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David Yager

David Yager

Based in Calgary, David Yager is a former oilfield services executive and the principal of Yager Management Ltd., an oilfield services management consultancy. He has…

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What A Trump Presidency Means For Canadian Oil

Trump

It is once again acceptable to be rich and successful. You are not a menace to the future of mankind. You are a key building block of the wealth, value and employment creation miracle called free enterprise. It is no longer the greedy and selfish 1 percent but the essential 1 percent; the entrepreneurial, visionary, risk-taking capitalists who have shaped the modern world as we know it and brought so much prosperity, freedom and opportunity to so many.

And so it will be when self-made millionaire, developer and shameless promoter Donald Trump becomes the 45th President of the United States of America. What will he do? How will he do it? Why should Trump be any different?

Be assured Trump will be different. For the last eight years under Democrat Barack Obama the U.S. has been anything other than the place where free enterprise and market forces drive the bus. Obama listened to environmentalists, signed international climate change accords and didn’t appear to trust or understand the private sector. Writing about Obama’s last speech Financial Post editorialist Kevin Libin wrote January 12, “The president instead returned to his favorite battleground for social division: pitting the masses against the one per cent. There is ‘stark inequality’ afoot in the nation, he reminded the audience. ‘While the top one per cent has amassed a bigger share of wealth and income,’ it has been at the ‘expense of a growing middle class.’ And ‘too many families, in inner cities and in rural counties, have been left behind.’”

Conversely, Trump is all business all the time. He runs a great company. Just ask him. Since the November election he has worked from his corporate office in the Trump Tower on 5th Avenue in Manhattan. No previous presidents have had multiple office buildings and other properties named after themselves. Obama’s claim to fame was as a “community organizer” in Chicago. The only community Trump ever tried to organize – and he failed – was reviving Atlantic City as a major tourist destination as the Las Vegas of the Atlantic Coast.

The big question is what does President Trump mean for the Canadian oilpatch?

It is hard to be an Obama fan after his agonizing delays cancelling Keystone XL after he approved the original Keystone line and Alberta Clipper in the early days of his administration. But although he talked a good story about environmental protection and the need to reduce carbon emissions, the behavior of his administration was the exact opposite.

Under Obama and thanks to the technological miracle of multi-stage fracturing of ever-longer horizontal wellbores, oil and natural gas production exploded. Despite what seemed to be relentless opposition to fracking thanks to green propaganda movies like “Gasland”, the U.S. put so much crude oil and methane on stream since Obama became President in early 2009 it collapsed the price of both.

Gas was so cheap and plentiful it became an economically viable substitute for coal. The largest reduction in carbon emissions in U.S. history came from generating electricity with natural gas instead of coal. At the same time the world price of natural gas was $10 per mcf or higher America was only paying 20 percent of that amount. This became a huge economic advantage for U.S. industry compared to competitors in Europe and Asia.

Putting over 4 million b/d of light tight oil on stream was a major contributor to the price collapse of November 2014. Even with the price recovery, today crude only fetches half what it did in June, 2014. A US$50 a barrel price drop saves the world a staggering US$4.8 billion a day or nearly US$1.8 trillion a year. This ensures demand growth will continue. When Obama came into power the world consumed only 84.5 million b/d. He exits the Oval Office with global oil consumption at 97 million b/d, 12.5 million b/d or nearly 15 percent higher.

Under Obama the American E&P and OFS sectors experienced growth unprecedented since the last great boom of the late 1970s and early 1980s. Hundreds of billions were raised and borrowed and invested in equipment, wells, plants, pipeline and infrastructure. Exports of crude oil were permitted for the first time in decades and LNG for the first time ever. There was enough room in the exploding U.S. oilpatch for multiple Canadian E&P and OFS operators to successfully buy their way into this historically closed market.

For someone who cancelled Keystone XL to appease the greens and signed Paris last year so he could have an environmental legacy, the statistics on U.S. oil and gas production growth under Obama indicate the exact opposite. He displaced some coal and gave a lot of speeches about how we should all be concerned. That’s about it. Then his policies helped reduce prices for oil and gas so much that the world has never consumed more. Related: Can Saudi Arabia Survive With Oil Below $60?

Barack Obama is going to be a tough act for Donald Trump to follow. Sure, for the most part oil folks despised him. Yes, he didn’t allow Keystone XL to be built. But in all fairness the North American oilpatch did rather well under this oppressive Democratic administration. On both sides of the 49th parallel. In Canada, it wasn’t that our upstream oil and gas did poorly based on wages, worker shortages, investment, taxes or any other metric of success. If it hadn’t been for Obama we might have done better. Maybe. But today everybody in Canada would happily trade 2017 for 2012, 2013 or 2014.

Donald Trump is impossible to like. Brash. Petulant. Self-possessed. The anti-politician in a world conditioned to those who run for public office being vague, polite, polished and soothing. Trump has campaigned on righting all the anti-oil wrongs and really get the U.S. oilpatch firing on all cylinders. As nice as that sounds what does it really mean?

Other than a refreshing public advocacy of how big business is better than big government, Donald Trump’s policies on anything are unknown and a work-in-progress. Trump has been steadily reversing many of his campaign promises, the most significant being his determination to indict Hillary Clinton. He is the first political leader in history to communicate his thoughts on economic policy on Twitter. He has a shameless pro-American bias and has promised to examine tax policies to help repatriate offshore earnings sheltered abroad by U.S. companies because of higher taxes at home than where the cash resides.

Trump’s comments on trade are certainly unnerving. His promise to tear up the North American Free Trade Agreement (NAFTA) is unsettling but that’s the policy that includes Mexico, not the original Free Trade Agreement (FTA) between Canada and the U.S. signed by Brian Mulroney and Ronald Reagan. That policy had some energy sharing provisions in it (highly controversial at the time) whereby in situations of shortages Canada is legally obligated to treat the U.S. in the same way as Canada meaning we can’t just turn off the taps.

There has been some musing about a Border Adjustment Tax or BAT whereby component or raw material imports by U.S. companies would not be considered a deductible expense for tax purposes. Canadian business media has written extensively in recent days about how awful this would be for Canada’s massive oil and gas exports resulting in further discounts to Canadian prices.

But Trump told The Wall Street Journal last week that he didn’t like the idea because it was “too complicated”. It would also drive up the cost of U.S. energy at a time when Trump is determined to make America more competitive. Whatever the optimistic forecasts for U.S. oil production may be, on January 19 the Energy Information Administration reported crude imports of 8.4 million b/d versus production of only 8.9 million b/d. This looks like an expensive way to tax the U.S. back into prosperity.

Conrad Black, a controversial Canadian corporate and media personality himself, has written extensively about how Trump is not such a bad guy. Black is one of only a handful of Canadian writers to say this and that may be a generous estimate. Last spring Black wrote, “I have known Donald Trump cordially for more than 15 years, and he was an ideal business partner in a co-development of a large property in Chicago and a loyal friend in my late legal troubles. What lunacy has possessed our media to be so horrified at someone who expresses mass exasperation over 20 years of misgovernment, failed fiscal and foreign policies, crumbling infrastructure, state education, a retrograde health-care reform, hemorrhaging public debt, the invasion of the country by 12 million illegals, and a self-satisfied political class incanting soporific lullabies about the ‘greatest nation in human history.’”

As for Trump’s views on Canada Black wrote, “Most Canadian media on the Trump candidacy have drunk the liberal Kool-Aid that he is a knuckle-dragging reactionary. Typical was a Huffington Post piece on May 2 by Remi Francoeur that tried to incite fears that Trump would act against Canada in the NAFTA agreement. He has made it abundantly clear that his problems are not with U.S.-Canada free trade, but with the $58-billion trade deficit with Mexico, and the steady inflow of illegal immigrants. He has never uttered a word of recrimination against Canada.”

But speculate is what you do in the 10 weeks between when a completely unknown political commodity is elected and assumes office. It is hard not to worry about what your largest trading partner will do when the messages have been so mixed. On January 18, the Globe and Mail reported Canada had received official notice that the new administration wants to discuss the country of origin and dispute resolution provisions within NAFTA. But the article also said, “Still, a senior government official told The Globe and Mail the signals from Mr. Trump’s trade team indicate the trade focus will largely be aimed at Mexico, essentially cutting the United States’ southern neighbour out of many NAFTA benefits.” Hopefully Conrad Black and the Globe’s unidentified source are right.

Trump has appointed some serious pro-oil guys like the former governor of Texas and the former CEO of Exxon-Mobil to key positions in his administration. Great. He claims he will resurrect Keystone XL which is thoughtful and friendly but whether TransCanada Corp. can re-sign the shippers to fill and pay for it after all the cancelled and postponed oilsands investment of the past few years is unknown. With huge American investment in secure Canadian oil and gas supplies and all the trouble to which the U.S. went to ensure the “proportionality” clause in the original FTA following world oil shortages, it seems unlikely Trump’s advisors such as Exxon-Mobil’s Rex Tillerson will support Canadian energy importation being penalized. Related: Why Big Oil Is Unprepared For The Coming Energy War

It has been suggested Trump’s pro-business, pro-oil policies will make the U.S. more attractive for investment than Canada. Assuming the BAT and FTA speculation are just that, problems for Canada’s oilpatch are north of the border, not south. Trump is going to make the U.S. open for business including oil and gas. Canada’s new governments in Alberta and Ottawa are taking this country in the opposite direction. Hopefully, history will prove Rachel Notley and Justin Trudeau are bigger problems for Canada’s upstream hydrocarbon business than Donald Trump.

As the idea grew that climate change was primarily caused by human fossil fuel consumption there were escalating calls for action. Former Prime Minister Stephen Harper was adamant that Canada would adopt carbon taxes, but no sooner than everyone else because global problems required global solutions. For Canada to introduce punitive carbon levies before its major trading partner would be economically damaging. Most executives and business lobby groups which support taxing carbon feel the same way.

What a reversal. Stephen Harper was defeated last year in part for not being progressive enough on the climate change file and replaced by the author of a national carbon tax. Meanwhile, south of the border the reversal is equally stunning. Canada is raising the cost of being in the fossil fuel business in several ways while our largest customer appears to be going in the opposite direction.

What does Donald Trump really mean for Canada’s oilpatch? Donald Trump is likely not the problem. It isn’t going to take draconian and unknown trade policies to render America’s largest supplier of oil and gas uncompetitive. We’re doing this entirely on our own.

Trump’s brash and shameless support for business, enterprise, competition, wealth and success will eventually affect Canadian politics. It is already happening. On January 18th businessman, reality TV star and media personality Kevin O’Leary announced his intention to run for the leadership of the Conservative Party of Canada. In an interview on BNN TV, O’Leary was already bragging about his ability to “make a deal” with Trump once he becomes Prime Minister because they both speak the same language.

What happens in the U.S. always affects Canada one way or another. The question is how much suffering we’ll endure before we again harmonize essential cross-border commerce.

By David Yager for Oilprice.com

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