Analysis: Fossil Bailout Not the Prescription for Canada’s Fiscal Health

Shovels or ladders?

That is the stark choice facing Justin Trudeau and Parliament as they consider aiding western Canada’s giant tar sands/oil sands producers, which can now sell their oil for only about US$10 per barrel. One year ago, the sales price was US$55. 

There is no prospect of bitumen-based oil prices surging 500% for the foreseeable future. Nor of any existing producer making sustained profits from tar sands/oil sands extraction. Nor of any new tar sands/oil sands projects being financed and built.

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One proof is the decision by Teck Resources Ltd. to abandon its proposed C$20.6-billion Frontier tar sands/oil sands project only weeks ago. According to regulatory filings, Teck needed to fetch an average oil price in the US$80 dollar range, for decades, to make the proposed mine profitable. No doubt, the only group to welcome Teck’s shocking retreat more than environmentalists was Teck shareholders (albeit in private), because oil prices went into a fatal freefall only days later. 

Even Alberta’s oldest, largest tar sands/oil sands producers can’t cover operational costs at prices U.S. refiners will currently pay for bitumen-based crude, so they are cutting capital spending, shrivelling dividend payments to shareholders, and laying off workers. Storage tanks are now brimming with unwanted bitumen product. Contracts to ship Alberta bitumen to refineries by rail have all but vanished. 

Worse, the first of many Saudi supertankers carrying two million barrels of dirt cheap oil is now bound for a U.S. Gulf of Mexico refinery that Canada now partially supplies. It is the largest on the continent. It is owned by the Saudi state oil company. The Saudis have also hired a fleet of oil tankers to store at sea their growing stocks of surplus oil.

These are brutal realities, particularly for Alberta, because it has dug itself a very deep hole by gambling that its tar sands/oil sands would be a chief source of capital investment, jobs, and royalty payments for decades to come. What Premier Jason Kenney proudly proclaimed as the “economic engine of Canada” (and un-claimed as the biggest source of national greenhouse gas emissions) now has clanking pistons and a crankshaft about to seize. 

Ever brazen, Kenney and his oil sector allies are now demanding that Ottawa pony up countless billions in bailout funds, suspend the federal carbon tax, rescind or defer other federal taxes, and spend at least C$12 billion to build the Trans Mountain pipeline—which has the prime purpose of shipping oil from not-yet-built Alberta bitumen mines to an ocean terminal near Vancouver, and then to unspecified refineries in China. 

This would ensure that all Canadian taxpayers triple-down on financing the reckless folly of one province, at the very time the federal budget is being hammered because of spiking national health costs, employment claims, tax revenue losses and other emergency expenditures driven by the coronavirus.

For this very reason, all Albertans (including oil sector workers) deserve a pro-rated portion of whatever national assistance Ottawa provides to stem the coronavirus spread, increase employment insurance, assist small businesses, and counter the seismic shocks from provincial economies lurching into recession. 

But no province deserves funding to buy more shovels with which to dig itself an even deeper hole. Instead, federal funds should serve as a ladder that helps the province diversify its economy and turn towards a low-carbon future that is both inevitable and necessary.

When Jason Kenney and his oilpatch allies recently sent a petition to the Trudeau Cabinet asking for an Obama-style bailout package, which in 2009 was aimed at saving GM and Chrysler plants and jobs from collapse, they unwitting asked for just such treatment. Ironically, this could prove to be an epic case of not being careful what they wish for. 

The US$80-billion Troubled Asset Relief Program (TARP), despite being condemned at the time by U.S. Republicans and conservative think tanks as a grievous government intrusion into free-markets, was hugely successful. It saved two of America’s largest car makers then on the brink of bankruptcy, and kept more than 100,000 employed at auto plants and related supply chain companies. 

The TARP rescue package had two essential contract features: 

• Billions in low-interest federal loans to the two automakers secured by shares in those companies. GM and Chrysler eventually returned to profitability, repaid all but US$10 billion of the TARP loans with interest owed, and kept all company shares.
• A binding pledge by the two U.S. automakers (and eventually all others) to improve their average fleet fuel efficiency from 25 to 35 mpg by 2016 through better combustion technology, lighter materials, better design, and an increase in electric car production. 

So Obama’s “tough love” triage proved to be the best remedy possible for the U.S. automakers, who resisted it as stoutly as kids scowling at spinach on their plates. The car companies survived, and became competitive again. The federal loans were largely repaid. And in the bargain, U.S. vehicle fuel efficiency vastly increased, saving an estimated 1.8 billion barrels of oil and reducing greenhouse gas emissions by some 900 million tonnes.

If Jason Kenney indeed wants a similar TARP assistance package from Ottawa, then the Trudeau government must embed the following features:

• All federal funding would consist of only loans (not grants, cash outlays, or tax forgiveness) for tar sands/oil sands producers. Any loans must be secured by company shares at properly appraised valuations, with Ottawa having priority claim if loan payments fail or the company enters receivership. 
• Any fossil projects which accepted such federal loans could not use the funds to expand oil output. Instead, as in the 2009 TARP automaker package, they would be contractually restricted to lowering carbon emissions per barrel, or capturing currently flared methane emissions from operations, or using flow-through shares to diversify into renewable energy projects, landfill gas capture, district heating systems, energy efficiency retrofits, or public-private infrastructure projects which cut carbon emissions in Alberta or Saskatchewan.  
• The same binding features must be embedded into any loans given by Canadian banks which accept part of the $300-billion liquidity assistance Ottawa is offering financial institutions, and in loans offered by federal agencies such as the Export Development Canada or Business Development Canada. This will ensure all loan recipients are treated fairly, secure the lowest fiscal risk to Canadian taxpayers, and allow the corporate loan recipients to choose how to maximize their fiscal returns and carbon reductions within TARP-like audits and rules.

It is doubtful whether this is the kind of federal TARP bailout Jason Kenney and his oilpatch allies will welcome. But it is the imperative that Parliament act, and spend, in the national interest—not give special treatment to squeaky wheel premiers, provinces, or business sectors. 

In fact, Canada’s tourism sector is a quiet but more dynamic powerhouse. It generates far more national wealth, and provides more jobs, with far fewer subsidies, in more diverse and rural regions, than the Alberta tar sands/oil sands. And it has far better prospects for future success, in part because of Canada’s natural beauty endowments, the people who own and operate tourism ventures, and global demographic and wealth trends. 

The coronavirus has hit our national tourism sector just as hard as plunging oil prices have hit Alberta companies like Suncor and Cenovus. But unlike the latter, the tourism industry had no way, or time, to shield itself from the unthinkable. 

Now it is facing a devastating year ahead. It needs Ottawa’s financial help, fast, in the biggest way. The one thing it lacks is a loud, forceful, single voice to demand help, because tourism tends to be regionally and seasonally based, with diverse assets (winter ski hills in B.C., summer fishing boats converted to whale-watching in Nova Scotia), cash flows, employment needs, and voices heralding its value, including its foreign exchange benefits and often low carbon footprint. 

There will be others pressing Ottawa for financial help, including different resource industries, railroads, airlines, car manufacturers, and countless worthy business sectors and enterprises. There will be extra demands for health care funds and social services. Employment insurance claims will skyrocket. All while federal tax revenues are falling. All of those expenditures and revenue losses will have to be made up later—by future national taxpayers. 

That means Parliament’s choices for business relief must be based on a clear-eyed assessment of the viability of each industry seeking help. 

For reasons that are far beyond the control of Jason Kenney and Justin Trudeau, the global price of oil has plunged because the three largest producers—Saudi Arabia, Russia, and the U.S.—have ramped up production and left the world swamped in surplus oil. A dozen more countries, states, and provinces like Alberta have accelerated oil production simultaneously. 

Yet the coronavirus may trigger a 10-million-barrel-per-day drop in world demand for the next year—if we are lucky enough to see the virus vanish by then. 

But even if that happens, there will be no resurgence for the Alberta tar sands/oil sands because the very petro-giants which have driven the price down for now still have enough vast reserves of low-cost, higher-quality oil deposits to pump and sell once they and allied producers start turning off spigots in unison. 

But cartel members tend to have the conscience of cannibals, especially when the dominant players like the Kremlin, the Kingdom, and Texas shale barons are deep in debt themselves. Even if such an unholy alliance existed, and oil prices rose, more costly, high-carbon, landlocked producers in Alberta’s tar sands/oil sands region would likely qualify for only thimbles of approved export volumes to Asia. 

And if no such OPEC colossus appears, as is far more likely, Alberta’s oil future will be exactly as it is now—trying to survive against savage oil price cuts in a perpetual Groundhog Day loop while begging for more federal bailouts.

This is the ugly reality: Alberta’s tar sands/oil sands now face the same terminal fate as Quebec’s Thetford region asbestos mines, which clung to life for decades under the illusion that more government-funded “shovels” could sustain it in a world that no longer wanted such a dangerous product. 

Similarly, Alberta’s tar sands/oil sands have no escape from far more powerful, less costly, and ruthless global oil rivals because all refineries, everywhere, are hard-wired to buy cheap and sell high. Currently, U.S. refineries will only pay C$11.57 to buy a barrel of bitumen-based oil, or about 7¢ per litre. By contrast, a litre of grocery store milk costs C$3.00. 

This is doomsday math. So as a matter of due diligence, Ottawa should immediately suspend plans to spend $12 billion or more on the proposed Trans Mountain pipeline, unless and until there is sound, independent evidence that there are Canadian producers willing to contractually pay fair market pipeline tolls for decades to come, and Asian refineries contractually committed to buying bitumen-based oil at firm prices and volumes which might justify new tar sands/oil sands projects. 

Such evidence, if any exists, should be put before Parliament, subjected to scrutiny in public hearings, then approved or rejected by a formal vote of all MPs. Until then, TMX construction should be halted, so that $12 billion or more might not be wasted on a pipeline that has as much economic merit as the alluring, then suddenly worthless, $20.6-billion project which Teck wisely abandoned only a month ago. 

Emergency triage is the ghastly spectre that Canada’s public health heroes are working night and day to prevent in the face of the coronavirus. But smart fiscal triage is what’s needed to separate a mirage from what matters most for the country’s economic health.

Is there a doctor in the House? 

Paul McKay is an award-winning investigative reporter and author. His reports have appeared in the Ottawa Citizen, Globe and Mail, Toronto Star, and Vancouver Sun. He owns a Chevrolet Volt, which he charges with his home solar array.