Stratfor: U.S., CANADA: DRAWING THE OUTLINES OF AN OIL SANDS DEAL
Summary
U.S. President Barack Obama visited Canada on Feb. 19, where he discussed energy and environmental issues with Canadian Prime Minister Stephen Harper. A potential deal regarding Canadian oil sands could affect greenhouse gas emissions protocols, and has implications for regional oil-producing state Venezuela.
Analysis
U.S. President Barack Obama visited Canada on Feb. 19, marking his first foreign trip since his inauguration. Obama met with Canadian Prime Minister Stephen Harper for talks that focused on interrelated energy and environmental issues.
It is pretty clear what the two states want from each other. The United States wants energy security and a renewed military commitment from Ottawa in Afghanistan, while Canada wants investment of money and technology in its energy sector and cooperation on dealing with related environmental issues. The Feb. 19 discussions presage more comprehensive negotiations that ultimately could reshape the global framework for dealing with greenhouse gas emissions -- and could deal a blow to the energy industry in Venezuela.
Energy security is a key strategic concern of the United States, and Canada is the largest foreign supplier of crude oil to the U.S. market (followed by Saudi Arabia, Mexico, Venezuela, Nigeria and Iraq, in that order). In addition to its proximity, Canada is an attractive energy trading partner for the United States because it does not face the same challenges that limit Washington's ability to rapidly increase supplies from other significant producers -- such as a hostile government in Venezuela's case, legislation restricting foreign participation in Mexico's case, or militancy in the case of Nigeria.
Securing robust oil supplies from Canada will necessarily mean expanding exploitation of oil sands, which comprise most of the country's crude production. (Canada produces only a small amount of conventional crude.) This is an expensive proposition, however. Oil sands are not like conventional crude, which can simply be pumped and shipped via pipeline. Instead, they have to be strip-mined and then melted to extract the crude -- a machinery- and energy-intensive process. The resulting cost barriers have resulted in a freezing of new work on oil sands since the ongoing global recession has driven oil prices downward. Profitable oil-sands production requires a sustained crude price of $50 to $60 per barrel, but oil prices have been well below that level since the end of 2008.
The U.S. interest in energy security and the Canadian interest in boosting investment appear to be in sync on the oil sands issue, and Harper has been pushing for a deal. But Ottawa has two conditions.
The first is that the United States provide the bulk of the investment. Canada wants to smooth out the boom-bust cycle of energy production in general, and that of oil sands specifically. Because oil prices have not reliably stayed above the break-even point for oil sands production (despite a spike in mid-2008), oil companies are not likely to invest in the process on their own initiative.
Second, there is a greenhouse gas issue. The mining and processing of oil sands requires a considerable energy input in its own right, roughly 50 percent more than that of normal crude. Oil sands production by itself is thwarting Canada's ongoing efforts to comply with its obligations under the 1997 Kyoto Protocol, and Canada hardly uses any of the crude it produces. Ottawa simply cannot meet these requirements as long as it is producing oil sands at all, much less expanding production.
Thus, Canada wants the United States to join it in taking a common position on greenhouse gas talks globally -- or really, for the two to become a single entity for purposes of meeting treaty guidelines. In other words, the United States would become primarily responsible for picking up the carbon tab from the production of Canadian oil sands. The United States would take on a slight -- but not crippling -- increase in costs associated with emissions-reduction efforts, in return for the benefits of a strategic oil supply deal with Canada.
As a result, Washington would also share with Ottawa technological advances in the capture and sequestration of carbon from the oil-sands production process. This technology is now being tested on coal power plants in the United States, and as the technology matures, Canada will try to apply it to the oil sands. Once the carbon is captured and sunk underground, the emissions-related costs associated with the oil sands will become much less.
In return for these strategic concessions, Washington likely also will want a commitment from the Harper government to extend its military commitment in Afghanistan. Canada has about 2,700 troops deployed in the country, though its military commitment there is scheduled to end in 2011. With Afghanistan occupying one of the top slots in Obama's foreign policy agenda, and with Washington embarking on a new military strategy of a U.S. and allied troop surge to fight the Taliban insurgency, continued military cooperation might be the price Ottawa will have to pay to secure its stake in a strategic energy and emissions deal with Washington. Attempting to deploy additional troops would trigger a backlash from Harper's political opponents, but extending Canada's commitment beyond 2011 at the current level might be more politically palatable.
Should such a comprehensive deal go through, with all its conditions and counterconditions, it will have two major implications internationally: one regarding greenhouse gases and one regarding Venezuela.
First, a joint U.S.-Canadian position on greenhouse gases will more or less determine the boundaries of any future global legal regime for dealing with the issue. The United States is set to emerge as the global leader in negotiating the next major climate treaty, a protocol to the 1992 U.N. Framework Convention on Climate Change. The Obama Administration has signaled that it is willing to accept the general global consensus that the world must reduce greenhouse gas emissions by 80 percent before 2050 -- and with that, the United States is emerging as the leader in the next round of talks. (And if Washington and Ottawa effectively act as a single entity in these negotiations, Canada will share the driver's seat.) How that will shape global carbon policy will be up to Canada and the United States to debate, but any new protocol will also require a more informal mechanism that directly engages China and India, two of the countries with the largest carbon footprints. A failure t
o get Beijing and New Delhi on board would effectively doom any new protocol -- and the United States would be unlikely to ratify any such convention in any case, believing it will be penalized while China and India gain.
The second major effect of a U.S.-Canadian understanding on oil sands would be to wreck the future hopes of the other major producer of nonconventional crude oil in the Western Hemisphere: Venezuela. The Venezuelan Orinoco belt contains roughly the same amount of oil as do the Canadian oil sands. Venezuela's crude, like the output of the oil sands, is considered "unconventional" output, because it is very heavy and sour. It requires specialized refining processes, as does oil-sands crude, and a significant percentage of it -- about two-thirds of Venezuelan exports -- is refined in the United States. If Canada should absorb all the limited investment capital available for unconventional crude, and if it should take over the heavy crude refining capacity in the United States along with the available specialized technical knowledge and personnel, Venezuela will largely get shut out of the global market as its own industry degrades. The result would be to put further limits on th
e ability of the Chavez government in Caracas to use oil revenues to support the populist policies that keep it in power.
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