OPEC Surprise Cut and Canada’s Budget 2023
On April 2, OPEC surprised the markets by announcing a large production cut. Oil prices jumped about $5 a barrel on the news. On March 28, the 2023 Canadian Federal Budget was released which included additional details on investment tax credits (ITCs) and other incentives to support clean energy investment. This week on the podcast, Peter and Jackie discuss both the OPEC cuts and the 2023 Budget.
Content referenced:
- Canada Budget 2023
- Jackie Forrest’s Globe and Mail Article from November 2022 “We built the railway in five years. So why are so many megaprojects now stalled?”
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Episode 196 transcript
Disclosure:
The information and opinions presented in this ARC Energy Ideas podcast are provided for informational purposes only and are subject to the disclaimer link in the show notes.
Announcer:
This is the ARC Energy Ideas podcast with Peter Tertzakian and Jackie Forrest. Exploring trends that influence the energy business.
Jackie Forrest:
Welcome to the ARC Energy Ideas podcast, I’m Jackie Forest.
Peter Tertzakian :
And I’m Peter Tertzakian and welcome back. And to you Jackie, Aloha.
Jackie Forrest:
Yeah, I’m on spring break in Hawaii and it’s beautiful here.
Peter Tertzakian :
Mm-hmm. Well, it’s nice of you to join the podcast on your vacation. I guess they say the show must go on, so the podcast must go on every week after week, so great to have you.
Jackie Forrest:
That’s right. Yeah, and there’s always lots of news. Of course, the news always happens when you’re on vacation. So, our two topics today are the OPEX surprise cut and the budget that all happened while I was on vacation, and so we’re covering it all.
Peter Tertzakian :
Yeah, I know. I mean there’s no vacation in this business. I mean, I don’t think two weeks go by without some major piece of news, whether it has to do with new energy, clean energy, transition energy, whatever you want to call it, or the oil and gas world, or anything with the macro situation, geopolitics that affect energy, you name it. So here we are. Yeah, we’ve got the surprise OPEC announcement. It’s over a week old now, but it’s still worth talking about. So, what happened?
Jackie Forrest:
Yeah, so on April 2nd, OPEC made this announcement that they were going to cut something like 1.6 million barrels a day of crude. Now the actual cut is going to be less, some estimate in the range of 700,000 barrels a day because some OPEC members aren’t actually producing at their quota level right now, but still the market didn’t expect this. They thought this OPEC meeting would be kind of a rollover of the same, and the price of oil did go up about $5 as a result to about WTI $80 now.
Peter Tertzakian :
To about 80. What’s interesting to me, and I like to point out to people, is that the world is consuming, give or take, a hundred million barrels a day, actually it’s a little bit over a hundred million barrels a day now. And when you think about 700,000 barrels a day or a million barrels a day, it’s 1% or less and it causes a significant price to move of about whatever it is, 7%. It just gives a sense of how sensitive commodity markets can be, particularly oil, and how at the margin this thing is priced, it doesn’t take much to swing the price either way.
Jackie Forrest:
True, and how sentiment is so important in the price and people’s expectations about the future too.
Now, before this cut, if you looked at the IEA monthly oil report, which a lot of people look at, the view was that the market would be oversupplied for the first half of this year, but in the second half, it was going to be flipping into a 1.5 million barrel a day deficit. The market would be tight, and that was because China was supposed to be growing its demand, but at the same time, these barrels from Russia were going to be leaving the market due to these sanctions.
So that assumption about having this tight market in the second half of the year assumed no recession and that Russia lost this supply. But both assumptions seem a bit weak at this point with all those banking announcements, the price of WTI went under $70 in mid-March for a bit of a time, and there’s more and more news that Russia’s production has yet to show any signs of being curtailed because of these sanctions. So, with that news, there was a lot of pricing softness, and I think OPEC wanted to get in front of this and signal to the market that they are going to defend the price and keep the price high even in the case that demands start to be a bit weaker than people think.
Peter Tertzakian :
Mm-hmm. Another way to think about it is that price reflects everything that is known in the market, all the traders in the world and everything, and is a combination of the very current supply and demand situation plus some pricing for expectations of what supply and demand is going to be in the future. And so that’s all rolled up in this thing called price. And the deficit expectations that you just talked about in the second half of that one and a half million barrels, it was starting to lose belief in that because of the realities of the economy slowing down, the banking crisis that we just had with Silicon Valley Bank, basically a risk-off type market. The believability, and as you said, I think, is right. The Saudis wanted to get ahead of it. But let’s talk about it, is it the Saudis and the core OPEC group or the plus is Russia and a handful of other countries, which part of OPEC, knowing that Saudi is one that only really has any sort of swing capacity in this whole system?
Jackie Forrest:
Right. Well, I think Saudi was probably a real leader here. The reality is Russia’s probably going to be producing as much as they can regardless of what is being agreed to, that’s my view. I mean, I think another catalyst maybe for the Saudis was they were maybe unhappy with the news the previous week that the US Energy Secretary, Jennifer Granholm had made some comments that they were not going to start refilling the SPR, the Strategic Petroleum Reserve, even though the price of oil was below this $72 threshold that President Biden had said at that price they would-be buyers.
And I think Saudi and other OPEC members believed that that was going to keep a floor on the price of oil, that the US was going to be buying and help create that floor. A lot of people believe that the surprise cut was a reaction to that. “Well, if the US isn’t going to create a floor for oil, we will.” And while Saudi may be leading it, I think Russia, the UAE, and many of the other members, want the price to be higher. I don’t think anyone’s worried about losing market share right now by having a higher price.
Peter Tertzakian :
Yeah, yeah. Well, it’s all very interesting. I know you mentioned the SPR, which was used in the past when we had a hundred-plus dollars a barrel of oil to sort of moderate the price, which has depleted significantly and has not been replenished. And so there is a scenario out there that some of the investment banks and other agencies are saying, “Well, we could go back to a hundred dollars a barrel again,” because the oil demand could be stronger than is anticipated. And in that event, by the way, there’s no fallback within the SPR, so we’re seeing some strengthening of opinions again in terms of where the price could go in the second half.
Jackie Forrest:
There certainly are. Forecasters like Goldman Sachs and RBC have increased their prices by about $5 a barrel as a result of the news in the second half. So for example, Goldman Sachs went from having a $90 per barrel outlook in the second half of the year to 95 as a result of this news, and RBC also increased their price by $5. But others like JP Morgan and Citibank are more concerned about a recessionary scenario and haven’t increased their price or even decreased their price a little bit because they’re saying, “Well, even with these cuts, the recession would mean that demand is lower, and we may still have a weaker market.” So, I think there’s a bit of a bifurcation in the analysts right now, those that are assuming that there’s a recession and those that are thinking, “Well, if there is a recession, it’s going to be pretty mild, and the market could continue to be tight.
Peter Tertzakian :
Now, some of the Western leaders, including President Biden, were taken aback by this surprise news and unhappy because they’re trying to tame inflation and because oil runs through the veins of the economy because it transports almost every good you can think of, we’re not very happy because of the inflationary pressure upward that it would put, even five bucks of barrels significant.
Jackie Forrest:
Yeah, I mean that’s the downside, right? The central banks are working hard to increase the interest rates to slow down the economy to get this inflation under control, so higher oil prices are certainly not going to be helpful in the second half if that’s the scenario that unfolds. I guess everything though, the market has a way of working. If we do get those higher prices, it may create more of a potential chance for a recession.
Peter Tertzakian :
Yeah, but is the market working? Because we’ve talked on the program before that typically when you get this level of pricing, especially above 80, $85, it’s like a siren, a signal for the drilling rigs to go back out and bring on more supply. But we’re not seeing that. There’s just a very muted response to these high prices. Underinvestment is a big theme still. I saw another report on it this morning that the level of investment is not enough to keep up with a robust demand scenario for oil, and that that in itself is a setup, declining production, that’s sort of eroding over time, stubborn demand and the two come together recession or no recession and collide to give us these higher prices.
Jackie Forrest:
Yeah, I mean that’s one thing that’s very different right now than past cycles is, especially in the last 10 years because we had that tight oil that could respond very quickly to price signals, but we’re not seeing that. In fact, in 2022, US production disappointed, it didn’t grow as much as people thought. And although there are expectations for more growth this year, it’s uncertain if that’s going to happen regardless of price. So, this is a year, like you say, Peter, where we could have a recession and still have a tight market because we’re still undersupplied, especially if OPEC continues to protect the price of oil and cut their production to make sure that it’s a tight market. So, I think that’s why all those forecasters or many of the forecasters still have oil prices in a fairly high range for the second half of this year regardless.
Peter Tertzakian :
Yeah, they do. And I think that there’s this other overlay that we’ve talked about also on the podcast in the past, and is that, if you think back to around 2015, ’16, the United States with a surge in Permian production and Canada with its surge in the oil sands and its unconventional shale type production, we were talking about being independent of the Middle Eastern geopolitics. I mean, the United States was talking about energy dominance, let alone being energy secure after decades of energy dependency. And so now we’re in a situation with the multinational oil production, if you aggregate the big ExxonMobil, Chevron, Shell, those types of companies, their production has decreased over the last five years or so. I mean, the Western underinvestment is creating a situation where that energy security is diminishing, and we are yet again now hostage to these surprise announcements halfway around the other world.
Jackie Forrest:
Yeah, and I think that’s probably what the next 10 years look more like than the last 10 because I do think you’re right. If you look at the plans for many of these majors, they’re declining in their production. We’re not seeing a lot of growth from Western public companies. I think over the next 10 years, the supply growth is probably going to come from national oil companies in places like the Middle East and probably they’re going to have more and more control over the oil markets, and their objective is to keep prices high, in my view.
Peter Tertzakian :
Yeah, well it is to keep it high. And actually, I was looking at some numbers in terms of investment into other historical growth areas, and when I say historically, I’m talking only about five, seven years ago, offshore Africa, offshore Angola, Nigeria, places like that, they were all attracting capital risk, capital and drilling and production was going on. Now that’s completely reversed, and so actually I’m not so sure you’re going to see that kind of production growth even within the national oil companies, let alone the western consortia of big oil companies. And this all creates a situation, let’s put price aside, I mean it’s an energy security kind of issue. We’ve lost control that we momentarily had after decades of dependency. And I think that that does not help the situation geopolitically. It doesn’t help the energy transition for a variety of reasons. And I guess maybe I’ll just suggest that we table it and talk about this under-investment theme, the fact that the price signal’s broken. I think it’s worth revisiting and talking about it because it’s so consequential to the next 10 years of how the energy landscape evolves.
Jackie Forrest:
Yeah, I mean this message in the West that we’re moving on to clean energy, therefore we don’t need oil and gas and therefore we shouldn’t be investing. I think you just saw this big project in Alaska got approved and there’s been a lot of backlashes. They call it a carbon bomb. But the reality is, we still use a lot of oil and gas in the West and it would be better to get it from our own than to depend on countries in the Middle East. And that in the absence of reducing our demand, which is going to be very hard to do, it’s going to take some time, it makes a lot of sense to continue to invest in supply in the West that we have control over it, and obviously what’s been happening in Europe in the last year and a half is obvious why you want to have control over your oil and gas resources and the suppliers that you get them from.
Peter Tertzakian :
Right. Right, well, that’s interesting this term is carbon bomb because it’s sort of often used on the supply side of the equation, but the carbon bomb is on the demand side. That’s really where the stubbornness, the resilience is in bringing it down. The carbon bomb, I mean, 80% of emissions occur when somebody turns the key of an ignition switch or fires up some other oil-burning appliance or device or piece of machinery. And so, the carbon bomb on the demand side has to be diffused and that way the carbon bomb on the supply side will take care of itself.
Jackie Forrest:
Well, 2020 was a piece of very clear evidence that when demand goes away, supply stops.
Peter Tertzakian :
Oh, yeah.
Jackie Forrest:
Yeah, we saw demand contract, I think on an annual average basis, nine million barrels a day and every month, a much larger number, and producers stopped producing.
Peter Tertzakian :
Sure, there you go.
Jackie Forrest:
So, to me, it’s pretty clear that we don’t have to worry about supply if we just spent our time reducing demand, supply would follow very quickly along.
Peter Tertzakian :
Well, we’ll table this, but just remember what it took to lower demand by a mere nine million barrels a day, which is 9%. It took a global lockdown and immobility to do that, which gives you a sense of the scale of the problem of getting off an energy supply system based on petroleum.
Jackie Forrest:
For sure, yeah. And most people aren’t going to do it by continuing that lifestyle that we lived in 2020 as we’ve seen. People want to get back to going to Hawaii and going on vacations and traveling, and so it’s got to be done through means of more efficiency and electric vehicles, and that takes time.
Peter Tertzakian :
Okay, well more on the OPEC situation as it evolves, especially into the second half of the year, and on energy security, oil supply, oil demand, all that kind of stuff that we like to talk about and can talk about for the next two hours if we want. But we’ve only got another, how long, 15, 20 minutes, so we’ll talk about the federal budget and that’s now a few weeks old, but still worth talking about. Where are we at with that?
Jackie Forrest:
Yeah, so the budget was released on March 28th. It was 266 pages, which was described as a short budget.
Peter Tertzakian :
Did you read that on the beach?
Jackie Forrest:
Yeah, yeah, of course, Peter. I never stopped working. 43 billion dollars of new spending over six years, and there are some concerns because there’s a lot of spending here and they’re no longer projecting a balanced budget at any time when in the past there was always a forecast that eventually the budget would come into balance. So I think there are some concerns about the amount of spending in general. Now, clean energy was part of it, but a lot of new money was spent on things like dental and health spending and this one-time grocery rebate, which we’re not experts on, but it wasn’t all clean energy, but certainly clean energy did contribute to part of the outlook for ongoing deficits.
Peter Tertzakian :
Yeah. So, let’s talk about the scale of our spending here in this country, whether it’s on a per capita basis or put in the context of the elephant in the room, which is the US Inflation Reduction Act spending. So, before we put Canada in perspective, let’s back up a minute, what was the amount of spending for clean energy in that IRA, which came out, I don’t know, a few months ago?
Jackie Forrest:
Goldman Sachs has an estimate of 1.2 trillion in spending, and other analysts even see it as more. It’s very difficult to figure out how much this will ultimately cost because they provide incentives like investment tax credits or production tax credits for every unit of hydrogen produced or every solar panel produced, they’re going to give us a certain amount of money. Well, you don’t know how many manufacturing plants will ultimately be built in the next 10 years or how many hydrogen plants will be built. So, it is not easy to estimate exactly how much it’s going to cost. But anyway, I think the consensus now is it’s going to be quite a bit higher than the US government thought and maybe the 1.2 trillion of Goldman Sachs is sort of more of the realistic number.
So, if you took the 1.2 trillion over the whole time and you assume that we would be 10% of that, then we should be spending about 120 billion. How much is Canada spending? Well, again, it’s difficult to estimate for the same reasons as is as it is for the US, but several groups like Politico, CBC, and Canadian Climate Institute have come out with estimates of between 70 to 80 billion over 10 years. So, I don’t think we’re that far out in terms of overall spending when you look at the size of our economy compared to the US.
Peter Tertzakian :
Okay, but there is a big difference between… Well, there’s more than one big difference, there are a few big differences. So, let’s talk about that. One of the differences is the fact that our spending on clean energy is more targeted than in the United States. And when we had Minister Wilkinson on a couple of podcasts ago, before the budget was released, he sort of hinted that we couldn’t spend all over the map, that we had to spend on more targeted areas. So where are we spending on a focused basis?
Jackie Forrest:
Well, they talk about eight different areas of priorities, electrification, and clean energy, and those have very strong support, clean electricity, I think most people are pretty happy with the news in terms of the support there. We’ll get into the details. They did mention clean manufacturing as a priority area, but I don’t think the support is such that we’re going to see a ton of investment there, although they did give some incentives as well for critical minerals. And they all also have things like major projects, emissions reductions, electric vehicles, and batteries. So, they do have a lot of areas, but I would just say not in all the areas that they mentioned as priorities do I think we can compete necessarily head-to-head with the Americans.
Peter Tertzakian :
Right, right. So, if we think that the Americans are sort of this shotgun approach all over the map, generally very biased to incentives, where the Canadian approach is kind of, well, they call it carrot and stick, but there’s a lot of carrots in this thing, but much more targeted. So, let’s talk about electrification and clean electricity. Can you define that? What does that mean?
Jackie Forrest:
Well, it’s a clean electricity generation, so zero or near zero emissions, storage, low carbon heating, and industrial zero-emission vehicles are kind of everything that’s getting what they’re calling a Clean Technology Tax Credit, and it’s a 30% investment tax credit. So, you get 30% of your initial capital cost as a tax credit that you could then use to reduce the cost by having lower taxes in the future, or you may be able to sell that if you want the money upfront. They also added a 15% tax credit for groups that aren’t taxable. So, pension funds, municipalities, indigenous groups, they weren’t able to participate in just getting a tax credit, so they’ve made a new category for them and they’re also supporting 15% tax credits on things like abated natural gas, electricity, fire generation. So, if you have a natural gas power generation and you put CCS on it, that gets 15%. As well as a 15% tax credit on the transmission of electricity between provinces and territories. So those are two new categories that didn’t show up in the fall economic update that is now going to get support.
Peter Tertzakian :
So, I mean, we’ve talked about that again on this podcast. I can’t remember, we’ve probably had two or three guests that have opined on cross-provincial border electricity trade because we sort of act like 10 different countries with 10 different provinces in the territories. If you throw money at this thing, does it sort of solve the root problem of territorialism and all the politics that go with this?
Jackie Forrest:
Yeah, I’m not sure offering to give a tax credit for 15% will change it. We had Mike Law from the Alberta AESO concerned that just opening up these transmission lines, then it may cause lower power prices in a jurisdiction like Alberta and then there’ll be no incentive to build a new generation here. And for similar reasons, other provinces, want the generation in their province to generate jobs and economic benefits. So that’s one side. But we did have Blake Schaffer who joined the podcast earlier this year, and he had the opposite view that these interconnects can greatly increase the number of renewables you can get on for a much lower price than trying to back them up with large amounts of storage in the province. So, I think that is probably the more efficient thing to do. Hopefully, despite our provincial power systems and all the barriers that create, we can build some of these interconnects, because I do think it’s going to reduce the cost of getting to net zero electricity by 2035. That’s what the goal is.
Peter Tertzakian :
You can argue the theory and the technology and all this stuff, but the psychology of self-interest is a very powerful thing to overcome, and so we shall see. I mean, I don’t have the answers, but I do know that the barriers to getting to net zero are not so much technical or engineering and all that kind of stuff, the barriers are overcoming legacy policies that are entrenched, especially amongst the electrical utilities, which are often state-owned by each province. So, we’ll see.
Jackie Forrest:
Yeah, I also wanted to point out that they included abated natural gas electricity-fired generation. I think that’s important. There has been some concern with this clean electricity standard that it wouldn’t allow natural gas with CCS. I don’t think that makes any sense, of course, you should allow that, but the fact that it was included to have a tax credit to me is a good sign that that is going to be part of the future when we get clean electricity standard at some point this year. So, I thought that was interesting to point out.
Peter Tertzakian :
Yeah, we’ll see what it all costs. I mean, these are all interesting incentives, but whether or not the money is attracted to build these things out and then ultimately how it’s going to be paid for through increases in the rate base or so on, there’s a lot of unknowns here.
Jackie Forrest:
Well, there are still many details to be sorted, I would say, and it’s still light on details, the budget. For example, there was also, this is also in the vein of more growth in clean energy, especially electricity, they had 10 billion through a clean power priority area and another 10 billion through a green infrastructure priority area. This would be money coming from the Canadian Infrastructure Bank, so 20 billion of new money. We don’t know exactly what goes in these buckets, but I’m thinking more generation that’s clean and more infrastructure like transmission lines. We don’t know if these are going to be loans or grants, so we need a lot more information, but that’s a lot of money, 20 billion dollars. So that could also provide a real boost to investments here in Canada when we get more details.
Peter Tertzakian :
Well, it’s a lot of money, so let me put it in perspective though. It’s not nearly enough money to retool the entire electrical economy to net zero. We have to have, not only the federal government through its surrogate institutions like the Canadian Infrastructure Bank to help fund these things, and they will fund within Canada because that is their mandate. But we also need other big pools of capital, whether it’s in our pension funds or other types of financial institutions, or banks, financing Canada and not going and investing out of the country. I mean, this is the thing is you’ve got, let’s put an example to it, you have two carbon capture projects for a natural gas-fired power plant, one in Canada, one in Texas, and you’re deciding on which one you’re going to go to, which one are you? And it’s not a hundred percent clear unless you go deep into the math and the economics, which is hard to do because the policy is rather complicated.
Jackie Forrest:
Talking about CCS, there was just a reiteration of this story of the growth fund, the 15 billion dollars Canada Growth Fund that could create some certainty to carbon prices. So that’s one of the, when you do that analysis that you just talked about, comparing CCS and Alberta and Texas, the biggest difference is we still have this volatility in the price of carbon and they don’t, and this growth fund is going to have these contract for differences supporting major projects, it said. So, I’m assuming it’s not just for really tiny projects, but maybe the very large CCS projects. So, they did announce that this is going to be managed by one of the larger pension funds in Canada, the Public Sector Pension or PSP pension fund. So, we’ll wait and see. There weren’t details on exactly how that would work. Lots of questions there, but I think that’s an important one, to your point. We’ll wait and see how that goes because I think that’s an important one as well. I wanted to talk about hydrogen as well.
Peter Tertzakian :
Yeah, we had Frank Davis on our program a week ago.
Jackie Forrest:
Yeah, not long ago, A few weeks ago. And Frank talked a lot about the project in Newfoundland and talked about his concern about the policy in Canada, and whether would that enable investments here in Canada versus the US. Overall, I would say that the news around clean hydrogen was a little weaker. We’ll wait and see. I think some other incentives in Canada combined with this will see some investment, but I think right now it looks a bit stronger in the US. And the big reason is they’re getting production tax credits and we found out we’re getting investment tax credits. So, they get, in the case of clean hydrogen, the way Frank is thinking about creating completely clean hydrogen, they would get something like $3 per kilogram for each unit they produce, we would get for the cleanest level, about a 40% investment tax credit. So just pay you 40% of your initial capital cost. And by most people’s calculations, that is not going to compete. You’d need something like a 70% investment tax credit to compete, and we got 40 on the greenest level.
Now there are other incentives in Canada, you have the Large Emitters Program, the carbon price you have, especially around refineries. We have a clean fuel regulation that we’ve talked about quite a bit on the podcast that creates a lot of incentive for refineries to start to use green hydrogen or blue hydrogen instead of gray or to reuse hydrogen instead of natural gas. So, I do think when you combine these tax credits with some of those other policies, we’ll see some investment go forward. But on its own, it does look weaker than the US. I did want to mention that the other concern is blue hydrogen, that’s the one that comes from natural gas where you’re going to still have very low emissions because you’re going to capture and sequester a lot of the emissions, but you’re still using natural gas.
Peter Tertzakian :
As part of the process to make the hydrogen, yeah.
Jackie Forrest:
Exactly. Where green hydrogen is coming from, like Frank’s project, wind or solar, it’s uncertain if all blue hydrogen projects will qualify there. There’s an incentive that if you’re greater than four kilograms of CO2 per kilogram of hydrogen produced, you won’t get anything. If you are four or fewer, you would get 15%. There are some blue hydrogen projects I’m told that will be able to qualify for that 15%, but some of them won’t. So, it looks like there’s some support for blue hydrogen if you’re the cleanest blue hydrogen out there. And again, that doesn’t seem as compelling as the support for blue hydrogen in the US overall. So anyway, I think that one’s a bit weaker, but I am optimistic we will still see some investment with the other policies.
Peter Tertzakian :
Yeah, I agree. I’d like to sort of just back up a minute and we’re throwing a lot of jargon about hydrogen and production credits versus investment tax credits and carbon intensity of the green hydrogen versus blue hydrogen versus pink hydrogen or whatever. This is in part the challenge, the policy is detailed, and it’s complicated. I can’t tell at a glance whether the Canadian system is more competitive than the American system. They may be better ultimately, but it’s just hard to digest. And so there is again, the psychology of how the policy is presented because as a decision maker who’s going to allocate, say a billion dollars here or a billion dollars in Texas, there is a tendency to go to the place where there’s the least amount of uncertainty and the greatest clarity.
Jackie Forrest:
True, right? And we are getting more clarity, but this budget still has a lot of questions. There are three or four consultations that are part of this that will go forward so we won’t have clarity on all these areas. For example, to get the highest level of all these numbers I’ve been talking about for the investment tax credit, you have to meet the labor requirements. And the labor requirements say you have to be paying the prevailing wage, including benefits and pension contributions that come from collective bargaining agreements. Does that mean that you need to use union labor or just pay like union labor? If not, you would get a 10% reduction in the investment tax credit numbers I’ve been talking about. So, there’s a consultation that’s going to go forward on this, but just an example of uncertainty where you may just hold off on what you’re doing because you don’t want to go forward. After all, you might not have the right labor requirements and you may lose out on 10% of that.
So yeah, I think the more clarity we can get, the better. I did want to talk about the Clean Manufacturing Tax credits as well. That’s one area where I think we’re quite weak. We did talk to Minister Wilkinson about this when he joined our podcast in March, but they announced a 30% refundable investment tax credit for the investment in machinery and equipment used to manufacture a clean technology, while the US is offering the Production Tax Credit. So, this is a bit like the hydrogen case. So, for example, in the United States, if you are making a battery, they would give you as much as $45 per kilowatt-hour for each battery you manufacture for the next 10 years. And based on Bloomberg’s new energy finance data, that could be about 30% of the cost of the battery that you’re getting back as a subsidy. So, getting 30% off building the plant is a very small number compared to getting that type of incentive for each battery you produce.
Peter Tertzakian :
Yeah, and I think that this… So here in lies the difference between the American system and the systems that I’m seeing, not only in Canada but in other countries, which is there’s sort of the incentives to build the plant that you get after you build the plant because it’s applied against your tax versus incentives you’re going to get immediately after you produce the widget, or in this case the joule of energy, whatever form it comes out in.
Jackie Forrest:
Right, you’re going to get a production tax credit that you could then apply to your taxes owed each year, or maybe even some of them are refundable or direct pay. [inaudible 00:31:55] some cases [inaudible 00:31:55] years.
Peter Tertzakian :
Direct pay, I think some of them are direct pay. Yeah.
Jackie Forrest:
Yeah. Well, for a certain number of years, you see that in some of the cases, but not all. Based on this I’m not too optimistic we’re going to see a bunch of clean manufacturing technology being invested here in Canada. I think a lot of that’s going to happen over the border. And maybe this is a place, we’re not picking our spot here, we’re going to see a lot of investments in clean electricity here, maybe some hydrogen, but I just don’t see a lot in this manufacturing of clean technology based on this.
Peter Tertzakian :
For me, I don’t know, it may be embraced, but I am appealing in the future that policy be cleaner and easier to understand, because at the end of the day, one or more people are sitting in cubicles behind spreadsheets trying to fill out cells and trying to make sense of all of this stuff, and it is very complicated. And then they have to take all that material and convince their superiors up the chain to the big dollar decision makers. And if they don’t understand it, they’re not going to invest in any of this stuff.
Jackie Forrest:
Another issue in Canada is how it’s difficult to get major projects done. Now that exists in the US too in many jurisdictions, but you talked about Texas, the CCS project in Texas, it’s within just the borders of Texas. I think there’s a lot less uncertainty around getting the project built in the timelines for that. But that was also addressed in the budget that they were going to outline a concrete plan to improve the efficiency of the Impact Assessment Act process and the permitting process, and there was going to be a consultation to figure out how can we speed up, how we can get these major projects done. So hey, maybe they read my article about we built the railway in five years, so why is now it taking us so long to do these mega projects? So, we’ll see. That’s a consultation, but I do think that’s a really important part of the puzzle for these big investments.
Peter Tertzakian :
Yeah, we’ll put a link to that article again, it was a good one.
Jackie Forrest:
Okay. Yeah, we’ll put a link to it, and we’ll put a link to the budget of course as well. So, to wrap up, more details are needed in several areas. I think it’s going to take the good part of this year before this package is more clear, we’re going to be legislation and all these consultations about labor are going to have to happen. But I do think it’s positive in that we have more tools in the toolbox to compete with the US than we did before.
Peter Tertzakian :
Yeah, I do like this approach of being targeted, because a country of Canada’s size can’t be proverbially all over the map. We just do not have the economies of scale and the industrial base of the United States to be able to do everything. So, we have to pick our spots and I think this budget does that. I’m sure we’ll be talking about a lot more as we go forward.
Jackie Forrest:
Yeah, we definitely will. Well, thank you everyone for listening to the podcast. If you like this podcast, please rate us on the app that you listen to and tell someone else about us.
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