energy superpower, analyzing the rapid expansion of the Cana- dian energy sector and exam- ining possible export markets. With the United States and Asia become less dependable as export markets, the authors argue Canada should shift its focus to Europe. Transatlantic Security Task Force Series Policy Brief Canada as an Energy Superpower: Myths and Realities by Ferry de Kerckhove and George Petrolekas German Marshall Fund of the United States-Paris 71 Boulevard Raspail 75006 Paris T: +33 1 47 23 47 18 E: infoparis@gmfus.org October 2014 Introduction In 2013, Russia sold to the European Union and Turkey a record 162 billion cubic meters of natural gas, out of which 86 billion cubic meters tran- sited through Ukraine. In compar- ison, Canada produces 165 billion cubic meters of (liquifed natural gas) LNG annually, a fgure that is expected to rise signifcantly in future. Given the present situation and the tensions between Russia and the West, Europe, which is heavily depen- dent upon Russian gas, understand- ably fears potential supply cuts, and some European countries are already pleading for LNG exports from North America. But were both the United States and Canada to decide to supply LNG to Europe mainly Central Europe the frst shipment of North American LNG would not reach Europe until 2016. Many things can go wrong between now and then. Yet, a positive message would be a huge contribution to not only assuage the existing fears, but would free Europe from some of the geo-political constraints it is now feeling. Hence there is a need to have a clear and dispassionate look at the validity of the North American option. A European Option for Canada? While considerable focus of late has been on the transformation of the United States from an energy importer to a top producer of hydro- carbons and a likely major exporter, the role of Canada in the worlds energy mix is ofen ignored, primarily as Canadian oil and gas production is subsumed statistically into North American energy production and consumption fgures. For reasons of history and geography, most Cana- dian production has found markets to its south. Te prime minister of Canada has had a very diferent take, having argued since 2006 that the country has the resources and the capacity to become an energy superpower. It would be a serious mistake, in this day and age of revisiting Europes dependency on Russian oil and gas, to dismiss the potential contribution of Canada to Europes energy mix. Canadas energy riches are divided into three categories: oil (conven- tional oil and oil sands), conventional natural gas, and shale gas. Each are covered below. Oil Reserves Te following graphics provide a good snapshot of Canadas oil reserves. Tese antagonized Euro- pean lawmakers until the signing of the Canada-EU Comprehensive Transatlantic Security Task Force Series Policy Brief 2 Economic and Trade Agree- ment. Te fgures are telling: it has the third largest proven reserves in the world and a likely output of 3.5 million barrels a day by next year. But the Achilles heel is clearly the dependency on exports to the United States. And the U.S. market is giving Canada a lot to think about. Indeed and somewhat ironi- cally, the Keystone debacle an ongoing saga of delays in the U.S. decision to allow the transport of tar sands oil from Canada to U.S. refn- eries and the gas accord between Russia and China have put a series of dents in Canadas energy export outlook. Te United States is no longer the assured market Canada counted on even though there are 80 pipelines between Canada and the United States and Keystone is or would only be the 81 st . Hope to export LNG and oil to Asia has been stalled by pipeline and terminal construction issues potentially with a price diferential. Te fnal dent is Canadas fuctuating relationship with China (a phenom- enon common to other Western countries). Tus, Europe may actually become the market of choice. Key, of course would be the speed at which Canada could engineer its LNG export capacity a function of expanding terminal capacity as the energy geography shifs from a Canadian/U.S. market to overseas markets. Further- more, Canada would prefer the European market now that the European Commission has mellowed its take on Canadas oil sands. It could be timely since several mega- projects in Alberta have been temporarily shelved such as the $11-billion Joslyn North oil sands mine and Royal Dutch Shells 200,000 barrel-a-day Pierre River mine. A Glance at the North American Oil Market While it is undeniable that the North American energy picture is being transformed, there are still a lot of uncer- tainties out there. And while the United States is becoming a major gas exporting country it even accounts for 16 percent of the gas requirements of the Canadian province of Ontario it will still depend on energy imports for years to come, albeit at a lower level. But the evolution of the hydrocarbon situation in North America will force Canada and, to a certain extent, the United States as well, to rethink the North-South policy framework and reevaluate the East-West options. Canada is defnitely embroiled in difcult domestic debates on that score. Canada also needs to develop LNG export facilities (see Figure 3). While Mexico is quantitatively a large player, it is somewhat tech- nologically challenged in the present equation and needs a major restructuring of its industry even from a constitu- tional perspective since Pemex accounts for one-third of the Mexican governments budget. Globally, both tight or shale oil in the United States and oil sands in Canada ofer huge opportunities and raise new issues, including the quest by industry for new markets and the need for very large production investments. As Professor Monica Gattinger 1 points out, the issues are complex from a market perspective, including environment impacts, energy security concerns, dependency issues, 1 Monica Gattinger, Securing Canadas Energy Future, March 21, 2013, Atlantic Council of Canada Conference. Figure 1 Alberta Oil Sands Transatlantic Security Task Force Series Policy Brief 3 until the Keystone pipeline ripped apart the blissful picture. Yet, opportunities remain signifcant despite the changes, including a reduc- tion in U.S. imports by half. Te real issues are infrastruc- ture constraints 2 and the risk of the bonanza tapering of faster than predicted. Both Canada and the United States are looking at expanding their LNG export capacities but have to resolve infrastructure and environmental/policy issues. Of course, there will always be the more expensive option for both countries of developing Northern/Alaskan resources (this might also require the United States and Canada to imitate perish the thought Russia and Norway and conclude an agreement on northern mari- time boundaries). Clearly, Canadas energy strategy will be very much dependent on the dynamics of the market. For instance, today, since its export market, including most of its refning, is nearly totally dominated by the United States, the price at which Canada sells its oil is that of a price-taker. Tus, Canadas oil from oil sands sufers a discounted price (West Texas intermediate vs. Brent Crude instead of Western Canadian Select) due to glut and pipeline shortage. For the longer term, demand will continue to grow as per OECD projections, but Canada has no choice but to 2 Railway transportation of oil is the most ineffcient method of all, yet oil is shipped by train from the North Dakota Bakken oil feld to New Brunswick on Canadas Eastern Seaboard. Figure 2 Dependence on U.S. Oil Trade Figure 3 North American LNG Import/Export Terminals infrastructure build-up and protection, social acceptability, and government policy and regulations. Te energy relationship between Canada and the United States, being market based and covered by the North American Free Trade Agreement (of note: Pemex is exempted from the NAFTA provisions) were pretty smooth Transatlantic Security Task Force Series Policy Brief 4 develop alternative markets. Te question is where. As to what, LNG seems to be the answer. Conventional Gas and Shale Gas Canadas conventional gas production, although important, is decreasing as Figure 4 demonstrates. 3 It is important to note that while conventional gas production is declining, conventional gas production overall exceeds Canadian domestic consumption, which is what provides a modest glut for export to the United States. However, Canada, 3 http://commonsensecanadian.ca/shale-gas-lng-exports-elephant-room/canadian- gas-production-ziff-aurora_/. Figure 4 Canadian Gas Production to 2050 much like the United States, will have to develop its shale resources if it wants to become a key international energy player. And the resources exist if they are developed. Canada must fnd markets beyond the United States for its gas as the latters imports of Canadian natural gas decline (see Figure 5). Tis is a function of the United States having increased its proportion of shale based gas in its overall production volume; in Canada, the shale gas exists, but has not been developed as extensively. Canada is therefore only in the early days of shale gas development, given that conventional gas meets current domestic require- ments and still provides some export revenues with the United States (see Figure 6). Figure 7 may help explain how revolutionary shale gas may be in the production of geopo- litically secure energy supply. North America accounts for about one-half of the worlds estimated shale gas reserves. Canada alone has nearly 10 percent of the worlds proven reserves, and with a popula- tion of only 33 million people, capacity will far exceed domestic gas requirements. As a result, Canada, and for that matter North America as a whole, represents the greatest source of a politically secure energy supply for Europe. Asia May Not Look As Great As Once Thought As a Canada Asia-Pacifc Foundation report of June 2012 underscores, 4 At present, Canadas economic relationship with Asia is at best embryonic. As Canadians 4 http://www.asiapacifc.ca/sites/default/fles/flefeld/canada-asia_energy_futures_ task_force_-_fnal_report_2.pdf Figure 5 U.S. Natural Gas Net Imports from Canada (billion cubic feet per day) Transatlantic Security Task Force Series Policy Brief 5 work to build and expand that relationship, and to attract Asian investment in their economy, potential trade in energy commodities, technologies and expertise provides a wealth of opportunities. Our energy resources are abun- dant but underutilized, while Asias demand for energy is voracious and growing. However, these opportunities will be realized only if the supporting policies, infrastructure, and public support can be put into place. Te report also emphasizes that instability in traditional oil-exporting nations is prompting major Asian energy importers especially China, Japan, and Korea to look for alternative sources of supply. Events in the past year indicate the gas supply equally sufers from some instability. Investment from Asia in the Canadian hydrocarbon industry has grown and Asia is clearly the area of growth in the world. So it is perfectly logical for Canada to look at Asia as the outlet for its energy resources. But at the same time, it should not become totally dependent on the Asia market as conditions can change e.g. the recent oil and gas deal between Russia and China, which makes Canadian energy, temporarily at least, far less competitive. British Colum- bias hopes for a partnership with the province of Alberta to become a major exporter of LNG and oil may have been delayed as Canada deals with domestic impediments such as First Nation land rights. And U.S. competition will also become a major factor, which would call for a greater diversifcation of markets and product ofer- ings. Since China controls world oil and gas production facili- ties equivalent to the yearly oil output of Kuwait (3 million barrels a day), there is an additional danger in being too close to a country that is not guided by market rules for its energy supplies. Since the sale of Nexen to China which failed to acquire UNICAL of the United States 18 months earlier the Canadian government has adopted some slightly tougher policies with respect to foreign takeovers of Canadian energy companies, but it still lacks a solid instrument of control. Figure 6 Shale Gas as Share of Total Dry Natural Gas Production (2012, billion cubic feet per day) Figure 7 World Shale Gas Reserves Transatlantic Security Task Force Series Policy Brief 6 Tese are some of the reasons why LNG companies in Canada are looking seriously at export projects to Europe from the East Coast. 5 Te Australian company Liquefed Natural Gas Ltd. is looking at a Nova Scotia development to ship LNG to European ports starting in 2016. Te govern- ment of Canada also recognizes the shif in North Amer- ican LNG projects: As unconventional gas production increases, the U.S. is becoming increasingly self-sufcient with respect to natural gas. Pipeline exports from Canada to the U.S. are decreasing. With ample unconventional resources, industry is shifing its focus from importing LNG into North America to exporting LNG from North America. 6
Tere is therefore some hope that Canada will become a player in the European market and this would be sound both politically and economically. 5 There are already some LNG export deals between Canada and Germany slated to begin in 2020 with shipments from Halifax. 6 http://www.nrcan.gc.ca/energy/natural-gas/5683. Te views expressed in GMF publications and commentary are the views of the authors alone. About the Authors Ferry de Kerckhove is a senior fellow at the Graduate School of Public and International Afairs, Faculty of Social Sciences, University of Ottawa; a member of the Canadian Defense and Foreign Afairs Institute; and a member of the Board of the Conference of Defense Associations Institute. From 2008 to 2011, he served as Canadas ambassador to Egypt. George Petrolekas spent most of his army career in mechanized units rising to command of a regiment. Most recently, he has served as a strategic advisor to the current Canadian Chief of Defence Staf on the Afghan detainee fle. As a marketing executive he has had exten- sive experience in high technology medium, and start-up enterprises in the telecom sector. About GMF Te German Marshall Fund of the United States (GMF) strengthens transatlantic cooperation on regional, national, and global challenges and opportunities in the spirit of the Marshall Plan. GMF does this by supporting individuals and institutions working in the transatlantic sphere, by convening leaders and members of the policy and business communities, by contributing research and analysis on transatlantic topics, and by providing exchange opportunities to foster renewed commitment to the transatlantic relationship. In addition, GMF supports a number of initiatives to strengthen democracies. Founded in 1972 as a non-partisan, non-proft organization through a gif from Germany as a permanent memorial to Marshall Plan assistance, GMF maintains a strong presence on both sides of the Atlantic. In addition to its headquarters in Washington, DC, GMF has ofces in Berlin, Paris, Brussels, Belgrade, Ankara, Bucharest, and Warsaw. GMF also has smaller representations in Bratislava, Turin, and Stockholm. Contact Dr. Alexandra de Hoop Schefer Director, Paris Ofce German Marshall Fund of the United States Tel: +33 1 47 23 47 18 Email: adehoopschefer@gmfus.org