Everyone east of the Rocky Mountains is looking over their shoulders to the B.C. election. What transpires Tuesday in Victoria will confirm the principle that government policy exerts a big influence in society's love-hate relationship with energy.
Some are conjecturing that a tax-and-regulate NDP government will be lights out for the oil and gas industry. That won't happen, because taxes, regulations and bans often lead to work-around outcomes in a free market, though not always favourable to the imposing jurisdiction.
Let's flashback to 1696, when the government of England imposed a window tax to generate revenue. A homeowner's tax bill became a function of his exterior windows. The public reaction was swift: Citizens boarded up their discretionary windows to minimize their tax burden.
A few years later, in 1709, the British government imposed a tax on candles (we can diarize this as the world's first carbon tax). No doubt the policy makers thought this a brilliant way to generate revenue from a vital human need. Darker rooms that resulted from the window tax implied that people would need to light more candles to avoid tripping over the dog. But that's not what happened. Most people – especially the low-income and impoverished segment of society – shunned expensive, tax-laden candles in favour of burning cheap plant stalks dipped in pig fat. The unintended consequence was a greater community fire-hazard and a revolting odour inside households.
There is a repetitive theme in energy history: markets and society quickly adapt to government policies, often in unpredictable ways, and not necessarily optimally.
Banning, restricting or delaying energy projects reinforces the theme. Take, for example, the anti-pipeline sentiments in B.C., in particular against Enbridge's Northern Gateway project and Kinder Morgan's Trans Mountain expansion. Yet in the eyes of the oil markets, these two potential conduits are just one of many fluid options. Railways and other free-market mechanisms are now happy to step in and marginalize B.C.'s pipeline projects over the near term, maybe forever.
Anyone following the rapid progression of recent industry trends has to wonder why oil pipelines even came up as an issue in the B.C. election. It's s though the politicians are still debating which players to take off the ice – when the opposing hockey team has already left the arena.
One thing is for certain, Figure 1, at left, shows that there has been no slowdown in Canadian exports of oil to the United States as a consequence of all the brouhaha in headlines, blogs and tweets; in fact, Canada's oil output and its exports to the south are at an all-time high.
That's not to say that oil pipelines like Northern Gateway and Trans Mountain are now irrelevant or no longer needed. Canada, through B.C. coastal access, has a real opportunity to claim sovereignty over its export decisions instead of sending more volumes through the United States to indirectly compete in global markets. Regardless of who wins the B.C. election, Alberta's oil won't stop flowing; if B.C. doesn't want the oil business, someone else will gladly take it. In fact, they already have.
Political rhetoric on the natural gas side of the business is not as harsh as oil. Both leading parties, the NDP and Liberals, realize the lucrative, multibillion-dollar potential of LNG export terminals and the potential for greater royalties and taxes on future gas production. The Liberals have hinted at taxes already and the NDP want to study the sustainable development of LNG.
Yet there is no need for an "expert-led" sustainability study to know one thing: The development of 12 LNG projects is wholly unsustainable. For one thing, the production ramp-up needed to serve all the conjectured projects outstrips total Canadian gas production.
Having a government that scares away some of the noisy competitors in the fray may not be a bad thing. The challenge for the ruling party will be to cull out the marginal players, not the best ones with the deepest pockets and greatest sophistication – environmental discipline, safety and logistics – to bring a sustainable number of projects to fruition.
The window tax that could board up the natural gas industry in B.C. is potential uncertainty about fracking policy. Investors shun jurisdictions with policy ambiguities and burdens, especially when there are more welcoming places to put dollars to work. Capital markets are callous and don't wait around for public consultations and white papers. Lacking clarity and confidence, the investment dollars will quickly leave, probably to the Alberta side of the Rocky Mountains, where the Deep Basin holds lucrative tracts of natural gas, too.
Tuesday's B.C. election, whichever way it goes, will likely trigger nervousness in the oil and gas industry, and in capital markets. Any anxiety will probably be overdone. The next government is unlikely to blow out the candle on more than $6-billion a year that Canada's oil and gas industry spends in the province.
Peter Tertzakian