereignty.”

In a blunt message, he said “it is the Canadian people we get our mandate from, not the ambassador from the United States.”

Wilkins seemed startled by the lecture, insisting Jan. 27 he was merely restating Washington’s long-held position that it doesn’t “recognize Canada’s claims to the (Arctic) waters.”

For several decades, the U.S. has viewed any waters outside the 12-mile limit around Canada’s Arctic islands as international — “nothing more, nothing less,” Wilkins said.

He refused to say whether Harper’s remarks would be a setback to his dealings with the U.S.

The Conservative Party election platform proclaimed that “it is unacceptable for the United States or any other country to disregard Canada’s Arctic sovereignty,” which includes a belief that Canada has jurisdiction over the water, the ice and the land, although Ottawa has not been opposed to international navigation through the Northwest Passage.

But as the polar ice cap has started to melt, so have the prospects grown for the Northwest Passage to become a major shipping route between Asia and Europe — wiping 4,200 miles off the current passage through the Panama Canal.

If the passage becomes an international waterway, Canada believes there are greater dangers of visits from terrorists or smugglers, along with heightened odds of a tanker disaster on the scale of Exxon Valdez.

Without sovereignty, Canada could also lose control over vast resource prospects that could run to billions of barrels of oil and trillions of cubic feet of gas.

University of British Columbia professor Michael Byers said Harper’s plan to buy three new armed icebreakers, increase air surveillance and build a new military and civilian deepwater port near Iqaluit would strengthen Canada’s sovereignty claim if ever there was a definitive international agreement covering the status of the Northwest Passage.

—Gary Park