Energy and Markets
National Energy Board (NEB)
Presentation to the University of Toronto
International Relations Society
25 January 2014
Slide 1 speaking notes (click to view)
Thank you for the opportunity to speak on the timely topic of energy and markets.
I will start today with a brief overview of the National Energy Board - what we do and don’t do - so that you can better understand the perspective that I am bringing to today’s discussion.
I will then highlight some findings from the Board’s research on energy production, consumption, pricing, and trade.
This will be followed by a brief description of some of the initiatives being pursued by the Board in collaboration with its regulatory counterparts in other countries - “international relations” at an institutional level that also has an impact on markets.
Slide 2 speaking notes (click to view)
Established in 1959, the NEB is charged with regulating pipelines, power lines, energy development, and trade in the Canadian public interest. This includes regulating:
- Construction and operation of interprovincial and international oil and gas pipelines, international power lines and designated interprovincial power lines (the above map shows where the international pipelines sit within Canada);
- Tolls and tariffs for pipelines under the NEB’s jurisdiction;
- Exports of natural gas, oil, and electricity, as well as imports of natural gas; and
- Oil and gas exploration and development in frontier (Northern) lands and offshore areas not covered by provincial or federal management agreements. Canada’s other frontier and offshore areas are under the jurisdiction of Newfoundland and Labrador, Nova Scotia, Quebec, and the Northwest Territories (after NWT devolution in April 2014 - the map shows the NEB’s current jurisdiction).
The Board is and has always been independent. We operate within the mandate set for us by Parliament but at arm’s-length from government and free from political influence. Our role is to implement - not set - policies affirmed by legislation and regulation.
The Board is a quasi-judicial tribunal, which means that it operates like a court and must be transparent and fair. The information the Board uses to make decisions must be on the public record, and the Board and its staff must be both free from bias and perceived as free from bias. Thus, I am not in a position today to discuss past, present, or future applications before the Board.
Slide 3 speaking notes (click to view)
The Board’s mandate requires us to balance and integrate all relevant social, economic and environmental considerations when making a decision or recommendation.
For example, when assessing applications to build facilities and installations, the NEB carefully evaluates all relevant information presented, including evidence related to:
- Design and safety;
- Environmental protection;
- Socio-economic matters;
- Impact on Aboriginal interests;
- Impact on landowners;
- Economic feasibility; and
- Any other public interest that, in the Board’s opinion, may be affected.
Attention is often focused on the NEB’s review of projects’ initial applications, but we regulate over the full life-cycle of projects. When they are being built, we inspect. When they are being operated, we inspect and audit. And when a pipeline reaches the end of its usefulness, we review applications to ensure that it is abandoned responsibly.
The Board and its staff will not hesitate to use our full compliance and enforcement toolkit - which includes inspections, audits, orders, monetary penalties, and criminal prosecution - to protect the health and safety of Canadians and the environment.
Slide 4 speaking notes (click to view)
Now to the topic at hand, which is energy and markets. In support of its regulatory role, the Board actively monitors energy markets and produces energy reports.
The Board’s flagship information product is the Energy Futures Report, which has been published in some form since 1967. This report provides objective, comprehensive, and expert analysis that serves as a reference for both decision-makers and stakeholders.
The last release of the Energy Futures report was in November 2013, and I will now outline some of its findings.
Canadian Energy Production on an Energy Equivalent Basis
"Canada's vast energy resources are large enough to meet Canadian needs for many generations"
Slide 5 speaking notes (click to view
I want to begin by highlighting that Canada’s vast energy resources are large enough to meet Canadian needs for many generations. For crude oil and natural gas, the size of the resource is able to accommodate Canadian energy needs, and serve export markets, for generations to come. Canada also benefits from abundant hydroelectric resources, which account for a majority of Canadian electricity production.
As shown in the figure, Canadian energy production is expected to grow substantially over the foreseeable future:
- Shown in red, oil production grows the most significantly, and by 2035 is nearly 80 per cent higher than current levels.
- Natural gas production, in blue, continues its current decline, but by 2019 begins to increase and is 25 per cent higher in 2035 than current levels.
- Canadian electricity generation increases steadily by 27 per cent over the course of the projection.
Growth in Canadian End-Use Energy Demand
"Hydrocarbons continue to be the main source of energy for heat, transportation, and many other functions integral to Canadians' standard of living"
Slide 6 speaking notes (click to view)
While Canadian energy supply is expected to grow substantially during the projection, energy demand grows at a slower rate than in the past, especially in the residential, commercial and transportation sectors. Only demand in the industrial sector grows more quickly than in the past, due to growth in some energy-intensive industries.
A large part of slowing demand growth is due to the improving efficiency with which Canadians use energy. By 2035, the energy used per unit of Canadian economic output is projected to be 20 per cent lower than in 2012.
One notable change in energy consumption trends is in passenger transport. Although the transportation sector as a whole is expected to grow annually at 0.8 per cent due to steady growth in freight transport, passenger transport is expected to decline an average of 0.6 per cent per year. A key factor in this reversal is new passenger vehicle emission standards, which are expected to improve fuel efficiency.
Hydrocarbons continue to be the main source of energy for heating homes and businesses, transporting people and goods, and many other functions integral to Canadians’ standard of living. While emerging technologies such as solar hot water heating and electric vehicles are expected to continue gaining market share, demand in Canada for oil products and natural gas grows by nearly 30 per cent over the projection.
"Growth in export markets and the infrastructure to access them are key uncertainties"
Slide 7 speaking notes (click to view)
The projections for substantial growth in energy production and slowing growth in energy consumption imply that Canada will have ample energy to meet its needs and, therefore, significant amounts available for export.
In fact, on a combined basis, net crude oil, natural gas, and electricity available for export nearly double over the course of the projection. Much of that increase is in oil given substantial increases in Canadian oil production and relatively modest increases in Canadian oil consumption.
In the NEB’s Energy Futures work, foreign markets are assumed to be able to absorb all Canadian exports and the infrastructure needed to access those markets is assumed to be in place. These factors are key uncertainties to the projections that I just discussed. The next slides provide some added context on these and related price factors.
- Steady Canadian oil production growth
- Rapid growth in U.S. tight oil production
- Pipeline bottlenecks
- Refinery outages and maintenance
- Delays in pipeline capacity additions
- Growing transportation of oil by rail
Slide 8 speaking notes (click to view)
In normal market conditions, oil prices vary by region depending on factors such as oil quality (heavy or light, sweet or sour) and transportation costs.
Prior to 2011, oil prices in the continental U.S. (known as West Texas Intermediate or WTI) closely tracked international prices (known as Brent). Similarly, western Canadian heavy oil prices (known as Western Canadian Select or WCS) traded at a consistent discount to WTI due to transportation costs and quality differences.
Starting in 2011, these prices started to diverge from their traditional relationships. This occurred at roughly the same time as other North American trends:
- Supply increases due to steady oil sands production growth in Canada and rapidly growing tight oil production in the U.S.
- Pipeline bottlenecks, refinery outages and maintenance, and delays in expected pipeline capacity additions
- Rapid growth in the transportation oil by rail
"Global LNG trade currently accounts for only 10 per cent of global natural gas consumption, and minimal amounts of LNG are exported from North America, all from Alaska"
Slide 9 speaking notes (click to view)
Like oil, natural gas has seen an increase in price differentials in recent years.
Changes in gas production technology have greatly increased supply and decreased prices in North America, which has a single continental price (Henry Hub).
In contrast, prices for LNG (natural gas cooled to 162°C) are now much higher globally than in North America, especially in Asia. Global LNG trade currently accounts for only 10 per cent of global natural gas consumption, and minimal amounts of LNG are exported from North America (all from the Alaska North Slope).
As you may know, issuing licences for the export of Canadian LNG is one of the NEB’s responsibilities.
Slide 10 speaking notes (click to view)
I will now change gears and talk a bit about international relations – not at the geo-political level, since the Board is not in a position to comment on this, but at the institutional level. It is important to recognize the significant cooperation among regulators that is helping to improve safety and efficiency in the energy industry.
Energy regulators have a long history of working together, as cooperation allows cross-jurisdictional issues to be managed more coherently. Substantive collaboration occurs, not only between federal and provincial regulators in Canada, but also internationally.
One international example is the North American Electric Reliability Corporation (NERC), which develops and enforces standards to ensure the reliability of the bulk power system in North America. By developing a set of reliability standards that are consistent across jurisdictions, NERC allows both regulators and market participants to address risks and improve operations more effectively and efficiently.
Energy regulators also take advantage of opportunities to learn from one another. For example, the Board sent observers to rigs in western Greenland to learn the latest in safety and environmental best practices related to Arctic offshore drilling.
The NEB also actively participates in the International Regulators Forum, where global experts on offshore drilling share best practices and lessons learned. The key countries in the offshore regulatory world all participate in the Forum and are united on holding industry accountable for safety, environmental, and emergency response outcomes.
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Slide 11 speaking notes (click to view)
I will end by noting that there is sometimes a perception that the work of energy regulators such as the Board is contrary to market forces. In reality, regulation has to be strong – and be perceived as strong - for markets to function effectively.
- Companies cannot operate at maximum commercial capacity if there are questions about the safety and integrity of their systems.
- Industry also needs a robust regulatory framework that sets clear rules and expectations - in Canada and around the world - in order for companies to effectively strategize, invest, and grow.
The Board and its 450 staff work diligently to implement and continuously improve this regulatory framework. I hope my presentation today has provided a helpful overview of how we do this while also outlining some useful statistics and projections.
For a copy of this presentation or the 2013 Energy Futures report, please visit the NEB’s website at www.neb-one.gc.ca. The report is already on the site now. The presentation will be available starting Monday, January 27.
Thank you for giving me this opportunity to speak with you today. I look forward to your questions later in the session.
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