Superpower or Satellite?

Energy in Canada

A major turning point in the history of Canadian / U.S. relations occurred in 1984. The Trudeau government’s plans at nationalizing the oil industry were officially over, replaced by Brian Mulroney’s Progressive Conservative government and the era of free trade. Ultimately, the shape of oil policy transformed from that of a national interest to one of continental and international integration.

In 1985, to better facilitate the opening of the Canadian market, Mulroney’s government ended the role of the Foreign Investment Review Agency (FIRA), replacing it with Investment Canada, which operated on completely different principles aimed at attracting foreign investment in Canada.

At the Shamrock Summit in March of 1985, Prime Minister Mulroney and then President Reagan met in Quebec City for preliminary discussions regarding a Canada / U.S. Free Trade Agreement (FTA). In September of 1985, the Royal Commission on Economic Union and Development Prospects was created and in May of 1986, Canada / U.S. free trade negotiations formally began. These negotiations would conclude in October 1987 and were ratified in January 1989.

Mulroney saw this as an opportunity for Canada to use oil, gas and hydroelectricity as bargaining chips on the global market. Unlike those before him, Mulroney saw oil as a continental resource and the ultimate goal of the FTA was to ratify a continental energy deal. The FTA, by creating a free trade zone, substantially weakened Canadian control of energy resources.

Article 904 of the FTA, the energy chapter, contains the proportionality clause. This chapter essentially permits the United States to have free, preferential and secure access to the Canadian resource market. Canada was obliged to provide continuous exports of energy resources for the benefit of the U.S. and was denied the jurisdiction to place bans or quotas on energy resources, even in times of domestic turmoil. As well, Canada was no longer able to tax imports and exports. Prices of exports could not be higher than domestic prices.

This brought about an increased potential, once again, for the continued development of the tar sands industry. Regulatory restrictions had been relinquished by the Western provinces through the Western Energy Accord, bringing about a new assurance that foreign and Canadian firms were to be treated as equals. After the FTA was ratified, any profits that were made from the tar sands generally left the country, yet the environmental and social degradation which ensued as a result of the industry remained in Canada. In 2004, Canada surpassed Saudi Arabia as the main foreign exporter of oil to the U.S.

On January 1, 1994, NAFTA took effect. Signed by Prime Minister Chretien (who was elected by many voters on the basis that he would not support NAFTA), NAFTA simply incorporated the proportionality clause and provisions set out in article 904 of the FTA. The energy provisions, which were essentially designed for U.S. energy security, were rejected by Mexico which maintained sovereignty over its energy resources. Under NAFTA, the proportionality sharing rule appears twice, once in article 315 and again in article 605. Article 315 states that Canada must maintain a supply of energy resources to the U.S. in the same proportion to its total supply as the average of the previous three years. Article 605 reinforces these provisions in terms of grade.

NAFTA also provides U.S. oil companies with their own enforcement mechanisms, as it has developed into a form of continental, rather than international law which supersedes domestic law. Chapter 11 of NAFTA also provides the opportunity to hold Ottawa legally responsible should its actions restrict benefit, profit and productivity of foreign companies. This was furthered by the efforts of President Bush as he signed the United States Energy Policy Act in August 2005. It was a call for a truly continental energy policy which incorporated the tar sands at the very core.

In order to meet the growing U.S. need for oil, there must be an increase in tar sands production which will call for the need to limit environmental and social regulations – a political move being met with substantial resistance, especially as expansion of the oil industry and its pipelines introduce new social and environmental concerns. There is a continued discourse around the Keystone XL Pipeline, especially in light of the recent oil spills in Arkansas and Michigan, and there are many proponents for and detractors against, the latter resisting the former, who are likely to reap substantial benefits from its construction.

In the eyes of many, especially Prime Minster Harper, the tar sands promise to ring in a new economic era for Canada. Harper contends that the tar sands are the answer to peak oil and at the G8 Summit of Industrial Nations, he claimed that this could potentially boost Canada as an energy superpower. Canada has roughly 30 investment treaties with other nations, and continues to court prospective trade partners while protecting the freedom to review and approve any new investments or takeovers (including state owned takeovers) under the Investment Canada Act.

The powers set out in this act were recently at the centre of international attention surrounding the $15.1 billion acquisition of Calgary’s Nexen by China National Offshore Oil Company (CNOOC). The Canadian government, in the interest of ensuring a satisfactory outcome for all parties involved in this deal, extended the 45 day government review period by an additional 30 days, especially given the size and state owned nature of CNOOC.

This deal was cause for controversy as Canada was forced to decide what degree of foreign state-owned ownership of Canadian resources is considered acceptable. Canada lacks the necessary capital required to develop its natural resources and invites foreign investment for that reason; China had both the means and the need for such an acquisition. It was, however, made clear by the Canadian Government that deals of this kind will face the same, if not stronger scrutiny, in the future.

Another consideration for the future is the potential for Canada to regulate the tar sands environmentally without violating international agreements. The imposition of stricter environmental restrictions could potentially be in violation of NAFTA, as any restriction on a company’s profit making ability could reflect negatively on Canadian compliance with the agreement. In order to maintain control over its natural resources, Canada must focus on a few key policy areas to protect the environment upon which Canadians live and businesses operate.

Energy conservation should be a priority on every nation’s agenda, creating a sustainable economic climate, reducing consumption, and improving environmental conditions in the process. Another suggestion for Canada would be to increase energy reserves in line with the provisions of NAFTA. The benefits are clear – Canadian access to Canadian resources. A closer look must also be paid to energy security, primarily in terms of Eastern Canada which relies on imported oil and is therefore vulnerable to price increases and shortages. There is the possibility of searching for energy alternatives, which has been attempted by several nations, but this may have the unintended impact of driving up prices of food in developing countries, among other things.

While substantial profits are being made, there has been severe degradation to Canadian natural resources, fresh water supplies and the Boreal forest. As well, in Alberta and elsewhere, First Nations populations are suffering from tainted food and water supplies, threatening their very ways of life – a threat that can easily be extended to anyone as we share the same environment. As we continue to diversify our industry through foreign ownership, cementing these agreements in international treaties which take precedence over domestic laws, instead of asserting itself as an energy superpower it is more likely that Canada, on the international stage, is viewed as an energy satellite.

As demand for oil increases globally and supplies continue to deplete, Canadian oil policies will become ever more important, especially with regards to Canada’s place as the third largest oil reserve in the world, and as a net importer and a net exporter of oil.

The Canadian Petrochemical Industry and Related Government Policies – Part 1
An Era of Change and the Loss of Control – Part 2

December 16, 2018, 8:07 PM EST

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