Ice and Opportunity: Canada’s Northern Trade Route

Ice and Opportunity: Canada’s Northern Trade Route

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To begin this week’s podcast, Peter and Jackie recap the past week’s events, including President Trump’s tariff U-turn and the escalating US-China tariff war.

Next, the conversation turns to Canada, the upcoming federal election, and Arctic export ports. To help us understand the opportunities and challenges with Arctic ports, Chris Avery, CEO of the Arctic Gateway Group joins the show. The Arctic Gateway Group is an Indigenous and community-owned transportation company that operates the Port of Churchill—Canada’s only Arctic seaport serviced by rail—and the Hudson Bay Railway, connecting The Pas to Churchill, Manitoba.

Here are some of the questions Peter and Jackie asked Chris: What is the condition of the rail line to the port now? What types of goods are currently exported from the port, and what types are expected to be exported in the future? Is it a deep-water port? How much of the year is Hudson Bay covered by ice, preventing exports? Is it feasible to break the ice? They also discussed whether the port could be suitable for LNG exports.

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Episode 280 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 Forrest.

Peter Tertzakian:

And I’m Peter Tertzakian. Welcome back. Well, Jackie, is there any sense of stability out there?

Jackie Forrest:

No. Here it is, we have to timestamp still. Monday, April 14th, eight o’clock in the morning. And Peter, you called it correctly last week, you said the White House would U-turn on these tariffs and not all of it, but a big part were paused. We’ve got for non-China 10% tariff now, but of course for China, we saw a big escalation, kind of crazy. I think we’re at 145% tariff on most things coming in from China now. Of course, the president, there was news all the weekend that electronics would be excluded, but still I think massive.

Peter Tertzakian:

Well, even there was a capitulation on that one, like, maybe. They said, first of all, as if it was going to be open-ended, no tariffs on electronics. But then by Sunday morning, and then the talk shows it was rescinded in a sense that it was, well, it’s not forever, we’ll see.

Jackie Forrest:

Yes.

Peter Tertzakian:

It’s almost the statistical theories around if things become so unpredictable, they become predictable in a statistical sense. And so this is just, the unpredictability is predictable here, and so there’s going to be more toing and froing and capitulation. And I keyed in on that word stability, because a lot of people talk about volatility and for sure things are exceedingly volatile. And for those that follow, for example, the VIX or the Volatility Index, it’s just absolutely through the roof in the equity markets.

And so, I mean, it’s going to be volatile, there’s no question, but it can be stable and volatile such that you can quantify the volatility and get a sense of the uncertainty. I don’t believe we’re there yet. Our question is, what is the new norm for volatility? And I think at that point there’ll be some sense of at least stability in the financial markets, but for now, it’s going to be trying to predict or trying to get predictability in an unpredictable world. Stay tuned. We’ll see what happens with the standoff between China and the United States. What is the total tariffs now? It’s some ridiculous number-

Jackie Forrest:

It’s 145%, on goods coming from China into the U.S. and I think it’s about 125% the other direction. But I did want to just talk about the magnitude of this. This is from a Guardian report, and I’ll put a link to that in the show notes, but it was basically saying that, we’ll talk about these electronics. 90% of Apple iPhones are assembled in China. That’s what analysts estimate. The company has never really put out the actual number.

If a smartphone was 1200 U.S. dollars before, it’s now they’re estimating over $2,000. Now, maybe not everything’s falling under the 145% in that calculation. And in the same article, an analyst estimated if that same smartphone were to be made in the U.S., it would cost $3,000. This is going to really, to me, damage the U.S. economy, and maybe that’s why they u-turned on the electronics. But I was just listening to an article this morning on the New York Times where it was like, baby goods and they were saying the same thing, that it would cost three times more to produce this in the United States, if they could even do it. Because they don’t have the equipment or the expertise.

Peter Tertzakian:

Well, when you think about 145% tariff, we’re getting to the point of it being, it’s going to affect supply chains. But if you think about tariff, what is a tariff? A tariff is a mild sanction. If you think about sanctions such as they are on North Korea, Russia, Iran, and countries like that, a sanction is effectively an infinite tariff. In other words, there is no price at which you can buy this. But when you get sort of like 145… Well, let’s back up. I mean 10%, okay, that’s a mild tax, we’ll call it. 25%, all right, that’s starting to bite, but 145%, you’re basically getting into the territory that’s almost like a full sanction. We are not going to buy your goods because it’s just so expensive. We have to go somewhere else.

But, guess what? You can’t go somewhere else right away for whatever it is, inputs into baby clothes or what have you. It effectively is potentially going to affect supply chains again, certainly in the United States.

Jackie Forrest:

Well, and let’s talk about energy. This is really impacting clean energy. The U.S. imports a large amount of the lithium ion batteries, for the electric cars, for the grid equipment, from China. And there’s a whole series of things, even the stuff that’s manufactured in the U.S. for clean energy, many of the component parts are coming from China. This is going to massively increase the cost of clean energy. It’s interesting, when this all started and Trump came into power, there was a lot of concern around the Inflation Reduction Act and if that would go away and how that would affect clean energy. I don’t think anyone saw that the cost for this equipment could go up multiples and really hurt the economics of these projects.

Peter Tertzakian:

We’re not going to see this probably for a couple months because there’s still inventories. But once the inventories are depleted and people have to buy new to replace the inventories, that’s when I think you’re going to see it. And so, whether or not there’s going to be some further lessening of tariffs in during this 90-day period, I think they’re trying to do 90 deals with 90 countries in 90 days, which is, one a day. Whereas most tariff or trade negotiations, you’re lucky if they’re done in 18 months. I think that you’re going to see something or the manifestation of all of this stuff, the consequences of all of this stuff, by the end of the second quarter, it’s going to show up in the numbers and for sure the third. Unless there’s some soon a full lift or maybe back down to 10% lift of the tariffs, bring them back down to 10% or something.

Jackie Forrest:

This is the problem though, it’s hard for business people to make any plans right now. They’re just sitting there like, “Well, why should I take action? Because it could change tomorrow.” I did want to say, Canadians may think they’re being spared right now, but, for instance, I bought this small cabinet on the internet this weekend. It was from China, and it was like $400. And I’m thinking, “God, for an American right now, this would be like $700.” And like you say, I probably wouldn’t buy it. But I’m really concerned that when the Americans come to our trade negotiation, which I think there’s a better chance… I feel more optimistic that we will get a trade deal with the Americans. That we are probably going to have to adopt whatever they have on other countries.

And we saw that with the electric cars. Do you remember the electric cars last fall? The Americans put 100% tariff on Chinese electric cars, we were asked to do the same. I don’t think Canadian businesses can just sit here and think they don’t have a problem. I think there is a risk that we may see whatever tariffs on China and other countries applied to us as well.

Peter Tertzakian:

Well, I think the message is there’s many chapters to be written in this story yet, and how it’s going to affect Canada is yet to be seen. And I agree with you, the story is far from over.

Jackie Forrest:

I did want to talk about one other chapter is, I don’t know if you noticed the sell off in the U.S. bond market last week, and a lot of people… We had the sell off in the overall equity market. But usually when equity markets go down in times like this, the bond market actually does well because people see that as a safe haven, especially U.S. treasuries.

But we actually had a situation where, there weren’t a lot of people buying U.S. treasuries. The interest rates were really having to go up to attract people. And a lot of people say this is one of the catalysts is why the Trump administration put the pause on. This is an example to me of an unintended consequence. There’s a lot of things that could come out of this that we can’t even predict today. But here, we’re not going to buy U.S., well, maybe people aren’t going to buy U.S. debt either. And Japan and China are some of the biggest holders of U.S. debt. If they decide, I’m not buying U.S. debt anymore, that could have broader implications for the financial markets that come out of this. So, something to watch.

Peter Tertzakian:

Well, it certainly will have an effect on you as a vacationer, if you’re planning to go to Europe this summer. A lot of the traders have been, you’re right, selling their U.S. bonds and buying European ones. You can see that in the currency movements. The Swiss Franc is way up, the Euro is way up even the Pound. And so it’s going to cost you a lot more on that vacation. And in large part, that’s because of these shifts in the global financial markets and the, again, lack of stability in what’s going on here.

Jackie Forrest:

Well, and then the negative implications could be quite broad for the U.S. economy as a whole, right? Because they have benefited from the fact that, in all sorts of circumstances, people see them as a safe place to put their money.

Peter Tertzakian:

Well, there was the old adage for years when the U.S. sneezes, Canada catches a cold. When the U.S. catches a cold, we’ll see what happens to Canada and the rest of the world. Speaking of Canada, let’s bring it home here and talk about the chapters being written in our federal election.

Jackie Forrest:

And well, I wanted to talk about one of the platforms that the liberal party has, and if you go to their website, we will put a link under the Mark Carney website. He has put out a platform which he talks about his economic pillars for change. And one of them is working closely with indigenous leadership, to fortify our Arctic against enemies and strengthen our year-round land, air, and sea presence. And he also talks about wanting to have infrastructure such as deep water ports and runways. And he has told the media that he wants Arctic ports that will create direct access to Europe and Asian markets, including oil pipelines.

Peter, we had talked a little bit about this last week. You had said, “Well, other countries do it, so why shouldn’t we?” And I did do some research on this. Mainly it’s the Russians that are doing this kind of thing, but Yamal LNG project, does have special-made LNG ships that are icebreakers, so they don’t need a separate icebreaker. And according to their article I found, and I’ll put a link to it, they can break up to two meters of ice. And in that area they have ice covering seven to eight months. I don’t know. It’s obviously more expensive than shipping out of other places, but they are doing it.

And they also have crude carriers that can break up to one and a half meters of ice, without an escort vessel. However, they’re not like the very large crude carriers, but they do have crude carriers that are operating in their north. It does happen. And so I thought we should learn a little bit more about our potential for Arctic ports.

Peter Tertzakian:

Well, I think we should. Because the Russians have been doing this for a long time, so why can’t we or can we? And now that the discussion is open about building infrastructure to the north, who better to help us through understanding it than Chris Avery, CEO at the Arctic Gateway Group at the Port of Churchill? Welcome, Chris.

Chris Avery:

Oh, thank you for having me. Thank you, Peter. Thank you, Jackie.

Jackie Forrest:

Good. Well, maybe tell us a little bit about yourself and the Arctic Gateway Group, because I’m sure a lot of our listeners maybe aren’t so familiar.

Chris Avery:

Yeah, sure. Let me give you some background on the Arctic Gateway Group. First of all, the Arctic Gateway Group owns and operates The Port of Churchill, The Hudson Bay Railway, and The Churchill Marine Tank Farm. We are owned by a consortium named One North, which is a consortium of 41 First Nations, Northern Manitoba, First Nations, and the communities that we operate through. Largely Indigenous-owned organization. What we’ve talked about way before Trump was elected president was, we were about building trade-enabling infrastructure that allowed the vast resources in Western Canada, access to global markets through the Port of Churchill. And primarily those global markets are European markets, African, Middle East, even South America market. I.e, non-U.S. markets.

Peter Tertzakian:

I’ve been to the Port of Churchill, and if you haven’t done that as a Canadian, you should put it on your bucket list because that’s where the polar bears start waking up in the last few weeks of September, first few weeks of October.

Chris Avery:

That’s right.

Peter Tertzakian:

And you can go up there. It is just amazing. It’s honestly a life-changing. It was life-changing for me to see the Hudson’s Bay as it was freezing up and see the polar bears so highly recommended. But we had to fly there. There’s no roads. There’s a railway, which we’ll talk about. What is the access to the Port of Churchill? Is everything by air and summer barge or how does it work?

Chris Avery:

The access to the Port of Churchill is by rail. The Hudson Bay Railway runs from The Pas up to Churchill, and in The Pas it connects to the Class One Railways Network, particularly to CN and The Pas. It’s really connected to all of North America. And then from The Pas up to Churchill, it’s connected with the Hudson Bay Railway.

Peter Tertzakian:

The Pas, Manitoba?

Chris Avery:

That’s correct.

Peter Tertzakian:

And so there has to be some fork that goes north from the main, is it the CN line?

Chris Avery:

Yeah, it connects from the CN line to the Hudson Bay Railway and from the Hudson Bay Railway, we go north up to Churchill.

Peter Tertzakian:

Some people say that that railway is unable to handle large volumes of cargo or large tonnage.

Jackie Forrest:

I think there’s a concern. And just for history, there was a flood and it was out of commission from 2017, so maybe tell us a bit about that. But there’s also a concern that it’s built over a bog, so there’s limits in terms of the weight it can carry. I don’t know if that’s true or not.

Chris Avery:

Absolutely. Well, as with anything, what I’m learning about the Hudson Bay Railway and the Port of Churchill, there’s a lot of history. And the railway and the port has been operating for almost 100 years. And for much of its history, it was originally owned by CN, and then it was sold to American interest, and then now it’s owned by Arctic Gateway Group. Long history of trade through the Port of Churchill, including traffic of grain and agricultural products through the railway up to the port. There’s a long history and a long love of example of trade going through the Port of Churchill.

Peter Tertzakian:

The original trade was the fur trade with the Hudson’s Bay Company, which unfortunately now is in demise and a loss of some Canadiana for sure.

Chris Avery:

Absolutely. And then, after that, the access of providing markets for the vast grain, we have agricultural products we have in Canada. In 2017, the railway washed out and it was a significant weather event for sure. It was in the springtime, and the northern part of the railway washed out. It was largely because the infrastructure was neglected for decades, ironically, by American interests. At that time when the railway washed out, it stranded all the communities in Northern Manitoba cut off all any trade that went through the Port of Churchill, and in fact cut off some of the supply routes to Central Nunavut to the Kivalliq Region, where traditionally Manitoba has supplied.

It was a service stalemate for 18 months where the American company held Canada hostage somewhat, refusing to repair the railway. That’s when Arctic Gateway Group was formed to take over the ownership of the railway and the port, in partnership with the Government of Canada. That’s kind of the history.

Jackie Forrest:

And you’ve since done a lot of work to improve the railway. Is it better now than it was before the flood?

Chris Avery:

Yeah. We’ve invested significant capital into the railway, and it’s probably in better condition than it has been for almost 30 years now. It’s in great condition. And maybe to answer your question about the bog and really essentially permafrost, I would say, maybe half of Canada’s geography is in permafrost regions. And so, as a result, a lot of our linear infrastructure has to go through permafrost at some point or another. We have great people and great academia and scientists and industry in Canada, who work through permafrost, whether it’s for railways, highways, pipelines, and whatnot. What I would say is, we have great technology in this country that help us manage permafrost that we maybe didn’t have 30 years ago and maybe even didn’t have five years ago. Things like anticipating the different types of impact of permafrost to the railway and addressing it properly, whether it’s with things like thermosiphons, which help keep the ground cold, to simple things like culverts to help the water flow when ice melts, so that you can properly maintain the railway, to really frankly letting the permafrost melt and putting proper foundation down.

We’ve put down some 350,000 railway ties. Any of your listeners have done gardening work, you know how heavy those are. We’ve moved 350,000 of those. Half a million tons of ballast rock, which is, really solid rock foundation that allow water to flow through. All that to say, we have a great foundation for the railway. And then on top of that, go on a little bit. But on top of that, we have great technology to help us monitor the railway, and see what’s happening to the railway before it actually happens. We have things like, ground penetrating radars that are mounted onto our locomotives that’s taking real time data of what’s happening in the ground. We have drones flying overhead of our railway, because we have a shorter railway, we can do that. That’s measuring the geometries of the track and the levelness of the track. And looking at the lands around the tracks because the lands, culverts and beaver dams and so on, are important part of maintaining a railway.

And then we have things like computing power and AI to help us analyze what’s happening. Because in the past, someone would’ve had to look through all that footage of the drone footage or siphon through all that data. Now with GPS, AI can help us identify where the issues will be, predict where the issues will be, and then GPS will tell us exactly where that’s happening.

Peter Tertzakian:

So for preventative maintenance and ensuring that the thing is reliable throughout the year, 365 days a year. Talk about the railway access as a right of way. Is the Hudson’s Bay Railway typically there’s a wide swath carved out for the railway? Is it possible to bring other utilities including pipelines and things along this right-of-way?

Chris Avery:

Yeah, we definitely have a right-of-way all the way up to Churchill. The details around whether there’s exactly enough room for pipelines or certain pipelines, I wouldn’t say we’ve looked at it in detail.

Peter Tertzakian:

I mean, we talk to people here in the lower latitudes, I’ll call them, who basically say, “Ah, Churchill, the railways decrepit and there’s a bog and way too expensive and so on.” But what I’m hearing you say is that, that may be opinions that have been formed based on the condition of the railway, maybe even half a dozen to 10 years ago. That it’s now it’s in a different state.

Chris Avery:

One of my colleagues who’s been involved on the Churchill file for many years always tells me that we have a reputational deficit. And the railway has this history of being washed out at some points and other issues, but really, the railway is in better condition than it’s ever been. And we focused on that because we knew you need to connect the port to the railway to the southern parts of the country first, and now we’re turning our attention to the port.

Jackie Forrest:

Now it’s interesting. I think we’d have this issue anywhere we did an Arctic port. Rail is the most efficient way to get things to ports, maybe pipelines for oil and gas, but we have permafrost in our north, so we have to find a way to manage these problems. It’s not just unique to this location, is it?

Chris Avery:

No, it’s not. And in fact, we have academia working on it, and we have great partnerships with academia. And that academia ranges from University of Calgary right here, where we’re doing the podcast, to Laval, to Royal Military College. We have great people and great minds working on this and permafrost is not new to Canada.

Peter Tertzakian:

There’s a lot of talk about energy corridors, certainly it’s one of the platforms of the CPC to create energy corridors across the country. Does that come up in terms of a corridor to Churchill or is the corridor the Hudson’s Bay Railway right-of-way?

Chris Avery:

Jackie, you were asking about this. We were talking about building this infrastructure for a long time before Trump was even elected president. And we had it as a view because with the washout, essentially all trades through Churchill came to a halt. We think of ourselves like a startup, because building back up the business completely from almost nothing. And so we’ve been focused on things like critical minerals. We took 10,000 tons of critical minerals, zinc concentrate, that was mined in Manitoba, transported up on the Hudson Bay Railway, and then exported from Churchill to Europe last summer. We’ve been focused on things that we know we can do today. So bulk handling of critical minerals.

In fact, we are increasing the amount of critical minerals to be exported this year, this coming season, doubling that. And then we’re tripling our capacity to handle critical minerals and doing a number of other things. These are things we can do right now. And then we had in the long-term, we focus on the short-term and get the port running and the railway running and trading, the conversations around, energy products would come in the long-term. And whether that’s hydrogen to LNG, to oil and gas, we thought those conversations would be more longer term. And certainly the recent events have pulled forward a lot of those conversations that we weren’t anticipating having for maybe at least five years.

Jackie Forrest:

Do you have grain? I know historically there’s been a lot of grain going out of the port. Is that the case today?

Chris Avery:

No, we’re working on that now. We expect to have grain and agricultural products going through the port this coming season. And then we’re really, even within the agricultural industry, diversifying into different types of products. We signed an agreement with a company called Genesis Fertilizer recently, which is planning to build a $2.3 billion fertilizer plant outside of Regina. The Hudson Bay Railway and the Port of Churchill is an ideal routing for it to potentially export fertilizers to global markets, to European markets.

And the other thing that they need as a feed product for farmers in Western Canada, is phosphates. And phosphates traditionally come from Southeast part of the U.S., so we know what’s happening in the U.S., right? Another source of phosphate is from Northern Africa or the Middle East. Churchill becomes a perfect import route for this product coming from Middle East and Africa, through Churchill, and then down on the Hudson Bay Railway to Western farmers.

Peter Tertzakian:

We’ve talked about the railway and getting to and from Churchill on land. Let’s talk about getting to and from Churchill by sea or the Hudson’s Bay. I looked it up and Churchill is at a 58 degree latitude, which is actually below the Alberta Northwest Territory, the North of 60 line. And Yamal, which Jackie mentioned in Russia, is actually at 70 degrees, so it’s considerably further south. But you have to go up and around Northern Quebec as you transit out of Churchill, so there’s a considerable ice pack. How many months of the year is this route ice free? Let’s talk about the logistics of getting in and out.

Chris Avery:

No, that’s a great question, Peter. Currently, our shipping season is four months of the year from July to October. And we partner with University of Manitoba and Dr. Wei Feng, who is one of the preeminent sea ice researchers in Canada. And with his group. In fact, the Churchill Marine Observatory is our neighbor up in Churchill. We partner with him and what he tells us his data shows is that, the sea routes could actually be open for six months of the year. But really what’s stopping that happening right now is really the insurance industry. We’re working with the University of Manitoba to gather the data so that we can provide this to the insurance companies, who are working with decade old data. Once they have this data from an objective point of view, we can then potentially open up the sea lanes for even up to six months of the year, because really the premiums really skyrocket after October.

Jackie Forrest:

This is with breaking of ice though?

Chris Avery:

Nope. This is just the way it is just today, without any ice breaking.

Jackie Forrest:

That’s because they would just charge you more for insurance for the risk of icebergs and things like that?

Chris Avery:

Yeah. And because their data is from decades ago. We essentially need to provide them up-to-date data, from a reputable source, which the University of Manitoba is. We’re working on this study today, and we should have that completed by the end of the year.

Jackie Forrest:

Now in those Russian examples, they built special ships so they don’t need a special ice breaking ship out front that could do up to one and a half to two meters of ice breaking independently. How thick in the coldest part of winter is the ice that you’d have to transit?

Chris Avery:

For the sea lanes, and this is from the University of Manitoba, for the sea lanes that we operate through, the ice is single season ice, so it’s only for one season and it’s less than two meters. It’s about one and a half meters.

Jackie Forrest:

It would be more expensive to build special ships that ice break. I was actually reading about the Yamal, sometimes their capacity is limited because they only have so many ships. And apparently during that peak ice period, they go much slower. The amount of ships you have aren’t moving as much, but it is possible based on the Russians that you could break ice and move things, commodities like oil and gas. And I imagine other commodities with other specially built ships. Of course, that would be more expensive though than just moving out of an ice-free port.

Chris Avery:

Absolutely. But the study that the University of Manitoba has done is, their trends in the data shows that the sea lanes can be open for one additional extra day for every year that goes by, and that’s based on the past 40 years of data. From their projections, if nothing else changes, if current climate change conditions continue, they estimate that within the generation of our kids or our grandkids, that the sea lanes could be open 365 days a year. We need to start preparing for that, because that’s not very long.

Jackie Forrest:

Is that like 40 years away?

Chris Avery:

40 to 60 years away.

Jackie Forrest:

Right.

Peter Tertzakian:

Well, here in the now though, there’s another advantage to this and that is the northern latitude because, if we start talking about destinations for the goods, this is a polar type route. And if you look at a globe from the top down, you can see that the transit distance from Churchill to Europe and certainly Northern Europe is actually not that far.

Chris Avery:

That’s correct. We estimate it saves up to two to three shipping days of time.

Peter Tertzakian:

So when it’s slower, it’s still faster in a sense than going other traditional routes that are closer at lower latitude.

Jackie Forrest:

Another opportunity I guess would be, we’ve been talking about Canada’s lack of energy security. You could imagine we had the CEO of TC Energy, Francois Poirier, come on the podcast and he talked about how building a pipeline all the way to Eastern Canada would be very expensive. I guess another option for energy security would be to go here to Hudson Bay and then you could bring the products back around to Eastern Canada.

Chris Avery:

Sure.

Jackie Forrest:

That would be an energy security benefit of it, even if it would be maybe more expensive than going through the U.S. today, it would provide us sovereignty over our energy flows, right?

Chris Avery:

Sure.

Peter Tertzakian:

You could do that and you can also rail the oil if you had to. There’s all sorts of intermodalities and things, and once you have a port, you can start thinking about all the possibilities.

Jackie Forrest:

How deep is the port? Could it take the very large crude carriers that can carry 2 million barrels a day? Or is it equivalent to some of the ports in the world with the deepest water, or does it have some limitations that way?

Chris Avery:

In the past, we’ve had a Panama size vessel in the port, but that’s the more common size, it’s more of a handy max, it’s more the common size. The very large vessel that you’re talking about, it’s not been something that we’ve looked at. But I would say that’s as those opportunities come up, those are the things that we’re going to study. Right now we’re focused on fixing up the port that’s been neglected for decades, whether it’s the wharf face or the wharf deck, but we are also doing some planning for the future. This past season we’ve done drilling in the harbor to better understand the current conditions of the ground at the bottom of the Harbor with the aim that we then understand how much dredging we can do and how much depth we can create for vessels. As the opportunities come up, we’re ready to have those discussions, but right now there’s no need for it. We haven’t started our dredging program yet, but that is in our plans.

Peter Tertzakian:

Well, whether it’s dredging or building other infrastructure and just growing Churchill as a port, it all speaks to increased need of people and labor. Can you just talk about the labor situation? And, I mean, as I said, I’ve been up there, albeit I think it was a dozen years ago, and it’s a pretty small town, and now we’re talking about major expansion in an outpost of Canada, not as far out as some parts of the north. But, I mean, it’s not an easy place to get to.

Chris Avery:

No, that’s a good question. First off, the Town of Churchill is maybe a population of around 800 people, and the infrastructure in Churchill can support up to about 5,000 people. There’s great infrastructure already in Churchill, so we aren’t needing to build that up. From our ownership perspective, maybe I’ll pivot to our ownership perspective. One of the questions I get asked from our indigenous leaders who are owners and partners in the Arctic Gateway Group is, as we’re making these investments into capital infrastructure, and as we’re building up business, the number one question that I get asked is, how many jobs are you creating in the communities and how many indigenous and non-indigenous jobs are you creating for local rather than bring people to the region?

I think there’s a huge demand and a huge need for good jobs and good opportunities in the north. I think we’re ready for that, it’s a matter of providing the opportunities. And to be fair, I don’t think a lot of those opportunities have been available in the past. I think this is a great opportunity. I think our Premier Wab Kinew in Manitoba talks about the economic engine pulls the social cart, and so he recognizes that, as we’re building up this trade in infrastructure, that helped create economic and job opportunities for people.

Jackie Forrest:

Well, and I think another broader benefit… I want to talk a little bit maybe Peter, about my views on oil and gas shipments out of the port considering these constraints of the ice time. But I think another benefit to Canada, which is hard to quantify, but it’s just having more people in the north, having more sovereignty over our north, that’s a big push right now. And so that would be a benefit to the country that comes from this port. It certainly is going to be more expensive shipping out of a place with that much ice than other ports that we have in this country, but I think it would benefit our sovereignty over the north as well and our security of our country.

Peter Tertzakian:

This is a multi-generational project. If you start running numbers in a spreadsheet, if it’s a 20-year payback or 10-year payback, forget it. This is a multi-generational thing for the country, for the north, for our sovereignty. I think it’s a great thing.

Jackie Forrest:

But here’s the problem. If you’re a private company that needs to ship your product, why would you pay a lot more to go through this port? Because, now you have ice breaking, now you have seasonality, you have a special railway that has to deal with permafrost. This is going to be more expensive than just out of the Port of Halifax or Montreal or Vancouver. The private company isn’t going to be motivated to pay more for their transportation.

Peter Tertzakian:

I’m not convinced, and I have not run a numbers or anything, I’m just thinking gut feel here. But once you get the infrastructure built and you get economies of scale and you start getting transit on a more routine basis, there are distinct advantages to these northern polar routes, distance being one of them as Chris said, it’s a three-day advantage to Europe. I’m not convinced.

And then as I said, if you amortize this over say, 60 years or 50 years, like a multi-generational project, I think that we’ve got to think longer term in this country. If you think about how China thinks and other countries with a long-term vision, they don’t think in terms of 20 years, and, yeah, it might be more expensive to do this, they just think really strategically. And that’s what we need to do in this country. We need to think strategically about things. It’s not all about whether it costs 25 cents more or whatever. Maybe it is 25 cents more, but arguably it’s 25% less if we really put our minds to it.

Jackie Forrest:

Well, I’d argue it’s probably more than 25 cents. But here’s the thing, let’s talk about Russia. They are doing it, right? But that’s a national oil company that maybe okay with taking a higher cost transportation route because they see broader benefits for this project to the country. We don’t have companies that think that way, we have companies that need to maximize return for their shareholders. And going through a route that doesn’t have the best return is not something they’re going to want to do.

Chris Avery:

Well, maybe I could talk about what we tell the companies because, certainly when the sea lanes are open, we actually feel that we’re very competitive price-wise because of the shortened length of transport and lower cost structure. Not having to be out at sea for as long as they do going through the St. Lawrence River and going through the canals and so on. We talk about that and then we talk about the opportunities in the future as the sea lanes become open for even longer.

But the other thing we talk about is also optionality because, certainly with the U.S. trade wars today, where everyone’s looking for infrastructure to go to access other markets, and Churchill provides that. And in my mind, if it’s not the U.S. today, it’s going to be China or Asia tomorrow. For a country the size of Canada, to have a Northern Seaport option, to me, just makes sense.

And then aside from the trade piece, it wasn’t too long ago in 2021 that the Ports of Vancouver were all washed out. Access was cut off because the railways and the highways were washed out. And you can imagine, I don’t know if someone has done the math, but the impact on the Canadian economy was great because the port was completely cut off. Again, optionality I think is super important. And Churchill will never replace the Port of Vancouver or Montreal, but it’ll be an option for exports and imports for when things happen. And we’ve seen more weather events and more volatility and weather and forest fires and even labor disputes.

Peter Tertzakian:

Well, you look at the distance, getting back to the distance thing, you look at the distance from Alberta, let’s just call it Calgary to Europe, there’s a reason why when you fly to London, you go over the Hudson’s Bay. It’s because it’s shorter. Going from Calgary to Churchill, I think we even fly over Churchill to go to Europe, it’s just a far more direct route.

Jackie Forrest:

I agree with that when the ice lanes are open, but when they’re not, it’s very expensive. I put some thought into the LNG idea. I thought, okay, could we do LNG out of this port? And I had to think about it from a competitive perspective. Now the Russians are doing it, yes, but it’s a national oil company, so maybe not looking at all of the things the way a private company would. If you’re going to do a facility the size of an LNG terminal, these are like tens of billions of dollars, you need to be running 365 days a year to get a return on that investment, right? There’s no just four month a year option.

When we think about deliver to Europe, who are we competing against? U.S. Gulf Coast and the Middle East. Those are the two main suppliers in U.S. Gulf Coast, they can build those facilities cheaper than us already, because they’re sitting there on the massive Gulf Coast, they bring in the big modules. Tried building an LNG facility in this remote north, it’s going to cost more. On top of that, we’re going to have to build these special ships that maybe go slower in the winter, in order to ice break. And then our other competition is the Middle East where they build stuff cheap and they don’t have any of these issues. I just have a really hard time seeing how we can compete with our competitors.

I do think, too, the other issue is, I don’t think we can access the West Coast here. And the West Coast really is our best market for LNG because we’re pointed towards Asia. And Asia is where I think the growth in natural gas will be.

Peter Tertzakian:

Well, this is good debate. I think that we have substantial advantages if we just put our minds to it, think differently and think bigger. As a northern latitude, there’s substantial advantages for LNG in terms of the efficiency of liquefaction. Gulf Coast, Middle East, I mean you’re talking about 45 degrees C plus 45 here in Churchill, it can go down to minus 40. It’s just a different thing.

And again, I’ll just come back to the Russians. I mean, Yamal is at 70 degrees north in the middle of absolute nowhere, the northern part of Siberia, and they’re doing it. Why is it that Canada with equal resources and ingenuity arguably can’t do it? It’s just a matter of how long-term we think about this thing and how things… I’m going to be the number one salesman.

Jackie Forrest:

Peter, we’re going to disagree on this one. But I do agree if we had a national oil company or maybe some government funding or maybe some government regulation that forced companies to do it, I wanted to make one side note on totally different topic around LNG. Don’t know if you noticed, it was a quiet release talking about our West Coast LNG opportunity. But on March 21st, the B.C. Government posted an update to their policy on net-zero LNG. They’re now saying that you don’t need to be net-zero LNG by 2030, if you can’t get the electricity. And it’s not reasonably possible to do it. And the proponent has tried to get the electricity, but it’s not going to be there. And you don’t have to be net-zero until you can get the electricity. Side point, that just makes our LNG I think, that’s been a big barrier to building on our West Coast. So that is a really helpful change in policy for the B.C. Government. I will put a link to that in the show notes as well.

Chris Avery:

Jackie, Peter, could I maybe add couple more things just quickly on LNG in particular?

Peter Tertzakian:

Sure.

Chris Avery:

And like you said, Peter, it’s all in the math and we need to work through this and certainly we don’t have all the details around it. But I would say some of the things that are helpful for Churchill is clean energy. Manitoba has lots of hydroelectricity and lots of opportunities for clean hydroelectricity. So that’s a tailwind. And then the other thing is Churchill is a cold weather location. While the cold causes some problems, my understanding it also helps with the LNG liquefaction.

Peter Tertzakian:

Absolutely.

Chris Avery:

There are some things, again, as you said, it’s all in the numbers and someone has to do the math to see if it works.

Jackie Forrest:

Right.

Chris Avery:

The other thing is you mentioned sovereignty, northern sovereignty. Churchill with the railway connecting the port to the rest of North America, so rail is the most efficient logistical way to move goods. And then the Port in Churchill. And then we also have a 9,200-foot runway in Churchill at the airport there, that’s capable of handling any transport aircraft or passenger aircraft in the world. And then the town infrastructure. It’s a great set of infrastructure to help us assert our sovereignty in the north. And it can be a great supply base for all those northern bases and military bases that we need to have for our defenses. All that adds to the infrastructure and adds to the scale as we’ve talked-

Peter Tertzakian:

Well, and it adds to the argument that it’s not all about dollars and cents. I mean, there’s bigger things that play in the world today as we know, and we have to start thinking strategically for future generations of this country.

Jackie Forrest:

And today does the Port of Churchill supply a lot of those northern communities?

Chris Avery:

Yeah. Particularly the Central Kivalliq Region. We actually have a great relationship in an MOU with the Kivalliq Inuit Association and their Economic Development Arm, SACU, to talk about how we can really leverage the opportunities between Churchill, Northern Manitoba and the Kivalliq Region.

Peter Tertzakian:

Well, this has been a wonderful conversation. Thank you, Chris Avery. You’re the CEO at the Arctic Gateway Group at the Port of Churchill. Again, I encourage those who have not been to Churchill, to go to Churchill. Particularly, I think I said late September or early October, I think it’s late October, early November.

Chris Avery:

That’s correct.

Peter Tertzakian:

And I mean, it is a uniquely Canadian experience to see the Hudson’s Bay and the polar bears. But also in future, to see a hub of economic activity that I think, is essential to so many dimensions of Canada’s future prosperity and for the people of the North. Thanks so much for joining us.

Chris Avery:

Thank you for having me.

Jackie Forrest:

Thank you, Chris. And thanks to our listeners. If you enjoyed this podcast, please rate us on the app that you listen to and tell someone else about us.

Announcer:

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Liberation Day Aftermath: Trade Wars, Oil Prices, and Canada’s Election

Liberation Day Aftermath: Trade Wars, Oil Prices, and Canada’s Election

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This week on the podcast, Jackie and Peter discuss the significant volatility in the financial markets due to the escalating global trade war unleashed by President Trump’s “Liberation Day” on April 2nd. Economists and banks are sounding the alarm about the increased risk of a global recession. At the same time, oil prices have fallen by about $US 10/B due to fears of a recession and news that OPEC+ is adding more supply than expected into the market. In Canada, the uncertainty is further compounded by the upcoming federal election scheduled for April 28th, 2025.

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Episode 279 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 Forrest.

Peter Tertzakian:

And I’m Peter Tertzakian. Welcome back.

So we record Monday morning, April 7th at 7:22 just before the opening of the markets on Friday. Of course, the markets fell on Thursday, they fell with Tariff Liberation Day in the United States. So we’re going to talk about that. It’s really hard now where I have to timestamp the actual podcast because things are changing so quickly. So we’ll try and keep the conversation to a longer time horizon than just one day, because by the time you download this as our audience, it’s going to be out of date, even within 24, 48 hours, something’s going to change who knows what with the tariff situation, isn’t that right?

Jackie Forrest:

Well, I think the details, but I think you’re right, the broader sort of long-term trends, and for sure there’s a ton of uncertainty. I was just looking at all the information last night and being like, wow, it’s really hard to make decisions, and I think that in itself is going to result in a slowdown of the economy.

Peter Tertzakian:

Yeah, it’s the uncertainty, the anxiety creates paralysis, and people just sort of, what do we do? So tariffs, we’re going to talk about that, oil price down to the low of $60, that’s WTI oil price, and the Canadian election. A lovely set of very happy topics.

Jackie Forrest:

This is why no one can make a decision.

Peter Tertzakian:

So where do you want to start?

Jackie Forrest:

Well, let’s start with the Liberation Day, which is more been like a market shock day. I’m sure all of our listeners have been following this closely, but as you know, tariffs were announced, and on average, there’s some estimates now that when you put it all together and you look at all the goods that come into the United States, they’re looking at about a 23% tariff on everything on average that comes in. Certain countries, like Asia really got hit hard, 25% for some countries, even into the 45% for places like Vietnam and Cambodia.

I will put a link to an article from the Financial Post that does a good job of looking at the size of trade, like a bubble chart with the tariff that came down. And you can see that Asia’s really kind of taken the biggest hit. Europe is around 20%, and of course, Canada didn’t have any additional tariffs, but of course, we already had some, facing 25% steel-

Peter Tertzakian:

Yeah, the 25%, yeah, the steel and aluminum, yep.

Jackie Forrest:

And non-USMCA compliant exports also having tariff-

Peter Tertzakian:

Right. But this is, it’s not that we are without a consequence of Liberation Day. I mean, this is leading to global economic slowdown. Some economists and bank CEOs are calling for recession either globally or within the United States. So it all has very negative, at least, attitudinal consequences, I’ll call them, and we’ll see how it transpires over the next few days, weeks, and months.

Jackie Forrest:

There’s been a few articles in terms of expectations of how this will affect growth. We’ll get to that, but I did want to say one more thing worth noting that’s relevant for Canada, is that these tariffs for other countries don’t include oil and gas and refined products. They’re exempt. So I think that’s a positive sign in that the government in the US is recognizing they don’t want to put tariffs on energy imports because it’ll influence the cost of energy and inflation. And so I think that’s also a sign that Canada maybe will continue to see lower or an exclusion if they’re USMCA compliant for oil and gas imports into the US.

Peter Tertzakian:

Yeah, no, that’s a positive thing because the price of oil, as we’re going to talk about, has dropped quite dramatically, and that reflects the sentiment of a global economic slowdown, and the number one variable that affects oil price demand on the demand side is the global economy.

Jackie Forrest:

Right. And the markets are certainly…

Peter Tertzakian:

Certainly.

Jackie Forrest:

… saying there’s going to be issues there. So as of end of day Friday, if we compare to April 2nd before Liberty Day announcement, overall equity markets globally were down around 6%. And we just see that Japan, because Monday is coming to an end in Japan now, has doubled that, so they’re down about 15% from April 2nd. I expect we’ll see more of a slide in the equity markets here.

Now, oil and gas is actually taken a bigger hit because of the price of oil has come down at the same time of the fear of a recession.

Peter Tertzakian:

Right. I look at those equity markets, I mean, we’re panicking big time, and it’s certainly not good. As I say, it affects the psychology, but they had run up very dramatically in 2024 and certainly in the latter part of ’24 into ’25 post-Trump election because of the optimism about things.

So in fact, I think we’ve shed all the gains that were made since early 2024. So in other words, one year’s returns have been wiped out in the equity markets. It’s not good, as I said, because it more affects the cost of capital psychology spending by corporations. But when you actually look at a long-term equity chart, it’s still not as if it’s a major impact.

Jackie Forrest:

Right, for people that have been in the market for a long time.

Now, the markets are reacting though to the view that we’re going to potentially have a US recession and global recession. I haven’t seen very many forecasts yet, but J.P. Morgan came out expecting that the US economy was going to grow by 1.3% in 2025 previously and will now be negative 0.3%, so a recession. That’s the average for the entire year. And so I think you’re going to see more… I looked at Polymarket last night, they have a question; US recession in 2025, question mark. It’s nice and simple. It was around 66% last night, and it had gone up a lot over the last several days. It was kind of more in the 30 to 40% range before.

Peter Tertzakian:

So we’ll see where it goes. It’s just too early in the days. I think you’re going to see some form of capitulation in the White House in terms of this tariff situation, even though President Trump over the weekend basically said, it’s the medicine the world needs to take. But we know from our own Canadian experience, so there’s a flip-flopping, and one day it’s absolutely tariffs are coming, and then the next day it’s okay, you get a month reprieve till we talk this over, and then the next, when the month goes by, there and then again it’s we’ll give you another month. And so we’ll see.

Jackie Forrest:

Well, that’s an important point. Unlike other downturns like the financial crisis or COVID, this is kind of voluntary, this is by the stroke of a pen, we could change this. We know that Trump can change his mind, we’ve seen that before. So I think there’s some bookends in terms of where this goes. One is it’s the tariff arms race scenario. I’ll call it, where there’s this escalation of tariffs, the US putting on tariffs, China, you saw that over the weekend, countering, maybe the US countering again. You see that globally with a bunch of different countries, and it could get pretty bad.

And then there’s this de-escalation sort of scenario where Trump changes his mind. We did see also those anti-Trump protests in the US and in countries around the world, and this economic uncertainty that’s being created, he starts to sort of rethink his strategy. You could see both of those happening. It’s hard to really know what the probability of either is. I know there’s a lot of pain, and because this is something that could be changed fairly quickly, it makes me think that there is potential for that.

Peter Tertzakian:

There’s potential. And the market is certainly sinking as we’ve talked about as we speak. However, if I look back at the four financial crisis that I’ve witnessed; the crash of ’87, the Enron crisis, the financial crisis of 2008, and then of course, the pandemic. Certainly the financial crisis and the pandemic, we actually saw the markets freeze up, liquidity actually dried up. And so this is not the case at the moment where the markets have frozen, the markets are just trading, and they’re just falling, and there’s a lot of liquidity, there’s buyers and sellers and so on. It gets a lot more serious if the markets, particularly the credit markets start to freeze up. And that’s not the case at the moment. So again, on an optimistic note, we shall see how this all plays out, and when we’ll see some sense of stabilization in the markets.

Jackie Forrest:

All right. Well, you forgot about when it comes to the oil markets, there was a downturn in 2015, the OPEC price war downturn.

Peter Tertzakian:

Oh, right. Well, that was specific to the oil markets.

Jackie Forrest:

Specific to oil markets. So let’s move on to our next topic, which is the oil price coming under pressure here. Now, there’s two factors here. First of all, a recession is bad for oil price. It would be softening anyway because less economic growth means less oil demand growth and potentially an oversupply. But OPEC made it even worse with an announcement around the same time on April 3rd, just after the Liberation Day announcement that the eight members of OPEC have decided instead of raising their output by 135,000 barrels per day in May, they’re going to actually raise it by 411,000 barrels a day. So adding about 300,000 barrels a day of additional supply into a market that looks like it’s going… it was already oversupplied. And with this potential for a recession, that’s even getting worse, and then this isn’t helping.

And it kind of reminded me even of the COVID pandemic when, I don’t know if you remember, right around March of 2020, Saudi Arabia was proposing to make some cuts, and Russia didn’t want to make them. So they started a price war, and actually added supply into the market at a time when demand was dropping. So bad timing, this is bad timing too, and has obviously impacted the oil price, which has fallen from being in just above $70 to low 60. So pretty much $10 per barrel for WTI so far. I mean, of course, market hasn’t opened yet today.

Peter Tertzakian:

What’s fascinating to me is how 400,000 barrels a day, and I know that’s just the supply side, but 400,000 barrels a day is, we’ll call it .4% of world demand of 100, 103 million barrels a day. That .4% of change on the supply side creates a 5 to $10 drop in the price of oil.

Jackie Forrest:

Yeah. Well, and I think it’s the combination though because…

Peter Tertzakian:

It’s the combination.

Jackie Forrest:

… there’s recession fear. And I’ve only had one estimate so far, but according to the Bank of Montreal note, they reported that energy aspects has put out a note calling for a million barrel per day demand hit based on Trump’s latest tariffs. So we already had an outlook for about a million barrels of surplus supply in the market in 2025 when you consider we were having some economic growth, but non-OPEC was growing, and Saudi and others were putting more supply into the market. So now we’ve got potentially another million barrels a day of oversupply because demand isn’t growing anymore. And now this extra 300,000, and where does it go from here? This is just next month. They actually had expected to increase their supply throughout the year, and does that mean they’re going to accelerate even more supply coming back faster? So I know what you’re saying, but I think there’s kind of like this uncertainty too.

Peter Tertzakian:

What I was saying is that, okay, so a million barrels a day at demand loss, 400,000 barrels a day incremental supply. So now we’re talking 1.4% change, and the supply-demand balance leads to the price of oil going from $70 to $60, which is a seventh, which is 14%. So 1.4% change in the supply-demand balance causes a 14%… I mean, this is why we say in the business of oil and gas, it’s priced at the margin. In other words, very small changes in the supply-demand balance creates very big swings in the price of oil, and it can go the other way.

So what we’ll look out for next is what happens on the supply side in the United States in particular, because if we look back at the pandemic, we saw that the Permian and places like that where there are very steep decline rates, that the moment you stop drilling, all of a sudden you start to see the declines kick in, and it didn’t take very long during the pandemic.

Jackie Forrest:

Right. Well, and we could… if this escalates more, this trade war, and it turns into more of a global recession, we could see prices fall further. And you’re right, that’s the one thing that’s different now compared to maybe past oil market downturns, is that the supply response will be quite quick and hopefully rebalance the market.

I mean, there’s another potential change here too. According to the media reports, Saudi is adding this production because they’re unhappy with the cheaters, people that are producing over what they’re supposed to be, specifically Iraq, Kazakhstan, and even Russia. Kazakhstan is the worst offender, apparently exceeding their quota by 700,000 barrels per day in March. So maybe those countries fall into line here a bit more, and that solves the problem as well.

Peter Tertzakian:

That’s a movie we’ve seen before too, and eventually there’s an end to the movie, and there’s discipline starts to fall back in.

But look, I think it’s going to be a rough year for the oil price because there’s just so much uncertainty. And so now we’re in the 60 to $70 range. We’ll see if the economic numbers start coming out worse. Certainly there’s a chance it’ll go below 60. But if it goes below 60, now all of a sudden we have definitely the prospect of production declines and the self-regulating mechanism, because the large part of oil supply growth has come from these highly elastic fields, from the shale producers, the oil producers in the United States, and even here in Canada, there’s some of that.

So the ability for the supply side to react to the demand side is much greater than it used to be. The price signals, in other words, will self-remedy the price. And I think the long-term price of oil doesn’t change. I think it’s still around in the high 60s to low 70s in that range. That’s what you need to keep the production to meet the baseline of demand in the world these days.

Jackie Forrest:

Yeah. Well, and this is opposite by the way of what Donald Trump wanted. He wants to see the US grow production, and this is if we see prices at this range, and especially if they go lower, we’re going to see non-OPEC, including the US, which has been a big part of non-OPEC growth, go the other direction here.

Peter Tertzakian:

So what do you think of this theory marginally, a conspiracy theory that the Trump administration has asked the Saudis to open up the spigots so that the price of oil comes down, the price of gasoline comes down, and helps to mitigate some of the inflationary effects of the tariffs?

Jackie Forrest:

Well, they’re inconsistent because they want that, but they also want supply to grow. So I guess we’ll have to choose which is more important.

Peter Tertzakian:

Yeah, well, drill, baby, drill was already a contentious issue within the oil and gas industry, the American oil and gas industry, because $70 is not really enough to drill, baby, drill, in other words, aggressively ramp up drilling. So now we’re at 60. There’s no way that either there’s the cash flow available or the appetite to drill a lot more because the returns just aren’t there.

Jackie Forrest:

Yeah, yeah. So competing priorities here.

I mean, the one silver lining maybe of this whole thing, if there can be one around the oil markets, is that we’ve had an overhang since COVID where OPEC has just been sitting on a whole bunch of spare capacity, and non-OPEC, including the United States, mostly the United States, has been growing too much and not allowing OPEC to get their barrels on the market. So if this kind of period of where non-OPEC declines a bit, allows OPEC to get more of their supply onto the market, maybe that sets the oil market up for a more healthy, balanced scenario going forward.

Peter Tertzakian:

Well, I think it sets it up for, as I said just a few minutes ago, a more responsive supply side, which is where I think we’re at. And that is the big difference between today and past eras, is that the amount of unconventional or shale drilling that is out there with very steep declines is enough that when the drilling stops, the declines kick in.

Jackie Forrest:

Yeah. And it doesn’t take many, many years to balance to market.

Peter Tertzakian:

And by the way, in 2014, ’15, the world had just come off a big spending, probably a 10-year spending binge, including in the Canadian oil sands where there was some, at that point, I think cumulatively $250 billion spent, and all these new facilities were coming on in the market. We don’t have that right now. There hasn’t been, other than places like Guyana and a few other places in the world, there hasn’t been a lot of big spending to create a surge in background capacity.

So I think that the oil markets today have been relatively balanced. Yeah, OPEC at the margins manage that supply, but I think the supply-demand balance is such that the pricing at the margin can work the other way. In other words, a few hundred thousand barrels of production loss will kick that price right back up.

Jackie Forrest:

Yeah. I think you’re right, but I do think there’s a period here where they’re sitting on a lot of spare capacity. I’m just looking at the latest numbers. I know not all of this is real, but the official numbers are like 6 million barrels a day of spare capacity in the OPEC+ group right now. So I think we need to get that down lower. And then I think I agree with you that for sure the non-OPEC side is going to respond to low prices, but for a while, OPEC will have enough spare capacity to fill the void. But eventually the market, I think, will be in.

Peter Tertzakian:

I’ve always commented in the past, that spare capacity, I mean, it’s gone as low as 3%. So 6 million barrels a day is about 6%. But if you think about the global oil supply chains as a manufacturing line, 6% spare capacity is really not very much. In the manufacturing world, you try and have that 10 to 15% because you have downtime, you have maintenance and repairs and all those sorts of things.

So 6% is still pretty thin, and we know all of that 6% isn’t the best quality oil. As you draw down on that spare capacity, you get into the lousier and lousier grades and qualities of oil. So not all oil is the same.

Jackie Forrest:

Yeah.

Peter Tertzakian:

Jackie’s looking at me as if I’m overly optimistic, but I think this is a different market, this is a very different market that has evolved for oil going forward. I think it’s much more elastic to the price signals out there. It’s price at the margin, and so stay tuned.

Jackie Forrest:

Okay. Well, with that, I just got breaking news on my phone that North American stock markets are plunging, but let’s move on to topic three, which is the Canadian election and some of what we’ve learned about energy policy so far. There’s so much going on with the election, and I’m not going to talk about some of the broader policies that are out there, but I think it’s probably worth just revisiting the poll numbers and a little bit about what we’ve learned about energy policy so far.

Peter Tertzakian:

Okay. So I’ve been the barrel half-full optimist or cautious optimist on what’s going on here, so I don’t know what to say about the Canadian election.

Jackie Forrest:

Well, it does appear that the Liberals continue to be pulling away here in terms of the polls. So latest numbers from that three-

Peter Tertzakian:

338Canada.

Jackie Forrest:

Yeah. So I’ll put a link to that in the show notes. Mark Carney at 44%, and Pierre Poilievre of the Conservatives at 37%, and it will take 172 seats to form a majority. And they have a seat projection for the Liberals at 195, and then there’s a range, 167 to 226. So it’s looking right now like they have a pretty good chance of getting a majority. And the Conservatives right now are 122 in terms of the seat projection, which wouldn’t get them anywhere even close to a majority.

Peter Tertzakian:

Yeah. Well, I’m not going to call it because as we know, anything can happen in these elections, especially in the last week or two. We’re not in the last week or two yet. What are we actually? We are…

Jackie Forrest:

I think we’re two weeks in, so the actual date is April 28th.

Peter Tertzakian:

The 28th. So we’ll see. Maybe the next couple of podcasts, we’ll start to make a call on the election. What about the energy policies? Is there anything new there?

Jackie Forrest:

Yeah. Well, I think there are. I mean, Pierre Poilievre and the Conservatives have come out with a bit more clarity in terms of some of their energy policy.

I would say with Mark Carney and the Liberals, there’s things he’s saying in media reports and things like that, or when he came to Edmonton a couple of weeks ago, but not as formal, but I thought we could go through some of the five major topics. The oil and gas emissions cap, the Conservatives have clearly said they’re going to repeal that policy. Mark Carney says he’ll keep, but when he came to Edmonton a couple of weeks ago, he said he will want to work for increased flexibility working with industry and funding carbon capture storage. So it’s not like he’s got it… These were media reports. It’s not like he’s got a written position on this, but it does look like there might be a little bit more flexibility in terms of how it works.

The next one topic is just generally clean energy and the carbon tax. So Pierre Poilievre and the Conservatives want to repeal the industrial carbon tax, but they’ve made no statements on other policies. However, potentially things like the investment tax credits, clean fuel rags, and the Canada Growth Fund, and things that we’re supporting subsidies around clean energy, maybe they’re at risk. Just they haven’t said anything, but it’s uncertain.

With the Liberals, they’ve made no specific statements on any of those things either, the ITCs or Canada Growth Fund, but we can assume they’ll be supportive since those are policies the Liberals put in place. They have said they’re going to keep the industrial carbon tax, but Mark Carney wants to even tighten it more. He wants to put a carbon border adjustment mechanism in, he wants to explore strengthening of methane rules, and mandate corporations to do more climate risk disclosure. So I think we can assume there’s still going to be a carbon focus from a new Liberal government here.

Peter Tertzakian:

Well, I think so. However, then there’s a reality of what the government can afford. There is a lot of talk about infrastructure from both parties, and there’s no question infrastructure has to be built, especially to diversify our export markets. And that includes ports, and I think from rail and pipes and so on.

Jackie Forrest:

Rail, transmission.

Peter Tertzakian:

And so it’s going to come down to, okay, what can we afford and what can’t we afford?

Jackie Forrest:

And what’s the priority?

Peter Tertzakian:

And what’s the priority? So I think a lot of these, they’re not even promises, they’re just sort of platform statements that are being made I think are going to necessarily probably change. But on things where you have anything related to the carbon tax, there’s no question in my mind that things are going to have to change there because as we’ve said many times on this podcast, it’s very complex and dense and inhibits investment.

Jackie Forrest:

But do you want it to be more strict? The liberals are implying it.

Peter Tertzakian:

No, no, well, no, no, we certainly don’t want that.

Jackie Forrest:

Improve entirely.

Peter Tertzakian:

And on the Conservative side, they’re definitely saying they’re going to get rid of the industrial carbon tax. That in itself does not repeal the carbon tax on a provincial level because the Greenhouse Gas Pollution Pricing Act is the federal carbon tax policy, both retail and industrial. And on the industrial side, there’s also the provincial equivalence. So each province has elected to take all or part control of the carbon taxation.

Saskatchewan, when was it, last week. I can’t keep track of time, but whatever, it was the last week or two, basically said they’re getting rid of their industrial carbon tax. None of the other province have said that. So in the event we get a federal conservative victory and they get rid of the industrial carbon tax, Saskatchewan has already said they get rid of theirs, but none of the other provinces have said they’re going to do that. So the industrial carbon tax endures at a provincial level, and each province is different regardless of whether or not the feds get rid of it.

Jackie Forrest:

Right, yeah, so provincial leaders, and many of those have been in place quite a long time, like the Alberta one, it’s been in place for more than decade.

Peter Tertzakian:

And getting rid of industrial carbon tax is not an easy thing because there’s been billions of dollars of investments in the various provinces on the assumption that there’s value in things like carbon credits.

Jackie Forrest:

Right. Of course, those carbon credits have to have a predictable price, and that’s been an issue too.

Peter Tertzakian:

Well, that’s a whole other issue, but I’m going to say it’s not easy, but there’s no question that the whole thing needs to be cleaned up, and we have to set the stage for investment into all these infrastructure projects. So that brings us to Bill C-69.

Jackie Forrest:

Yeah, so when it comes to major projects, there’s different views. The Conservatives want to repeal Bill C-69, which is, doesn’t really exist anymore. It’s now the Impact Assessment Act, and Bill 48, which is that tanker ban, and they want six-month approvals for applications.

Meanwhile, the Liberals want to improve Bill C-69 for one project, one approval. So get rid of this overlap between needing to do all the work with the province and then do it again with the federal government process.

So I would just say the Liberals look like pretty modest changes, where the conservatives look to kind of be more radical. And six-month approvals, we’ve talked about this, I think this would be really important for driving more investment into the country. So I do think the conservatives have a better approach at least on that.

Peter Tertzakian:

More concrete for sure. And ditto on the oil and gas export projects.

Jackie Forrest:

Right, yeah. So the conservatives are saying they want to do national energy corridor, fast-track LNG and pipelines to the Atlantic and Pacific, go ahead with indigenous loan guarantee programs to help make that happen so that indigenous partners can be part of those projects.

With Mark Carney and the Liberals, actually, it was a couple of weeks ago, I don’t think he’d even said oil and gas, but in media interviews, especially when he came to Edmonton a few weeks ago, he did say he supports building pipelines to displace foreign oil and building infrastructure and energy corridors to new export markets. And he even talked about building export infrastructure to the Arctic, which is kind of curious because we haven’t talked much about that. That actually is going to be a topic of our next podcast, is talking about the potential to have a big terminal out of an Arctic port, and there’s some issues with that, there’s ice and things like that. So we’re going to learn a bit more about is that feasible considering ice, ice breaking, cost of all of that?

Peter Tertzakian:

Yeah, it’s a big issue. But on the other hand, it’s not like it’s new, building northern latitude, oil and gas facilities, and Norwegians do it, and certainly the Russians do it. So it’s certainly something that I think we need to consider. That consideration of making LNG terminals in the north in Canada dates back actually to the 1970s where there was proposals. I think it was by Dome Petroleum.

So it’s not like this is new, and I think this is a Canadian problem, is that we talk about a lot of stuff, but we never actually get it done. And so we hope whichever party gets in, we start to get things done.

I certainly support this national energy corridor. I think that’s what we need. It’s a corridor for all sorts of infrastructure, whether it’s pipes, wires, and even digital wires. We need a corridor where you don’t need to have… well, it’s pre-approved in terms of the regulatory requirements, that you go straight from one end of the country to the other. But I would say the priority is getting to the west coast that offers us the fastest and quickest optionality for diversifying our export markets.

Jackie Forrest:

For oil and gas.

Peter Tertzakian:

Certainly for oil and gas, but not exclusively oil and gas. We have port expansions that are necessary for agriculture products, minerals, you name it. And the railroads probably need some help too in terms of creating the ability to transport more volumes, more tonnage.

Jackie Forrest:

Well, so when you say pre-approval, so basically a private developer would come along, and they could just start building tomorrow, and because the environmental review has already been done and the indigenous groups and all of that…

Peter Tertzakian:

That’s it.

Jackie Forrest:

… stakeholders have already bought it.

Peter Tertzakian:

Well, I don’t know about tomorrow, but it’s certainly not 10 years.

Jackie Forrest:

Yeah, like six months or less. I do like this six-month thing. I mean, we had some great podcasts. We heard with TC Energy and with PETRONAS talking about how we really need to shorten this approval timeline to get rid of the risk associated with building major projects.

Peter Tertzakian:

And I think it’s important what you just said is that whomever can come along and build. We want to leave the competitive nature of the business, or we want to maintain some level of competitiveness. In other words, it should not be up to the government to pick and choose individual projects. They should approve the corridor, pardon the pun, but lay the groundwork for investment, and then companies can come in and get the capital, raise the investment capital to actually build, so it is not wholly dependent on the public purse to build these sorts of projects either.

Jackie Forrest:

Right. Well, I will say the Conservatives right now have the most detail around what they’re going to do here. And the Liberals, it’s pretty high level at this point, and we don’t have anything other than just sort of some comments in the media. So I do hope from the liberals, we start to see a bit more tangible plans about how we’re going to build this infrastructure in a way that attracts capital, because we can’t afford for the government to be paying for all of this stuff and addresses some of the issues that we’ve heard from on the podcast of people that want to spend money in this country, but they see it as too risky.

Peter Tertzakian:

Prime Minister Carney is talking a lot about building the infrastructure to be the biggest economy in the G7 ultimately, and certainly we would have the resources and things. It’s the potential to do a lot to grow our economy. So there’s a lot of the right signals, but on energy, you’re right, the Conservatives have more clarity in terms of what they would do.

Jackie Forrest:

Yeah. Well, with that, I think we’ll probably talk more about the election, obviously, as we get towards the big date here at the end of April, but I think that’s a wrap for today.

Peter Tertzakian:

Okay. And hopefully we don’t have to timestamp the next podcast because I’d like to think that what we say in endures more than a couple days.

Jackie Forrest:

Yeah. Well, it hasn’t been that way so far this year, so my prediction is at least the next many months might still be this way.

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April 7, 2025 Charts

April 7, 2025 Charts

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