U.S. Guaranteed Share of Our Oil Growing

NAFTA oil/gas-sharing clause threatens our energy security
March 1, 2014

Twenty-five years ago, when I first scrutinized the text of the Canada-U.S. Free Trade Agreement (FTA), I warned that the proportionality clause in the energy chapter posed a grave danger to Canadian energy sovereignty. When invoked, it would require Canada to make available to U.S. importers the same proportion of our total oil or gas supply as we sold them over the previous three years. That same clause was later incorporated into NAFTA.

Mexico, unlike Canada, wisely negotiated an exemption from this clause.

In 2008, I decided to test my concern that the proportionality obligation could actually lead to energy shortages in Canada. In a study entitled Over a Barrel, co- published by the CCPA and the Parkland Institute, Gordon Laxer and I explored three scenarios concerning what would happen if the clause were invoked.

Using data from Statistics Canada for the years 2004-2006, I calculated that our oil exports to the U.S. over that period were equivalent to 47.5% of total supply (defined as production plus imports). These exports were equivalent to 64.2% of Canadian oil production over that period.

One scenario we explored involved what would happen if Canada decided to cut oil production by 10% for conservation purposes, as then advocated by the David Suzuki Foundation. I calculated that, if the U.S. were to insist on taking 47.5% of the remaining supply, there would be an eight-million-barrel shortfall in oil available to meet domestic demand in 2007. This would be equivalent to four days of Canadian needs.

Each year since then, as new data become available, I update the numbers first published in Over a Barrel. On the recent 25th anniversary of the FTA, I found that the proportional sharing obligation has risen from 30.8% of total supply in 1989 to 57.3% in 2013 -- by an average of 1.1 percentage points each year since the FTA came into effect.

Recalibrated in terms of Canadian oil production rather than total supply, the proportional sharing obligation has soared from 38.3% in 1989 to 74.5% in 2013, an average increase of 1.5 percentage points each year.

Repeating the hypothetical scenario explored in Over a Barrel, I find that, had we attempted to put aside 10% of our oil production in 2013 and had U.S. importers invoked the proportionality clause to demand 57.3% of the remaining supply, the shortfall for Canadians would have been 83 million barrels, equivalent to 48 days of domestic demand.

For natural gas, the situation is somewhat different given the boom in shale gas production in the U.S. Canadian natural gas exports to the U.S. fell after 2007 while imports rose. As a result, the proportional sharing obligation also fell after 2007. In 1989, the sharing obligation for gas was 32.7% of total supply. It peaked at 51.6% in 2008 before falling back to 44.7% in 2013.

But this is only part of the story. When I worked through our second scenario involving a decision to set aside 10% of Canadian gas production for use as a feedstock for the petrochemical industry, I found that the potential shortfall in 2013 was the same as it was in 2007 – equivalent to 37 days of domestic demand. The explanation appears to be that, while gas exports to the U.S. have fallen, imports of shale gas into Canada have risen even more. Meanwhile, domestic production has also fallen. These changes in effect cancel each other out, leaving the calculation of a potential domestic shortfall unchanged.

Given the increase in U.S. oil and gas production from fracking, the U.S. has reduced its dependence on petroleum imports while remaining the world's largest net importer of oil. Indeed, the International Energy Agency (IEA) projects that the U.S. will remain dependent on imported oil through to 2035.

There are also good reasons to be skeptical that the fracking boom will continue. Geoscientist David Hughes has convinvingly documented the falling productivity of fracked wells, and citizens in many states are mobilizing to prevent fracking operations from contaminating the water they drink and the air they breathe.

In the short run, it appears there is little danger that the proportional sharing clause will be invoked, since neither the federal government nor the producing provinces are inclined to undertake aggressive conservation measures, let alone meaningful action to halt climate change. But what would happen if a petroleum shortage were to develop in Eastern Canada, which imports two-thirds of its oil" In the event of a global supply disruption as occurred during the OPEC embargo of 1973, and in the absence of a Canadian strategic oil reserve, Canada would need to redirect Western crude from export markets to meet Eastern Canadian needs. This would undoubtedly cause the U.S. to invoke the proportional sharing obligation, especially if its imports from overseas were also threatened.

In the event of another global crisis, the slow but steady increase in our obligation under the proportionality clause could suddenly become a grave threat to our security. The clause remains a hidden danger to Canadian energy sovereignty, and the case for eliminating it is as urgent as ever.

(John Dillon is the Ecological Economy Co-ordinator for KAIROS: Canadian Ecumenical Justice Initiatives.)