The Need for Energetic Diplomacy

Global Affairs Minister Chrystia Freeland was an inspired choice for the job: she brings a keen understanding of the global economy and international trade to a portfolio that will require these skills in the near term. Trade relations between producers and consumers of energy are shifting, and the new Trump administration in Washington will accelerate this realignment. Canadian diplomacy must secure new markets for energy exports, or risk being left behind.

The impetus for the historic change in international energy trade relationships is largely the historic increase in U.S. fossil fuel production, which is displacing the need for Canadian imports and making it likely that the United States will be a major supplier of oil and natural gas to world markets.

The U.S. Energy Information Administration’s 2017 forecast, launched at Johns Hopkins University’s School of Advanced International Studies in January, anticipates that the United States will become a net energy exporter by 2026. As always, there will be objections concerning the methodology behind the EIA forecast, but the Trump administration’s support for fossil fuel production and skepticism about subsidies for renewable energy support the EIA’s estimation of trend lines and may even mean that the EIA is understating the significance of the near term change.

The EIA anticipates that the United States will become a net energy exporter by 2026.

“The EIA anticipates that the United States will become a net energy exporter by 2026.”

In both Canada and the United States, oil and gas are produced and distributed by private firms, but governments play an important role in world energy markets. Contracts for the delivery of natural gas or petroleum elsewhere are often negotiated with foreign governments or with foreign state-owned enterprises (SOEs) that have close ties to government leaders. And Canada needs foreign direct investment to develop and export its resources.

Accordingly, Minister Freeland may become Canada’s chief energy salesperson as Canadian producers look to diversify Canada’s export markets, and provincial governments seek energy investors. The challenges that Freeland will face vary widely by market. Consider:

Mexico. Mexican President Enrique Peña Nieto initiated historic energy reforms in 2013, opening up the oil and natural gas sectors to foreign investment and participation. American and Canadian firms, particularly energy services providers, have entered the Mexican market and are poised for success. At the same time, the Trump administration’s demand for the renegotiation of NAFTA and hard line against illegal immigration has roiled Mexican politics in advance of national elections in 2018. Trump’s tough talk on Mexico and relative warmth toward Canada may reflect a deliberate attempt to divide the NAFTA partners prior to renegotiation. Calming Mexican nerves and maintaining good relations with Mexico City are essential for sustaining Canadian participation in the Mexican energy sector.

Mexican President Enrique Peña Nieto initiated historic energy reforms in 2013, opening up the oil and natural gas sectors to foreign investment and participation.

“Mexican President Enrique Peña Nieto initiated historic energy reforms in 2013, opening up the oil and natural gas sectors to foreign investment and participation.”

Europe. North Sea oil and gas production have declined, the Middle East and much of North Africa are in turmoil, and Russia continues to manipulate energy supplies. European countries could use a reliable supplier of energy, and east coast LNG export capacity as well as the proposed Energy East project could give Canada the means to fill this role and capitalize on the goodwill generated by ratification of the Canada-European Union (EU) Comprehensive Economic and Trade Agreement (CETA) at a time of economic and trade uncertainty for Europe. However, impending British exit from the EU, populist parties rising strength in France, the Netherlands, Poland and Hungary, and the continued weakness of the Greek and Italian economies will preoccupy European leaders internally as they must simultaneously respond to the Trump administration’s skepticism about NATO and Russian intentions.

Russia, Central Asia, and the Middle East. Troubled countries that rely on commodity exports, particularly oil and gas, will not welcome Canadian exports into new markets, both because Canada’s political stability and transparency will make it appear to be a more stable and reliable supplier for some consumers, and because Canadian energy exports will keep world market prices lower. Freeland’s outreach on behalf of Canadian energy exports – and her efforts to promote global cooperation to address climate change – will be met with some pushback from countries like these:

Asia. No world region has a greater need for energy imports. Japan is still seeking ways to reduce its reliance on nuclear energy after the Fukushima disaster. China’s growth, and the rise of Chinese living standards, is naturally increasing the country’s energy demand. Australia is meeting some of this need through LNG exports, but the prospect of Canadian energy setting sail for Asia from British Columbian ports is contingent on the Trudeau government navigating environmental concerns surrounding current proposals for new infrastructure. The differing views among First Nations communities – the majority of which have not had their land claims in British Columbia settled – are another political obstacle to Canadian energy exports to Asia. As appealing as Canada might be as a supplier to Asian markets, the lack of capacity to deliver cannot be overcome by diplomatic reassurances.

Meanwhile, former ExxonMobil chief executive Rex Tillerson will be engaged in his own energetic diplomacy on behalf of U.S. firms. This is as U.S. Secretary of State and former Texas Governor Rick Perry, a longtime proponent of oil and gas exports from the United States will serve as the U.S. Secretary of Energy and former Oklahoma Attorney General Scott Pruitt will lead the U.S. Environmental Protection Agency in a direction more supportive of fossil fuel production.

“Asia. No world region has a greater need for energy imports.”

Canada’s energy market diversification efforts, catalyzed by the U.S. energy production boom of recent years that has supplanted Canadian imports, will face tough competition from the United States again overseas. This does not mean that Canada cannot succeed – Canadian firms have met and beaten U.S. competition worldwide before. But Freeland’s energy diplomacy will have to be energetic indeed.

Canada’s energy market diversification efforts, catalyzed by the U.S. energy production boom of recent years that has supplanted Canadian imports, will face tough competition from the United States again overseas. This does not mean that Canada cannot succeed – Canadian firms have met and beaten U.S. competition worldwide before.

“Canada’s energy market diversification efforts, catalyzed by the U.S. energy production boom of recent years that has supplanted Canadian imports, will face tough competition from the United States again overseas. This does not mean that Canada cannot succeed – Canadian firms have met and beaten U.S. competition worldwide before.”

Christopher Sands is Senior Research Professor and Director of the Center for Canadian Studies at the Johns Hopkins University School of Advanced International Studies in Washington, D.C. Concurrently, he holds the G. Robert Ross Chair in the College of Business and Economics at Western Washington University in Bellingham, WA and is a nonresident Senior Associate of the Center for Strategic and International Studies.