Tuesday, August 01, 2006

The Coming "War" with Canada

As I returned recently from a vacation in Canada, I took a detour along the Canadian side of the St. Clair River which divides Ontario from Michigan as it flows from Lake Huron into Lake St. Clair. The sunny, placid scene of sailboats, swimmers and the occasional motorboat or barge bore no witness to the fact that this was a border between two countries. As I passed two vast oil refineries I was reminded that I was indeed in Canada, a country so rich in oil and natural gas that the docks next to these refineries were likely used to ship refined products to the United States which is now in perpetual need of them.

From such a vantage point it is hard to imagine that this apparently benign unconcern for where the United States ends and Canada begins might suddenly be transformed into a pitched battle of words and deeds. And yet, that is almost certainly where these two old friends are headed.

Behind this looming turnabout is one very troubling development: Natural gas production in North America has leveled off. Only warm winter weather has so far delivered the continent from a severe crisis. The glib confidence with which Wall Street analysts touted the buildup in gas storage earlier this year betrays their ignorance about how tenuous those supplies really are. Underground gas storage currently stands at 2.8 trillion cubic feet (tcf) and could reach well over 3 tcf if the current hot weather abates and reduces demand for gas used to produce electricity. But those figures amount to a very small buffer when compared to the approximately 26.5 tcf consumed each year across North America. In fact, it is so small that the U. S. Federal Energy Regulatory Commission is taking steps to encourage an expansion of gas storage in order to reduce the volatility in prices.

But you can't store what you don't produce. Even though gas drilling rig counts in the United States have steadily advanced from an average of under 500 in 1999 to 1,376 in June, production remains flat. This has led to high volatility in prices. Since February 2002 prices have risen from a low of a little over $2 per thousand cubic feet (mcf) to nearly $15 per mcf last October. Prices have since come down considerably. Even so they are unlikely to stay there if a hurricane again knocks out gas production infrastructure in the Gulf of Mexico or a truly cold winter descends on North America.

But there is something else even more foreboding about the leveling off of gas production according to Douglas Reynolds, a resource economist at the University of Alaska-Fairbanks who has studied the North American gas situation closely. Reynolds predicts that North American production will begin to fall precipitously sometime after the beginning of 2007. And, unlike the gradual downslope that the declining production numbers for a depleting oil well or an entire oil-producing nation trace on a graph, Reynolds expects the falloff in North American gas production to resemble a cliff. When gas wells begin to decline, they decline swiftly and often with little warning.

Which brings us back to the coming "war" with Canada. There will be no quick fixes for natural gas shortages in North America. None. Eventually, natural gas from Alaska and the MacKenzie Delta in the Northwest Territories will arrive by pipeline. But that could easily be 10 years from now. Imports in the form of liquid natural gas (LNG) could offer some relief, but the timelines for building the necessary special purpose ports and ships could be equally long.

So, what happens in the meantime should Reynolds' prediction turn out to be true? The answer will be puzzling to many Canadians. The North American Free Trade Agreement (NAFTA) obliges Canada to share its oil and gas in the same proportion as it has in the previous 36 months prior to any restrictions placed on output. The specific reference is Article 605. In other words, the United States is supposed to get its share no matter what. In 2005 the U. S. imported almost 3.7 tcf of natural gas from Canada which produced about 6.5 tcf in the same year. That's more than half Canada's production.

(Perhaps even more galling to the Canadian public will be the fact that the other party to NAFTA, Mexico, retained control over its own hydrocarbon resources in the very same chapter of the agreement in which Canadian negotiators gave away Canada's energy sovereignty.)

But what if the Canadian government faced a situation in which its own citizens were freezing in their homes for lack of heat? Would it simply let natural gas flow south because of a trade agreement? And, what if it became apparent that the situation wasn't temporary, but rather a long-term problem?

Any party to NAFTA can withdraw from the agreement with six months' written notice. But the urgency of a mid-winter natural gas crisis wouldn't allow for such an orderly retreat. So, if, say, a weak Canadian minority government such as the one currently in power in Ottawa were faced with the wrath of freezing Canadian voters or a nasty row with the United States, which would it choose?

In the past when it suited the United States, the U. S. government simply ignored rulings made by the body that adjudicates trade disputes under NAFTA. Specifically, a long-running dispute over the export of softwood lumber to the United States from Canada had both parties hot under the collar. (Read here and here.) The dispute has since been settled. If this rather minor dispute had both parties this agitated for this long, how much more will they be agitated by a natural gas crisis.

I seriously doubt that the Canadian government would ever risk an actual military confrontation with the United States over energy, a confrontation that it could not win. But, what would it do short of that? And what would the United States do short of military action when its own people are threatened with freezing?

We can all hope for lovely cooperation. But if the past is any indication, I fear we Americans could be in for what is about as close to a war as we will ever get with Canada.

You might expect that under the circumstances Canada and the United States would be invoking emergency conservation measures for natural gas. But instead both governments fiddle while the continent's remaining and perilously tight natural gas supplies continue to burn. They thereby risk that one day in the not-too-distant future their relationship may turn as icy as the St. Clair River during the depths of a frigid winter.

18 comments:

the_map said...

Hearings are currently underway in Canada regarding the 'development' of the Mckenzie Delta gas deposits. I've heard rumours that once approved (and this will be approved whether or not the proposals find environmental and/or social degradation to be the result) virtually all of this gas will be diverted by pipeline to the vast bitumen deposits in Alberta and Saskatchewan to provide fuel for further tar sands mining. Can anybody here verify or debunk these rumours? The obvious question arises: does it make any sense to burn what may amount to be our last large deposits of relatively clean-burning methane to fire the engines of low quality liquid fuel production? 'Cutting off our nose to spite our face' comes to mind...

Anonymous said...

Your article is very thought provoking; I wish that the majority of Canadians were aware of many of the points you raise with regards to supply issues and our NAFTA obligations. However, the conclusions that you jump to are rather extreme, unwarranted and incendiary.

Article 605 does place some rather onerous restrictions on Canadian exports. But there is a very easy way out of this predicament (for Canadians anyways) and the Alberta government is already doing it for Albertans during winter months. It’s called a rebate. Canadians pay the same market rate for natural gas as Americans. But then the province kicks in a rebate of X dollars per GJ anytime natural gas prices exceed a certain level, and this is automatically included in their natural gas bill. As a result the market brings to bear its full force on the American consumer but the Canadian consumer is shielded to a much greater extent. Is it a perfect solution? Hardly, because the government is losing tax revenue. However, it is a solution.

As a Canadian I’d rather we had never permitted articles such as Article 605. My opinion is the resource belongs to Canadians and we should be able to do with it as we please. But, that’s water under the bridge now. As natural gas supplies drop and prices increase, the majority of the price increase burden, from a consumer standpoint, is passed to our American importers. So, as you can see, there is no need for withdrawal from NAFTA and certainly no need to jump overboard and decree that wars will come of this.

Mike from Toronto said...

I was reading some time ago to continue with the IN-SITU process of tar sands oil recovery, the French have offered to build nuclear reactors to heat the water instead of using natural gas! This should free up some LNG for own American usage.
There is another problem with Canada-two weeks ago there was a study done by the Dominion Institute (Canada in 2020), which says that Toronto will be, by then, the Sao Pauolo of the North(slum city) and the number of Canadians (reading white and WASP)will decline! This means that the aging Canadian population and with the other "mixes" coming to displace the homogenous Canucks, there will be no one willing or able to fight for Canada, and then we Yankees can just walk right in and takeover Canada without firing a shot-I can hardly wait!

Anonymous said...

Well hopefully not war but Kurt is right this is a huge problem that governments on both sides of the border are doing far, far too little to address...Energy efficiency is a key part of the solution which will include a huge mix of solutions.

That said, Mike your comments only serve to breed more isolation for Americans and anti-Americanism - most unnecessary and unfortunate. Americans should reconsider these types of stances because it is not serving your purposes rather it is compounding your problems!

JustZisGuy said...

"The dispute has since been settled. If this rather minor dispute [...]"

Minor? MINOR? The United States government signs an agreement, then refuses to abide by the terms of the agreement, collecting $5 billion in illegal tariffs. ("Illegal" by definition of the agreement - if the NAFTA dispute resolution panel says they're illegal, they're illegal, right?) It then even has the gall to threaten giving some of that money to U.S. companies.

The dispute has not been settled, either. The proposed agreement (which involves allowing the U.S. to keep $1 billion, proving NAFTA isn't worth the paper it's written on) is not likely to survive - even the trade minister admitted as much recently.

As they say, with friends like these, who needs enemies? Personally I don't see any reason why the Canadian government should be held to an agreement the United States government treats with contempt.

http://www.dfait-maeci.gc.ca/eicb/softwood/chrono-en.asp

hundreddollaroil said...

Since when have Americans not taken whatever they've so pleased. South American countries are waking up to the fact that they have been getting their resources stolen and are now standing up the the Amerian Oil companies.

Anonymous said...

Burning wood pellets instead of natural gas may help keep North American homes warm during the winter months.

Omnitir said...

"And what would the United States do short of military action when its own people are threatened with freezing?"

Would it not be worth considering doing what most of the rest of the world does for heating - electric heaters - rather then go to war with Canada?

Anonymous said...

Omar- Omar- Omar-

A large percentage of electricity is produced via burning natural gas and thus heating water and then electricity is produced by turbines, same as Hydro-electric dams.

Or is electricity magically produced by some other means we are not all aware of?

Anonymous said...

Using Natural gas to extract TAR SANDS CRUDE

At this moment, using someone's abstract means of calculation, at the moment they use X1(a single unit of measurable energy) amount of natural gas, and using that unit of energy, produce X1+(energy in excess of that which was originally used).

Anonymous said...

A good analysis despite the war hyperbole. To be perfectly honest, war would entail the wholesale invasion and annexation of Canada (a founding member of NATO) or, at the very least, occupation of the province of Alberta combined with murder or imprisonment of national leaders and installation of puppet regimes in Ottawa and the provinces. It's not Canadian resistance Washington would worry about (resistance would likely be determined but relatively ineffective), but the WWIII consequences it might trigger the world over. But again, I think the article a good analysis despite the war hyperbole.

Anonymous said...

War ? Are you serious ? The US would not be taking on Canada, but rather Canada the UK and the EU. Wanna wager ?

Richard Neva said...

Name one country that does not hate America. Bet you can't. We are the most hated nation and the greatest terrorist the world has ever known bar none. Canada would do well to sit on their gas and let America freeze it's ass off!

Bill W said...

Well Rich, you can go on hating Amercia as Geologists at SUNY Fredonia AND Penn State University discovered the LARGEST Natural Gas field in America in the Appalachian region which runs from South Central NY through Pennsylvania, Ohio to West Virginia and Tennesse. Marcellus Shale to be precise,ranging from 50TCF to 500 TCF. We'll be self reliant and won't need anyone. Oh btw, Bob Geldof and Bono love Bush for the Aid he has given to Africa

Bill W said...

http://www.usatoday.com/money/industries/energy/2008-02-03-naturalgas_N.htm

The above link discusses the find, enjoy.

Bill W said...

Oops I'm sorry, Terry Engelder's estimates of recoverable natural gas were TERRIBLY understated by USA Today, here is Dr Engelder's actual estimates in the link below:

http://live.psu.edu/story/28116

Just Some Guy said...

Why is it that every newly announced discovery, whether oil or nat gas is merely used an an excuse to keep consuming resources at the same rate.

I guess you're not broke if someone will give you another credit card...

scrat said...

Well if the gas is there use it...by the time this resource is consumed....engineers and scientists will have figured out a way to harvest Methane Gas Hydrates which are plentiful of the coasts of many countries.