What would happen if Canada stopped oil and gas production?

How much trouble can two men and a woman get into with handcuffs? 

Well, how does shutting down the prospects of a $15.7 Billion pipeline in Canada sound? (Shame on you if you thought that question was headed somewhere else…) Yes, in late August three individuals, through their own form of ‘political disruption’ caused the NEB (National Energy Board) to suspend hearings for the legal application of TransCanada’s Energy East pipeline. Social activists are no doubt lauding their achievement and the impact so few can have on so many (the many will be quantified later); meanwhile, people in the west are scratching their heads wondering how much worse can it get at $40/bbl oil? Ostensibly, there seems to be a genuine disconnect as to exactly how important the oil and gas business is to Canada.

‘Leave the resources in the ground!’ extolled one Montreal protestor.

Suppose we run with this counterfactual and conduct our own little thought experiment through the eyes of one of the protestors.

What would happen in Canada if the oil and gas industry was shut down?

For starters, 10.6% or $196 billion of the national GDP (in just oil and gas, 2014) would be wiped away and the replacement industry wouldn’t be as simple as manufacturing or hi-tech. Energy is the #1 export in Canada. Energy, energy services and the transportation industries represent 40% of the Canadian economy. The #2 sector is the automotive industry, by the way the automobiles manufactured are powered by hydrocarbons.

Now before I dig into the next topic, I want to state that I am a very proud Canadian and love my country from the east coast to the west coast. I love the diversity of our country and take great pride that in a world where countries are tearing themselves apart, Canada is a wonderfully unified multicultural society.

Let’s dig into the numbers: Canada’s total GDP in 2014 was $1.9 trillion of which Alberta contributed $376 billion, or 19% of the total; Ontario contributed $722 billion, or 37% of the total. Interestingly, on a per capita basis the story is more telling as Alberta had the highest per capita GDP among the major provinces at $91,182 (versus Canadian average at $55,510, 2014) and yet will receive the lowest transfer payments.

Federal support to Alberta in 2016-2017 is earmarked at $5.8 billion or $1,366 per capita, which is the lowest per capita equalization in the country. As of 2009, (when the government stopped publishing such data) Alberta was the only province to give more to the federal government in the form of revenue, than it received in federal expenditures. Combined, the oil and gas corporate income taxes, royalties and land sale revenue averaged $20.3 Billion each year over the last five years in Canada, so it really begs the question from where, or from what industry, could we replace that contribution IF THE OIL AND GAS INDUSTRY WAS SHUT DOWN?

Source: Warner Brothers, Mad Max: Fury Road

The conversation now needs to graduate to scale of employment displacement and the likelihood of replacement employment of similar economic utility and value.

Given that Alberta and Saskatchewan are land-locked provinces with no abundance of cheap-labour or mild winters, the ability to compete with the likes of Silicon Valley, Metropolitan Toronto, Metropolitan Montreal or Vancouver lie somewhere between dismal, and none.

Coincident with the loss in GDP, so would go 742,490 direct and indirect jobs across Canada (4.1% of total employment), not to mention the effect that would have on the families of those concerned (insert your own subjective multiplier here). Some of you will immediately jump up and say this will never happen so why are we discussing this. I will point out the closing of the coal-fired power plant in Hanna, Alberta has destined the town to a likely economic death. I am supportive of the transition from coal to natural gas and other energy sources, but the transition imposes direct economic effects to communities. I come from Grande Prairie, Alberta and the closure of oil and gas activity would be devastating to the local economy. I am witnessing the effects of the current commodity downturn and the resulting social economic effects. Crime has spiked in Grande Prairie and has changed the city I grew up in to something that has a very different social fabric. 

Economists will be quick to point out that the Canadian dollar is very much regarded as a petrol dollar. The dismantling of oil and gas exploration, development and refining would have a very negative impact on our currency. They’re right. But, as difficult as it is to quantify the magnitude of the currency drop precisely, the direction seems self-evident – foreign direct investment (FDI) of $158 Billion (2015) would find another home and so would the notional ‘bid’ for our beloved Loonie. Perhaps manufacturing out east will pick up some of the slack, but that still leaves the problem of almost 750k people employed in energy, and the derivative businesses that rely on the oil and gas industry (restaurants, hospitality, technology et al). The displacement of foreign investment and the refocusing of capital has already begun. 

CALGARY, Alberta—Canadian pipeline operator Enbridge Inc. on Tuesday agreed to buy Houston’s Spectra Energy Corp. in an all-stock deal valued at about $28 billion, creating a North American energy-infrastructure giant at a time when growth is challenged by lower commodity prices and higher regulatory hurdles.

The oil and gas industry is highly competitive, and competes on an international basis for capital. Transactions and investments are constantly evaluated based on risk and return and the stability of investment horizon. At this time in Canada, uncertainty has been created and thus domestic and international investors are focusing investment to other regions of the world. Now there are some unique corridors that continue to attract investment such as companies that have focused on the highly productive liquids rich Montney formation in Alberta and British Columbia.   

Readers at this moment may be calling out at this time “no one is going to shut down the oil and gas industry”. I will politely point out that a trend is appearing in our society. The continued challenging of infrastructure projects, the move to shut down fracking in numerous regions of the US and an intense push to move Canada to a greener economy without possibly considering the full impact to the greater society. 

If you are at the point of standing up and saying this could never happen, please stay seated and look up the death of the American Steel Industry. History has shown that business models, industries and economies are far from permanent. With globalization, capital has become very mobile and focused on yield, risk and return. As regions become uncompetitive or risk of the likelihood of a determined return declines reallocation is implemented. The potential evacuation of capital from a sector and or a region is done often with long term negative impacts to the social fabric of the society.

Is there truly a risk of our energy sector being shut down? Let’s look at two initiatives that were put forward in Colorado recently.

The two recent Colorado Initiatives proposed to prohibit drilling in 90% of Colorado. Colorado’s Initiatives 75 and 78 would have had major implications to the oil and gas industry:

•  Initiative 75: provides local governments with greater authority to regulate oil and gas drilling in their territories, which may include stricter regulations and outright banning oil and gas wells.
• Initiative 78: increases the current 500-foot buffer zone between wells and homes to 2,500 feet. The increase also expands the setback to include environmental areas such as parks, open space, creeks lakes and other water features.

Both of the initiatives were not allowed on the November Ballot in Colorado. The fact is though; the intent was the elimination of drilling activity in approximately 90% of Colorado. Can the oil and gas industry be shut down, “YES”.

Ok, the ground work has been laid to conclude, the oil and gas industry is a major contributor to the GDP of Canada, a major provider of jobs to the Canadian economy and the industry is being pressured to a negative degree globally, nationally and provincially. 

Now for something completely different (my older readers will appreciate the Monty Python reference). I will approach the discussion from a different angle as to the consequences of shutting down the oil and gas industry. Canada has entered a new era politically. The focus is reverting back to a platform that was put forward in the 1970’s being the “Just Society” today we may want to call it the “Justin Society”.   The vision was that Canadians have a greater sense of identity — justice, transparency and pride in themselves. It was about making Canada a fairer place to live, a place that respects all of its citizens. The next level of Canada’s vision for our society will likely be to increase our presence on the world platform. Visions and the Just Society platform will require financial commitments and allocation of our provincial and national budgets to facilitate. As we move forward with the new vision for Canada there will be the correlated allocation of a portion of Canada’s great wealth to meet that commitment. The risk to our society and the new national vision is that impairment of one of the major industries that contributes to the Canadian economy and our national budgets. Well, we could always just run greater deficits, but we know how that ends up. Higher interest rates and mortgaging the future of Canada.

In conclusion, I would encourage every reader to look around the room. Just about everything in your room (and the room next to you, ad infinitum) was somehow brought into existence by means of oil and gas exploration and refining. Every plastic and polymer, every ceramic and steel – if it wasn’t transported using a hydrocarbon fuel, then it was physically made and brought into our palms using oil and natural gas. This should underscore exactly how important hydrocarbons are to our everyday life.

Technology has shifted the supply curve massively upwards for oil and gas development, but the gross resource is still finite, by any measure, and I would agree that the environment needs to be preserved and brought back to its original luster as soon as an area has been fully developed. All of the western provinces have provisions in place for ‘abandonment and reclamation’ costs which must be borne by the producer. At Blackbird, even being in pre-production, we have initiated a tree planting program well above anything stipulated by the government – we have planted 51,329 trees to date and remain committed to reaching 200,000 trees. Despite capital being in short supply in the patch right now, our corporate social responsibility remains a top priority. I am also a proponent of cost effective cleaner energy – ensuring that implementation of the cleaner energy is balanced with social costs.

Source: Getty Images

Polarized thinking rarely gets us anywhere in society, and invariably the right path lies somewhere in the gray. Applying the principle of interchangeable perspectives, made famous my Dr. Michael Shermer, we must at least try to understand our interlocutors’ position with their and our own best interest at stake, and accordingly, I hope this piece acts as the starting point for a discussion on normative practices in oil and gas, not the end. Protestors looking to prevent the digging necessary for pipelines are instead digging trenches in the forum of public civil discourse – we desperately need to discuss the challenges that lie ahead of all Canadians, but it can’t involve handcuffs.

As a final statement, Canadians are well known worldwide as being the exceptionally polite people that will at a moment’s notice call out “Sorry”. It is my recommendation that us polite Canadians should continue to be polite but begin to stand up and say “I am sorry, but I would like the public process to continue and please understand the consequences of damaging or inhibiting the oil and gas industry in our Great Country”.

Garth J. Braun

Chairman, CEO and President, Blackbird Energy Inc.

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