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Canada's Pretentious Energy Games

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As witnessed this past weekend, on a truncated basis, at the NDP conference held in Edmonton, Alberta, Canadians are involved in a protracted, heated, debate over energy.

Specifically, how energy relates to the economy.

It is a debate ongoing in many other countries, largely based on arguments grounded more in fiction than fact but some of the pretense is specific to Canada, which our previous Prime Minister proclaimed is an emerging energy superpower.

The NDP (New Democratic Party) is to the left of the political spectrum and although it has never held power federally, nor come close, provincially it has governed a number of provinces.

The most dramatic example is the overthrow of 95 years of right wing governments in Alberta under the Social Credit and Progressive Conservative Parties by the current NDP premier, Rachel Notley, a year ago. In large part that win was predicated on widespread dissatisfaction with the handling of the provincial economy, which was suffering through one of many recent downturns due to low oil prices. The current one commenced the year prior to the election and continued and deepened subsequently.

Alberta is the hub of Canada’s energy industry and although it is now NDP lead, the main focus of the federal NDP convention, aside from a leadership question, was something called the Leap Manifesto, which is largely a call for Canada to restructure its economy so that it is less reliant on fossil fuels and further demands that there be absolutely no new infrastructure aimed at extracting non-renewable resources, including oil and gas pipelines.

Premier Notley, in the end fruitlessly, tried to counter the Manifesto’s call by claiming her province, which has seen more than 80,000 jobs disappear since the beginning of the current oil price decline,  is desperately in need of more pipelines to get more of Alberta’s energy products to tidewater so the province can receive a world price for oil, not the heavily discounted land-locked price we currently receive from our United States customers.

And here the fantasy begins or at least continues since the same line was espoused previously by both provincial and federal leaders of the Conservative Party.

Alberta gets the Western Canadian Select (WCS) price for the bulk of its oil (In January 2016 83.3% of its production was non-conventional or from oil the oil sands), which is about 64% of the West Texas Intermediate (WTI) price although it has been as low as half that, mainly due to the grade of the oil rather the geography of its production or the situation of that production relative to tidewater.

WTI and Brent – both “world benchmarks” – are light, sweet crudes (light referring to density and sweetness to sulfur content) whereas WCS is a heavy blended crude composed mainly of bitumen blended with sweet synthetic and condensate diluents.

To become a synthetic light crude, which brings “world price” (or in Canada’s case 89% of world price considering Cdn Light is currently priced at $35.28 compared to $39.72 for WTI) bitumen has to be upgraded, which involves vacuum distillation, de-asphalting, cracking and hydrotreating to remove sulfur; all of which are costly and energy consuming processes.

The argument therefore that pipelines to tidewater gets Alberta world prices for over 80 percent of its oil is a fantasy.

Further at current prices of $25.42 for WCS, whereas the breakeven price for thermal projects averages $39.67 a barrel and for mining projects the average is $35.34 a barrel, it is economic suicide to continue to produce this commodity. The only rationale for doing so is to derive sufficient cash flow to service the massive debts undertaken to commence oil sands projects but the flip-side to continued production is an expanded global supply glut that is in part the reason for the low prices in the first place.

All of which leads to the second fantasy, debunked on these pages back in January; that oil sands revenues can finance the transition to a green Canadian future.

Notwithstanding the admonition, Prime Minister Justin Trudeau told a Globe Leadership Summit in Vancouver the same thing with a twist two months later. Putting pipelines in the ground will help pay for the country’s transition to a greener future, he said and on this I agree except, where he was referring to oil pipe lines, it is hydrogen lines that are require considering they could provide heat, light, water and transportation fuel from a single service.

Witness the current plan to make Leeds a “hydrogen city” and Toyota’s case for hydrogen power.

“We want the low-carbon economy that continues to provide good jobs and great opportunities for all Canadians,” the Prime Minister told the Vancouver crowd of business, civil society, and science innovators.

“To get there, we need to make smart strategic investments in clean growth and new infrastructure, but we must also continue to generate wealth from our abundant natural resources to fund this transition to a low-carbon economy,” he said.

How you generate wealth producing oil at less than cost eludes me and even when things were good price-wise governments derived nothing like the kind of revenue required to make an energy transition. Witness the $17.7 billion in the Alberta Heritage Savings Trust Fund as of July, 2015 on over  $1.5 trillion in oil and gas production in the province since the fund was created in 1971.  And to make matters worse government’s share of gross sales of oil, bitumen/synthetic crude, natural gas and other gas by-products has been steadily declining.

The Lougheed government (1971-1985), which established the trust fund, collected an average 27.8% of the value of gross sales, peaking at 41.2% in 1978. The succeeding Getty government (1985-1992), averaged 14.9% while the Klein government (1992-2006) averaged 15.5% and in 2006 collections fell below 10.0%. The Notley government’s projected budget for 2015-16 was initially only 3.6% – $2.752 billion, which doesn’t buy you a ticket to ride very far down the energy transition road. And making matters worse, Premiere Notley revised the estimate of Alberta’s take downward by almost a half, to around $1.4 billion last week.

Naomi Oreskes, Professor of the History of Science and Affiliated Professor of Earth and Planetary Sciences at Harvard University, when asked what she thought of Prime Minister Justin Trudeau’s recent remark about clean energy funding said, “It’s an equation that doesn’t add up.” In an interview with the online magazine The Tyee she said “It’s like when Obama talked about the ‘all of the above’ energy policy. In theory, that sounds great, but it doesn’t work.”

“If Trudeau can say we’re going to do all these things,” building more giant pipelines to deliver Alberta’s oil sands bitumen or British Columbia’s fracked natural gas to proposed export terminals on both coasts, “that says to me that they have not truly assimilated what is at stake here,” she said. Further she called B.C. Premier Christy Clark’s promotion of liquefied natural gas as a climate solution: a “bridge fuel” to help China get off dirty coal power, dangerously “wishful thinking.”

In December of last year Canadian, Environment Minister Catherine McKenna was instrumental in leading the call in Paris to limit temperature increases due to climate change to 1.5 degrees Celsius this century. With reference to the tough measures required to try to reach that goal however, she warned last week that moving too fast would disrupt the country’s national unity.

“I’m a realist on this,” she said. “There are a lot of people who have lost jobs in Alberta. I’m not saying that we destroy our planet. But I think we need to be thoughtful of how we move forward.”

“We need a transition to a low carbon economy. We absolutely do. But we can’t do it overnight,” she said.

Realistically we can’t do it overnight but being thoughtful has become code for doing nothing or at least nothing fast and that is the surest recipe for crapping out on both ends of the energy market: today’s and tomorrow’s there is. It is also an eerily reminiscent sentiment to what has been heard in this country for over 20 years with respect to climate change.

The same engineers and skilled labor that are currently out of work in Alberta’s oil patch are the same people needed to build the low carbon economy of the future.

The longer it takes to transition form Frontierland to Tomorrowland the longer  skilled Canadian energy workers will be out of work and the less likely it becomes Canada plays a significant role in the major challenge of this century.

It’s time to leave the fantasies to Disney and to embrace technology that permits Canada to live up to its environmental commitments least we truly do risk the breakup of this country.

Photo Credit: waferboard via Flickr

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