The challenges and opportunities in the Canadian energy sector are hot topics of discussion as the industry waits for the outcome of the 2024 U.S. elections.
Although analysts with Economist Intelligence have declared the US presidential election is now a toss-up, the publication also recognizes that during the Biden presidency, three critical laws—the CHIPS and Science Act, the Bipartisan Infrastructure Law and the Inflation Reduction Act (IRA) have created an ambitious and formidable industrial policy to subsidize decarbonization. The IRA in particular has radically increased the amount of federal funding for U.S. firms, creating stiff competition for other jurisdictions for capital investment in their projects that advance the energy transition.
At the recent Energy Disruptors 2024 conference in Calgary, two speakers addressed the critical role of using various forms of energy in approaches that could shape the Canadian and American industries going forward.
John Stackhouse, Sr VP, Office of the CEO at RBC sat down with Andrew Gillick, Managing Director, Enverus discussing ways to inform and improve the energy transition narrative. Andrew Gillick questioned how the paths to any energy transition can be planned for the long term.
“How do we get to the goals rather than complaining about the problems,” Gillick said. “If we are able to set our minds, as a country or as allies to say ‘OK, we need to achieve this goal in this timeframe and these are the different paths that we need to take,’ it has to be planned – it just cant be haphazard. You need longer term incentives, not just an IRA with uncertain or yet defined benefits and timelines. You need a 20-year structure so that the investment community feels comfortable coming in and taking the risk to bring forward the technologies.”
John Stackhouse pointed out that currently the IRA and the Bi-partisan Infrastructure Law in the US have collectively added up to $500 bn – a historic half a trillion in 3 years. Can that pace be continued? Can the U.S. afford to keep it going for 20 years and can the rest of the world afford to keep pace because he’s heard from Europeans that they cannot outspend or even keep pace with the U.S. incentives.
Gillick stated that as long as the government establishes a long-term framework outlining its goals and providing clear, long-term incentive structures, it won’t need to shoulder the entire burden of investment. Such a framework would give investors the confidence to deploy capital at a rate five to six times greater than the government’s capacity, as the risks associated with new technologies are mitigated. However, he emphasized that while investor confidence needs to increase, there is still concern that the government ‘tap will turn off.’ He acknowledged that while the IRA reduced some uncertainty around tax credits in the U.S., Canada still faces some unresolved uncertainties.
For the question, will the industry see the day when credits could be harmonized across jurisdictions globally? The answer seemed to be that a clean energy industrial strategy needs to be done right at home in Canada and allied with the U.S. before it could be successful in a multilateral way.
Could Canada align more with the U.S. on energy security? We produce oil and gas, nuclear and are developing a supply chain for critical minerals, plus hydro and renewables. We are certainly poised for a powerful mix of true “Energy Diversity” rather than just a transition. So how do we create a more confident system that allows investors to say ‘OK, I’m going to make a 20-year bet”, which is what energy projects require? Part of the answer seemed to be to bring supply chains closer to home and create supply chains that are not at risk. Getting more Canadian projects to FID was identified as an important factor in terms of talent retention. Both speakers agreed that once a major project is completed (like an LNG plant), the workers will disperse if they do not have another project to go to. At the end of the discussion, the audience was left with an interesting question in their minds- “Will the next generation be living in a world of both clean and affordable energy?
We’ll have to look to the outcomes of both U.S. and Canadian elections for clues to that answer. Trump’s proposals for sweeping tariffs on all imported goods do not bode well for Canada’s oil and gas industry. According to CAPP’s March 2024 report:
“ Canada exported over 80% of its total oil supply to the United States in 2023. Canada is the United States’ largest foreign crude oil supplier, making up ~60% of all United States imports in 2023, equating to roughly 5X the next biggest supplier, Mexico.”
According to oilprice.com, the United States still imports roughly 6.5 million barrels of oil each day for refineries in the U.S. Gulf Coast region that are set up to process the heavy sour crude grades that are sourced from places like Canada – not the light, sweet oil produced domestically. The tariffs would negatively impact gasoline prices in the major gasoline-consuming states – like Florida or the New England states– that lack refining and pipeline infrastructure and rely on fuel imports.
Perhaps history is our best indicator of the possible outcome. For example, we’ve seen that in 2018 when Trump raised washing machine tariffs, that tax was passed on to consumers leading to sharply higher prices for both imported and domestic machines, increasing the costs paid by consumers dramatically. Interestingly, in 2020 Biden and Harris campaigned against Trump’s China tariffs but kept most of them in place during their term and even finalized increases this fall..
Ultimately, any elected U.S. administration may be influenced by the reports from various economists that predict the policy would be bad for growth, (2.8 to 9.7 percent lower GDP by 2028) and cause inflation to spike in the U.S. by 4.1 to 7.4 percent by 2026.
Maureen McCall is an energy professional who writes on issues affecting the energy industry.