A Vision for a Continental Energy Strategy

Digital Publication Digital Publication FRASER INSTITUTE Digital Publication February 2008 A Vision for a Continental Energy Strategy Ralph Klein and Brian Tobin with Gerry Angevine Introduction / 1 The need for a continental energy vision and strategy / 3 Principles and goals / 8 North American energy use and supply: an overview / 12 A North American energy transportation network / 29 The cornerstones of a continental energy strategy / 39 Conclusion / 47 References / 49 About the authors / 53 Acknowledgments / 55 Publishing information / 56 About The Fraser Institute / 57 Supporting The Fraser Institute / 58 Continental Energy Strategy 1 1 Introduction We are greatly honoured to have been asked by The Fraser Institute to work together to guide the Institute’s North American Continental Energy Strategy project. We expect that the Continental Energy Strategy project will have a significant and measurable impact on public debate regarding the development of energy resources and the benefits that can be expected to flow from increased intra-continental energy trade. In particular, this project will help to define the appropriate roles for the public and private sectors in the development of energy resources, and the bounds of public policy in this regard. The continental energy strategy that we shall be working towards will focus, for the most part, on prospective policy changes that would allow the continent’s energy markets to function more efficiently and would provide greater opportunities for energy commodity trade among Canada, the United States, and Mexico. Governments, on behalf of the citizens who own the energy resources, have an important role to play in ensuring that the policy framework pertaining to energy resource investment, development, production, consumption, and trade is stable, fair, and appropriate. If additional investment were attracted to the energy production and transportation sectors, then that investment would bring economic benefits, including employment and income growth, as well as greater choice for consumers as they decide how to meet their energy requirements. Because market forces will determine the most efficient allocation of our energy resources, our objective is not to put detailed energy production and trade targets forward. Rather, we wish to contribute to the energy policy debate to ensure that the policy settings and institutional arrangements are appropriate for facilitating expan- sion of the continent’s energy supply capacity—subject, of course, to competition from other sources of supply. The continental energy strategy that we envisage is one that is clearly focused, first and foremost, on policy measures that will facilitate private energy investment that benefits Canadians. Accelerated investment in the development of Canada’s energy resources that takes advantage of export opportunities holds considerable promise. Such investment would improve Canada’s economic performance and contribute to improvements in the quality of life of all Canadians. More broadly, the development of a comprehensive North American energy strategy that supports a business environment conducive to increased development and production of the continent’s resource base, to the extent that market conditions allow, will bolster the security of energy supply in all three countries. Furthermore, if the continent’s advantages in relation to the supply of energy commodities such as uranium, coal, and bitumen from oil sands allow us to increase our reliance on them, then the resulting direct and indirect economic benefits will help improve living standards in all three countries. The Fraser Institute www.fraserinstitute.org Continental Energy Strategy 2 Canada, as one of the continental partners, likely has the greatest potential to become a world energy leader due to its hydropower potential, proven nuclear power technology, and large quantities of uranium and hydrocarbon reserves, including coal, oil sands bitumen, coal-bed methane, and “frontier” petroleum reserves. For its part, the United States has relatively little remaining hydropower potential and has depleted much of its growth potential with respect to domestic supplies of natural gas and crude oil. The United States does, however, still have considerable conventional petroleum reserves yet to be developed in Alaska and offshore, and sub- stantial reserves of non-conventional oil and gas, such as coal-bed methane and petroleum associated with shale formations. Mexico, the third partner in this continental energy strategy, is also facing increasing natural gas shortages as well as rapidly growing demand for electricity. More importantly, there is concern that Mexico may not be able to maintain its current rate of oil production, a direct result of its state-directed model of economic development. In order to meet these and other challenges, the three countries have developed considerable petroleum pipeline and electric transmission connections to facilitate cross-border trade, but a great deal more can be done to facilitate transnational energy commerce. This report presents our vision for a North American-based continental energy strategy and includes what we regard as the fundamental elements of that strategy. These elements, such as greater energy supply security and energy and environmental policy compatibility, will be examined in a number of separate papers that culminate in a special report with recommendations for a continental energy strategy. We plan to publish these discussion papers between now and the fall of 2010, at which time a final paper will be released and the program will, ideally, move to a new stage, perhaps on a more formal tri-national basis. From now until publication of the final report, The Fraser Institute’s focus will be on research leading to the publication of papers focused on the “cornerstone” subjects noted below. Potential topics for these papers are: 1 The North American Energy Supply Potential; 2 Compatibility of Energy and Environmental Policy; 3 North American Energy Security; 4 People Issues in Relation to the Development and Construction of Energy Projects; 5 Regulation in the North American Energy Sector; and, 6 Financing North American Energy Investment. The Fraser Institute www.fraserinstitute.org Continental Energy Strategy 3 2 The need for a continental energy vision and strategy A number of current global and intra-continental factors affecting North America’s energy sector suggest that the development of a comprehensive energy strategy is important at this time. These factors—including policy considerations, certain aspects of international agreements pertaining to North American energy trade, and the current geopolitical situation—are discussed in this section. Energy market developments In the last 10 years, the most significant factor affecting the continental energy sector has undoubtedly been the remarkable increase in the prices of crude oil and natural gas. This increase has been necessary in order to balance growing global and continental demand in the face of slower production growth. The higher prices are generally having a very positive impact on the attractive- ness of investment in the production and refining/processing of crude oil and natural gas, and, especially, in the development of oil sands. However, analysis of the impact of the higher price levels on continental energy consumption, investment, and trade, as well as consideration of the possible implications for Canadian and continental energy policy, are needed. Policy considerations North America has a large energy resource base, yet it is becoming more dependent on low-cost imported supplies of oil and natural gas. For this reason, policy settings and institutional arrangements need to be reviewed by governments so as to ensure that they are appropriate for attracting the investment required for energy development, production, and transportation projects. Considerable investment will be necessary to effectively reduce the continent’s dependence on unreliable regions for the energy supplies warranted by market conditions. Such investment would improve energy supply security, reduce the pressure on energy commodity prices, and allow Canadians, in particular, to enjoy continued employment and income benefits from an expanding energy sector. Policy changes should not be implemented with the intention to distort trade patterns, as with tariffs on non-continental supplies or on economically-bene- ficial activities. Instead, these changes should be implemented with the intention to open the economy to the greatest extent possible and to reap the benefits that result from investment, trade, and wealth creation. The Fraser Institute www.fraserinstitute.org Continental Energy Strategy 4 The three national governments have committed, through the Security and Pros- perity Partnership of North America (SPP), to working towards defining the fundamental elements of a long-term continental strategic framework which would support further integration of North American energy markets. Hopefully, this framework will lead to broader regional and continent-wide markets, and increased opportunities for the convergence of energy commodity markets. If markets converged, consumers would pay less for the energy they consume and would be able to switch from one energy commodity to another more readily because of greater efficiency and technological developments. In addition to contributing to the convergence of North America’s

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