Oilpatch hopes new pact will raise investor confidence, save sector up to $60M
NAFTA uncertainty 'definitely' had an impact on the market, industry group says
Canada's energy sector hopes a new trade pact with the U.S. and Mexico will give investor confidence a much-needed lift, while also saving the industry tens of millions of dollars annually.
The uncertainty hanging over NAFTA's future had been a worry to the oilpatch, adding to persisting concerns about Canada's ability to attract investment in the wake of its struggles to build new pipeline infrastructure.
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"The uncertainty in whether NAFTA would exist was definitely having an impact on the market," said Nick Schultz, vice-president of pipeline regulations at the Canadian Association of Petroleum Producers.
"It is, of course, not the only issue we have with competitiveness and investors, but [a trade agreement] is an important step."
Also under the new agreement, a border bottleneck that cost Canadian oil producers as much as $50-$60 million every year also appears to have been addressed.
Under the old NAFTA rules, oil and gas producers had to prove the origin of their product right back to the wellhead if they were to be exempt from duty at the border.
The difficulty was with the diluent that was mixed with oilsands bitumen to help it flow through a pipeline, Schultz said.
"You have to establish the origin of the product if you want to have the preferential access under NAFTA," he said.
The diluent is a light oil which makes the heavier oil flow and sometimes it comes into Canada as an import.
It became increasingly difficult at the U.S. border to prove either light or heavy oil moving through was of Canadian origin, Schultz said.
"Before Canadian oil travels, it comes from different producers and is mixed in tanks and traded multiple times," he said.
In part, it was U.S. officials being sticky at the border over the rules of origin of the oil, as they would demand documentation for all of the product, he said.
As a result, both heavy and light oil producers were paying 5.5 to 10 cents a barrel in fees. Schultz estimates heavy oil producers paid $20-$30 million in fees and light oil producers an equivalent amount.
Schultz says the new trade agreement allows a proportion of diluent — up to about 30 per cent — without Canadian producers paying that fee. But he said he's not clear whether the problem of having to provide extensive documentation of the origin of an energy product has been eliminated.
With the original NAFTA … agreement, we were very worried that it would take away our energy sovereignty.- Sujata Dey, trade campaigner for The Council of Canadians
In a news conference Monday, Global Affairs Minister Chrystia Freeland highlighted the breakthrough on fees for Canadian oil. She also announced that the "proportionality" clause of the NAFTA agreement had been eliminated.
Under that NAFTA rule, Canada must continue to export the same proportion of oil (and natural gas and electricity) as it has in the past three years. The rule was geared toward ensuring the U.S. had access to Canadian energy in times of shortages.
Schultz said the rule was never invoked, nor was it seen as a problem in the oilpatch.
Carlo Dade, director of the trade and investment centre of the Canada West Foundation, said it's clear the Americans no longer need the clause as they are much less reliant on imports.
But The Council of Canadians, which had opposed the clause since NAFTA's inception and lobbied for its removal, said the omission of such a rule from the new deal was a "victory" for the organization.
"With the original NAFTA … agreement, we were very worried that it would take away our energy sovereignty," said Sujata Dey, trade campaigner for The Council of Canadians.
The council was concerned, she said, a continuation of the "proportionality" clause would make it difficult for Canada to meet its climate commitments in the future.