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Canadian energy, global markets

By Brenda Bouw | January 22, 2016
Canadian energy, global markets
Robert Johnston

To compete globally and boost economic growth, Robert Johnston, of Eurasia stresses that innovation and productivity need to be the focus of governments and industry leaders.

Canadian governments and industry leaders need to be “obsessively focused” on innovation and productivity to better compete in global markets and to boost economic growth at home, says a top executive at Eurasia Group.

Robert Johnston, CEO and Director, Energy and Natural Resources at the global consulting firm, says Canada’s new Liberal government and the current commodities downturn should be seen as opportunities for stakeholders to come together and find new ways to work together and to increase productiveness.

“Are CEOs interested in a convergence of public and private sector agendas? Because they have a willing partner in Ottawa,” says Johnston.

Prime Minister Justin Trudeau’s Liberal government has vowed to “maintain and diversify” Canada’s energy market, while developing a National Energy Strategy to help transition to a low-carbon energy system to help reduce greenhouse gas emissions. That includes plans to partner with the private sector to raise funds for technologies that reduce emissions.

In Alberta, Canada’s dominant oil and gas producing region, the government has adopted a Climate Leadership Plan, in consultation with energy industry and environmental groups, which includes a new carbon tax, the phasing out of out coal and set a cap a greenhouse-gas-emissions cap on the oil sands.

These new policies in Ottawa and Alberta set the stage for a changing regulatory environment, while at the same time trying to sustain a sector that is key to Canada’s future economic growth. Managing these changes is particularly challenging and important at time when lower oil and gas prices are weighting on Canada’s GDP, Johnston says.

“I think the climate and carbon pieces add an element that has not been present for fossil fuels in previous cycles,” says Johnston. “Those factors will influence the slope of the recovery over the medium to long term but probably won’t be the key factor in the next three or four years.”

Costs need to come down

The supply curve should be a key focus right now, Johnston says, to help the Canadian industry can be more competitive amid lower energy prices.

“Canada's governments and industry leaders need to be obsessively focused on our place in the global supply curve across commodities, recognizing that if the slope of recovery is less steep than it's been in the past, whether it's for metals or for energy, we still need to be competitive,” he says.

It was less of a concern when oil was at $100 (U.S.) per barrel, versus around $30 today, and when China’s economy was growing in the double-digits, which helped to support demand for metals and minerals.

At that time, “it was more about how quickly can you put your projects online and get them to
market,” Johnston says.

Now, he says, it’s more about knowing that an oil sands project investment will work at $65 (U.S.) a barrel, or a gold project at $1,100 (U.S.).

“That, to me is the key variable; the competitiveness in our position on the supply curve for all these commodities,” Johnston says.

More innovation, not diversification, needed

While some argue Canada’s economy is too dependent on industries like oil and gas and mining, Johnston believes the country has “normal exposure” for a resource nation.

“We do have a more diversified economy than some,” other resource focused countries, he says, pointing to sectors such as financial services, real estate and manufacturing.

The problem, he says, is that the cost of doing business in the energy sector are too high, which threatens global competitiveness.

“Our productivity and innovation is not necessarily where we want it to be,” Johnston says. “And, in the case of oil and gas, we have geographic constraints that prevent us accessing global markets. Those are pretty challenging circumstances. That's why looking at Canada's role as a high-cost producer from a policy perspective is more important than ever.”

While the new carbon policies in Alberta and Ottawa are good move, Johnston says it’s unclear how the oil sands industry will achieve those emissions reductions.

“Is it going to be through slower growth? Is it going to be through a cap on growth? Is it going to be through technology that lowers GHGs? Is it going to be through carbon taxes and, if so, what does that mean for Canada's meta-position and the future of the oil sands?”

He urges the resource sectors to further develop their social licence to operate, including better addressing the concerns of people who are far removed from the direct benefits, like in urban centres, for example.

“These people are concerned about negative impacts on the environment, on human rights or on aboriginal people,” he says. “That's where I think the industry needs to do a lot of work to try to reinforce the importance of energy to the economy, to everyone's day-to-day existence.”

More global partnerships needed

Where the resource industries do well, and can be an inspiration for other sectors, is with global trade and partnerships, Johnston says.

An example he cites is the mergers of major mining companies, Inco and Falconbridge, with other offshore players about 10 years ago.

The proposed Trans-Pacific Partnership and European Comprehensive and Economic Trade Agreement (CETA) will go a long way in helping to bolster trade in other key Canadian industries, Johnston says.

“Governmental leadership in exports and in really promoting global competition is important,” he says. “But for a lot of companies global means the U.S. For them, taking a risk and competing with big global companies and local companies in Korea, China and in Eastern Europe simply isn’t their orientation.”

A recent report commissioned by the University of Ottawa’s Centre for International Policy Studies (CIPS), called No time for complacency: a 21st century trade strategy for Canada, calls for a reduction in provincial trade barriers as well as the finalizing of the Canada-EU deal to help Canadian companies increase their competitiveness.

“Negotiating deals with other countries is only one part of ensuring that Canada can compete globally,” stated Brian Kingston, a Senior Associate with the Canadian Council of Chief Executives and member of the CIPS International Trade and Commerce Working Group. “We also need to take a close look at our domestic policies, so that businesses can grow, achieve scale and tap into global markets.”

Talent remains a top challenge

One area where businesses across all sectors can start immediately improving productivity is in their hiring, Johnston says, as the country faces a growing skills gap. The mismatch is expected to get worse as more of the Baby Boom generation retires, and not enough people are lined up behind them to replace their level of skill and experience.

A steady increase in immigration will continue to help bridge that gap, Johnston says, alongside government initiatives such as the Start-Up Visa Program, which gives citizenship to promising entrepreneurs in other countries.

“If Canada has an aging population and a limited set of productive, youthful, dynamic employees, it does support the case for a more dynamic immigration policy and the need to really compete for global talent,” he ways.

That would show Canada is committed top opening its borders to highly skilled workers across various industries, he says.

Johnston believes the conversation about innovation in Canada is too often disconnected from discussions around immigration and the capital markets.

“If you look at the U.S. economy and the role of healthcare and technology in the market relative to what it is in Canada, I think those are the factors that differentiate it right there, getting the best immigrants and getting incredibly dynamic capital markets, risk-taking capital markets.”

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