By Michael Cleland

Sept. 27, 2013


 

Canadian energy producers can no longer afford to act as if energy demand grows forever as economies get richer or that someone else should worry about what the customers are up to.

These ideas have been guiding principles for energy producers of all sorts for many decades. And with a few exceptions they have worked, but they won’t for much longer.

Demand growth is slowing and competitors abound, but we are still paying far too little attention to what is happening in the markets on which our future prosperity depends. These changes will impact Canada, and we need to calibrate our expectations and our actions accordingly.

We continue to enjoy the advantages of established physical and institutional infrastructure and a familiar business culture in North American markets. We should continue to build on this, but we can no longer rely on it.

Transportation energy demand has stalled and will likely steadily decline as more energy efficiency kicks in. However, most transportation demand will continue to be based on high efficiency vehicles using petroleum fuels (and some natural gas) as electrics and bio-fuels continue to struggle with economics and convenience. More important, despite growing US oil production, Canadian crude from oil sands is likely to be the strongest single competitor in the US market and could enjoy closer to world prices as North American transportation bottlenecks are resolved.

Electric power demand is now growing at half the rate of the 1990s. Natural gas-fired power is surging and reducing US GHG emissions. Canadian electricity exporters face very tough competition.

On the other hand, more natural gas demand for power generation is of some help to Canadian producers in a glutted North American market. Low gas prices may also underpin stronger industrial demand. But for the most part, Canada is in a tough position on natural gas – the loss of most of a market that as recently as 2008 absorbed more than half of Canadian production.

In other words, if we want to sustain, or even grow our energy-based prosperity, we need to be market savvy in our traditional markets – at home and in the US – and in Asia. But Asia will not be a cakewalk.

For many people, high energy demand growth in Asia is a given. While it may be higher than North America, it could start to slow – and sooner than we might think. Exxon-Mobil’s 2013 energy outlook sees Chinese energy demand growth remaining relatively strong out to 2025 but declining from 2025 to 2040, much like the US. Other parts of Asia show stronger growth, but overall, patterns of slower economic growth, slower population growth, a shift to more service based economies and strong environmental pressures all presage slowing growth.

Against that, many competitors are lined up to fight for Asian market share and most are well ahead of Canada. Australian LNG projects – in production, under construction or planned with start-ups from now to 2017 – involve capacities more than double the maximum probable Canadian export capacity. And Australia is not alone. Middle Eastern countries such as Qatar have strong market positions throughout Asia and gas rich Russia looks hungrily to Asia to diversify its markets. China itself is estimated to have the largest unconventional gas resources in the world.

We need to look to all markets but there is no escaping the fact that energy demand growth worldwide is set to slow. At the same time, supply is growing due to more unconventional and conventional fossil supplies, plus the promise of more renewable sources.

We are a high cost producer with weak links to non-North American markets and brand image issues in North America. This means we have to keep costs in line, we have to be nimble and timely to market and we have to attract investment based on our reliability to get projects built – while improving our environmental game and our environmental story.

Governments need to be realistic about likely volumes and prices and the declining fiscal returns from energy. Over the long haul, a fiscal environment which is over dependent on energy revenues is very much at risk.

There is much we need to do on the domestic side to ensure our continuing competiveness, but our first job is to spend more effort understanding the markets and ensuring that our actions align with those realities.

Michael Cleland is the Nexen Executive-in-Residence at the Canada West Foundation. The Canada West Foundation is the only think tank with an exclusive focus on policies that shape the quality of life in western Canada.