The energy sector has long played a crucial role in underpinning the competitiveness of the North American economy, and in assuring the quality of life expected by our citizens. Abundant supply, relatively low prices, and reliable delivery systems are the result of decades of capital investment that created thousands of jobs in communities from coast to coast to coast. However, our successes of the past are not guaranteed into the future as we move from yesterday’s opportunities to confront tomorrow’s challenges. Mobilizing the very large amounts of capital required to ensure future prosperity will require policy coherence, regulatory co-ordination and efficiency, and an attractive fiscal regime. Given those conditions, the challenges can be turned into opportunities, and the energy sector can continue to deliver its historic advantage to citizens.
As North America contemplates its energy future, it does so in the context of rising and more volatile energy prices, declining productivity from conventional low-cost energy supplies, the need to access resources from more remote and costly regions, and meeting ever more stringent environmental requirements. At the same time, the appetite for energy remains undiminished. For example, growth in Canadian demand is projected to rise between 30-40% over the next 20 years.
The need for investment in new production, transmission and distribution infrastructure over the next 30 years is estimated by the International Energy Agency (IEA) to be in the range of US$1.7 trillion in Canada and the United States and roughly US$10 trillion globally for the same time period. This latter reality is important in that it will create strong competition within global capital markets, making it vital for the optimization of investment conditions. As the IEA explains, "The energy-investment challenge is heightened by the fact that capital needs in the next thirty years will be much bigger in real terms than over the past thirty years."
One of the reasons capital needs in the next 30 years will be significantly greater than the past 30, is that we are approaching the end of the lifespan of a very large stock of infrastructure built between 1950 and 1980. The post-war boom meant energy consumption grew at an exceptionally high rate and led to a wave of major developments such as hydro mega-projects, the first round of nuclear facilities, the vast expansion in conventional oil and natural gas exploration, and development of associated transmission and distribution facilities. In Canada, much of this capital was financed from public budgets. As the IEA notes, the private and foreign capital that has replaced public financing is very sensitive to the nature and stability of government policies.
In the case of electricity, Canadian capital expenditures from 1980 to 2000 fell by roughly two-thirds. Although oil and gas investment tripled and will likely climb to historically high levels, new reserves are increasingly high-cost and high-risk. In essence, we are living off the capital of an earlier era, much of which will now need to be replaced.
This means that not only must we build to meet future demand growth and the needs of customers in the future; we must also replace much of the production, transmission and distribution capacity built over the last 50 years. The IEA estimates that 51% of energy production investment will be needed to replace existing and future capacity over the next 30 years.
In the case of oil and gas exploration, finding and development costs for conventional oil and natural gas, and capital and operating costs for oil sands and unconventional gas continue to escalate dramatically. On the electricity front, new projects will be more expensive due to environmental mitigation costs, distance, technology complexity and/or higher resource input costs. All of which point to rising costs for energy.
North America as a prospective destination for energy investment is attractive based on the large and affluent market it represents. Canada’s ability to draw an appropriate share of that investment rests in its resource endowment, which remains considerable, and the conditions perceived by investors that differentiate it from opportunities in the U.S. or even Mexico. As noted earlier, investment prospects will be in more costly and remote sites, and the historic comparative advantage enjoyed in the production of electricity, and the development of conventional oil and gas reserves are no longer as pronounced as they once were. The recent increase in value of the Canadian dollar relative to the U.S. has further amplified the effects of that change.
The bottom line is that investors will be faced with a wide array of potential opportunities, all of which will be affected by policy, regulatory, environmental and security considerations that will add a significant additional degree of complexity and uncertainty to decision-making. To be successful, we need to be able to clearly define our advantages to potential investors.
For capital markets to view projects in a positive light, a number of important factors need to be aligned. To begin with, the overall policy framework for the energy industry needs to be clear, sensitive to investors’ priorities, and stable. A reaffirmation of our market-based model and a fully functioning continental marketplace within North America is a key starting point. The Canadian market itself is too small to fully justify the extraordinarily expensive major projects underway in the oil sands and remote northern and offshore oil and gas fields. Similarly, major electrical generation projects, particularly hydro and nuclear, require significant regional markets to allow for a sharing of risk and a phasing-in of domestic consumption for the output of large blocks of power. In this context, Canada is an integral part of the overall North American marketplace for both energy and investment.
Finally, the returns on investment offered by projects must be competitive with those offered globally if we are going to attract the investment required to develop our energy infrastructure. Returns required will vary depending on the level of success achieved in establishing an appropriate policy framework, consistent and stable market rules, efficient and effective regulation, and finally, the relative risk perception for investment in a global context.
The Energy Dialogue Group believes Canada must be seen as an attractive destination for investment, if Canadian projects are to compete for the capital necessary to finance our future energy needs, and to play a full role within North America and internationally. If our policy and regulatory processes are clear, efficient and effective, our many other features will ensure we are a destination of choice for energy investment. As we look into the future, we see significant challenges with respect to ensuring the adequacy and affordability of our energy resources. If we do not succeed in attracting the necessary investment to finance tomorrow’s energy projects, the economy and our citizens’ well-being will be placed at risk. Therefore, it is only prudent that we embark on a process to identify precisely what needs to be done to ensure that we are the destination of choice for energy investment.