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Bracing for Trump: Energy sector fears competitive disadvantage

Dump trucks are parked near crude oil tanks at Kinder Morgan's North 40 terminal expansion construction project in Sherwood Park, near Edmonton, Alberta, Canada November 13, 2016.

CHRIS HELGREN/REUTERS

Canadian governments will face pressure to backtrack on commitments to dramatically reduce methane emissions from the oil and gas sector as president-elect Donald Trump is expected to reverse the Environmental Protection Agency's efforts to tighten similar regulations in the U.S.

Provincial governments in Alberta and British Columbia are proposing new rules that would require industry to invest in equipment to capture methane that is currently released in the production, processing and transportation of natural gas and oil. The provincial efforts are in line with a federal Liberal commitment to curb the release of methane, which acts as a powerful heat-trapping gas when released into the atmosphere.

The Canadian Association of Petroleum Producers has said it could cost "hundreds of millions" of dollars for the industry to comply with Alberta's proposed regulations.

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Mr. Trump's nominee to run the EPA, Oklahoma Attorney General Scott Pruitt, was one of several state attorneys-general to sue the agency challenging its regulations for methane emissions from new equipment at oil and natural gas sites. The top oil lobbyist in Washington, the American Petroleum Institute's Jack Gerard, last week urged the incoming administration to reverse course on methane emissions.

"The methane regulations were clearly one of the accomplishments of the Obama administration; unpacking that will be high up the list for the Trump administration," said Alan Ross, an energy lawyer and managing partner for the Calgary office of Borden Ladner Gervais LLP.

Prime Minister Justin Trudeau signed an agreement with President Barack Obama last March during a visit to Washington in which both governments vowed to reduce methane emissions from the oil industry by up to 45 per cent by 2025, as part of a broader effort to reduce greenhouse gas emissions and meet climate targets set out in the 2015 Paris accord. Mexico joined that agreement at a trilateral summit in June.

Industry executives say Western Canadian producers face growing competitive pressure as Mr. Trump – who is to be inaugurated next week – pledges to work with the Republican-led Congress to cut corporate taxes and reduce regulatory costs. They fear energy investors will turn away from Canada to reap better returns south of the border.

"I think we run a serious risk of being completely misaligned with the burgeoning energy producing regions of the United States – Texas, North Dakota and Pennsylvania – on this methane issue," said Gary Leach, president of the Explorers and Producers Association of Canada, which represents smaller companies that produce a quarter of the country's oil and gas.

"We have inherent competitive disadvantages that have only been magnified in recent years. So we are concerned about the costs of embarking on this adventure when our American competitors are unlikely to be shouldering these costs."

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However, Mark Brownstein, vice-president at Environmental Defence Fund in the U.S., said it won't be easy for Congress or the Trump administration to undo the EPA rules. He said incoming administrations cannot "arbitrarily or capriciously" roll back regulation, any more than they implement new rules without adequate justification.

He pointed out that many states, notably Pennsylvania and Colorado, have adopted their own regulations, or plan to do so.

The methane regulations are only one example the industry points to as it warns about the potential for an eroding competitive position if Liberals in Ottawa and New Democrats in Edmonton fail to respond to the Republican ascendancy in Washington.

In note to clients this week, Mr. Ross said federal-provincial plans for a carbon tax rising to $50 a tonne by 2022 is "out of step" with Mr. Trump's planned pivot away from Mr. Obama's climate commitments.

While tax cuts and deregulation in the U.S. are a concern, the industry does expect to benefit from Mr. Trump's support for pipelines from Canada, including TransCanada Corp.'s Keystone XL project that was rejected by Mr. Obama in November, 2015.

In a report Tuesday, analysts at Barclays Bank PLC warned that oil exporters could be hit with a border adjustment measure that is being proposed by House Speaker Paul Ryan and would essentially add a tariff to crude imports into the U.S. However, most analysts suggest that, even if Mr. Ryan's plan is adopted, energy imports would likely be exempted.

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