Eric Nuttall, Partner and Senior Portfolio Manager, Ninepoint Partners LP
Originally Published on March 1, 2022
As a dad of three young kids, much of my non-working hours are spent trying to help them avoid self-inflicted injury. Fatherhood, it seems, has imbued me with the ability to foresee imminent potential doom such as head traumas and broken bones.
A key lesson I try to teach my kids is that while wisdom is often the result of experience, which is often the result of bad decisions, smart people try to learn from the mistakes of others rather than making the same mistakes themselves. Gain the wisdom, avoid the pain.
Is what we are witnessing in Europe a teachable moment for North America energy policy? Can we learn from the mistakes of others and improve North American energy reliability and affordability?
Europe, quite clearly, has an energy problem. Over the past several years, coal plants have been shuttered, nuclear plants decommissioned and some offshore natural gas fields prematurely abandoned, all in the name of decarbonization and environmental protectionism.
Proponents of such moves argued that “renewable” forms of energy such as wind and solar could easily make up the gap. Furthermore, Russia was willingly delivering meaningful amounts of natural gas into Europe, accounting for between 25 to 100 per cent of European countries’ natural gas needs. Despite already being a critical and now irreplaceable energy provider, Russia had intended to further increase its supplies into Europe via its Nord Stream 2 pipeline project. What could go wrong?
Let’s fast forward to late 2021 and the events of the present day. In the United Kingdom last winter, the wind stopped blowing by 90 per cent, the lowest wind production since 1961, which nullified much of its offshore wind energy capacity. Without adequate redundancies in place, coal plants were fired up and liquefied natural gas demand surged, resulting in the price of coal and natural gas rising by 175 per cent and 590 per cent, respectively, both making all-time or near all-time highs.
Power prices surged. At least 19 energy suppliers went bankrupt. The rise in energy costs trickled through the economy and made the production of necessities such as fertilizer uneconomic, which impacted CO2 production and indirectly threatened beer and meat production.
The U.K. Parliament introduced energy “rebates,” which, of course, is just government borrowing more money to offset increasing “energy poverty.” Could things get even worse? Sadly, we know the answer with the Russian invasion of Ukraine in recent days. What can Canadian energy policy-makers learn from this?
Canada, like Russia, is blessed with an abundance of natural resources. We have the world’s third-largest oil reserves and we’ll have the ability to ship natural gas from our west coast to global markets in the next few years.
In April, the Canadian government will announce its spring budget and several items relating to the oil and gas sector are expected. Some of these items may follow the path that Europe has chosen, placing restrictions on the growth potential of our energy sector. In a world in which energy is becoming weaponized, and demand is set to grow for at least another decade, is this prudent?
Canadian oilsands producers, responsible for 0.1 per cent of global CO2 emissions, have already pledged to reach net-zero status by 2050, and operate under one of the most stringent environmental regimes of any oil-producing jurisdiction in the world.
For example, according to Joule Bergerson of the University of Calgary, if the rest of the world’s oil production were held to Canadian standards for flaring, total greenhouse gas emissions from every barrel produced would drop by 23 per cent — the equivalent of taking 100 million cars off the road.
Market share that Canada voluntarily cedes due to any new restrictive legislation will be happily assumed by others that do not share our strong environmental stewardship, resulting in global emissions increasing, not decreasing, as the potential new policies intend.
Reducing hydrocarbon production also implicitly increases our dependency on renewables. The U.K.’s experience demonstrates that while renewable technology is promising, the required scale is just not there today to offer the necessary redundancies to be entirely relied upon.
If we eliminate hydrocarbons from the power mix, without having massive battery backup, what exactly do we do in winter when the sun doesn’t shine and the wind doesn’t blow?
Given the likely increase in global oil demand for at least the next decade and existing structural supply challenges to growth, such as years of chronic underinvestment in new production and the call by investors for maximum free cash flow and shareholder returns, is limiting our production growth potential prudent? It should be obvious: the world needs more, not less, of Canada’s abundant and ethically produced energy.
What about pipelines? Finland, as an example, imports approximately 94 per cent of its natural gas needs from Russia, which we can safely say is no longer viewed as a reliable energy provider. To have such a high dependence on a single energy provider is flawed policy.
Canada, meanwhile, exports 99 per cent of its oil to a single customer. Diversification is a necessity, and even with recent cost overages on the taxpayer-owned Trans Mountain Pipeline expansion project almost doubling to $21 billion, it is still of national imperative that the project proceed post haste.
Assertions that the project is no longer economic are wrong. Even with a $2-per-barrel increase in tolls, producers will still happily welcome the incremental takeaway capacity and much-needed customer diversification.
Parents know the value of a time out, a chance for a child to reflect on a mistake and learn from it. Perhaps it’s time Canadian energy policy-makers took one.
The United States currently imports about 595,000 barrels of oil from Russia every day, equating to a daily wealth transfer of US$54 million. At a stroke of a pen, this could in time be supplanted with some of the cleanest and most ethically produced oil in the world, requiring nothing but the support of a government that will, given the imminent cash taxability of the sector, receive the bounty of meaningfully increased tax revenue, which will aid in digging Canada out of its trillion-plus dollars of federal debt.
Let’s learn from the mistakes of others and not make them ourselves. The global energy transition will occur over many, many decades. For now, the world has an insatiable thirst for oil and it is growing every day. Let it be Canada that meets this need, and, in doing so, help both our citizens to prosper and the environment by not ceding market share to other countries who have vastly inferior environmental standards.