The lack of detail in President-elect Donald Trump’s campaign promises, combined with doubt about his commitment and executive ability to actually carry them out, have created a cottage industry in discerning the impact of his presidency on Canada—nowhere more so than in our largest export industry, oil and gas.
Some prominent oilpatch voices are worried that Trump’s intention to rollback regulations affecting the sector to boost production will see investment, equipment and human resources sucked southward, leaving Canadian companies high and dry. In releasing the Canadian Association of Oilwell Drilling Contractors’ forecast for 2017, president Mark Scholz called a Trump-enabled spike in drilling stateside a “serious threat” to the industry north of the border. Speaking at an energy conference in London a few days later, Enbridge vice-president Ian McFeely publicly doubted that Canadian producers, subject to a federal carbon tax beginning in 2018, could compete with their counterparts in the U.S., whose government is moving in the opposite direction.
There are flaws with these arguments, however, and plenty of more compelling reasons to believe Canadian energy companies will do very well by a term or two of President Trump.
First, consider the source of the doom-and-gloom scenarios. The drillers’ association is a lobby group whose interests lie in reducing regulation in Canada. Its prediction of a grim future in Canada alongside frenetic activity in the U.S. should therefore be taken with a grain of salt. As for the carbon pricing argument, we still have no details on how the federal tax will be implemented. There is no reason to believe it will unduly penalize the oil and gas sector, which emits less than 20% of the carbon dioxide for every barrel of oil produced. Most of the revenue would come from end users of fossil fuels, such as drivers and power plants. A recent study by TD Bank economists suggests the burden of a $50-per-tonne carbon tax (due to come into effect in 2022) would work out to between 84¢ and $1.25 a barrel—a small dollar amount, considering Canadian producers currently enjoy a 25% cost discount vis-a-vis their American rivals, thanks to the exchange rate.
Furthermore, Trump’s election did nothing to change the carbon pricing calculus. There was no realistic prospect of federal carbon pricing taking hold across the U.S. under a Hillary Clinton presidency either. Citing Trump’s election as a reason to abandon Ottawa’s climate plan doesn’t wash.
Let’s consider the measures Trump promised that, instead, represent a departure from the status quo. He pledged to reverse the rejection of the Keystone XL Pipeline application within his first 100 days in office—an unequivocal win for the industry. The Gulf Coast, which KXL would access, is the largest refining cluster in the world and, by an even wider margin, the largest market for heavy grades of crude. That makes it the logical destination for bitumen originating in northern Alberta. Direct pipeline capacity to the coast would cause the discount placed on Western Canada Select (currently pegged at about US$15 cheaper per barrel than West Texas Intermediate) to shrink significantly, meaning producers will likely gross more than the measly US$30 or so per barrel they’re making today.
Trump has also prioritized opening all federal lands to fossil fuel extraction and easing the regulatory burden on the industry. This might actually benefit Canadian companies with significant operations in the U.S., such as Encana and Enerplus. And while such measures could tilt investment in favour of the U.S. over Canada, they’re unlikely to open the floodgates to new supply. Individual states have imposed their own regulations—for example, the fracking ban in New York or the air-quality rules in Colorado—that are in all cases more stringent than the U.S. Environmental Protection Agency’s baseline. And before rushing into untapped federal lands, producers are more likely to restart already permitted operations that were suspended when oil prices plunged. Indeed, whatever rebound the U.S. industry experiences under Trump will be primarily dependent on pricing.
Carrying a much bigger potential impact for Canada—though harder to foresee coming to pass—is Trump’s vow in a speech in May to ban crude oil imports from “our foes, and the oil cartels,” taken to mean OPEC member countries. As of August, such imports comprised 3.4 million of the 20 million barrels America consumes every day. Canada currently supplies a similar volume, and although Trump pledged to bring about “complete American energy independence,” U.S. refiners would almost certainly look to Canada to help replace the OPEC supply, were it discontinued. “There’s no American energy security without Canadian oil,” says Tim Pickering, president and chief investment officer of Auspice Capital Advisors in Calgary.
Finally, Trump pledged to scrap the Obama administration’s Clean Power Plan, thereby removing policies that disadvantage coal-fired electrical generation, along with tax credits for renewable energy investment. Support for coal could endanger Canadian natural gas exports. In reality, though, the price of gas has been so low for so long that it is hard to foresee utilities returning to coal-fired plants. These generating stations typically operate for half a century, far longer than any one president sits in office. At best, Trump’s approach will prolong the lives of some legacy coal facilities without diminishing the demand for gas.
Putting aside our personal leanings on climate policy, the degree to which Trump extends the runway for all fossil fuels in the U.S. market is a net positive for a hydrocarbon-exporting nation like ours. Just keep in mind that the vicissitudes of global commodity markets, not the orders emanating from the White House, will continue to call the shots.
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