Economy
Ottawa’s Regulatory Assault on the Extraction Sector and Its Impact on Investment
From the Fraser Institute
Business investment is a foundational requirement for a prosperous economy. It provides the resources to establish new companies, expand existing ones, and invest in new factories, machinery, and technologies. Business investment in Canada has declined markedly for over a decade. It is a major reason why Canadian living standards are stagnating in absolute terms and declining relative to many peer countries, particularly the United States.1
One factor behind declining business investment is the heavy regulatory burden imposed by the current federal government on the extraction sector, which includes: mining, quarrying, and oil and gas. Since 1990, this sector averaged 17.3 percent of total non-residential business investment, and reached as high as 28.7 percent of the total in 2013.2
The federal government has been particularly critical of the oil and gas sector. As an example of such sentiment, in a 2017 speech Prime Minister Trudeau said it would take time to “phase out” the oil sands, indicating the long-term goal of the federal government to eliminate the fossil fuel industry (Muzyka, 2017). The prime minister’s comments were followed by a number of new regulations that directly or indirectly targeted the oil and gas sector:
• In 2019, Bill C-69 amended and introduced federal acts to overhaul the governmental review process for approving major infrastructure projects (Parliament of Canada, 2018). The changes were heavily criticized for prolonging the already lengthy approval process, increasing uncertainty, and further politicizing the process (Green, 2019).
• In 2019, Bill C-48 changed regulations for vessels transporting oil to and from ports on British Columbia’s northern coast, effectively banning such shipments and thus limiting the ability of Canadian firms to export (Parliament of Canada, 2019).
• Indications from the federal government that a mandatory hard cap on GHG emissions would eventually be introduced for the oil and gas sector. In 2023, such a cap was introduced (Kane and Orland, 2023), excluding other GHG emitting sectors of the economy (Watson, 2022).
• In early 2023, the government announced new fuel regulations, which will further increase the cost of fuels beyond the carbon tax (ECCC, 2023).
• In late 2023, with limited consultation with industry or the provinces, the Trudeau government announced major new regulations for methane emissions in the oil and gas sector, which will almost inevitably raise costs and curtail production (Tasker, 2016).
The growing regulatory burden has a number of implications that impede or even prohibit oil and gas investment, by increasing costs and uncertainty, making it less attractive to invest in Canada. Both a 2022 survey of mining companies and a 2023 survey of petroleum companies identified the same three risks as inhibiting investment in Canadian provinces—uncertainty over disputed land claims, protected areas, and environmental regulations.3
It is also important to recognize that the Trudeau government introduced a carbon tax in 2016, which conceptually should replace regulations related to greenhouse gas (GHG) emissions such as those listed previously rather than be an additional policy lever used to manage GHG emissions.4
The regulations discussed above, as well as direct decisions by the federal government had tangible effects on the oil and gas sector:
• In late 2016, the Northern Gateway pipeline running from northern Alberta to Kitimat, British Columbia was cancelled by the Trudeau government, further limiting the ability of firms in Alberta to get their products to export markets (Tasker, 2016).
• In 2017, TransCanada Corp. cancelled its $15.7 billion Energy East pipeline, which would have transported oil from Alberta to Saint John, New Brunswick. The project was cancelled in large measure due to changes in national policy regarding the approval of large infrastructure projects (Canadian Press, 2017).
• While the Trans Mountain pipeline from Edmonton to Burnaby, BC was approved, Kinder Morgan exited the project in 2018 due to uncertainties and questions about the economics of the project, forcing the Trudeau government to take the ownership. The cost of the project has since increased by more than four times the original estimate to $30.9 billion (Globe and Mail Editorial Board, 2023).
• In 2019, US-based Devon Energy announced plans to exit Canada’s oilsands to pursue more profitable opportunities in the United States (Healing, 2019).
• In 2020, Teck Resources abandoned its $20 billion Frontier oilsands mine in Alberta because of increasing regulatory uncertainty (Connolly, 2020).
• In 2020, Warren Buffett’s Berkshire Hathaway decided not to invest $4 billion in Saguenay LNG, a liquified natural gas plant and pipeline, due to political and regulatory risks (CBC News, 2020).
The divestitures above are not an exhaustive list. Other companies including Norwegian Equinor (formerly Statoil), France’s TotalEnergies SE (formerly Total SA), US-based Murphy Oil, and ConocoPhillips have all reduced their investments in Canada’s oil and gas sector.
The government’s mounting regulations and hostilities towards the oil and gas sector did not go unnoticed outside of Canada. A 2018 article in The Economist listed the many failures to develop pipeline infrastructure in Canada to bring much-demanded oil and gas to market. Indeed, the piece called it a “three-ring circus” that risked “alienating foreign investors who are already pulling back from Canada” (Economist, 2018).
It is first important to acknowledge the overall decline in business investment in Canada since 2014. Overall, total non-residential business investment (inflation-adjusted) declined by 7.3 percent between 2014 and 2022.5, 6
The decline in business investment in the extractive sector (mining, quarrying, and oil and gas) is even more pronounced. Since 2014, business investment excluding residential structures and adjusted for inflation has declined from $101.9 billion to $49.7 billion in 2022, a reduction of 51.2 percent (figure 1).7
A similar decline in business investment of 52.1 percent is observed for conventional oil and gas, falling from $46.6 billion in 2014 to $22.3 billion in 2022 (inflation-adjusted) (figure 1). In percentage terms the decline in non-conventional oil extraction was even larger at 71.2 percent, falling from $37.3 billion in 2014 to $10.7 billion in 2022.8
Simply put, the declines in the extraction sector are larger than the total decline in overall non-residential business
investment between 2014 and 2022, indicating the magnitude of the overall effect of the decline in business investment in this sector.
The importance of business investment to the health of an economy and the rising living standards of citizens cannot be overstated. One of the major challenges facing Canadian prosperity are regulatory barriers, particularly in the oil and gas sector.
In that light, much of the regulatory burden added over the last eight years to the oil and gas sector should simply be eliminated. In some ways this is already being forced on the federal government through court decisions. For instance, in October of 2023, the Supreme Court of Canada ruled that parts of Bill C-69 were unconstitutional as they infringed on areas of exclusive provincial jurisdiction, requiring revisions to the Act (Dryden, 2023).
A careful and clear analysis is needed of the costs and benefits of the regulatory measures imposed on the oil and gas sector, including Bill C-48, the recent methane regulations, and the emissions cap. Based on this analysis, the regulatory measures should be adjusted to help improve the ability of Canada’s energy sector to attract and retain investment.
Author:
The Canadian Taxpayers Federation is criticizing the Memorandum of Understanding between the federal and Alberta governments for including higher carbon taxes.
“Hidden carbon taxes will make it harder for Canadian businesses to compete and will push Canadian entrepreneurs to shift production south of the border,” said Franco Terrazzano, CTF Federal Director. “Politicians should not be forcing carbon taxes on Canadians with the hope that maybe one day we will get a major project built.
“Politicians should be scrapping all carbon taxes.”
The federal and Alberta governments released a memorandum of understanding. It includes an agreement that the industrial carbon tax “will ramp up to a minimum effective credit price of $130/tonne.”
“It means more than a six times increase in the industrial price on carbon,” Prime Minister Mark Carney said while speaking to the press today.
Carney previously said that by “changing the carbon tax … We are making the large companies pay for everybody.”
A Leger poll shows 70 per cent of Canadians believe businesses pass most or some of the cost of the industrial carbon tax on to consumers. Meanwhile, just nine per cent believe businesses pay most of the cost.
“It doesn’t matter what politicians label their carbon taxes, all carbon taxes make life more expensive and don’t work,” Terrazzano said. “Carbon taxes on refineries make gas more expensive, carbon taxes on utilities make home heating more expensive and carbon taxes on fertilizer plants increase costs for farmers and that makes groceries more expensive.
“The hidden carbon tax on business is the worst of all worlds: Higher prices and fewer Canadian jobs.”
Steven Guilbeault, Heritage Minister and Quebec lieutenant, leaves cabinet this week with his chief of staff, Ann-Clara Vaillancourt. He resigned on Thursday.
Steven Guilbeault’s resignation will help end a decade of stagnation and lost investment.
Steven Guilbeault’s resignation will come as no surprise to Mark Carney – save, perhaps, for the fact that it took so long.
The former environment minister quit on Thursday evening, after the prime minister unveiled his memorandum of understanding with Alberta premier, Danielle Smith. That deal is aimed at creating the conditions to build an oil pipeline to the West Coast and encouraging new investment in the province’s natural gas electricity generation sector. In doing so, Carney cancelled the oil and gas emissions cap and the clean electricity regulations that Guilbeault had been instrumental in constructing and imposing.
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The former environmental activist couldn’t accept the continued expansion of fossil fuel production and so walked away after six years in cabinet.
In his resignation statement, he said he strongly opposes the MOU with Alberta because it was signed without consultation with the province of British Columbia and First Nations.
He said removing the moratorium on oil tankers off the West Coast would increase the risk of accidents and suspending clean electricity regulations, which blocked new gas generation, will result in an “upwards emissions trajectory”.
In particular, he was upset about the expansion of federal tax credits to encourage enhanced oil recovery, a carbon storage technology that captures carbon dioxide from industrial emitters and injects it back underground. Guilbeault considered this a direct subsidy for oil production – a business he said he hoped the government was exiting.
In a Twitter post, I called Guilbeault “anti-Pathways” – that is, opposed to the giant carbon capture and storage development that Carney views as crucial to offsetting the building of a new pipeline.
One of Guilbeault’s defenders said he is not anti-Pathways, and that, in fact, he was part of the trifecta, along with Chrystia Freeland and Jonathan Wilkinson, who negotiated the details on the investment tax credit “that will pay 50 percent of the cost of construction to a bunch of rich oil companies”. To me, that showed Guilbeault’s (and his supporters) true colours. If he wasn’t anti-Pathways, he certainly wasn’t pro.
When he said he would back Carney’s leadership bid in January, I wrote that it was an endorsement the aspiring Liberal leader could do without.
The now-prime minister always had in his mind a plan to build, including fossil fuel production, offset by technology adoption and a stronger industrial carbon price in Alberta. Even then, he made clear he was prepared to be pragmatic in a time of crisis.
Guilbeault’s plan was to regulate the industry to death.
It was always going to end badly but, as Carney told me last winter, Guilbeault provided crucial support on the ground in Quebec and any politician’s first responsibility is to win.
Guilbeault should be respected for his deep convictions on climate change and his commitment to leaving a better world to our children.
But he should never have been allowed to dictate environmental policy in this country. He refused to view natural gas as a bridging fuel in the energy transition in a country that has reserves of a resource that will, at current production levels, last 300 years.
He made clear his lack of enthusiasm for small modular nuclear reactors and new road-building.
And he pushed an oil and gas emissions cap that he knew would hit production levels and further (if that were possible) alienate Western Canadians.
His departure – and that of Freeland – give Carney scope to pursue what he hopes is a transformative response to not only Donald Trump, but to federal policies that amounted to driving with the handbrake on. Carney has made his intent clear – to optimize Canada’s resource wealth, while attempting to minimize emissions.
Five years ago, Trudeau was nearly tarred and feathered during a visit to Calgary; Carney received two standing ovations in the same town yesterday.
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For too many years under the Trudeau/Freeland duopoly the plan was to redistribute the pie. Now it is clearly about wealth creation.
In my National Post columns, I have been scathing about some of the things the Carney government has done, as is appropriate for someone whose prime directive is the public interest. The decisions to recognize a Palestinian state; apologize to Trump for the Ontario “Ronald Reagan” ad; announce a bunch of major projects that were so advanced they didn’t need to be fast-tracked; split spending into the confusing binary of “operating” or “capital”; and visit the United Arab Emirates on a trade mission in the midst of a genocide in Sudan that the Emiratis had helped to fund were all, to me, missteps.
But, so far, Carney has got the big things right. The budget and this MOU are auspicious moves aimed at ending a decade of stagnation and lost investment.
There is a new mood of anticipation in the country, summed up in the S&P/TSX index, which hit record highs this week on the back of energy and mining stocks. Canadian pension funds are taking another look at the domestic market, intrigued by the prospect of investing in the potential privatization of airports, for example.
Canada is feeling better. There has been a shift in the mindset from saying no to everything to being open to removing barriers that stop the private sector from investing.
Success and prosperity are not guaranteed. But stagnation need not be either.
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