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Towards a

continental
crude oil and
natural gas
strategy

Bigstock
Gerry Angevine

I
n 2008, the Fraser Institute identified and the policy recommen- investment opportunities abroad.1
published a Vision for a Con- dations that were put forward. The primary objective is to ensure
tinental Energy Strategy (Klein that Canadians, Americans, and
and Tobin, 2008). In 2010, Mexicans can realize the maximum
the Institute released two studies A continental energy possible economic and social benefits
of North America’s crude oil and strategy from development of the continent’s
natural gas supply potential and energy resources through free and
requirements. These two studies The envisioned strategy is to have open markets, including energy trade
flagged roadblocks that stand in North American energy policies at with the rest of the world. Acceler-
the way of achieving petroleum de- the national, provincial, and state ated development of North America’s
velopment in a manner consistent levels aligned, as far as possible, in energy resources, spurred by market
with the goals and objectives of a support of efficient and rapid de- opportunities both at home and
continental energy strategy (Ange- velopment of the continent’s energy abroad would trigger employment
vine, 2010a; 2010b). This paper sum- resources in light of market condi- and income growth and contribute
marizes both the obstacles to market tions, science-based environmental to an improved quality of life.2 In-
development of the continent’s pet- concerns, and competition from creased availability of petroleum sup-
roleum resources that those studies oil and gas imports and petroleum plies from the continent’s indigenous

30 Fraser Forum March/April 2011 www.fraserinstitute.org


sources would also increase the range investment than elsewhere in North been underway for some time off
of oil and gas supply options that are America and overseas.3 of Canada’s east coast. A scientific
available to consumers. Further, in- task force review initiated by the
creased development and production Government of British Columbia
of the continent’s energy resources 2. Royalty regimes that fail in 2002 concluded that, with appro-
would bolster the security of oil and to recognize the higher costs priate safeguards and assessments
gas supplies (Klein and Tobin, 2008). of unconventional supplies of project proposals, the moratoria
Because market forces will de- on hydrocarbon exploration and
termine the most efficient allocation Royalty and production tax regimes development off British Columbia’s
of North America’s energy resources, that fail to take into account the shores could be lifted. However, the
our continental energy strategy fo- higher costs of petroleum develop- freeze on activity continues (British
cuses on ensuring that government ment and production from uncon- Columbia Ministry of Energy Mines
policies and regulations pertaining ventional and offshore resources and Petroleum Resources, 2002).6
to energy resource investment, de- relative to conventional, onshore
velopment, consumption, and trade sources of supply are yet another
are stable, fair, and appropriate. Gov- barrier to investment. Where this 5. Delays in oil and gas pipeline
ernments must avoid intervening in is the case, exploration for, and regulatory approval processes
energy investment decisions. Such development of, production facili-
decisions are best left to entrepre- ties involving higher cost oil and In December 2010, when the Na-
neurs who have an in-depth know- gas supply sources is likely to be tional Energy Board issued its deci-
ledge of the technologies involved constrained.4 sion about the Mackenzie Gas Pro-
and are prepared to take calculated, ject, more than six years had elapsed
educated risks (Klein and Tobin, since the consortium led by Imperial
2008). 3. Uncertainty regarding the Oil Resources Ventures Ltd. applied
course of environmental policy for permission to construct the
project. Although this is an excep-
Barriers to The cost of complying with policies tional case, it serves to illustrate how
development of the aimed at reducing CO2 and other lengthy and costly the regulatory
continent’s oil and gas greenhouse gas emissions which approval process can be. Delays in
some believe are contributing to the construction of a pipeline which
resources global warming is of particular prevents incremental oil or natural
concern to existing and potential gas supplies from reaching their
Unfortunately, a number of regu- oil sands producers and investors, market can impact consumers by
latory and taxation barriers are as well as heavy oil producers in increasing the local cost of natural
discouraging investment in the Western Canada, California, and gas or oil products. Moreover, delays
North American petroleum sector elsewhere.5 Without clear policies, in construction, which increase the
and making it difficult for projects potential investors will be unable capital cost of a pipeline because of
here to compete with development to determine the cost of compli- wage and price inflation during the
opportunities in other parts of the ance with the anticipated regulatory delay period, can result in higher
world. These include: changes. As a result, some projects transportation costs since pipeline
are likely either to be put on hold or tariffs are based on the cost of ser-
dropped. vice including depreciation and
1. Uncompetitive royalty interest.
regimes The National Energy Board
4. Moratoria on offshore has self-imposed “standards” re-
The tax structures facing the oil and exploration and development garding time schedules to follow
gas industry in North America, in- when releasing decisions following
cluding royalties and production Moratoria on offshore exploration the completion of public hearings.
taxes, need to be competitive with as, for example, in the Queen Char- However, these are arbitrary and
those elsewhere. In some provinces lotte Basin off of British Columbia’s serve only as guidelines. To ensure
and states, oil and gas production mainland, are another obstacle to a more rapid response to pipeline
is taxed to an extent that makes investment in petroleum explora- construction applications in Can-
them less desirable locations for tion and development. Exploration, ada, the National Energy Board
investment for petroleum industry development, and production have Act needs to be revamped to focus

www.fraserinstitute.org Fraser Forum March/April 2011 31


government involvement in the
construction permitting process
on the non-commercial aspects of
proposed projects, such as safety,
environmental impacts, and other
matters of public importance (An-
gevine, 2010a).

6. Land claims and access com-


pensation disputes

Uncertainty over land claims or


demands by aboriginal groups for
compensation can have serious con-
sequences for the development of
energy projects because an unsettled
dispute can result in a project being
deferred indefinitely.

7. Political constraints on
upstream investment

Laws and regulations that forbid


foreign investors from sharing in the
risks and rewards from the discov-
ery, development, and production of
oil and gas will result in slower pro-
duction growth than would occur
otherwise. This is the case in Mexico,
which nationalized the petroleum
industry in 1938, causing foreign- Bigstock
owned oil companies to leave the Offshore drilling may face continued moratoria until environmental issues have been resolved.
country. In 2008, the Mexican gov-
ernment introduced a number of
reforms designed to increase petrol-
eum exploration (Mueller, Thomas, from indigenous sources and im- timely investment in petroleum pro-
et al., 2008), but they fall far short of prove domestic oil and natural gas duction and transportation facilities
introducing a truly free market since supply and demand balances (and compared with other industries, and
ownership of any hydrocarbons that thereby lower import requirements) with oil and gas industry investment
are discovered through exploration in North America (Angevine, 2010a opportunities overseas.
is reserved for the state. and 2010b). However, in order for A specific North American oil
citizens to reap the benefits from and gas strategy should include the
accelerated development of the con- following:
Towards a continental tinent’s petroleum resources, energy
crude oil and natural policies in Canada, the United States,
and Mexico need to be reformed. Es- 1. Ensure that oil and natural
gas strategy gas royalties are competitive
sentially, the policy structure needs
to become more market-oriented
The potential exists to grow the to ensure that North America does In order to attract investment re-
capacity to produce petroleum not impose unnecessary barriers to quired for the development of oil

32 Fraser Forum March/April 2011 www.fraserinstitute.org


and natural gas production and ahead with oil and natural gas de- Canada is to provide First Nations
pipelines, Canadian and US juris- velopment projects and energy pipe- bands through whose territories a
dictions need to ensure that their line construction. For this reason, proposed pipeline would pass with
royalty regimes are competitive with provincial, state, and federal gov- a share in the ownership of the fa-
those of competing jurisdictions in ernments need to make the details cility so that they may benefit from
Latin America and overseas. of regulatory changes that they are in ongoing operations. One example
the process of implementing public of this is the British Columbia Gov-
without unnecessary delays. ernment’s decision to grant First Na-
2. Reflect the higher costs of tions groups $32 million to invest in
producing oil and natural gas the Kitimat to Summit Lake Pipeline
from unconventional and fron- 4. Remove barriers to offshore that the Pacific Trails Pipeline Part-
tier sources in royalties development nership (PTP) is planning to build to
Moratoria on petroleum exploration supply natural gas to PTP’s proposed
The governments of Canadian and production in offshore areas Kitimat LNG Terminal (Daily Com-
and American jurisdictions must should be lifted once the authorities merical News, 2009). Another, is the
reflect differences in the cost are satisfied that the environmental Aboriginal Pipeline Group’s (AGP)
structures between conventional risks can be mitigated. Doing so will one-third interest in the proposed
oil and natural gas production, open new areas for potential discov- Mackenzie Gas Project, with one of
on the one hand, and production eries and allow additional indigen- the interested parties (TransCan-
from unconventional and frontier ous oil and gas supplies to be tapped ada Pipelines Limited) providing
sources of supply such as the oil if the exploration is successful. financing to native groups to allow
sands, coal bed methane, tight them to buy into APG. Currently,
sands, shale formations, the deep- Enbridge Inc. is reportedly offering
water outer-continental shelf, and 5. Streamline regulatory pro- First Nations groups that would be
the northern frontier, on the other, cesses pertaining to pipeline directly impacted by the company’s
in their royalty structures if they construction permits proposed Northern Gateway project
wish to attract greater investment a 10% equity position, financing, and
in exploration and development of Additional pipeline capacity will be 1% of pre-tax earnings (Enbridge,
the more costly sources of sup- needed to transport new oil and gas 2011 and O’Meara, 2011).
ply. A universal, flat, net-revenue supply sources to market. Regulatory
approach to the determination of processes for obtaining construction
royalties, similar to the reforms permits need to be reviewed to en- 7. Reduce the frequency of
to personal and corporate income sure that unnecessary impediments disputes with regard to land
tax calculations proposed by are not allowed to stand in the way access issues
Clemens et al. in a 2008 Fraser of project construction.
Institute study, would overcome Where they are not already in place,
this problem (Clemens, 2008). In fair and appropriate means must be
lieu of such fundamental reform, 6. Develop more efficient and found to prevent delays in develop-
jurisdictions need to review royalty fairer procedures for resolving ment from occurring because of
regimes with regard to high cost native land claims disputes over the amount of com-
sources of petroleum supply to pensation to be paid to land owners
ensure that they are competitive. Approaches for settling native land for access to land—whether by pet-
claim and compensation issues ex- roleum operators for exploration or
peditiously and in a fair and appro- operations, or investors seeking to
3. Reduce environmental priate manner need to be found in build oil or gas pipelines.
policy uncertainty order to help to prevent such claims It would be beneficial if the
from delaying pipeline construction results of recently negotiated settle-
Uncertainty concerning the tim- and saddling eventual users with ments in the region were made
ing and specifics of environmental inappropriately high transportation publicly available as is the case with
policy changes can significantly costs. An approach which appears real estate transactions. Improve-
impact investor decisions to move to be gaining commercial favour in ments in the quantity and quality of

www.fraserinstitute.org Fraser Forum March/April 2011 33


available information would help to speed up the nego- References
tiating process and require fewer cases to be referred to
public tribunals. Alberta Department of Energy (2010, May 27). Alberta Stimu-
lates New Energy Investment and Technologies. News re-
8. Strive to remove political constraints on for- lease. <http://alberta.ca/acn/201005/28441DB838B27-0336-
eign investment in Mexican natural gas explora- BB5C-D5EDFEDE158ED1F6.html>, as of January, 26, 2011.
tion and development Angevine, Gerry (2010a).Towards North American Energy
Security: Removing Barriers to Oil Industry Development.
Allowing foreign companies to explore for oil and gas Fraser Institute. Studies in Energy Policy (September).
in Mexico, to develop and operate production facilities, Fraser Institute.
and to market gas there—subject to market condi-
Angevine, Gerry (2010b). North American Energy Natural
tions and a globally competitive royalty structure and
Gas: Reducing Investment Barriers. Fraser Institute Stud-
taxation framework—would facilitate a much-needed ies in Energy Policy (November). Fraser Institute.
influx of capital and expertise. This would allow Mexico
to increase its oil and gas production and avoid becom- Angevine, Gerry and Miguel Cervantes (2010). Global Petrol-
ing a net importer of petroleum supplies. eum Survey. Fraser Institute. <http://www.fraserinstitute.
org/uploadedFiles/fraser-ca/Content/research-news/re-
search/publications/global-petroleum-survey-2010.pdf>,
Notes as of January 26, 2011.
British Columbia Ministry of Energy, Mines and Petroleum
1 This in not meant to imply harmonization of policy frame- Resources (2002, January 15). Report of the Scientific Re-
works but, rather, to have each jurisdiction seek policies which view Panel on British Columbia Offshore Hydrocarbon De-
the responsible officials believe are necessary to foster petrol- velopment. <http://www.empr.gov.bc.ca/OG/offshoreoil-
eum resource development in light of the particular circum- andgas/ReportsPresentationsandEducationlMaterial/Re-
stances. ports/Pages/BCHydrocarbonDevelopmentReport.aspx>,
2 This assumes that the economies are at less than full em- as of September 10, 2010.
ployment such that inflation does not erode real incomes.
O’Meara, Dina (2011, February 10). Enbridge to Offer Natives
3 This is reflected in the relatively poor scores that Alberta, $380 Million. Calgary Herald.
California, Colorado, Newfoundland and Labrador, New
Clemens, Jason (ed.) (2008). The Impact and Cost of Taxation
Mexico, New York, and the Northwest Territories achieved
in Canada: The Case for a Flat Tax Reform. Fraser Institute.
relative to most other Canadian and US jurisdictions—and
many other countries—in relation to fiscal terms (royalties or Daily Commercial News (2009, April 15). First Nations in
production taxes) in the 2010 Fraser Institute Global Petroleum Northern British Columbia Sign PacificTrail Pipelines
Survey (Angevine and Cervantes, 2010). Partnership. <http://www.dcnonl.com/article/id33382>,
as of February 10, 2011.
4 Alberta recently introduced special incentives that lower
royalties for unconventional gas production and—in the Enbridge (2011). Aboriginal Equity Ownership (in the North-
case of deep or horizontal oil and gas wells—all situations ern Gateway Project.) <http://www.northerngateway.ca/
where the cost of production can be higher than with conven- aboriginal-partnerships/equity>, as of February 10, 2011.
tional gas production (Alberta Department of Energy, 2010).
Klein, Ralph, Brian Tobin, and Gerry Angevine (2008). Vision
The very perception that special adjustments are necessary,
for a Continental Energy Strategy. Fraser Institute Digital
though, suggests that the royalty regime is flawed.
Publication. (February). Fraser Institute.
5 Oil sands and heavy oil projects involve greater carbon
Mueller, Thomas, Federico Santacruz, and Jorge Oria (2008, De-
emissions per unit of production than conventional light/
cember 1). Energy Reform Falls Short. International Financial
medium oil production.
Law Review. <http://www.iflr.com/Article/2072926/Energy-
6 The failure of automatic flow shut-off controls to activate Reform-falls-short.html?Print=true>, as of January 26, 2011.
when the rig at the BP Deepwater Horizon site in the US Gulf
of Mexico exploded in April 2010, causing hundreds of thou-
sands of barrels of crude oil to leak into the Gulf with untold
environmental damage, will make it more difficult to sway
those who argue that risks to the environment from offshore
drilling cannot be adequately controlled.

34 Fraser Forum March/April 2011 www.fraserinstitute.org