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Ottawa’s oil and gas balancing act: building industry, protecting climate

British Columbia Premier Christy Clark, third left, speaks as Jim Carr, from left to right, Minister of Natural Resources, Catherine McKenna, Minister of Environment and Climate Change, and Dominic LeBlanc, Minister of Fisheries, Oceans and the Canadian Coast Guard, listen after the federal government announced approval of the Pacific NorthWest LNG project, at the Sea Island Coast Guard Base, in Richmond, B.C., on Tuesday September 27, 2016.

DARRYL DYCK/THE CANADIAN PRESS

The Liberal government is walking a tricky line with the country's oil and gas industry, trying to reposition Canada as a leader in the battle against climate change while at the same time approving projects that will boost oil and gas exports.

With his rhetorical "Canada is back" flourishes and his "pan-Canadian carbon strategy," Prime Minister Justin Trudeau is, in effect, leading a national rebranding effort. The Prime Minister is proffering an implicit bargain with industry that some pain on the environmental front will lead to real gains for the sector's export ambitions and long-term viability.

The Liberals underscored that approach with the conditional approval of the Pacific NorthWest LNG project, which they said combines economic opportunity with environmental responsibility. But the announcement also indicated the limits to the strategy: The environmental conditions add costs to a liquefied natural gas project that is already a risky investment, while it would be a massive source of climate-altering greenhouse gases.

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Complicating the Liberal government's challenge is the battered state of the Western Canadian resource sector, which faces depressed global prices for crude and natural gas.

As high-cost suppliers, Canadian producers can ill-afford major increases in costs associated with environmental regulations. But in a world increasingly determined to combat climate change, neither can they afford to operate in a business-as-usual fashion.

When they announced approval for the PNW project this week, Federal Environment Minister Catherine McKenna and British Columbia Premier Christy Clark highlighted their plans to rein in the resulting greenhouse gas (GHG) emissions from the plant and the gas fields that would supply it.

The Premier boasted that British Columbia would be supplying "the cleanest natural gas produced anywhere in the world" – though that claim depends on the projects' proponents actually building PNW or one of the several other LNG projects on the drawing board, despite glutted global markets.

The federal government approved the PNW project subject to 190 conditions, including a cap on GHGs, and is implementing regulations to reduce methane emissions from upstream natural gas production. In announcing the decision, Ms. McKenna said emissions from all oil and gas projects, including PNW, "must fit with Canada's plan to meet our international obligations" to combat climate change.

On crude oil, the federal Liberals are looking to complement Alberta Premier Rachel Notley's carbon policies with a national plan that would set the context for any approval of new pipelines. Ottawa hopes to conclude a pan-Canadian climate strategy that would put the country on a path of reducing GHGs by 30 per cent from 2005 levels by 2030, even as oil sands producers increase their production and exports.

The federal government is working with the provinces to impose carbon regulations where none or weaker ones existed, and is supporting industry efforts to adopt cleaner technologies to reduce its carbon footprint.

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The Liberals are also allocating significant funding to support industry efforts to reduce its environmental footprint, including $1-billion to deploy cleaner technology in the resource sector.

"The government believes that the investments we are making in reducing emissions … will be a competitive advantage for Canada in international markets," Mr. Carr's spokesman, Alex Deslongchamps, said in an e-mailed statement Friday. "We need to invest in clean tech, in energy efficiency, and in finding greener ways of developing our resources. That's true for oil and gas, and it's true for every resource sector."

However, production in the oil sands remains, for the most part, highly GHG-intensive and experts say it will require widespread deployment of game-changing technology to dramatically lower emissions.

Environmentalists question the Liberal approach and note that Ottawa's "bargain" would result in a dramatic increase in GHG emissions in the oil and gas sector over the next decade if the proposed projects get built. And that increase would make make it virtually impossible for the country to meet its international commitment to reduce the country's GHG emissions by 30 per cent from 2005 levels by 2030.

Industry, on the other hand, is looking for a return on the environmental bargain in the form of regulatory approval for pipelines and other projects. Oil and gas companies also see a host of climate-related challenges – from investors assessing carbon risks, to domestic and foreign governments imposing ever-tougher regulations – that need to be managed. And some executives say those issues can best be addressed if Canada is seen as a leader, not a laggard.

After the industry resisted tougher regulations for years, prominent leaders in the Calgary-based oil and gas industry now embrace carbon pricing and other measures as a necessary burden to overcome the public backlash against their business. The emissions-intensive, fast-growing oil sands sector, in particular, has drawn international condemnation as a climate threat. And while no one expects environmental activists to cease and desist, there are hopes that the current approach will reduce the heat on the sector.

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"We need to change the channel so to speak," said Alex Ferguson, vice-president at the Canadian Association of Petroleum Producers. "There is a feeling that everything else we tried hasn't worked very well. So let's try something different. … But we have to get some tangible value back so we can be competitive for investment and for the product purchasing."

The Calgary-based companies are particularly eager to have the federal government approve Kinder Morgan Inc.'s expansion of the Trans Mountain pipeline to Vancouver to provide access to Pacific Rim markets. The Liberals are said to be leaning toward approving that project, despite fierce opposition from Vancouver-area politicians and the threat of lawsuits from First Nations.

However, there is still considerable resistance in the oil industry, and among some western politicians, to carbon pricing and more robust environmental reviews. Saskatchewan Premier Brad Wall argues that carbon pricing will further devastate the weakened resource sector. Imperial Oil Ltd. chief executive officer Rich Kruger complained last week that the process for approving major infrastructure and resource projects lacks clarity and predictability.

The Exxon Mobil Corp.-owned company is seeking approval for two major oil sands expansions in Alberta. Mr. Kruger has previously called the province's hard cap on emissions from the sector unnecessary, putting him at odds with major rivals, such as Suncor Energy Inc. and Cenovus Energy Inc., that support the move.

The cap, a centrepiece of Premier Rachel Notley's climate plan, limits oil sands emissions to 100 million tonnes a year, from around 70 million tonnes currently. At the previous pace of expansion, the industry was expected to far exceed the cap. The New Democratic Party government also imposed a carbon price that provides incentives for the most efficient producers.

Such measures should encourage companies to build more efficient infrastructure that is able to compete under more stringent carbon controls that are required to meet emissions-reduction goals globally, said Jackie Forrest, vice-president at ARC Financial Corp., a private-equity firm in Calgary.

One difficulty is that Canada has set more stringent targets than rival oil exporters.

Top OPEC producers Saudi Arabia and Iran have promised to reduce emissions from business-as-usual scenarios, but are unwilling to impose widespread carbon pricing or caps on emissions. What they save in costs now could be offset later if exports are hampered in a carbon-constrained world, Ms. Forrest said.

"You can say Saudi Arabia will never slap a carbon tax on their industry and that may be the case. But you've already seen it in importing countries, where they're putting policy on to stop those higher-carbon crudes from coming in," Ms. Forrest said, citing low-carbon fuel standards in California.

"To say that a huge oil exporter can avoid it because they don't want to put policy in their own country, longer-term, if these countries implement this Paris agreement, I think they are going to face higher costs somehow, even if it's not in their own market."

University of Alberta economist Andrew Leach said the carbon regulations imposed by Alberta are unlikely to deter investment in the oil sands. Under the National Energy Board's price forecast, a new in-situ project would earn a 15-per-cent rate of return, said Mr. Leach, who chaired the provincial government's climate-advisory group last year. It would take a carbon price of $181 a tonne to reduce that rate of return to 10 per cent.

He said the industry will benefit from regulations in the long run as the destructive impact of climate change becomes more and more apparent. For one thing, carbon pricing creates further incentives for companies to invest in energy efficiency that lowers costs over all.

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