Mixed US signals forcing Canada to rethink energy expansion plans

27 April 2017
27 April 2017, Week 16, Issue 455

Since taking office, US President Donald Trump is sending mixed signals on US energy trade with Canada, prompting Canadian players to rethink their strategies, writes Monte Stewart.

What: Aspects of US energy trade with Canada could change under the current presidency.

Why: US President Donald Trump wants to renegotiate NAFTA, among other moves.

What next: Rising US energy production could also lead to imports from Canada being pushed out.

US President Donald Trump’s mixed signals on energy trade with Canada are forcing Canadian producers and federal and provincial governments to rethink their oil and gas expansion efforts.

As John Baird, a former Canadian Minister of Foreign Affairs noted during a panel discussion at a Greater Vancouver Board of Trade luncheon on April 24, Canada does not know what trade items the US will try to change.

“But I suspect Wilbur Ross, the [US] Commerce Secretary, said it best when he said: ‘It is not whether Canada will make concessions; it is how many and what concessions they will make’,” said Baird, who is now a senior adviser with law firm Bennett Jones. “So we are in for a really challenging few years in the economic trade relationship with the United States, and let’s hope that our government and Canadians as a whole can respond effectively to that challenge.”

 

Mixed signals

Baird’s comment, along with his hoped-for result, echoed the sentiments of many government officials and ordinary Canadians alike. However, Canadian energy companies are not willing to bet that the country’s response will be effective enough – especially while Trump sends out confusing signals on the US’ energy relationship with Canada.

Shortly after taking office in January, Trump indicated that he did not foresee many changes in Canada-US energy trade. He also alleviated Canadian energy companies’ fears by supporting the Keystone XL pipeline and then saying that the steel needed for it would not be subject to his government’s “Buy American” rules.

But lately, Trump has created a different impression as he begins to follow through on a pledge to overhaul the North American Free Trade Agreement (NAFTA). He said recently that he would target the US’ energy trade with Canada in NAFTA talks, though he added on April 27 that he would renegotiate the agreement rather than terminating it at this time.

Meanwhile, Republicans in US Congress, led by Speaker of the House of Representatives Paul Ryan, have been pushing for a proposed border adjustment tax that, if approved, would place hefty duties on US imports.

Following considerable pressure from corporations, Trump did not include a border adjustment tax in a sweeping new plan unveiled on April 27 that allows for widespread tax cuts. But a complete about-face would come with high political costs, because his approval ratings are the lowest in US history for a president in the early days of his tenure. So it is reasonable to expect Trump to attempt, or at least threaten, to impose some form of border tax adjustment in the future.

Also, the new tax plan calls for a 15% corporate tax rate, and Trump would have to cover the cost of that reduction somehow.

“If there is a border adjustment tax and it is significant in any way … that would include energy,” said Global Public Affairs’ chair Tom Clark during the event in Vancouver. “That would be a real hit against the energy companies in Alberta and, perhaps, even in British Columbia.”

And such a tax could also affect Saskatchewan, Nova Scotia, Newfoundland and Labrador, New Brunswick and Quebec, which is trying to ramp up its fledgling energy sector.

The Vancouver event illustrated the confusion and concern surrounding Trump’s overall trade policy – on both sides of the border. He is also targeting Canada’s softwood lumber and dairy sectors, which are expected to take harder hits than energy. Meanwhile, US companies that do business with Canada’s energy industry are also worried about the effects on their operations. 

“The problem for Canada is being sideswiped [by Trump], not being targeted,” said Clark. “The sideswipe is the one that has everybody concerned.”

In other words, Canada could feel the impact of trade barriers that Trump imposes on its other trade partners. But the director of Johns Hopkins University’s Center for Canadian Studies, Chris Sands, likely went straight to the heart of Canadian energy producers’ concerns.

“Donald Trump is very in favour of fossil fuels, from coal to natural gas to oil,” said Sands. “And, as a result, production is going up. People are very optimistic in that sector in the United States – which means we’ll buy less from Canada. So it’s not a question of Canada being targeted. It’s a question of demand for Canadian exports dropping.”

 

Canadian concerns

Sands’ comment was not exactly a revelation, but it cut to the core of Canadian producers’ motivation to look beyond North America for new energy markets like never before. Canadian producers were concerned about reduced demand for their oil and gas even prior to Trump taking office, thanks to the boom in US shale oil and gas production. The US still has unresolved energy infrastructure issues and will still draw heavily on Canadian energy – particularly oil – for some time in order to meet domestic demand, but producers operating in Canada are not taking this for granted.

In his comments, former minister Baird hit on another factor contributing to Canadian producers’ concerns.

“When you look at the amount of US capital and international capital leaving the [Alberta] oil sands, it’s real and it’s significant,” said Baird, referring to billions of dollars worth of divestments by global energy majors. “But we hear it’s not over.”

A “one-time tax” proposed this week on US cash held abroad could also influence US producers’ investment decisions in Canada. And as Baird noted, the reduction in the US corporate tax rate also threatens to reduce Canada’s global competitiveness owing to its higher taxes. In addition, a relaxation of US Environmental Protection Agency (EPA) regulations could make the US oil and gas industry more attractive to global investors while Canada tries to bring in carbon pricing over the coming years.

Trump’s unpredictability and policies explain why both Canadian Prime Minister Justin Trudeau and Alberta Premier Rachel Notley, concerned about the potential loss of billions of dollars to tax bases, are keen to attract more Chinese investors to the Canadian energy industry. The inconsistencies in Trump’s words could also result in Canadian energy firms becoming increasingly determined to press ahead with efforts to develop more pipelines and LNG projects designed to serve overseas customers.

Trump can only hold office for up to eight years, which is a short period when it comes to energy development. But he could have an impact on North American energy trade for decades to come – especially if successors keep his more populist measures in place.

 

Edited by

Anna Kachkova

Editor

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