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The Untold Story about Canada’s "Defection"

by | published December 14th, 2011

Even after the scores of lectures I've sat through on environmental economics, or the long discussions about energy policy with think tanks at the Johns Hopkins D.C. campus…

I never expected this to happen.

At least not from the perpetrator in drama…

Not Canada. They were supposed to live by example for the West…

But, on Tuesday, citing economic and political concerns, Canada became the first country to officially withdraw from the Kyoto Protocol, a 1997 agreement under which 37 countries committed to reduce carbon emissions below 1990 levels.

On the surface, this represents a breakdown in transnational climate negotiations.

But underneath, there's more important trend. And it's very good news for investors like you and me.

So… while policy wonks debate “what's next” for climate talks, we need to discuss what this means for the future of energy investment in North America.

And it's positive… for now.

A Policy Breakdown

As you'll see, there are actually two stories here.

The first is about policy failure and the blow to members' expectations that economies could meet emissions reductions by 2012.

But the Canadian government has, for at least a decade, expressed dissatisfaction with the Kyoto Treaty since it fails to hold two of the largest emitters and economies in the world – India and China – accountable for meeting reductions targets. In addition, the United States, the second-largest emitter in the world, never ratified the treaty in the Senate.

Meanwhile, Canada was reducing its emissions. The country has been weaning itself off coal for the better part of a decade.

Its decline in coal consumption was mainly due to the Ontario government phasing out its remaining 6.1 gigawatts of coal-fired plant capacity through 2014.

Still, that reduction would never have been enough to meet Kyoto's rigid standards.

Under the agreement, Canada was supposed to cut its emissions to 6% below 1990 levels during the four years between 2008 and 2012.

As of today, the country is roughly 30% above its target.

So, in order to fulfill its obligations, Canada would now have to buy carbon emission permits from other Kyoto signatories to offset this imbalance and meet its agreed target.

That price tag was estimated at $14 billion – or $1,600 from every Canadian household – even though these permits still wouldn't reduce global emissions levels.

Now, Canada will likely avoid these costs.

But the second story was more troubling to politicians.

In order to reach future emissions targets, the country would likely have to curb significant levels of economic activity and strip down its oil and gas production, particularly in the Alberta tar sands, its largest source of new emissions.

And this is the story every oil and energy investor needs to know, but isn't hearing anywhere else.

A Nod to Energy Producers

The Canadian economy continues to be a shining example to a Western world struggling to rebound from the global financial crisis. The resource-rich nation has enjoyed a nice buffer from the aftershock of the crisis, thanks to strong production in energy, minerals, and agriculture.

In the last nine years, Canada's GDP has doubled.

And leaders would like to keep this going.

The country has immensely benefitted from the boom in oil and gas production in the sands of Alberta. But tar-sand mining is far more carbon-intensivethan traditional crude oil production.

The rise in tar sand production naturally has led to increased emissions since 2008, even though a heavy majority of the crude is used as energy in places like the United States or China – two countries that aren't bound by the emissions treaty.

So even though Canada is a very small emitter of carbon by comparison, political leaders had to be asking themselves one question: Why should Canada buy credits for their emissions from oil production, when two of their largest consumers of oil and gas are not required to do the same for burning their imported oil?

And, why should they cut production or stall growth in order to meet these obligations?

It appears Canada isn't willing to turn off the pumps or pay the costs for now, not with global energy demand rising and financial conditions ripe for production in Alberta.

As Kent has noted before, the price of oil needs to be roughly $70 to $75 a barrel in order for production in new oil sands fields to be profitable.

Existing fields require crude prices to be at least $50 to $55 in order to justify extraction of crude. With global prices expected to swell well past $100 a barrel in 2012, now is the right time to be producing oil in Alberta.

Profiting Upstream (and Midstream)

Canada is the largest supplier of oil and gas to the United States, shipping approximately 75% of its exports here each month. According to the government of Alberta, nearly 173 billion barrels of recoverable oil rest in these tar sands, based on current production costs.

This represents nearly 75% of the total North American reserves currently available.
And such a tally has attracted a great number of upstream and integrated companies looking to produce with demand rising and access to conventional sources falling.

It was just last year, in an interview with Money Morning, that Kent explained why Asian state oil firms, led by China, were acquiring interests in oil sands projects and spending billions to satisfy their rising energy needs.

And this trend is expected to continue as greater production from unconventional sources is needed to meet this demand. With margins increasing, upstream producers are settling in and expecting strong returns.

In fact, in August, Travis Davies, a spokesman for the Canadian Association of Petroleum Producers, told the New York Times that the sector expects oil sands production to roughly double by 2020, depending on the long-term price of crude.

This should also be welcome news to midstream service providers.

Despite the delay of the Keystone Pipeline between Canada and the United States, it's clear that production will continue, uninhibited, and that politicians are on board.

And anywhere the oil is flowing is a good thing for midstream providers.

Remember, these companies are assessing fees in order to move oil and products from the production points (upstream) to processing, treatment, and retail centers (downstream).

So the greater the levels of production, the more these services will be needed to transport and store these fuels.

Canadian rail companies were already increasing domestic transporting capacity with the growth of the Bakken shale field. Now, expansion of tar sand production will only pique their interest even more as they aim to profit on this “black gold” rush.

Of course, Canada has stated that it is willing to step back to the table to negotiate a long-term treaty that binds all countries to specific emissions cuts, which would likely introduce new taxes or fees on producers.

But given the lukewarm outcomes in Durban last week and Copenhagen in 2009, I'm expecting Mr. Davies' prediction will come soon long before these nations, all seeking to grow their economies, can reach a profound agreement.

It's a good time to look north for opportunity.

Sincerely,

James

P.S. Canada's withdrawal is the latest twist in a huge story about the energy markets. And for months, Kent has been talking about the next big trend and what it means…

It means… you can profit.

To learn more, go here now.

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  1. December 14th, 2011 at 13:26 | #1

    Canada would have had to take the penality on oil and gas production while at the same time the end users of the Canadian OIL sands would not have had no penalities for the use of these products. Stepping out of this Kyoto agreement is the right thing to do. Finally there are no Tar Sands, please research what this huge deposit is, it is OIL SANDS and the misnomer does not help the conversation!

  2. Ronald Drakeford
    December 14th, 2011 at 14:39 | #2

    I musr take exception to Richard Soley’s statement on there being no tar sands. What does he think Canada’s deposits are? As far as I understand it the “Sands” are known colloquially as both oil sands and tar sands. The bitumenous deposits require heat in order to flow and that sounds more like tar to me than oil, but then what do I know?

  3. Fred estlin
    December 14th, 2011 at 16:31 | #3

    Normally proponents of the deposits call them oil sands and opponents (for their own obvious reasons) call them tar sands. This article uses the two terms interchangeably. Choose sides and take your pick!

  4. Mike Mann
    December 14th, 2011 at 16:35 | #4

    Richard and Ronald. Both of you are correct!

    Certainly, the term “tar sand” is a colloquialism and refers to the Alberta oil sands. The term got its name early in the past century due to its appearance and likeliness to byproducts of coal gas. Correct Richard is in the fact that it isn’t truly “tar”, as tar actually is a man-made byproduct of coal.

    Ronald is correct that it has historically been used to describe the sands for the better part of a century. However, in recent years, the usage of the word “tar” has taken on a negative connotation it appears due to the environmental lobby. As we’ve witnessed, either usage has the potential to sidetrack the conversation.

  5. Joseph.E
    December 14th, 2011 at 16:36 | #5

    Good on you Canada ! I wish our idiotic Australian PM could see through the tar in her communist tainted head and stop destroying this great country of ours.

  6. Rob
    December 14th, 2011 at 16:58 | #6

    Just an observation, but if/when there is a recession in the EU which many analysts are predicting, or a a problem with the new “treaty” that some countries don’t want to sign (Finland and Poland), wouldn’t this have a negative impact on the U.S. economy? If the U.S. has very slow growth for the next few years resulting in maybe stagflation, wouldn’t this cause the price of oil to decrease?

    Of course, as the euro declines, the dollar rises and oil prices decline. Just wondering what a recession would do to energy stocks in general. I read that housing prices in Shanghi have decreased 40%, so China has its own housing bubble to contend with. Will there demand for energy keep rising?

  7. Wojtek
    December 14th, 2011 at 17:45 | #7

    Well done Canada!!! I wish that our EU loonies in Brussels wake up too.

  8. Justin
    December 14th, 2011 at 18:15 | #8

    The Kyoto Protocol was a stupid idea to begin with. Increasing GDP (a good thing if you want to make money) requires energy! Therefore reducing the present system (coal, oil, gas )to reduce carbon dioxide output is just plain stupid. If you want to change a system you must find a more efficient and less costly way to produce goods that doesn’t use organic chemicals (carbon based chemicals)and outputs carbon dioxide. But the reality maybe that the present hypothesis that the excess carbon dioxide will ruin life maybe incorrect. First we know all this organic fuel came from living organisms (plants mostly). Therefore the planet had an ecosystem in which life thrived before it was turned into coal, gas and oil. Second not all organic remains(I call remains that which is left after life ceases)can be used as fuel. Life also created carbon compounds not useful for fuel. Just look at all the limestone and marble that exists. These rocks were made by sea creatures (seashells are limestone and marble is metamorphic limestone). Therefore we cannot return to the original state of earth before creatures existed.So it seems to me using all the fuel available should not be feared as much as some people claim.
    Climates may change but that is something that has always occured on the Earth. Evidence of change is seen by geologists studying the earth and finding present deserts thriving with life in the past as well as changes on all parts of the world. Many explanations exists that cause climate change including output energy of the sun, the position of the Earth from the Earth’s wobble, the changing of the magnetic field, the volcanic eruption activity, increase paved area of earth’s surface, errornous measurements conducted at city locations, as well as the techtonic plate position from its slow and steady movement. The truth of the matter will be when supply runs out then another system must be incorporated. Sooner or later the system that will last will be one that will not depend on depleating sources like coal, oil, gas, nuclear energy.

  9. CanadaNorth
    December 14th, 2011 at 20:24 | #9

    The Trouble with Kyoto and Canada. It’s as if the Kyoto side is using only one side of the ledger when calculating Carbon Debits. What kind of accounting system would do that? Every system has a Debit and a Credit. The Credit in Canada’s case is the large ecosystem that absorbs way more Carbon than it produces. The amount of Water and Plant Life as well as the low population density that Canada has, guarantees a large Credit refund if it was a fair game that the Kyoto people were playing. If Kyoto was fair, Canada would have dollars rolling in every month from the net producers of pollution. Does China and India come to mind? Anyway. Canada had to pull away from this agreement even though many thought Kyoto was popular a few years ago. Since then, the numbers have been scrutinized, it appears that Kyoto is a fraud. Best Regards, CanadaNorth

  10. December 14th, 2011 at 22:49 | #10

    The one thing I worry most about lately is the politics surrounding just about everything. We have a president that will undoubtly sign on to the Kyoto treaty. Cap and Trade is still alive and well. Canada has already felt the pinch. Now that Canada has decided to drop out of Kyoto I would suspect that the powers that be will turn up the heat. Canada may cave. I know we will. What happens with oil then?

  11. Ed Nichol
    December 15th, 2011 at 00:32 | #11

    I think you are being distracted. Do just one simple test. Go to the grocery store and try to figure out where your food comes from. Hint; you did not produce it. The USA and Europe have been playing a game of ‘see how far we can ship it’ for some time. First they destroy the home ground with glyphosate and then they pumped every well dry around the world. tch! You can’t eat paper money or tar/oil. And it is happening…now.
    Google Dr Huber / GMO for a start. Oh yes, China is moving one half billion into the cities and away from the farms and this is their fourth year as a net importer of food! Hooee. Worried, nah. Go on and check your pension plan again.
    Ed the Grocer

  12. Bernard Durey
    December 17th, 2011 at 16:21 | #12

    Well,it certainly could be good for investors. Be the Kyoto Proctol a stupid treaty or not. I highly suspect it is a spinoff treaty from the 1987 Montreal Protocol. That treaty had a unanimous vote for ratification ofthe treaty. I wonder if there will be any spinoff isues withat treaty and the Kyoto Proctol? It does refer back to the Montreal Protocol especially in reference to chemicals covered or not. Sorry this is a couple of days later but have been doing a little research on it. They usually spin back to other treatys or acts or if going the other way and trying to chase something down I have found end of chapter and verse. Basically next chapter and verse need to be written,etc.

  13. Bernard Durey
    December 17th, 2011 at 17:32 | #13

    Well,as stated above,”It may be good for investors. I apologize for some of the typographicals. You take the word protocol and one definition is as follows: The preliminary draft of an official document,as a treaty;specifically,the preliminary draft or report of the negotiations and conclusions arrived at by a diplomatic conference,having the force of a treaty when ratified. As stated before the Kyoto Protocol refers back to the Montreal Protocol,which was eventually ratifed by 196 countries or unanimous. Is the Kyoto Protocol a spinoff document of the Montreal Protocol or the preliminary one? Once again thank you and Happy Holidays.

  14. Malcolm
    December 17th, 2011 at 21:32 | #14

    At last Canada has made a good decision for its people and the world.
    The Kyoto accord is based on the obviously false premise that the temperature of the world is increasing solely due to the increase in man made carbon dioxide. Carbon dioxide even appears to being treated as a “toxic” gas. Carbon dioxide is essential to life. Every single human being on the planet as well as every single animal on the planet is breathing it out right now. The only ones that are not are dead. The gas is essential to every living thing on earth and all plant need it to survive. Increasing Carbon Dioxide levels increases the growth of plant life on earth. Indeed the current levels of carbon dioxide are far BELOW historical levels. A fact which the IPCC deliberately tried to hide by “modifying” (read deliberately leaving out important data)that proved that CO2 levels today are far LOWER than they were in recent (geological) history. Of course the whole thing is complete nonsense. Human produced carbon dioxide is a tiny fraction of the total carbon dioxide in the atmosphere and to argue that a tiny percentage change of an already tiny percentage has any impact on the climate is complete and utter nonsense.

    Many scientists consider that changes to the earth’s climate occur periodically due to changes in the heat input from the Sun and there is important and reliable data to substantiate a strong correlation between the performance of the Sun and the climate here on earth. All of which is effectively suppressed (ie not reported) because the media believes in CO2 driven climate change as a religion not as provable scientific fact.

    So good for Canada. Keep building your economy based on common sense and ignore the politically driven super idiots leading the rest of the world down the garden path.

    Malcolm

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