Power Struggle
Improving the energy dialogue in Canada (and beyond) through honest, non-partisan, and fact- based conversations.
The energy conversation is personal: it’s in our homes, in our hands, and now, it’s in our ears. Power Struggle invites you to listen in on honest, non-partisan, and fact-based conversations between host Stewart Muir and the leaders and thinkers designing modern energy.
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Power Struggle
Can Canada afford to ignore U.S. energy needs? // Kent Fellows
Dr. Kent Fellows is an economist and assistant professor at the University of Calgary. With expertise in energy, infrastructure, and competition policy, Kent has advised provincial, federal, and international governments on major policy decisions. He’s also a Fellow at the City Hall Institute, contributing to cutting-edge research on energy and infrastructure economics.
In this episode, Kent reveals how energy decisions ripple through households, businesses, and government revenues, exposing the often invisible costs Canadians face from lagging infrastructure.
We dive more into:
- What’s the Trans Mountain Pipeline expansion?
- The invisible price Canadians pay without proper infrastructure plus savings opportunities
- Can the Trans Mountain Pipeline expansion truly save Vancouverites over $1,000 a year on gas?
- Why Alberta’s oilsands could produce the world’s “last barrel” of oil
- What’s at stake for Canada and the U.S. in energy trade and policy decisions
- Criticism behind the carbon tax, “Ax the Tax” and Kent’s (maybe surprising!) take on it
- Do oil and gas companies actually care about the environment?
- The energy trilemma: Can we balance affordability, reliability, and sustainability?
- How oil sands producers are cutting emissions while staying globally competitive
- How to effectively plan for future infrastructure
Through Power Struggle, we’re giving audiences a holistic and objective view of the modern energy landscape. With Stewart Muir at the helm, listeners are invited into candid conversations with scientists, engineers, analysts, professors, sociologists, economists, and the many diverse voices addressing energy today.
Reach out to us with thoughts, questions, or ideas at info@powerstruggle.ca
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Welcome to Power Struggle. I'm Stuart Muir. Kent Fellows is our guest today. Kent Fellows is an assistant professor of economics and the director of graduate programs at the School of Public Policy at the University of Calgary, alberta. He is also a fellow in residence at the CD Howe Institute as an academic advisor and contributor to the Institute's Energy Policy Program. Through his academic and policy publications specializing in competition policy and energy and infrastructure economics, he has provided advice to provincial, federal and international governments. Kent Fellows, welcome to Power Struggled. My pleasure. You're in Vancouver today where we're filming in our studio. You've come out to meet with business leaders and share your thoughts and ideas on a few topics of interest on the west coast of Canada. I was there. It was a really interesting presentation. It was clearly appreciated by the audience. I just want to give folks a flavor of what that was about. Just how would you characterize what we talked about at lunch today?
Kent Fellows:Sure, you brought a great group together for today's meeting and what we were talking about was changes in retail and wholesale gasoline prices, particularly as they relate to the new Trans Mountain expansion opening.
Kent Fellows:So I've done quite a bit of research in this area, dating back a few years, on the relationship between pipeline infrastructure and retail gasoline pricing in Vancouver, because there's a pretty direct correlation. One way to think about that is you know, if you think about, the pipeline is just like a long straw between Edmonton area refineries and wholesale gasoline distributors in the lower mainland here in BC Since 2015, we've really been pinching that straw off. That throughput has reduced and fallen by a pretty dramatic amount, and what that's meant is wholesalers here in the lower mainland have had to go to higher cost substitutes to find gasoline to sell to retailers. So you think about the difference between retail and wholesale being the wholesalers, that's what your gas station pays for its gas, so you pay the retailer, the retailer pays the wholesaler and a lot of the price increases that we've seen in Vancouver since 2015 are really down to that wholesale price going up and up and up because of a lack of pipeline capacity on the Trans Mountain Pipeline.
Stewart Muir:Now, before May 2024,. If you were a driver in Vancouver, you went to the gas station to fill up, you were paying 44 cents more than a driver in Edmonton. Is that right?
Kent Fellows:Yeah, it depends on the exact month, but definitely I think the highest we've seen it is sort of 45 cents. 45 cents, maybe a couple of cents higher than that, and sort of bouncing between there and 30 cents. So that's the price difference between Edmonton and Vancouver, and then in May something happened. Yeah, what happened in May is finally, after years and years and years, we have the opening of the Trans Mountain Expansion.
Stewart Muir:Sorry. What is Trans Mountain Expansion? For anyone who's wondering.
Kent Fellows:Right, yeah, in my world this needs no introduction, but for a lot of people absolutely so. The Trans Mountain Pipeline, the existing pipeline there's been a pipeline that's gone from Edmonton over into BC down through the interior and exiting in Vancouver. So that Trans Mountain pipeline been in service for decades, since the 1950s, and that pipeline ships both crude oil and gasoline and diesel from Edmonton through to Vancouver. And what's been a long time in the works, since probably the late 2000s, early 2010s is the company that owned that pipeline wanted to more than double the capacity. So they had a plan in place that they were going to put down a second line beside the existing line, using 99% the existing right-of-way, because they know where all the faults are, they know where they have to make all the river crossings. They've done all the surveying to expand that pipeline capacity, allowing for more crude oil shipments but also allowing for more gasoline shipments.
Kent Fellows:So, as you alluded to, in May 2024, what happened was that expansion finally opened. It's been delayed several times. The original company that proposed it actually ended up having to sell the whole project to the federal government to get it finished because of policy and political risk around that pipeline. So there have been a lot of opponents to it. But with the pipeline opening, those gasoline shipments from Edmonton to the lower mainland have now gone back up to their historic levels.
Kent Fellows:We don't have that supply constraint, we're not pinching that straw anymore, and gasoline prices in Vancouver have started to drop pretty dramatically Now. When I say they've started to drop, what I mean is they've started to drop relative to the Edmonton price. So both of those prices are moving around but the difference between the two has come down pretty significantly. So coming out this week I actually drove out. This is the first time I can remember in a decade that I actually saw prices on the BC side of the border that were comparable and in a couple of places lower than what I filled up at in Calgary before I came out on Wednesday.
Stewart Muir:That is really shocking. I think you've run a number on how much now the average British Columbia household will save in a year. How much will they save?
Kent Fellows:So the average BC household over the year. Given how much an average BC household spends on gasoline, this is going to save them over $1,000, about $1,200 a year.
Stewart Muir:$100 a month. $100 a month.
Kent Fellows:Back in your pocket. Yeah, that's nice. Yeah, I mean dwarfs, a bunch of other things that we think about in terms of policy driven costs for households. But it's kind of invisible because if you don't follow the pipeline stuff as closely as I do and as closely as other people do, you have no idea that you've been paying this extra amount because we haven't had the infrastructure in place.
Stewart Muir:I'm interested in the winners and maybe the losers from the new pipeline. And we sort of got into that because obviously British Columbia consumers are winners. Who else is a winner?
Kent Fellows:British Columbia consumers are definitely winners. Anyone who's shipping crude oil on this pipeline right now is a winner to a certain degree. There is a difference in the amount you pay per barrel if you're shipping crude oil, so that cost has gone up a little bit because of the cost of the pipeline. But I think if you're any of these shippers on the pipeline right now you're happy to pay more to be able to ship more. We could have a conversation. Some of them might disagree, but I think most of them, if they're being honest, are happy about the pipeline opening, even if the tolls have gone up a little bit. And then a huge winner government of Alberta and the federal government. Because the government of Alberta now gets to collect more royalty revenue and more tax revenue, which ends up being a really big impact on the bottom line for government coffers in Alberta. And the federal government gets some of that tax revenue as well through corporate income taxes.
Kent Fellows:Okay, any losers? There are potentially a couple of losers. There are certainly companies that have been making pretty good money off the higher gasoline prices and not all of those companies have faced the cost of the higher shipment. So if you're a wholesaler that's able to bring in additional supplies, say up from the United States, or if you had a long-term contract and you had a lower price to ship. Then we'd say, using the technical language, you're an inframarginal person, so you're sort of if any of your listeners are thinking back, if they've done even introductory economics at one point you think about the shape of the supply curve, the guys at the low end of that supply curve who have really low costs. They're probably making some additional money off of it.
Kent Fellows:I think rail companies probably made some additional money as well because a lot of those volumes that are now returning to the Trans Mountain Pipeline while we were pipeline constrained they would have been shipping via rail, so being loaded onto a rail car and I've been to enter at some other refinery and then being shipped in. So the rail companies might lose out, but probably not a whole lot because there's a lot of demand for rail shipment anyways. So when they're shipping refined products or crude oil or something like that, it means they're not shipping something else. Sort of the wedge on how much they make by shipping gasoline versus shipping a container probably not a huge chunk. So yeah, they're losers, but I think the gains to the winners far outweigh any of the loss to the, to the losers now there have been some fears expressed in the united states that they could be losers.
Stewart Muir:Do you think that's legit? Uh, potentially, and for what reason?
Kent Fellows:so one of the areas of of supply that has been sort of making up for the, for the pinched pipeline has been stuff coming up from from the united states uh, so importing refined fuel from sort of the seattle or the western seoard, and there's a chance that they might lose out a little bit. I know those fears have been expressed. I'm less sympathetic for a couple of reasons. I mean, first of all, not to be too much of an economic nationalist. We're Canadians. We should be considering Canadian firms and Canadian households first off. But secondly, there's lots of demand to go around for refined products and so, yeah, you might lose a couple of cents on having to sell it domestically if you're a US producer. But again, I don't think that's a huge chunk of change that they're losing out on and I don't think it's going to hurt trade relationships or anything like that.
Stewart Muir:Okay, and this price differential. Is that a win-lose situation for American, say, refineries who want oil from canada right now?
Kent Fellows:they can't get it sure, yeah, so so, yeah, it's a great question, right, because on the one side it's are you trying to sell gasoline into canada? The other side is are you trying to buy crude oil from canada to the us? Um, and I think there, I think there they should be quite happy about the expansion of the of the pipeline, because if you're owning a refinery down there, this is increasing your potential supply, right, so you can buy now from a Canadian supplier or you can buy from a US supplier, so you have some substitutability there. There may be some downsides. If you're a crude oil producer in the US, do you want to compete more with Canadian crude? Probably not, but I think those concerns are pretty minor, right, you know we are a major producer. We do import a lot, or export a lot into the United States. Some of that's through Trans Mountain, but a lot of that is through other pipelines that go more into the central US. So, again, you're hearing some of these fears, but I think they're kind of overblown compared to the winters.
Stewart Muir:Yeah, Just to get a sense of the scale of this 600,000 barrels a day. I don't have any concept of what that is, but I know that Canada exports about 5 million barrels a day of crude oil right, so it's about 10% of our right through Vancouver. How does it go through the economy? Because here we've got Vancouver, it's now this major international port export for this commodity. That is the biggest export commodity that Canada has right. You mentioned the governments in Canada as being winners. Can you unpack that a little more?
Kent Fellows:Yeah, I think the best way to think about this is anytime a private sector business anywhere in the economy wins, you've got levels of government that also win. They share in that success and we often think about taxes as a burden. But another way to think about it is it's sort of the public sharing it's the government per sharing the success of the private sector, which is good, I mean because we use it to pay for things. So a big chunk of the benefits that are accruing at the federal level are those corporate income taxes. So you've got an oil sands firm now that's able to expand production a little bit and export a little bit more. Maybe they're also getting a better price, they're making more money, they have higher profits, they have higher revenues, they have higher income. So they're paying income tax on that and a share of that goes to the federal government.
Kent Fellows:You've got other firms involved in this as well, so trans shipping firms. So let's say you have a firm operated somewhere else in Canada that runs a tanker business. They're benefiting as well, so they're paying that. You've got people supplying chemicals to the oil and gas sector. They're earning a profit, they're benefiting from this. They're paying taxes as well. So you've got all these taxes at the corporate level that go to the federal government but also go to the respective provincial governments. So that's one chunk, and at the federal level that's the biggest chunk. The other thing that you'd get is anytime someone's drawing an income in this sector so an oil and gas worker in this sector they're paying income taxes as well, and there's a public share of that, because we all pay income taxes. We may not like it, but it contributes to the public good and there's a good reason for it. And if that money spent responsibly, this is great for the whole country.
Kent Fellows:Now for the province, specifically in Alberta, the biggest chunk of this is something called royalty payments, and so this is a payment, because the crude oil itself, when it's in the ground, is public. It's owned by the people of Canada, more specifically the people of Alberta, constitutionally because of decisions that were made in the constitutionality of natural resources. So, just like firms in British Columbia have to pay a fee when they cut a tree a stumpage fee if you're extracting crude oil in Alberta, you have to pay a royalty on that, and there's a really complicated formula that we could go through, but the simplest way to think about it is that it's a share of the profits. So you make a profit on this. So we look at what your costs are to extract, we look at what your revenues are, we look at the difference between that. There's a bit of a formula, and then you pay a chunk of that to the provincial government. If you're not earning a profit, you're not paying much royalty because there's no money left over.
Kent Fellows:But if you're earning a huge profit, you're paying a big chunk of that to the provincial government, and that's one of the reasons that Alberta has been able to have both low taxes and historically high services, which is maybe not a popular thing to talk about in the rest of the country. Sort of brag about how well we're doing. But the Alberta Advantage is something that successive Alberta governments have talked about. That's straight down to these natural resource royalties and the types of things they pay for. Then there's some other benefits too, around balance of payments and thinking about exports and that we want to import stuff and we can get into that if you want to. But just sort of thinking about the accounting of it all. The biggest chunk for the province of Alberta are these royalty payments. It's an astronomically high number. It's a big chunk of public revenues there.
Stewart Muir:Right, you, you've talked about the oil sands. They're in the ground in alberta, they're not on the coast. They're not some of you. You can't move them to, say, china, where you could get lower cost oil workers. How is that a differentiator for this resource that makes canada more or less competitive globally?
Kent Fellows:yeah, I mean I think that's a great question. So it's one of the few sectors in the economy that isn't mobile as you just described. Right Like you're not going to get outbid for this, because the only other places that can try to outbid you are places that have crude oil. The crude oil stock, it's there on the ground. So, comparing it to something like battery plants for EVs, so the federal government has spent a lot of money or is planning to spend a lot of money in subsidies to try to entice battery plants to locate in Southern Ontario. You don't have to do that with the crude oil. The crude oil can't move. If we don't produce it, no one's going to produce that crude oil. They might produce it somewhere else and so, as sort of the highfalutin economics term for it is as a factor of production, it's one of these things that is really important for the economy because we can't repurpose that to anything else. It's in the ground. If we keep it on the ground, then it's just lost value.
Stewart Muir:You're visiting Vancouver from Calgary. Calgary is the heartland of Canadian oil and gas. Is there a cliche about Alberta that you'd like to put to rest? I'm going to give you a chance.
Kent Fellows:Oh, I mean there's probably a couple. I think a big one here is this idea that the oil and gas companies themselves don't care about environmental quality and they don't care about their carbon emissions, because they really do. Bc often brags that it was the first carbon price in Canada. I think that's an open question. Alberta might be, depending on how you define a carbon price. So we had our large emitter system that was sort of put into place between 2004 and 2007. And that started off the large emitters pricing part of that system and the oil and gas firms, while probably pushing back against something of it. You know, no one wants to have to pay, to pay more taxes.
Kent Fellows:Generally speaking, we're quite cooperative with the governments of the day and coming up with these things, coming up with a plan that worked to balance the environmental concerns with the business concerns, with the government's concerns. So I think that's one misconception I'd like to put down, the other one being that the oil sands are a high cost producer, and I can get into that, but that's a slightly longer conversation. Um, because we often hear oil sands are a high cost producer and I can get into that, but that's a slightly longer conversation. Um, cause we often hear oil sands is so expensive. It's such an expensive way to get oil and it's so dirty and and um. That's not true.
Stewart Muir:Well, actually we should get into that, but I'd like to get into it from something. You said that Canadian oil sands will be the last barrel of oil in the world. Yeah, and we've had that said before. I've heard it, but you explained it in a really interesting way. Can you share on that, sure?
Kent Fellows:So one of the conversations we hear an awful lot about is what's going to happen to global demand for crude oil. So, in substantiating even the expansion of the Trans Mountain Pipeline, are we going to need this pipeline? Because is the world going to use enough crude oil? And I think if you're sitting in Western Canada, anywhere in Western Canada not just Alberta, I mean BC is a crude oil producing province and a natural gas producing province as well. The question that you should be asking isn't how much crude oil is the world going to use. That's maybe an interesting question, but if you're talking about the business prospects of producers in Western Canada, the real question is what do you think the price of crude oil is going to do in the next 12 months, in the next five years, in the next 10 years, in the next 20 years? And that's a different question because prices and quantities do move around together. But when we get large level changes, it's entirely possible we can get a reduction in global usage without a steep depression in pricing, because it kind of depends on what OPEC does. It depends on what other oil producing nations do.
Kent Fellows:Back to the matter at hand. Why do I think the price matters more? All of the producers we have in Western Canada are the economic phrase where it would be a price taker. So this is someone who looks at a market and says what's the prevailing price? That's the price I'm going to get if I produce. That's different different from price makers. So if you're the only person in town, you get to set your price and then you decide how much you want to sell, and if you want to sell more, you have to set a little bit lower price. If you want to sell less, you can set a little bit higher price, and so that's sort of the conversation those those people are having. And, depending on the market, you can be a price taker or you can be a price maker.
Kent Fellows:I think all of the oil and gas producers in Western Canada are price takers. None of these producers have enough market power to change the world price, and so what that means is, when they think about their production decisions, they're really thinking what price am I going to get? What's the world price going to be six months from now, 12 months from now, 10 years from now? And in making that decision on whether I want to produce more or less, you're really looking at what are my costs of production and not what are my all-in costs. But what's the cost to produce one more barrel of oil? Oil sands producers have what we call a really long capital cycle, and that means when they're deciding whether to make an investment or not, they're deciding whether to construct a new oil sands mine, or what's called an in-situ operation, where they pump steam down the hole to break everything up oil sands.
Stewart Muir:Mine is. There's two ways the oil sands are developed. One is kind of uh, well known because it's those pictures, those huge mines you see from the aerial and it looks wow, how could that be so big? And then the other one is this modern high tech. It's like a big chemistry lab that's. I visited one of those and that's what they called it and it's totally different.
Kent Fellows:That's the future of mines yeah, you've got the surface mining and anytime you're seeing, you know, those giant dump trucks filled with with uh, with literal oil sands. That's the surface mine and they go in the hole and they've got a mine face and they're scraping that off and putting in the in the dump truck and then taking it for processing to separate the oil from the, from the sand, the one being what we call in situ, which I'm sure there's a Greek or a Latin way, but I mean it means we leave the sand in place and we're trying to get just the oil out from subsurface. So, like you described, I mean a big chemistry set. They're basically a big water treatment plant and a steam plant plopped on top of an oil sands formation. So you spend a lot of money to set up your steam plants, so you're burning natural gas to generate steam, really really high, high temperature steam that you then pump down the hole, so down into the oil sands formation. What that does is that loosens up all the crude oil.
Kent Fellows:So one way to think about oil sands is it kind of has the consistency of peanut butter. That's the closest thing. Like you go into your kitchen, you open up a jar of peanut butter and look at it, you know how stiff it is. And if you heat that up just like peanut butter, if you warm it up it flows a little bit more nicely. So we pump tons of steam down although the companies work every year to try to make sure that they can do it with less steam because that saves money. But we pump steam down the hole to heat up the formation and the hole to heat up the formation, and then the oil sands, bitumen, flows into the production. Well, and we pump it back out. But in both of those cases you're spending a lot to get set up.
Kent Fellows:You have big setup costs billions of dollars, billions of dollars because if you're a mine, you've got to buy all those dump trucks, you got to buy all your treating facilities. You got to buy your, your, your, you know, your, your scrapers or whatever the technical term is all the heavy equipment. If you you're an in-situ producer, like an oil sands producer from one of the deeper ones, you've got to pay to set up your steam plant. There's a water treatment plant because you want really clean water to go into the steam plant. You need to heat that up and you need to be able to pump that steam down. Whole those investments are made on multi-decade cycles. So I'm not building an oil sands plant today and expecting it to pay itself back in a year or two years. I'm building an oil sands plant today with the expectation that over the next several decades I'm going to get my money back out. That's very different from the way most of the world produces crude oil and in fact the way we produce crude oil even in Canada outside of the oil sands. So conventional production is sort of how we divide it. We divide it into conventional and oil sands Conventional production that we do here and that most of the rest of the world uses.
Kent Fellows:What you're doing is you're drilling sort of the typical pump jack. If you've driven around in rural Alberta or even northern BC, you've seen the pump jacks. They go up and down, they produce out of the well. That's one well that you punch, you pump it until it runs down or more or less runs dry, and then you punch another well somewhere. The return period, the return on capital for those, because there's a much smaller capital cost is a whole lot quicker. But you're really measuring that in quarters or years rather than measuring that in decades. Now why that matters for the conversation about whether we'll be the last barrel of oil. If you're a conventional producer and I'm an oil sands producer and that price starts to drop at some point, you're going to make a decision and you're going to say that next well isn't economical, I can't get my money out of it, and you're not going to drill the next well, or you might start drilling fewer wells rather than being one well or another. And the well is what? 10 mil.
Stewart Muir:Yeah, it depends on the formation, but we're not talking about the billions of dollars.
Kent Fellows:I had this far less. So, yeah, so I put a billion dollars down on my pile and I say I'm going to earn from that. You're making decisions that you know. You're making tens of million here and tens of million there, Not that that's not a lot of money. That's a lot of money but in the grand scheme of things, compared to my out and you need to get another one. Yeah, we have a thing called decline curves.
Kent Fellows:That's how quickly that production drops off. They're like a water slide. So they start off and they're producing quite a bit and then over time that production comes down fairly quickly. So if you want to hold your production in conventional, you have to be punching new wells every year and you need to be punching wells to explore and then hopefully you get lucky and you can produce out of one of them.
Stewart Muir:So where else in the world is oil produced like in the oil sands?
Kent Fellows:So there are a couple of places in South America, but not at the scale that we're doing.
Stewart Muir:And they're kind of dysfunctional in some of those countries.
Kent Fellows:Yeah, they definitely don't have it going the way that we have. What about Russia? No, Russia is mostly conventional. I think Russia is all conventional.
Stewart Muir:So when you say Canadian oil could be the last barrel, can you put that together?
Kent Fellows:Yeah, so going back to this thing where you're conventional and I'm oil sands, right. So if that world price starts to fall, you start cutting back. There's no point in me cutting back because I've made my big capital decision. Yeah, I might have to punch a new well, but my cost for an additional well is actually lower than yours because I know where my crude oil is. It's harder to get out of the ground, but I know exactly where it is. I don't have to take a risk and I know that I can do it. So when I start looking at my costs to punch one more well using the same oil sands facility, I'm probably competitive.
Kent Fellows:If I'm in the Canadian oil sands at an oil price of anywhere between $50 to $60 a barrel, on the high end, all the way down to some of those producers, $10 a barrel, and at $10 a barrel I can keep going. You can't because you'll stop drilling wells, Whereas I've already made my big capital allocation. So when I say I think the oil sands could be the last barrel standing, that's what I'm talking about. It's those capital cycles. I've made my bet for 20 years and it makes more sense for me to see it out unless that price drops really, really dramatically. You make your bets on one or two year cycles and if the price starts to drop you'll stop making the bets.
Stewart Muir:OK, so we get to this point where the last barrel of oil really is a Canadian barrel.
Stewart Muir:But I know there's someone out there thinking wait a minute, it shouldn't be an oil sands barrel because that's bitumen and it's bad
Kent Fellows:that the oil sands crude has a higher emissions profile in general than conventional crude has nothing to do with when we burn it in our cars, right? I mean, the gasoline looks exactly the same. I can't tell whether I'm getting gasoline from oil sands, bitumen or for some other source. The difference really is that, upstream, that when we're pumping it out of the ground in northern alberta, there are emissions associated with that, because I have to burn natural gas in order to run my boilers to get my steam steam to pump that down, whole all of that stuff. So I think there are serious material concerns about the carbon emissions profile the oil sands. But I think it's really important to understand both of these conversations in context, because if we just ignore this sector and expect it to go away because it's going to be high cost, I think we're making the wrong bet and I think you know if I can get into a little bit of speculation I think this is part of the reason the federal government has had such an issue with this particular sector since they introduced national carbon pricing, because I don't think those emissions have gone down as much as they expected them to, because I think they expect this to do more damage to the sector than it's done in terms of production. Right, I think we're going to bring in a carbon tax and the sector is going to start to shrink. We haven't seen that, and that's why I think it's really, really important to focus on policy decisions that motivate a reduction in emissions intensity. So not necessarily how can we produce fewer barrels, because then we're leaving money on the table and we've got stranded assets and we've got all kinds of problems there but how can we get the emissions intensity down for the barrels that we are producing? This is something I think the Alberta policy has been really good at trying to motivate over the last several years. First the specified gas emitters regulation and then the climate change incentive regulation under the NDP government in Alberta and now the tier regulation under the UCP government. These are all primarily focused on emissions intensities. I think the more we do there to try to get those emissions down, the tier regulation under the UCP government these are all primarily focused on emissions intensities. I think the more we do there to try to get those emissions down, the better. We know we've already moved the needle. You look at Alberta.
Kent Fellows:One of the really close metrics we can look at is called the steam oil ratio, so SOR. So when I talk about that thing that I'm pumping high-pressure steam down the hole to produce from in-situ producers, that steam is why I'm generating those emissions, because I have to boil the water to make the steam. So things that I can do, technology innovations that I can bring in to reduce the amount of steam I need per barrel of oil also reduce my emissions. So they save the company's money and they reduce emissions. Those are real wins. And some of that is as simple as redesigning the production casing, the pipeline that I use to bring the crude oil up, so that I keep more sand out of it. Some of that might be adding some chemical treatment to it as well to mix chemicals in with the steam. So I think there's still a lot we can do there and I hope there's a lot more we can do.
Kent Fellows:But the conversation really needs to be more about reducing the emissions intensity than trying to cut down on the number of barrels, as the economist in me would say.
Kent Fellows:I mean, this industry is doing well. It's going to be really hard to kill because it's profitable Industries that aren't doing so well if you introduce a couple of new regulations or hoops that they have to jump through or something you can kind of make them go away quietly. But this is really a juggernaut. I mean, we know that oil and gas, especially when times are good, but even when times aren't great, generates a lot of profit both for the sector and, as we were talking about earlier, for the public purse, both at the provincial and federal level. I think at the federal level one of the really unfortunate things that's happened recently is the new bill I think it's C-59, that really muzzles the industry's ability to tell its own story and I know you'll get cross comments that well, it's trying to cut down on propaganda and that kind of stuff, but what it's doing is the bill has come in and it's limited the industry's ability to talk about, um, environmental improvements that they've come up with now?
Stewart Muir:wait a minute. The government just spent years making the industry follow these regulations to to improve, yeah, and now it's not allowed to talk about it well.
Kent Fellows:So that's the thing is. I think, um, someone playing devil's advocate on that would say, well, they are allowed to talk about it if they can prove it right, but I think that comes down to what's proof. So what do you actually have to do? And I haven't seen a test of this yet. So right now, what we're seeing is we're seeing a chilling effect, which often we see with this kind of legislation, right and so this, you know, maybe the legislation's having its intended effect, maybe it's not, but what we're seeing is we're not seeing, um, these companies working to try to prove their claims or going to a higher standard proof. We're seeing them retreat because they don't know where the bar is in terms of what they have to prove and what they don't have to prove.
Kent Fellows:Part of that may be good in terms of cutting down on false advertising If there were false claims. I haven't seen really good evidence that there were a lot of false claims in this space, but I think the damage it does is it really has a chilling effect on the industry being able to tell their story and being able to say look, over the past 10 years, we've done this with our steam oil ratio, or we've done this to reduce our emissions intensity until they have more clarity on what the standard is for proving their claims. I think this is a really problematic piece of legislation.
Stewart Muir:Well, there's so much improvement that's possible and you've got, say, all this wind energy and solar energy in Alberta, but it can't get to where it's needed. Like if you could get that to bc, do you think that would be desirable? Do you think there's enough? And and also I'd throw in nuclear, you know, small nuclear reactors yeah.
Kent Fellows:So I mean pivoting a little bit here. Um, as we're talking about energy infrastructure and we've been talking about pipelines up till this point, I think a big part of this conversation is the electricity intertie stuff. Right, so can you physically move, physically move electricity between Alberta and BC? And right now you can, but not that much of it. So we have a physical capacity. And then there's been some regulatory stuff and so what we've done is we've told the industry you're not actually allowed to use all the wire that we have in place. Some of that's for legitimate reasons.
Kent Fellows:The electricity grid, while being a pretty strong grid most of the time, has pretty serious vulnerabilities around things like frequency and making sure that we're actually generating as much as we need in any given time. So, as a really quick aside, one of the things that makes electricity even more interesting than oil and gas and I love talking about oil and gas is electricity is pretty unique in being a market that we have to be producing exactly what we need at the same time that we're using it. We can't stockpile electricity Not really. I'll get into an exception to that in a second which is particular to BC. But with crude oil or gasoline or something. Yeah, you can put it in a tank. You buy it ahead of time. You put it in the gas tank of your car until you're ready to use it. Your retail gasoline station has big underground tanks station has big underground tanks. They fill those up with gasoline. They store it until they use it.
Kent Fellows:Electricity doesn't work that way. If someone's not producing it, I can't use it. Now. The exception of that is in bc, because bc has these wonderful hydro reserves right, so you can actually store that water up behind a dam, so you're storing it as potential energy rather than energy, and then you run it through so you're still actually generating the electricity at the same time. But you can choose when you run the water through the dam, which is really, really cool. That's what makes alberta and bc such great compliments, if we could figure this out. Because what you can do is you can use solar or wind in alberta basically as a as a resource to fill up those batteries in bc. So bc be importing Alberta electricity and filling up the water behind the dam and then, when the wind stops blowing and the sun stops shining in Alberta, or when demand spikes, bc could sell at a higher price by running that water back through the dams. So huge advantages there if we can figure out how to build the intertie capacity and I think that's a really big if.
Stewart Muir:It sounds like you're what one of our earlier guests would call an environmental optimist.
Kent Fellows:I like to think realist. The academic in me always always tries to point for that. But yeah, I mean, I think I like pointing out where there are these potential wins and then, as a policy economist, talking about what are the conversations or what are the policy changes that we need to get from where we are to actually get the win, what's the strategy to get the win?
Stewart Muir:Right now in Canada, provincially and federally, axe to tax is the phrase of 2024. And it means that some policies that have been in place for quite a few years are probably about to be turfed when there are potential changes of government. Are you concerned, and what concerns might there be on this?
Kent Fellows:I'm concerned for a couple of reasons, starting off with the current administration of liberals. I'm concerned there that they didn't understand their own carbon tax well enough and they weren't willing to defend it, and I think that's part of the reason the acts to tax campaign slogan rhetoric has been so successful and has been so compelling for sort of the average Canadian looking at their electoral choices in the next federal election. What I mean by that is a lot of the academic research. A lot of the research I do on carbon pricing shows that for an average household it could potentially be a benefit rather than a cost, depending on the part of the country that you're in and what your own profile looks like in terms of what you're spending. Because we talk about the tax portion but we don't talk enough about the rebates. The rebates show up quarterly. This isn't as germane to BC, because you guys have a slightly different system, which we can talk about in a second, but in most of the provinces that are under the federal backstop this is what happens is you pay the carbon tax and then, quarterly, you get a rebate out of that money, depending on the size of your household, a little bit depending on where you live. If you're a rural resident, you get a slightly higher top up because sort of the carbon tax costs are higher there.
Kent Fellows:So some households are actually coming out ahead on this, some households are coming out behind, and I think the federal government, when they talk about this being the most efficient way to reduce emissions, they say that I'm not sure they believe it. Because when faced with complaints that oh, this is causing the price of home heating oil to go up too high in the maritime provinces, the federal government turns around and says, okay, well, we'll take the carbon tax off home heating oil. That immediately says to me that they don't believe this is the lowest cost way to do it. Because if they believe that this is the lowest cost way to do it and that the household rebates were working, they'd say, well, you get a household rebate for that and maybe we can look at topping up the rebate, but we're still going to leave the carbon price in place. So there's a lot going on there in terms of a new administration coming in, uh, and asking this.
Kent Fellows:I worry about two things. Number one I worry about are we actually going to have a strong enough incentive to reduce emissions? Because emissions reduction is important. So is that still going to be in place? And then the second thing I worry about is if a new federal government pulls out the carbon tax and decides they still want to decarbonize, what are they going to replace it with? Because it may be that the thing they replace the carbon tax with is more economically destructive than the carbon tax, and all the academic research says it's very likely to be, because, if you look at the theory, the carbon tax is the best way to do this.
Stewart Muir:You look at the US, I think in a lot of things the government does, they tend to be people of the carrot versus the stick, whereas in Canada is it the British colonial thing? We're the stick people, carrot versus stick. There's an executive in Calgary I've heard give a speech where she says, yeah, canada, the canadian government, when it says it's doing a favor to the oil and gas industry, what they're doing is serving up a buffet of sticks, and that's the canadian solution. And yet a carbon tax or pricing is inherently sort of a, you know, a stick type of measure rather than a carrot, or or am I wrong?
Kent Fellows:I. So I think that's a great question and I'm going to give you the classic economics answer. It's both one on the one hand, on the other head now I'll explain what I mean by that the large emitter system in canada. So this is a carbon tax, but it's not the one that you and I pay. This is the one uh, a large oil sands firm would pay, or a chemical plant or whatever. Again, in most of canada, bc a little bit different, but in most of Canada this is what it looks like.
Kent Fellows:And how that system works is, if I'm an oil sands mine, I would be given a target emissions intensity. So this is emissions per barrel if I'm producing crude oil. So the federal government tells me or, in Alberta's case, the provincial government, because they have their own system that matches the federal backstop they tell me this is how much we want you to be producing per barrel in terms of emissions. If you produce more than that, you got to pay up. So that's the stick part. When I say it's both, that's the stick part. If I'm above that intensity, if I'm well above average, then yeah, I'm paying a carbon tax. If I'm below average, if I beat that intensity, if I come in below it. I get credits that I can sell to other producers. Depending on what the market price of those credits are, they tend to be pretty close to the carbon tax rate. So I think it's $65 a ton right now. So for every ton I come in below that target that the provincial government has set for me. As an oil sands producer, I'm making $65 a ton on being every ton that I'm under because I can sell those on the secondary market and, as it turns out when you plot this data, we have firms on both sides of the intensity. There are oil sands companies that are making more money with the Alberta carbon tax in place than they would if we took the carbon tax out, and those are largely the ones that have done the work to invest in emissions reducing technologies and the ones that are lucky enough to have access to resources that are easier to extract.
Kent Fellows:So not all crude oil is created equally. Depending on how deep it is or how tight it is in the formation, you might need more or less steam, so some of this is technological advancement. How tight it is in the formation, you might need more or less steam, so some of this is technological advancement, some of this is a geologic advantage. I might have geological advantage, but there are definitely firms for which this is a carrot, because I'm beating the standard. So if I'm beating the standard, it's a carrot, if I'm not beating the standard, then it's a stick. It's a really elegant, brilliant design.
Kent Fellows:My hope is, if we see a change in the federal government where we get rid of the federal carbon tax, that a lot of the provinces that have worked to develop their own large emitter systems that they keep those around. I don't know if that's going to happen, but in general, what's happened is the federal government has set the standard and said you can either use our plan or you can come up with one that's equivalent to it. Most provinces on the large emitter side have come up with plans that's equivalent to it. Most provinces on the large emitter side have come up with plans that are equivalent, and especially the high emitting provinces. So Alberta, for sure, ontario, have their own large emitter systems, and so the hope is that if we see this changeover, they'll stick with those, even though the federal government's not going to require it anymore.
Stewart Muir:So these carbon pricing mechanisms are a lot more complicated than just tax to tax.
Kent Fellows:They are.
Kent Fellows:They absolutely are, and even at the retail level. So the carbon tax that you and I pay, some provinces have their own retail system. Some provinces are on the federal system. So Alberta actually was both under the previous NDP government we had our own consumer carbon tax. The UCP came in and repealed that and then the federal government said no, no, you have to have one. And so the UCP said well, we'll just use the federal one. Bc had their own before the federal one came into place. That's fine. Quebec has had their own.
Kent Fellows:So even at the retail level, so the one that you and I and all the listeners and viewers pay, in some provinces that's a provincial thing, in some provinces that's a federal thing. So a poly of government could come in and say, yeah, we're going to ask the tax and they could do that. That's only immediately going to apply to the provinces that are under the federal system, those provinces that aren't going to have to make the decision. Ok, are we going to get rid of the provincial system because we don't have to have it anymore, or are we going to keep it?
Stewart Muir:in place. I just want to get to some of the work you're doing at the University of Calgary, because you've got a lot of neat projects. One that caught my attention I've been watching it for a while is the Canadian Northern Corridor Project. What is that?
Kent Fellows:Canadian Northern Corridor Project is really a research project, a long-term research project, looking at the acceptability and the utility of large infrastructure corridors across Canada's north and near north. And so when I say a large infrastructure corridor, what I mean is something like the corridors that we already have in the south, the ones in the south. Some of those were planned, some of them weren't, but if you think about sort of the area around the Trans-Canada Highway, we have other pieces of infrastructure that are co-located with that running across the country. And lots of other countries internationally use this corridor methodology as well. So they put aside a right of way and they say OK, we're going to put energy utilities, transportation, trade infrastructure in this corridor so we can co-locate it and save a bunch of money by doing that, because it's cheaper to build a pipeline if it's close to a highway. It's cheaper to build a highway if it's close to a rail line. It's cheaper to build an electricity transmission line if it's close to a highway, all that kind of stuff. There's some rules about how closely you can put electricity lines to pipelines.
Kent Fellows:The physicists tell me this is really really important, and I believe them. I don't completely understand the physics or the chemistry of it, but I know that's important anyway. So this is a long-running program through the school of public policy. We've actually just wrapped up the research. We've got a final paper coming out, hopefully in the next couple of months. That's something that's on my to-do list to get back to. We're still interested in doing more work on infrastructure, but the Northern Corridor program as it stands is a body of work that we want to leave behind for posterity.
Stewart Muir:And just one subset of that is the First Nations involvement in such a vision.
Kent Fellows:Yeah. So what we found we did quite a bit of community engagement all across the country, both in non-Indigenous communities and in Indigenous communities, a really important aspect of bringing all these different parties to the table. So First Nations, municipal governments, provincial governments, federal government to try to get them all talking together. One of the things that we realized, and one of the reasons why we're trying to broaden our research on infrastructure, is having this as sort of a top-down thing rather than a grassroots thing really causes some serious concerns and serious problems for some of these small communities, because they don't want to be steamrolled into something, and so this really has to be a broader strategy where we think about where do we need this infrastructure and who do we start talking to, trying to build this from the ground up, because the communities that are worried about steamrolling are also communities that could really benefit from better quality infrastructure if it's better tailored to that community.
Kent Fellows:What they don't necessarily want is, say, a pipeline going through that's going to generate some economic activity when it's being constructed and then nothing after that. Right, communities want access to infrastructure, they want to be able to trade, they want to be able to benefit from the lower trade costs. So a pipeline is a wormhole technology that produces economic benefits at one end and economic benefits at the other end. Maybe it doesn't help people in the middle, but if you pair that with rail infrastructure for a community that thinks it can get into manufacturing, or telecommunications infrastructure for a community that's currently underserved by our current telecommunications structure, that really sweetens the pot. But you have to start those conversations at the community level, and so we've been advising provincial and federal governments to try to do that, to get out ahead of this and to start with their own consultations. We've actually seen some movement there, corridors starting that work on consultation to see where they can get some of those good wins early on. Pluck that low-hanging fruit and get corridors in place to benefit those more remote communities.
Stewart Muir:There's a border between things the private sector is really good at and things the public sector is good at, and you're kind of talking about that space of the country saying we have to do these things for the national benefit.
Kent Fellows:You've taken from the national game of hockey You've got a great image for this- yeah, and so I mean, I've been trying out this metaphor and I'm happy to get feedback from it on social media or wherever we hear a lot about this. You know the? I think it's the Wayne Gretzky line that we need to skate to where the puck is going, and so a lot of these decisions by various levels of government is we need to subsidize industry X because we need to skate to where the puck is going, and I've heard that, specifically with reference to something like the battery plant subsidies for electric vehicles to try to get those battery plants to locate in Southern Ontario. I don't think that's a really healthy way to think about this. Yes, I want someone skating to where the puck is going.
Kent Fellows:I don't think it always has to be government that does it.
Kent Fellows:I think the first job of government is to make sure we have a nice ice surface to play on right. So setting the rules of the game, making sure that we've got an environment that lets the intended players, in large part the private sector, make those investment decisions, because they're the ones putting money on the table. In that case, they're making the bets, they're spending shareholder money. They have a responsibility to make good decisions when a federal government screws up, yeah, they're liable for it, but really they're spending taxpayer money. They're spending your and I money on these subsidies and they're making a bet on our behalves and it's a bet I don't really like. If I'm a shareholder in a publicly traded company and they make a bet, I don't like I can say, well, I want my money back. Right, I sell my shares, I invest somewhere else and I think those decisions. I think that's a really nice way to sort of guide this. I'm not sure there's clear-cut rules there, but I think that's an important way to guide this.
Stewart Muir:It's probably cheaper to fire the Zamboni driver and get a new one than to fire the production team.
Stewart Muir:Maybe something in that resource works. We did a poll a couple of years ago. We found about half the population of British Columbia believes that in 20 years or less, oil and gas won't be needed. It'll just be off the scene. So you know, 2040-ish, in the 2040s, a lot of information we have would lead one to suggest that is unlikely to happen, and a lot of people are terrified of climate change. And you're an economist. You're terrified of climate change and you're an economist. You're not a climate scientist, but you're an enlightened guy. How do you come at this critique that we have an existential crisis? We must get off fossil fuels as soon as possible? How do you parse this?
Kent Fellows:Yeah, I mean, it's a big question, I think one of the things. I'll start off my answer here by saying there's a fantastic book on this by a? U of A economist, Andrew Leach, titled Between Doom and Denial, which I think is a great read. Whether you agree with Andrew or whether you don't, there's some really good points in that book. I'm a little biased because he cites one of my papers, which is always fun, but the title, I think, tells us a lot of what we need to know here. Title, I think, tells us a lot of what we need to know here.
Kent Fellows:When he's talking about between doom and denial, that's literally what he's talking about the doom being people thinking that if we don't get off crude oil tomorrow, the whole climate and the whole economy is going to go straight down the tube and we'll be living in a post-apocalyptic world. And then the denial part being no, no, everything's fine, we don't have to cut emissions at all. And I think he's right to try to push people into the center on that. That it's a balancing between the two sides of things. And what I'd say to people who say, well, we need to shut down the sector tomorrow and it's this terrible thing and it does all these horrible, horrible things to the planet. There is a cost to carbon emissions Absolutely Carbon emissions. If you trust the climate scientists and I do generate anthropogenic climate change. So this is human caused climate change. Whether there are natural processes at work or not, the consensus is we are contributing to it by burning fossil fuels. That's true. There's an environmental cost to doing that, but there's an environmental cost to doing a lot of what we do, right. When we build a highway, we're disturbing the natural indigenous plant forms and life forms that we're living there ahead of time. When we build a bridge across a water crossing right, You're dealing with all these things Me just taking up space of the planet. There's a trade-off, because if I wasn't taking up that space or I wasn't using those resources, something else could be. So economics is always about these trade-offs.
Kent Fellows:The other thing I would point out is you're talking about real people with real jobs when you're talking about cutting out the sector, right, and jobs not just directly working in the oil sands, but other sectors that support the oil sands. So executives in downtown Calgary, maybe you're not that sympathetic to them, but truck drivers in rural Alberta, maybe be a little bit more sympathetic to them. But truck drivers in rural Alberta, maybe be a little bit more sympathetic to them. The people working at convenience stores in and around the oil sands, Conklin grocery stores, all this stuff. Right, it's an industry, but it's got industries around it because there are spinoff effects. So there are huge costs to making bad decisions here or making decisions too quickly.
Kent Fellows:And I think this is why you get so many economists who are coming back to carbon pricing as the answer. Because it rebalances the scales. It says, okay, we have this cost of carbon emissions generating climate damage. We want to make sure that we're accounting for that. The free market doesn't currently account for that. We're going to introduce a carbon tax to level the scales. We can use that revenue to do whatever we want. We can subsidize the industry, we can do anything.
Kent Fellows:But as long as we're rebalancing it, as long as we're getting that substitution effect, we should get a better quality outcome that balances the costs and the benefits. Because over on the one side, on the doom side, you're seeing just the costs and you're ignoring the benefits. Over on the denial side, you're seeing just the benefits, you're ignoring the costs. The true answer comes in the middle, where we can balance the two, and that means making tough decisions and it means outcomes that aren't going to please everyone, because it does mean that we're going to have more carbon emissions that contribute to global warming. It means an increase in climate temperatures. It means environmental damages from that more intense hurricanes, flooding, rainfall all of these differences that the climate scientists worry about. We have to accept a degree of that to get the benefits of continuing to produce the emissions, because there are huge benefits in doing that as well. Like anything in the economy, there are costs to using a resource one way and costs to using a resource another way. We need to make sure we're hitting the right balance on that.
Stewart Muir:Now Andrew Leach's doom and denial. That's a sort of polarization to extremes. There's this other idea that we've been talking about a lot on the show, which is the energy trilemma, and of course that's reliability on one corner, affordability on another environment, and the idea here, of course, is you've got to have all three. What do you think is the useful place to land in the energy trilemma?
Kent Fellows:I'll give you the cop-out answer first. Then we can go into a little bit more detail. I think the right place to land is if we price the emissions properly. The market's going to figure that out for us, and I mean that's the short answer. That's the you know no-transcript. Okay, the emissions generated by me burning a tank of gasoline are going to cost this much to future generations. I pay. That Government can take the revenue and do whatever they want with it. The point is, by forcing me to confront that cost, I then make the correct decision about how much I want to emit, but I'm actually forced to pay the cost. So I think that's the short version is I would really prefer the market to decide.
Kent Fellows:Along with that comes a realization that when we talk about the environmental costs, the reason I care about environmental costs and I think, if people really seriously think about it, the reason most of us care about environmental costs and I think, if people really seriously think about it, the reason most of us care about environmental costs is really the world that we're leaving to our future selves and future generations. So often this is framed as sort of humanity versus nature or something, and we have to care about endangered species and we should. I mean, there are reasons that we care about that. But I care about endangered species because of my own utility, because I'll feel guilty if an endangered species goes extinct. I'm less concerned about the world that I leave post-humanity to. You know, whatever comes after us on the planet.
Kent Fellows:What I really care about is how my friends, kids and my family younger family members, how they're going to have the world they're going to have, and trying to make sure that we got the right balance there too, acknowledging that, yeah, climate change is already here. Yeah, it's probably going to get worse. We also want strong economies so we can pay for mitigation. So that comes back to this balancing act, that how do we balance those things? And I think the carbon tax is just such an elegant way to do that. If we can hold on to that, that'd be great. If we can't, we need to find something that does a similar thing in terms of balancing those incentives.
Stewart Muir:Ken, I know you're not just an economist.
Kent Fellows:You have a hobby on the side that has to do actually fits into the energy trilemma and your work in a funny way, tell us about it. So this actually comes out of a little bit out of me being an economist that I have a fascination with depreciation. If I didn't sound nerdy enough to the audience already, I did a lot of my graduate work on depreciation and how that factors into economic decisions. So anytime there's old equipment, in particular old farm equipment, I'm pretty fascinated by, can we keep it going? Can we limit that depreciation? Can we stave it off?
Kent Fellows:And so one of the things I really got into through the pandemic but I've still kept up with is I have two, uh, lawn tractors, so garden tractors, small tractors with lawnmowers and and rototillers made by general electric in the 1970s, and these are electric garden tractors, so from the 1970s. They charge out of a standard 110 volt outlets. Whatever outlet you've got. You plug them in, you charge them and they'll run for three to six hours depending on what you're doing with them. They're great machines and you can still get parts for them, which is incredible.
Stewart Muir:When you're riding around one of those, aren't you wondering how come there's not only electric lawnmowers today?
Kent Fellows:I am a little bit and I think part of it, part of that, comes back to the depreciation question. I'm not sure general electric made enough money selling them because they don't break down. Um, so I've had one that I've done a frame off restoration so I've actually taken the whole thing apart and got some new parts and shined it up and cleaned contacts and put the put it back together. The other one I've got has never been professionally restored, hasn't been professionally serviced since it was purchased in 1972, actually by a family member. So I know the whole track of that tractor. All that, all that's had to happen is the batteries have had to be replaced. I think at this point they've been replaced now three times since 1974, which is not bad, and they use a standard lead acid battery. So it's not these because 1970s, not these expensive lithium ion or anything like that. It's basically a version of the same type of battery you'd put in your car, right and it works well.
Stewart Muir:Look, uh, it's been fascinating this conversation. We've covered a lot of ground. There's so much other work I'd love to be able to talk about that we just don't have time for, and maybe another occasion we'll we'll be able to do that. Kent fellows, thank you for coming on. Power struggle absolutely. This has been a lot of fun. Thanks it has. Thanks for being here.
