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Canadian oil patch blindsided by Kyoto ratification decision Industry fears loss of jobs and money if climate-change treaty is fully implemented, with Arctic, oil sands and East Coast at top of ‘hit list’ Gary Park PNA Canadian Correspondent
Western Canada’s oil patch and its provincial governments are angry, edgy and bewildered by the Canadian government’s decision to roll the dice and put the Kyoto Accord to a ratification vote in Parliament this year.
There is talk that if Canada moves from ratification to full implementation, plans to spend billions of dollars in the Alberta oil sands, Arctic and East Coast offshore will dry up, triggering a flight of investment money to the United States and countries such as Mexico and Venezuela that are exempt from Kyoto, but are poised to challenge Canada’s role as the leading exporter of oil and gas to the United States.
When Prime Minister Jean Chretien pledged at the World Summit of Sustainable Development in South Africa on Sept. 4 that his government would adopt Kyoto’s targets for greenhouse gas emissions and face a possible constitutional challenge from Alberta he cast a pall over industry head offices in Calgary.
Echo of 1989 Amid cries of “betrayal” and “breach of trust,” there was an echo of 1980 when the federal government imposed the National Energy Program, which was prepared in secrecy to increase Canadian ownership of its energy resources by offering incentives to domestically controlled companies to explore the Arctic and East Coast frontiers.
In fact, many of the Canadian companies who borrowed heavily to buy the assets of foreign firms ended up in bankruptcy. Capital budgets were slashed by billions of dollars and thousands were laid off with devastating consequences in Calgary where hundreds of homes were sold for $1 to those willing to assume mortgages, enabling the sellers to avoid foreclosure proceedings.
An estimated C$97 billion was drained out of Western Canada’s economy in the early 1980s until a change of government saw the National Energy Program disbanded in the mid-1980s.
Green Twin Kyoto has been described as NEP2 or the Green Twin of the NEP, although Natural Resources Minister Herb Dhaliwal told industry leaders in Calgary Sept. 4 there is “absolutely no comparison” between the two.
Chretien, in taking to the podium in South Africa, brushed off the resource sector warnings and insisted that Canadians shared an even greater “imperative” to tackle the challenge of climate change.
“You cannot wait until it’s too late,” he said. “We have an international obligation.”
With Canada and Russia announcing their intention to ratify, they have tipped the balance in favor of the 1997 Kyoto pact, which requires support from at least 55 countries accounting for 55 percent of global greenhouse gas emissions, the bulk of which come from burning fossil fuels.
Chretien dismissed the Alberta government’s “disaster scenarios,” including estimates that Kyoto could drain C$23 billion to C$40 billion a year from Canada’s Gross Domestic Product, add C$3 a barrel to oil sands production costs and set off a flight of capital from Canada to the United States and elsewhere.
Alberta Premier Ralph Klein said Chretien told him in a phone conversation that Kyoto could have a “15 percent negative impact” on the industry. “But is it 15 percent?” Klein asked. “We don’t know. Neither does the prime minister.”
Petro-Canada warns of scale downs Petro-Canada, which gained a 25 percent interest in all federal lands under the National Energy Program, is no longer a state-owned enterprise and was the first Canadian company to warn of Kyoto’s consequences. A spokesman said Sept. 4 it was a “very real possibility” that close to C$5.8 billion in two new oil sands projects could be scaled down or scrapped if Kyoto was fully implemented, requiring Canada to reduce its greenhouse gas emissions to 6 percent below 1990 levels by 2012.
Currently, those emissions are estimated at 14 percent above 1990 output.
“This is not an idle threat,” the spokesman said. “This is business reality.”
By later in the week, other Petro-Canada spokesmen were attempting to soften the impact of those remarks, saying the company would still proceed with the oil sands projects, while weighing the costs of Kyoto.
Petro-Canada’s initial spokesman said the Chretien government has yet to answer questions on how much Kyoto will cost and who will bear those costs.
“The way things stand now, each of the government’s four Kyoto options would require us to scale back our oil sands investments,” he said, although Petro-Canada is hopeful it will know more about the government’s intentions before it makes business decisions on the two projects in late 2003.
Meadow Creek at risk At risk are Petro-Canada’s plans for a C$750 million, 80,000-barrel-per-day project at Meadow Creek in northeastern Alberta, with Nexen Inc. as a 25 percent partner, and a C$5 billion proposal to expand its Edmonton-area refineries to process up to 175,000 barrels per day of bitumen within 10 years.
While acknowledging that the oil sands sector is an “energy intensive” method of extracting oil, the Petro-Canada spokesman said his company has given a high priority to protecting the environment.
Citing the company’s MacKay River project due to come on stream this year at 30,000 barrels per day and the Meadow Creek scheme, he said co-generation power sources for those plants will reduce greenhouse gas emissions by 50 percent compared with conventional extraction methods, while raising recovery rates to between 60 and 80 percent from the traditional 50 percent.
Petro-Canada is also a 12 percent partner in Syncrude Canada, the giant oil sands operation that generates about 250,000 barrels per day and expects to add 100,000 barrels per day in 2004. That consortium is chasing a target of lowering its carbon dioxide emissions by 45 percent per barrel from 1998 to 2008.
Uncertainties for others Two other oil sands players added to the mood of anxiety.
ConocoPhillips Canada Ltd. said it needs more information on the specifics of Kyoto before it makes a commercial decision this year on proceeding with a C$1 billion, 100,000 barrel-per-day project.
TrueNorth Energy L.P., owned 78 percent of Kansas-based Koch Industries Inc., said Kyoto is “just one more uncertainty” facing its planned C$3.5 billion Fort Hills oil sands project targeting 190,000 barrels per day by 2008.
The oil sands represent both the biggest hope for Canada’s future oil production and the biggest fear, if Kyoto becomes the law.
Output from the oil sands is targeted to pass conventional crude in early 2005 and triple to 3.4 million barrels per day within a decade if projects costing another C$25 billion proceed on schedule after 2005.
But pressures have been building on the sector to get serious about cleaning up its environmental performance.
The National Energy Board estimates than producing 50 barrels of conventional crude emits 1 tonne of carbon dioxide; with the oil sands, just over eight barrels of oil produce the same quantity of greenhouse gases.
The companies in the field insist they are making great strides in developing new technologies to combat greenhouse gases. Shell Canada Ltd. and its partners have set a goal of cutting emissions in half by 2010 at their massive Athabasca project, due on stream in early 2003 at 155,000 barrels per day and eventually reduce emissions below those of conventional crude.
Information vacuum However, the industry is operating in an information vacuum, because it doesn’t yet know precisely what the government intends to do. The Canadian Association of Petroleum Producers is “resoundingly disappointed” that Chretien bypassed attempts to find a made-in-Canada solution to champion the accord, said association president Pierre Alvarez.
“It’s impossible to know what all this means until we’ve heard more from the federal government,” he said. “We’re not hopeful for anything at this point.”
Almost without exception, the other major players in Canada have expressed their concerns about Kyoto. Chief executive officers of EnCana Corp., Imperial Oil Ltd., Nexen Inc., Husky Energy Inc. and Canadian Oil Sands Trust are among those joining the chorus.
EnCana CEO Gwyn Morgan took the unusual step of writing directly to Chretien saying that Kyoto would be the equivalent of “economic self-mutilation” for Canada and be “one of the most damaging international agreements ever signed by a Canadian prime minister.”
He said the terms of Kyoto would place Canada at a competitive disadvantage against the United States, and would discourage investment in Canada.
Morgan and Nexen CEO Charlie Fischer said their companies would consider shifting their investment programs elsewhere if the business climate in Canada suffered under Kyoto.
Imperial CEO Tim Hearn said Canada could develop its own greenhouse gas emissions strategy through “strong consultation” among the public, business community and interest groups that would achieve “good environmental management and economic growth.”
Chretien promises consultation In Calgary Sept. 18 for meetings with oil patch leaders and a speech to 900 supporters of his Liberal Party, Chretien pledged that the progress achieved in the oil sands over 30 years will not be put at risk, nor would the oil and gas sector carry more than its fair share of Kyoto obligations.
He said the implementation of Kyoto “must take into account our place in the North American economy,” but beyond promising extensive consultation he offered no specific details.
“If there was ever a file where the devil is in the details, it is in climate change,” said Alvarez after the speech.
Eric Newell, chairman of Syncrude Canada Ltd., the world’s largest producer of synthetic crude, said he took some comfort from Chretien’s assurance that he does not intend to hurt the petroleum industry. But Newell said he won’t be satisfied until he sees the terms of the contract.
Brian Prokop, an analyst with Peters & Co., said companies now immersed in developing 2003 capital budgets are likely to take a cautious line and could divert money they were planning to spend in Alberta to other places. Alberta opposed Alberta Premier Ralph Klein sent a sharply worded letter Sept. 4 to Chretien demanding a “clear, thorough, honest and public understanding of the costs of Kyoto,” a detailed plan on how Kyoto will be implemented without unduly penalizing any region or sector of the country and an evaluation of other options to address climate change.
At the same time, Klein has directed government officials to start preparing a court challenge to any federal interference in the constitutional ownership by provinces of their natural resources.
Alberta government sources also say the province is drafting legislation to pre-empt any federal law. The bill could include a timetable for specific emissions targets and incentives for companies to develop technology to reduce emissions.
Klein also announced the province’s top adviser in the struggle will be former premier Peter Lougheed, who led Alberta’s fight against the National Energy Program in the 1980s.
From Canada’s other oil and gas producing provinces, British Columbia Premier Gordon Campbell said it would be “irresponsible” to proceed with Kyoto without knowing the cost and Saskatchewan Premier Lorne Calvert said he wanted to know how much implementing Kyoto would cost and how the federal government would compensate the provinces most affected.
Newfoundland Premier Roger Grimes said he has seen preliminary federal figures that show his province, which is expected to produce one-third of Canada’s total light crude output in 2003, would see half of its projected growth wiped out if Kyoto was fully implemented.
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