Prime Minister Stephen Harper is promoting Canada as an "emerging energy superpower." The term sounds good, because energy-rich countries tend to have outsized economic and political clout, not to mention exchequers brimming with petro-bucks. Russia comes to mind. Under Vladimir Putin, the country is building massive energy projects, and using them to restore some of its imperial glory. A few years ago, Russia didn't really matter. Now countries come begging for its oil and gas, and Mr. Putin extracts a hefty price.
And Canada? Canada is indeed energy rich, but where is the economic and political power that comes with it? So far, Canada seems utterly content to act as a storehouse of resources for the U.S. market. We pump (or dig) it out of the ground and export it as fast as we can, end of story. Exports alone utterly define the value proposition.
Take Enbridge. Yesterday, Canada's second-biggest pipeline company announced at a conference in Beijing that it expects to operate the $4-billion (U.S.) Gateway pipeline by 2014 (which is later than company had contemplated). The 1,100-kilometre tube would take oil from the Alberta oil sands to a port on the British Columbia coast, where it would be sent by tanker ships to Asia. Two state-controlled Chinese oil companies, PetroChina and Sinopec, would have some role in the project. In the meantime, Enbridge is accelerating the development of its Alberta Clipper crude oil pipeline to the United States.
The Gateway pipeline is not to be condemned. It's in Canada's best interests to diversify its oil markets. Having a big foreign buyer besides the United States makes sense, even if the prospect of Canadian oil flowing offshore must make the Americans nervous; they don't consider Alberta a "foreign" supplier. The problem is the endless promotion of the pump-and-dump culture.
Canada could instead move up the value chain, and become a world-class upgrading and refining centre. It could create an entire industrial economy around the oil sands. Yet all the big recent business decisions are pushing the country in the opposite direction.
EnCana recently signed an $11-billion pact with ConocoPhillips to expand EnCana's oils sands production, and send the bitumen to Conoco's refineries in Illinois and Texas, where it would be turned into gasoline. This is the equivalent of sending raw logs to the United States to be turned into finished products like flooring and furniture.
Royal Dutch Shell may do the same. The proposed buyout of the minority interest in its Canadian subsidiary, Shell Canada, might be followed by a deal to ship Shell's oil sands production to American refineries. Analysts have said the privatization of Shell Canada is all about tying the oil sands production into Royal Dutch's refining infrastructure.
Many MPs and Alberta MPPs were upset by EnCana's decision to ship unprocessed oil to U.S. refineries. But both levels of government are guilty of shortsightedness. The Alberta government created a traffic jam in the Athabasca oil sands. It licensed dozens of projects, then compounded the error by dropping royalty rates on new projects to practically nothing until capital costs are recovered. The result was outrageous cost escalation, with some of the bigger developments running billions of dollars over their original budget estimates. There is no money left for refineries, and no spare workers to build them if someone wanted to.
The feds' sin is the failure to promote an industrial policy that would move the Alberta oil industry up the value chain. Instead, Ottawa has provided the industry with billions of dollars in tax breaks, such as the accelerated capital cost allowance, to expand production at a reckless rate. Upgrading Alberta's bitumen is becoming the right and privilege of U.S. energy companies.
Various Alberta politicians, including a couple of men who are vying to replace Ralph Klein as Tory premier, have talked about encouraging oil producers to upgrade bitumen in Alberta through the royalty regime. If they were to choose not to upgrade locally, they would face higher royalty rates. That talk is fading, and it's probably too late to deploy the royalty stick.
Once the bitumen crosses the border, it's hard to slow the flow. U.S. refineries are being modified and expanded specifically to handle Alberta bitumen. Those multibillion-dollar investments would be at risk if the bitumen did not arrive. NAFTA's investment provisions might have something to say about it, too.
Still, Mr. Harper has the glorious idea that Canada is the next energy superpower. Someone should ask how he defines power. So far, it looks like "supersupplier" is the apt description. No one has to beg to get Canada's energy. It just flows out of the country, no economic and political strings attached.
ereguly@globeandmail.com