Securing Canada’s energy future – Part 5

A strategic framework for Canada-Asia energy relations

July 7, 2012

EDITOR’S NOTE: A recent study released by the Asia Pacific Foundation of Canada and the Canada West Foundation argues that Canada’s approach to energy should be more clearly based on its national interest, not a collection of private interests. It therefore calls for the establishment of a framework that will bring into play the interest of not only the private sector and federal and provincial governments, but also First Nations governments, communities and environmental interests. This backgrounder was written by Yuen Pau Woo, from the Asia Pacific Foundation of Canada and Roger Gibbins, with the Canada West Foundation.

There is a strong case for making Canada-Asia energy relations a national priority. Prime Minister Stephen Harper has made clear his determination to diversify Canada’s trade towards Asia, with a focus on exports of Canadian energy products.

However, it is less clear how this will come about, or if the efforts of individual provinces, firms and projects will, in and of themselves, amount to the kind of broad-based energy relationship with Asia that will generate the scale of potential benefits for the country as a whole.

Indeed, it is conceivable that specific oil and gas export projects could fall victim to economically damaging delays if stakeholders do not have a vision of the Canada-Asia energy relationship that includes the distribution of benefits across a wider spectrum of interests.

We recommend the development of an inclusive strategic framework for the Canada-Asia energy relationship that engages the broader national interest. The onus is on the private sector and governments, both federal and provincial, together with First Nations leaders and environmental interests, to create and coalesce around such a framework, and over a time frame that recognizes the urgency to act in order to capture this opportunity.

The building blocks for this strategic framework should include the following:

1) Think ‘Big’ on Diversification: Diversification into significantly new and different markets and geographies works best at a significant scale and scope. Canada needs to develop the capacity to export energy to Asia, which is home to the most rapidly growing markets for energy products.

However, diversification is not simply about exporting to new markets. If Canada is to maximize its future prosperity, Canadian governments and industry should ensure that they are not overly focused on one country, or product, or industry, or technology, in their relationships with Asia. A major focus of this diversification strategy also should be to emphasize innovation and value added, which means, where economically feasible, going downstream on energy products and services to the greatest possible extent, including greater emphasis on innovation in the conventional and alternative sectors.

2) Country Diversification: As the world’s fastest growing economy, China must be a priority market for Canada’s energy products. However, China is not the only Asian country that will require substantial energy resources in the future. Diversification should mean selling energy products and services to multiple buyers in multiple countries, thereby strengthening Canada’s security of demand. Japan, for example, will require imports of natural gas as it shifts away from nuclear power production following the Fukushima Daiichi nuclear disaster. Korea is already a major importer of natural gas and uranium and should be another priority market for energy exports. India is a more distant market for Canadian oil and gas exports, but there is good potential for the sale of uranium and nuclear expertise, subject to final arrangements under the Canada-India nuclear cooperation agreement. Geographic market diversity will ensure that Canada will be able to sell its energy to the buyers willing to pay the highest price for those products.

3) Product Diversification: Canadian governments and industry should promote the full range of their energy commodities, expertise and renewable energy technologies in Asian markets. Asian countries will not only be looking to import oil and natural gas, but also a wide range of other energy and mineral products, including renewable energy and green technologies. Canada’s renewable energy and green technologies sector need access to large and fast-growing Asian markets to be competitive, which in turn support product development and innovation. There is no contradiction between oil and gas exports on the one hand, and cooperating on green growth with Asian countries on the other.

Indeed, many Asian governments are interested in working with Canada on a range of energy issues that address the twin concerns of energy security and greenhouse gas emissions. For example, the head of the Presidential Commission for Korea’s National Green Growth Strategy recently called for a partnership with Canada to advance green growth in both countries, even as he pointed to the urgency and opportunity of Canadian natural gas exports to meet growing Korean demand.

Canadian energy expertise is found across the country, and extends into the financial and manufacturing heartland of Ontario and Quebec. The Toronto Stock Exchange and the TSX Venture Exchange are already global centres for the listing of mining and energy extraction companies, as well as for the financing of energy projects.

Indeed, there are emerging clusters of energy expertise across the country. The further development of Canadian energy clusters (in extraction, distribution, research, finance, manufacturing, etc.) can serve as platforms for the expansion and diversification of energy trade with Asia, including higher value-added activities, which are based on strategies that are specific and economic to each cluster.

4) Industry Diversification: In the same way that energy trade with Asia should encompass a wide range of products and services from Canada’s various energy clusters, the Canadian economy as a whole must look to Asia as a key source of demand for future growth and innovation.

The fact that Asia has become the most promising market for Canadian energy exports means that it is also the most promising market for other Canadian industrial sectors. At the heart of Asia’s continuing rapid economic rise – and hence the growing need for energy and other resources – is the dramatic increase in the middle class and the need for massive investments in infrastructure. These two forces are creating new sources of demand for products and services across a range of industries that Canada can, and should, capitalize on.

In Canada, much attention has been placed on the impact of the emerging economies in Asia on the global demand for natural resources. However, much less attention had been paid to the emergence of a middle class in these economies (estimated in the range of 600 to 900 million) and the consequences for global demand of goods and services that meet these new middle class consumers’ needs and tastes.

Simply put, we also should be considering what these newly emergent consumers want – whether it is better and more sophisticated nutrition for their families; better housing; better education; better health services; better financial services; or better entertainment services, including tourism – and consider how Canadian companies can provide them.

As part of this, we need to consider how to best get Canadian enterprises, including small and medium-sized enterprises (SMEs), involved in these opportunities. To achieve the objective of greater SME involvement in the opportunities in Asia, consideration should be given to a more specific trade development focus for Asia in the form of new public-private trade development partnerships to help Canadian firms, including energy companies, trade successfully in Asia.

These partnerships would create critical mass in information sharing and market knowledge among Canadian enterprises interested in exploring Asian opportunities, expanding on the current efforts by the Department of Foreign Affairs and International Trade (DFAIT) and Export Development Canada (EDC). These partnerships should also include industry groups such as boards of trade, chambers of commerce, and universities and community colleges.

Critical to sustained success is the training of the current and next generation of Canadian business leaders to do business in Asia. The Canada-Asia energy relationship should therefore be set in the context of a broader Canada-Asia strategy that is based on stronger diplomatic relations, trade and investment agreements with key Asian partners, involvement in emerging Asian regional institutions, and market diversification strategies at the provincial and sectoral levels.

5) Diversification through Innovation: If Canada aspires to be an energy powerhouse for the long term, it must become an innovation powerhouse in energy, including in unconventional oil and gas exploration, development and production; renewable energy development; hydro power, distribution and logistics; and conservation. We need to be innovating in the energy products and services we sell, the processes by which we produce and distribute them, and the markets into which we sell them.

But Canada suffers from too little investment in research and innovation today in all sectors including energy. In fact, Canadian private sector spending on research and development (R&D) ranks 15th among OECD countries.

Building on the large investments in Canada’s university research capacity by both federal and provincial governments over the past 15 years, governments and the private sector should commit to establishing world-class centres of excellence in energy research and technology, matched to Canada’s energy strengths, at a scale, scope and level of excellence that would place Canada at the global forefront of key aspects of energy research and innovation.

We recognize that some of this infrastructure already exists. The Government of Canada has already established the Networks of Centres of Excellence to fund research collaborations between industry, academia and governments across a range of industry sectors, not just energy.

Furthermore, many universities already have institutes that promote research partnerships between industry and academia on renewable and hydrocarbon energy technologies. Excellent examples include the University of Calgary’s Institute for Sustainable Energy, Environment and Economy and the University of British Columbia’s Clean Energy Research Centre.

Nevertheless, greater emphasis needs to be placed on articulating a national, not only a provincial, vision for centres of innovation that cover both carbon and renewable energy industries, and scaling the level of research and innovation to the size of the opportunities.

A network of energy innovation institutes would foster close university/industry/government investment and collaboration on research and problem solving, and have the compelling mandate of making Canada a recognized global leader in efficient energy production, including value added energy products and energy solutions. This should include best practices in the mitigation of environmental and other impacts on communities in the regions affected by oil and gas development.

The Need for Leadership

An expanded Canada-Asia energy relationship has the potential to provide substantial benefit to Canadians all across the country provided we think creatively about the potential markets and benefits.

However, the development of this relationship involves many different jurisdictions, corporations, and civil society groups that have a heterogeneous set of interests. Parties affected by specific projects or proposals will legitimately take the perspective of their specific and sometimes narrow interests as defined by the community, organization, or government which they represent.

The federal government, on the other hand, has both the challenge and opportunity of defining and advocating for the national interest. We characterize the challenge of building a Canada-Asia energy relationship as a national endeavor that would generate benefits for all parts of the country.

To achieve this goal, there needs to be a vision of the energy relationship with Asia that appeals to different regions and sectors of the country. This process will be challenging as some groups undoubtedly receive more direct benefits when energy is extracted and exported from Canada than others who may be more concerned with the associated risks.

Crafting such a vision will require leadership from stakeholder groups across the country and, in particular, from the federal and provincial governments, and from First Nations governments, industry, and environmental and other civil society organizations.

Some of the most critical areas in which leadership is required include the following:

Federal Government: The federal government is the obvious leader in developing a framework for the Canada-Asia energy relationship. As we envision, the framework should be based on the fundamental need for closer economic ties with Asia to secure Canadian prosperity, diversification of markets to protect Canada’s security of demand, and a broad definition of energy that includes fossil fuels, renewables, clean technology, and energy expertise.

By focusing on market fundamentals and the benefits of expanding the scope of the opportunity, there is a better chance that the federal government will be able to shape a framework that accommodates the interests of commercially motivated firms, of provincial governments and of impacted First Nations, and win the support of the general public.

While the business of exporting oil and gas to Asia will be carried out predominantly by private interests, the federal government can play a vital role in establishing trade and investment relations with Asian governments. Given that most Asian oil companies and utilities are government-controlled, the role of state-to-state discussions is critical.

In the case of natural gas exports, it is essential that long-term contracts are in place for these projects to proceed. For example, the federal government should make LNG exports a priority item in its discussions with counterparts in Japan, Korea, and China.

More generally, the federal government has an inescapable role in developing the linkages between Canadian resources and Asian markets. Its constitutional responsibilities for international trade, ports, fisheries and oceans, navigable rivers, and for Aboriginal affairs, along with its concurrent powers relating to environmental stewardship, permit no other conclusion.

Both the federal and provincial governments will need to co-operate to continue the development of streamlined regulatory processes that provide a sufficient level of standards and scrutiny, while also creating more efficient and effective energy project approval processes.

The federal government will also have an important role in encouraging cooperation and collaboration among the various interests, including First Nations, provinces, private sector concerns and other stakeholders. Indeed, without the federal government as an active player at the table, negotiating the inevitable trade-offs in project development and securing the social license to operate would be difficult, if not impossible.

Provincial Governments: A broad-based framework for Canada-Asia energy relations should articulate the benefits of energy exports for all parts of the country, and not simply for oil and gas-rich western provinces. To be sure, development of the oil sands in Alberta creates economic activity well beyond its borders, which in itself makes oil sands development of national import.

The framework can go further, however, by identifying the ways in which other energy assets in the country have the potential for export and to attract foreign investment, resulting in direct benefits to non-western provinces.

By accepting the premise of Canada as an energy power in the broadest sense of the term, provinces can carve niches in areas of expertise and develop export and investment opportunities as part of the overarching Canada-Asia energy framework.

In the near term, those provinces that are at the leading edge of potential energy exports to Asia can demonstrate leadership in a variety of ways. For example, Alberta must more clearly articulate the benefits of oil sands development for the rest of the country and provide leadership in the formulation of a Canada-Asia energy framework that explicitly includes renewable and clean technology. BC can advance discussions with First Nations governments on Strategic Land Use Agreements, such as the one concluded with the Haida and the Tlingit. Saskatchewan is an energy-rich province with interests in uranium and oil. Moreover, Asian markets are already accounting for a large share of its exports. It can likewise play a role in the development of a broad based Canada-Asia energy framework.

Further, working with the federal government and industry as part of the public-private trade development partnerships, the provinces should enhance their marketing of natural resources in Asia, especially in the case of first-time exports of energy products such as oil and gas. Provincial governments also can play a large role in ensuring that Canadians have the soft skills necessary to further trade with Asia, including more programs for learning Asian languages and cultures, as well as improved educational exchange opportunities with Asian countries.

Industry: The current state of industry-stakeholder relations on a number of proposed Canadian energy export initiatives is a somewhat troubled one. There is vocal opposition to projects from a variety of aboriginal communities, environmental groups, and some provincial and municipal leaders.

Without a broader view of the imperative for energy exports to Asia and the benefits that can accrue to Canadians, the obstacles facing specific projects and the possible delays can be very considerable. Business has to be part of this broader perspective.

Business has a clear interest in helping shift the public policy question on transporting energy to Asia from whether it should happen to which options are best. They have a responsibility to address the risks that are associated with their projects, which in turn makes it easier for governments to demonstrate the national interest in supporting these projects.

More specifically, industry should be less reticent about commitments to underwrite losses resulting from environmental mishaps, including the loss of livelihood and impacts on the land and health of local people, since these are the fundamental concerns of affected communities. More attention should be given to mitigation plans and insurance schemes, rather than mere assurances of safety.

Further, public consideration of alternate proposals to transport energy products to the coast should be encouraged so that there is a fuller picture of the options and wider public awareness of the technical challenges involved.

First Nations: Many First Nations governments are looking to develop business ties with Asian partners in all sectors, including in the energy sector.

Working with the Asia Pacific Foundation of Canada, the BC First Nations Energy and Mining Council released the First Nations China Strategy: Transforming Relationships and provided the leadership for a First Nations mission to China, led by the Assembly of First Nations, that took place in October 2011. These are encouraging first steps in the First Nations-Asia relationship and it is vital for First Nations leaders to continue to articulate their vision of cooperation with Asia.

The Constitutional rights of First Nations across Canada must be respected and protected. The lack of treaties in British Columbia, Canada’s major access point to the Pacific Ocean, is particularly relevant to a Canadian vision for exporting energy resources to Asia.

Greater certainty for investors in the resource sector can be achieved by concluding agreements with First Nations governments.

Many First Nations governments are looking to responsible energy development projects for the same reasons as federal and provincial governments: as a means to securing viable and sustainable economic futures for their communities, and as a source of revenue, while ensuring protection of the environment and health and well-being of those communities which may be affected.

While no community will have the same approach to development, First Nations governments generally seek to be a partner with provincial/federal governments and industry in the development of energy assets on First Nations land. A positive relationship between a company and a First Nations government is often a component in gaining the social license necessary to undertake a project.

Furthermore, many companies are entering into Impact and Benefit Agreements and Traditional Knowledge Protocols with First Nations communities to ensure that local communities benefit economically and socially from energy development projects.

Currently First Nations governments and community members have concerns about the potentially deleterious environmental effects of a leak or spill from new oil pipeline infrastructure to – and associated oil tanker traffic on – the West Coast. Consultation with First Nations, based on their Aboriginal and treaty rights and Aboriginal title must be seen as an important element of any discussion.

The realities suggest that the risks and benefits of major energy projects will have to be shared amongst federal and provincial governments, affected First Nations governments and industry. Government and industry can improve the chances of successful energy projects by engaging early and often with First Nations communities and governments.

Environmental Groups: Clearly, there are concerns about the potential environmental impacts of new infrastructure required to facilitate oil and natural gas exports to Asia, as well as related shipping in coastal waters, expressed by environmentalists and many First Nations. Such concerns about environmental risks and remediation capacity, and more generally about responsible and sustainable development, deserve discussion and consideration.

There is a real and pressing need for leadership from environmental groups to propose ideas, including alternative options for the export of energy products to Asia, and to participate in the crafting of a Canada- Asia energy framework. This framework could help broker solutions for responsible and sustainable development at home, taking into account development risks, as well as help Asian countries shift to less carbon-intensive energy production to the benefit of all.

Advisory Council: Canada’s deep trade and investment links with the United States have grown over more than a century, but particularly in the 65 years since the end of the Second World War.

These links reflect shared experiences in war and peace, commercial opportunity, north-south infrastructure (highways, seaways, air connections, pipelines), educational partnerships, bilateral agreements (i.e. Auto Pact, NORAD, environmental agreements, the FTA, and the list goes on), as well as extensive people connections.

In pursuit of diversification of our trade and investment towards Asia, little of this ‘infrastructure’ is in place, nor do we have the luxury of a half century or more to develop it.

To “fast track’ the deepening of the relationship between Canada and the key countries of Asia, we believe consideration should be given to establishing a Canada Council on Asia that would bring together Canadian and Asian leaders in business, academe, civil society and politics to provide wise counsel to the Government of Canada and Canadians on the Canadian diversification objective towards Asia in all its dimensions.

Such a Council should be chaired by the Prime Minister, denoting the national interest in the exercise, and could be supported by a mixed secretariat comprising both government and non-government participants. It would be comprised equally of members from Asia and Canada, and should meet more than once per year.

Commitment to developing the necessary infrastructure to export energy to Asia

Canada will require a diverse array of infrastructure in order to export energy to Asia. While oil pipelines from Alberta to the west coast are currently attracting the most public attention, it is important to recognize that infrastructure is required for the export of all kinds of products.

A commitment to developing infrastructure for exports is a prerequisite for closer economic ties with Asia, and for a diversification strategy that enhances Canada’s security of demand. The Asia Pacific Gateway and Corridor initiative is an example of infrastructure investment that enhanced the competitiveness of Canadian ports and airports to transport goods and people across the Pacific.

In the same way, a Canada-Asia energy framework must have infrastructure investment as an essential feature for energy trade with Asia to take place. By using a broad definition of energy assets, the framework would also include investment in ‘soft’ infrastructure for the export of energy expertise. This might include institutional partnerships, joint research, energy education and training programs, and pilot projects.

There is obviously a link between hard and soft infrastructure, in the sense that physical investment often requires or leads to the sharing or marketing of expertise, which in turn requires new institutional arrangements for long-term partnerships. Whatever the form of infrastructure investment that is required, it is essential that stakeholder interests are balanced so that projects can proceed expeditiously.

Government and industry should encourage an airing of all potential infrastructure options for exporting energy to Asia, including pipelines and rail, so that they can be discussed and considered in the development of a Canada-Asia energy framework.

One idea that may merit further study is a public energy transportation corridor that is constituted by government, regulated as a kind of public utility and operated by the private sector.

This corridor could be some combination of pipelines and rail transportation for oil and gas to the west coast. Governments would have responsibility for setting and enforcing environmental, safety, and other standards dealing with involved First Nations on environmental safeguards and possible models for revenue sharing with operations in the corridor.

Environmental groups would be consulted with respect to standards and appropriate remediation capacity. The private sector operators would in turn operate under the terms of the negotiated agreements and they could be selected through open RFPs. In this way, the onus to come to terms with the multiple interests that are affected by transportation corridors will rest with more than private sector companies, reflecting the national interest imperative.

Why a public energy transportation corridor?

Equally, one could ask: why a St. Lawrence Seaway, a TransCanada highway system, or a national ports and airports system? Simply put, when do the external benefits of collective action outweigh individual interests and concerns, and how can one construct the collective action framework in a way that it minimizes risks, maximizes public gains and appropriately shares the benefits of invoking the national interest?

We believe that the potential benefits to Canadians from diversifying our trade towards Asia are enormous, but they are accompanied by real and perceived risks that may be better addressed through collective action rather than through a series of uncoordinated private sector initiatives. A public energy transportation corridor is one possible example.

Yuen Pau Woo is the President and CEO of the Asia Pacific Foundation of Canada and Roger Gibbins is the President and CEO of the Canada West Foundation. To download a complete copy of their report click here.

This backgrounder is FREE to use on your websites or in your publications. However, Troy Media, the Asia Pacific Foundation of Canada and the Canada West Foundation, with links to their web sites, MUST be credited.

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