The Round-Up: November 3rd 2006

Draining Canada First

How long can Canada go on behaving like America's most compliant energy colony?

Not very long, according to David Hughes, a petroleum geologist with the Geological Survey of Canada. Speaking before the World Peak Oil Conference held in Boston last week, Hughes painted a remarkably pessimistic picture of Canada's energy future, especially regarding natural gas.

Despite record drilling activity, natural gas extraction volumes have slipped from the peak set in 2002, and output per well is now declining at an annual rate of 28%. Put another way, energy companies must add 3,000 more wells in 2007 on top of the 15,000 now in production just to keep output from diminishing.

That would be a daunting challenge even if there were spare rigs and drilling crews standing by. As it now stands, there is no spare capacity of this sort anywhere in North America.

With only eight years of proven reserves left in Canada, Hughes suspects that natural gas output is about to fall off a cliff. Barring a miracle or two, Canada will soon experience challenges in providing for its own citizens, let alone producing surplus volumes bound for American furnaces.

Energy trusts lose $17 billion in value over income trust tax changes

"If the tax proposal is enacted as presented, we believe that Canada will lose control of its energy sector and investment activity will decline in conventional oil and gas production," the capital markets unit of investment firm Canaccord Capital said in a report Thursday.

"This tax proposal puts a 'for sale' sign on Canadian energy resources by removing a competitive cost of capital advantage - a wave of foreign takeovers is likely to emerge. As a result, Canadian energy decisions will eventually be made outside of our borders."

Canaccord suggested the government has effectively increased the cost of capital for the Canadian oil and gas sector.

Income trust tax angers Alberta oil patch

"What you have amongst a lot of people in the oil patch is an intense sense of disillusionment," he said. "There was billions of dollars bet by ordinary people, companies, executives on the strength of this promise. To have this result, to have billions of dollars lopped off, seems to have struck a raw nerve."

Broken Trust

If he had merely ended the investment trust mechanism, he could have halted the erosion of the Canadian tax base, without also destroying $25 billion of shareholder wealth in a single day, shutting down the existing investment trust apparatus, violating the trust of every investor in Canadian assets, imperiling future investment in the country, eroding the Canadian government's credibility, undermining the Canadian dollar and looking like an incompetent buffoon.

Talisman puts off $1B in projects

Talisman Energy Inc. is deferring $1 billion in exploration projects in 2007. It's the latest oil and gas producer to pull back on drilling amid high costs for labour and equipment....

....Talisman ex-pects to spend $4.8 billion on exploration in 2007, the same amount as 2006. But given spiralling costs for drilling and other services in the energy industry, Buckee said that's a real decrease of between 10% to 15%.

Two of Talisman's larger competitors in the Canadian oilpatch -- EnCana Corp. and Canadian Natural Resources -- have cut their drilling plans for 2007, citing rapidly escalating costs and softer natural gas prices.

Officials pushing for natural-gas alliance

Russian officials are pushing for the formation of a "natural gas OPEC" that would link Moscow with major suppliers in Central Asia and Iran to gain more clout against customers in the West. If successful, the alliance would control more than half of the world's known gas reserves and give Moscow powerful leverage as it seeks to strike a new long-term deal on energy with the European Union....

....Russian President Vladimir Putin first floated the idea of a natural gas cartel in 2002. Genadi Zodanov, a Communist Party member of parliament, said a gas cooperation deal with Iran would create a strategic alliance with Tehran, giving the world's two largest natural-gas producers the kind of clout OPEC's Persian Gulf producers have wielded in the oil market for decades.

Yesterday's presentation by Encana to a financial audience included an interesting slide on the replacement of production with new reserves in the gas industry. The figure seems at variance with the prevailing view of an imminent shortage. While the majority of companies it shows are American, that's where most of the gas is.  

Neither does the EIA think that Canadian gas exports are about to "fall off a cliff".

From 3.5 tcf in 2002 to 1.5 tcf in 2018 may not look like a cliff to some, but how steep does it have to be to deserve the name?

And they still won't even get the 1.5, I'll bet. People think gas drops like oil, but it goes much faster.

Well, a ski slope then, and an easy one at that. With no lift and no helicopter to get us back up, we can hope that the lodge at the base is still comfortable, albeit less luxurious than the one at the top.


RE: Drilling Canada First

A bit of a shame that the writer doesn't dig deeper. And Canada can decrease its exports, but only in increments calculated over the prior 36 months. A fixed quota is not a fixed amount or percentage. The real NAFTA danger may turn out to be in what Canada imports rather than produces, as the NDP grasps, see below.

Some of his phrases are so similar to mine, they make me think my MTL articles get read in Wisconsin. Shameless self promotion? Not really, the paper's audience dictates a much different approach, less knowledge can be assumed. And never enough space.

It's just that these issues will control Canada life and politics soon, there's no way out of that.

September 14th, 2006

Selling Canada by the cubic foot

On July 14, one day before travelling to St-Petersburg for the G8 meeting, Stephen Harper gave his first speech abroad in his capacity as PM. He told the Canada-U.K. Chamber of Commerce in London that Canada is the "new emerging energy superpower."

The next day upon his arrival in Russia, Harper, according to Canadian Press, "hadn't yet checked into his hotel" before he and Putin met and announced a Canada-Russia joint venture to send Russian gas to Canada.

But why does an energy superpower need to import Russian gas?

Under NAFTA's "proportional sharing" clause, Canada is obliged to sell the U.S. a fixed quota of its energy assets, over 60 per cent, even if Canada runs out of oil and gas and we're freezing in the dark. Mexico didn't accept this clause, but Canada sold itself outright. While "energy security" is a huge issue south of the border, Canada, which once had a law stipulating the country keep 25 years of supply for itself, today has completely relinquished control of its energy security.

The NDP denounced the deal, saying "the amount of natural gas Canada must provide to the U.S. would increase if we imported gas from Russia, however, if Russia cut back on the amount it was supplying, the American quota would stay the same, forcing Canadians to give up supplies we might need for ourselves."

In the U.S., over 200 electricity plants designed to run on natural gas were built in the past 20 years. People thought there was an abundance of natural gas available. Not so. But Canada exports natural gas, therefore it must have large reserves, yes? Not so. According to the U.S. Energy Information Agency (EIA), Canada has eight years left at present production levels. Moreover, there's rising demand from the U.S. and Alberta's oil sands. In 10 years, the oil sands will use enough gas in the extraction process to heat every single house in Canada.

Natural gas is much harder to transport than oil, which can simply be pumped into a tanker. It has to be "superchilled," under pressure, to about -160 C (which shrinks its volume 600-fold) and transported in special tankers as Liquefied Natural Gas, or LNG. At the destination, an LNG re-gasification terminal reheats it. LNG carries risks. The U.S. currently has only four LNG terminals. Though there are lots of applications for more, building permits are held up by public protests. So attention shifted to Canada. Canadians are less aware of the dangers of LNG, and there is less resistance.

Two LNG terminals in Canada have been approved, Bear Head in Nova Scotia and Canaport in New Brunswick. Two are awaiting approval in Quebec for the St-Lawrence River: Gros Cacouna, owned by TransCanada and Petro Canada, and Rabaska, owned by Gaz Métro, Gaz de France and Enbridge. Three more in the rest of Canada means seven new terminals in a country that needs only a fraction of the gas imported.

Jacques Levasseur, president of APPEL (Association pour la protection de l'environnement de Lévis) sounds desperate when reached by phone. He'd like to know why Canada needs LNG terminals when it has natural gas reserves. "Rabaska will produce 150,000 tons of greenhouse gases per year." He calls the location a poor choice. The terminal is planned about 1 km from the town of Lévis and pristine Île d'Orléans, and less than 10 km from Quebec City. But APPEL feels its protests fall on deaf ears, and politicians listen to money, not people. Gros Cacouna's final decision is expected next week, Rabaska's a bit later. Levasseur is not confident that Quebec Environment Minister Claude Béchard will rule in his favour.

Gros Cacouna will import LNG from Russia, and Petro Canada is eager to buy stock in Russia's Gazprom energy giant. Rabaska says it will get gas elsewhere. Algeria, Qatar, Trinidad are options. However, Rabaska partner Gaz de France is about to be privatized. And who is bidding high but... Gazprom. Accidents never happen alone. And money talks in Canada, and in Quebec, these days.

"Under NAFTA's "proportional sharing" clause, Canada is obliged to sell the U.S. a fixed quota of its energy assets, over 60 per cent, even if Canada runs out of oil and gas and we're freezing in the dark" - an absolute ridiculous assertion reserved for idiots.

  1.  NAFTA can be abrogated with 6 months notice.
  2.  The NEB's mandate superseeds NAFTA.
The problem with 1 and 2 is political.
When will there be political will to invoke number one and when will the NEB feel politically un-encumbered to act on the mandate.  Number two will happen after one I would guess.
For the first the question is: "When will be willing to risk the USA locking our manufacturing, other resource areas and sevice sectors out of their economy?"  Any answer would be a guess but I think the debate must be joined in Canada at the political level to even hope to raise the prospect.  No matter what political party or position we have we need to get people in all parties and provinces discussing it ASAP.  Maybe there will be enought political weight in the new ASPO Canada to begin?
Not in this government.  That would mean returning the EnerGuide program.  (The one that was home made, accountable and cost effective)

Having an anti-urban sprawl plan
Getting banks involved to help add plans for people to renovate their homes for efficiency, add geothermal pipes , and solar/thermal panels.  

We have nothing.  We don't value the money it would take.  It's too expensive we say, but it just means it's not free.  But getting these add-ons would reduce load and make houses powerplants, creating cottage industries.  During a crisis the costs will soar.

The timescales are too short for government policy to act with prudence and priorities.  I wish I was more optimistic but in the end, they will just blame each other.

I would rather look at your local community.  What are they doing?  some links for ideas.  Basically, when the global and national systems fail, go local.

I agree local is where we can start and have some effect.    And many things are beginning to appear here in terms of local economic and energy intitatives.  However, the debate must go up the political food chain if we are to have a hope of avoiding much of the chaos and suffering that will accompany economic recession or worse.  In Ontario the province has begun very tentative initiatives on energy while pretending there is no economic disaster looming.  And the more I read on TOD and elsewhere I am beginning to believe that the movers and shakers of the economy and politics KNOW how bad it could be.  They, however, believe the population is generally stupid and should be kept in the dark lest we panic and stop buying toys and vote them out of office for stating reality.  If credible people begin to discuss PO it might put it on the agenda.  This seems to be happening in baby steps elsewhere but so far not a murmur in Canada.
In NAFTA, Canada specifically gave away it's energy rights when Mexico did not.  We did this to save culture.  In the agreement is says that Canada must make a request to cancel energy committments 36 months in advance.  I don't think the gas is going to cooperate with that timeline.
1/ NAFTA can be abrogated with 6 months notice
The overall effects of such a step would collapse the Canadian economy. NAFTA's energy provisions cover just 12 out of a total of over 2000 pages.
So while it is possible in theory, it's not in practice. The signees were well aware of this. That's probably why they chose to leave it in.

Another effect of NAFTA is the facilitation for US investors to purchase and hold Canadian assets. Hence, abrogation would mean endless litigation with potentially devastating financial penalties.

The only feasible step would seem to be a separate renegotiation of the energy part of NAFTA. But the first demands the US would bring to the table, if it were to agree to negotiations, would be a long list of extremely expensive ones.

2/ The NEB's mandate superseeds NAFTA

Resource Imperialism
Energy Policy under NAFTA
by David Lapp

 The U.S.-Canada Free Trade Agreement provides insights into what can be expected to result from NAFTA. The evisceration of Canada's National Energy Board (NEB) due to the U.S.-Canada trade deal encapsulates NAFTA's broad reach. After examining a number of natural gas projects being developed by several U.S. companies, the NEB determined the projects would provide no net benefit to Canada and rejected the companies' applications for export licenses. The companies appealed the ruling, arguing that the NEB's cost-benefit analysis was, in effect, a price test that violated the free- market intent of the Free Trade Agreement. In the end, the NEB conceded that its cost/benefit analysis might violate the Free Trade Agreement, and, rather than risking potential arbitration, it backed down.

Dillon explains in an upcoming book entitled The Political Economy of North American Free Trade that before the deregulatory measures of the free trade agreement were implemented, "the NEB applied a 'surplus test' requiring that minimum supplies of nonrenewable hydrocarbons be available for Canadians before sanctioning exports. However, under [the trade agreement] the NEB has been reduced to a monitoring agency with limited ability to restrict exports."

I repeat...

NAFTA is a commerical accord that Canada can legally abrogate with 6 months notice.  Anyone who asserts that Canada will be forced to continue to ship NatGas to the US while her citizens freeze to death - is an absolute and utter moron.

Roel may envision a thriving Canadian economy without heat in our homes but I most certainly do not.

As for the NEB...

The posted example of the NEB giving up on a cost/benefit argument in a time of surplus is a strawman.  

In truth, no one really knows how the above will play out, however, we have a few years left to ponder the consequences or better yet, lay the groundwork for a neighborly agreement that will see Canadians share - as they always have.

There seems to be some confusion over Canada's rights to limit energy exports under NAFTA. The relevant section is Chapter Six, Article 605.

Canada (and the US, for that matter) can implement regulations  to limit exports only if exports are maintained in relative proportion to the average of the 36 months preceeding implemenation of the regulation. Otherwise, it's all open markets, all the time. Note that the average is based on exports as a percentage of total supply, defined as production plus imports.

In practical terms this means that in the face of falling production the one thing that Canada cannot do is make regulations to ensure that Canadians' needs are met first before allowing exports. It must either let the market do the allocation or force Canadians to accept a proportional cut in supplies.

Interestingly, at the provincial level the Alberta Energy and Utilities Board still has a requirement to ensure that Alberta's needs for the next 15 years can be met before issuing an export license.

A bit of a shame that the writer doesn't dig deeper. And Canada can decrease its exports, but only in increments calculated over the prior 36 months.


Thanks for the feedback. Bear in mind I am writing for a general audience which includes one independent weekly newspaper in norhtern Illinois. Suffice it to say I wasn't at all prepared for the cold shower that came in the form of two David Hughes presentations at the ASPO-USA conference 10 days ago. After ruminating on his sobering conclusions (WI is loaded with ruminants:<p) I decided to capture the basic thrust first and drill a little deeper into this issue in future columns. <BR>

This issue is more than just a passing concern to us. Enbridge is proposing to build a dual-purpose pipeline to and through Wisconsin. This pipeline will transport Canadian bitumen to American refineries and carry diluents back to Alberta. After his presentations, Hughes told me that the pipeline is a "done deal". I'm not so sure about that. The more people here become aware of Canada's natural gas woes and how that might stop the tar sands rush dead in its tracks, the more the resistance against Enbridge's will build.

Some of his phrases are so similar to mine, they make me think my MTL articles get read in Wisconsin. Shameless self promotion? Not really, the paper's audience dictates a much different approach, less knowledge can be assumed. And never enough space.

Sorry to disappoint, but I have not read your articles nor do I know what MTL stands for. Would you kindly enlighten me. I'd like to read them.

Michael, Madison

BTW, how much of that natural gas do we need to make fertilizer?  would be nice to know when I should be buying up some MRE's.