(Bloomberg Opinion) -- Canada’s masses have spoken. Good luck to the energy industry interpreting what they said.
Prime Minister Justin Trudeau and his Liberal Party have secured a second term in power, albeit having lost their majority. That latter point is critical for Canada’s oil and gas producers and shippers, as is the wider redistribution of seats.
If there’s one defining aspect to take away from Canada’s election, it’s the deepening of divisions. Energy likes to flow, but Canada has become a case study in bottlenecks. Alongside the tortured saga of the Keystone XL pipeline to take Albertan oil south, other pipelines have been delayed or, in the case of Kinder Morgan Canada Ltd.’s Trans Mountain expansion to British Columbia, bought out by Ottawa to get it done. Five years ago, oil sands output was forecast to rise above four million barrels a day by the mid-2020s. That’s been pushed back to the early 2030s(1), and even that looks optimistic. Discounts on Canadian oil, reflecting the higher costs of transporting it by rail rather than pipeline, now routinely exceed $10 a barrel.
Canada happens to be a large oil producer that also has a strong movement to deal with climate change. An opinion poll released in early September found 69% of Canadians thought climate change should be a top priority for the next government — but that 58% thought oil and gas development should also be a top priority. Little wonder, then, that after a campaign defined largely by arguments over carbon taxes and pipelines, Canada has ended up without a clear winner.
Even so, the result is a net negative for fans of the oil sands. Trudeau’s green credentials are tempered by, among other things, his backing for Trans Mountain. One of the more memorable press releases during the campaign was a mic-drop rebuttal of the Liberals’ climate plan by the New Democratic Party that read: “You. Bought. A. Pipeline.” Yet Trudeau may now rely on the likes of the NDP for crucial votes, providing leverage for a more assertive environmental agenda. Even if Trans Mountain survives, the likelihood of another major pipeline getting done just dimmed appreciably.
Equally, while the Conservatives are spinning Monday’s election as a victory, having pushed Trudeau into a minority government and seemingly winning more votes, it looks largely hollow from the perspective of a place like Calgary. Yes, the Liberals were wiped out in the prairies. But then what else was expected, given the Conservatives’ pro-fossil fuel and low-tax manifesto? The fact remains they secured only about a third of the seats in an election where the incumbent was dogged by scandal and climate change was front and center. The Liberals, NDP and the Greens secured more than half the seats and the popular vote, while the Bloc Québécois — which also favors more stringent measures on carbon emissions — took another 11% of parliament. A future win for Conservatives will require securing support beyond its base, which demands a more nuanced approach on energy and climate issues.
As we know, though, nuance is a rare commodity in politics right now, and Canada is no exception. The election exposed divisions between east and west and young and old, the latter a growing theme in the climate debate and democracies in general. The resurgence of the Bloc Québécois, along with the Liberals’ wipe out west of Ontario, raise the old demons of separatism, now with a climate-change dimension. Meanwhile, Trudeau finds himself battling several provincial governments over the imposition of a carbon tax. Conservatives clearly require a rethink, but it would be a mistake for climate-change activists to take Monday’s result as case closed. While Canada’s climate politics are quite different from those in the U.S., the clash between owners and employees of incumbent energy interests and those pressing for a Green New Deal (or a new, green deal anyway) straddles the border.
All this means Canada’s energy producers remain in a bind. Like at least some of their peers elsewhere in North America and, especially, in Europe, they know the pressure to deal with climate change is growing even as their profits depend on satisfying current demand for fossil fuels. The uncertainty exemplified by the election result will serve to deter at least some investment, raising the cost of capital for oil and gas producers (which is the ultimate strategy behind those pipeline protests). Ownership of Canada’s oil sands, which have seen an exodus of foreign companies such as Royal Dutch Shell Plc, will likely consolidate further. And with growth prospects dimming, producers should move toward even bigger payouts to support valuation, in keeping with the broader trend in a less-loved energy sector.
What energy producers will want to avoid above all else is the risk of more interventionist or prescriptive laws — a growing theme in climate politics as the window for taking action has narrowed. That argues against simply doubling down on the Conservatives’ current platform or disappearing down the rabbit hole of separatism. Indeed, the new balance of power in parliament raises an intriguing prospect. Given the bargains Trudeau must now strike to keep power, Canada’s energy producers might be better off if Conservatives entertained working with him on some issues rather than just sticking to their guns.
(1) Forecasts as per the Canadian Association of Petroleum Producers.
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Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.
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