The Fraser Institute

The Fraser Institute

September 27, 2010 06:32 ET

The Fraser Institute: Reducing Barriers to Crude Oil Investment Will Foster Job Creation and Energy Security for United States, Canada, and Mexico

CALGARY, ALBERTA--(Marketwire - Sept. 27, 2010) - A hodgepodge of misguided government policies, costly and time-consuming regulatory processes, and environmental restrictions have resulted in multiple barriers to investment in North American crude oil production and transportation, concludes a new study released today by the Fraser Institute, Canada's leading public policy think-tank.

The study, Towards North American Energy Security: Removing Barriers to Oil Industry Development, recommends nine policy changes that would reduce barriers to investment in the crude oil sector, and ultimately lead to additional job creation and reduced reliance on foreign oil imports for the United States, Canada, and Mexico.

"Crude oil is an important element of North America's energy mix and will not be supplanted by other energy forms in the foreseeable future," said Gerry Angevine, Fraser Institute senior economist in the Global Resource Centre and author of the report.

"Although Canada has more than 81 percent of the continent's proven oil reserves and is the major single-country supplier of oil to the United States, the U.S. still relies heavily on oil imports from OPEC countries, leaving it vulnerable to supply disruptions."

The report suggests that decision makers in the U.S., Canada, and Mexico must work together to reduce barriers to investment in North American crude oil production and transportation facilities. It points out that these obstacles are making it difficult for the sector to compete for investment with other industries and with oil industry opportunities overseas. It makes nine policy recommendations to better facilitate investment in North America's resource base:

  • Ensure that oil production royalties are competitive with other provinces, states, and countries.
  • Reflect in royalty regimes the higher cost of producing oil from deepwater offshore and non-conventional sources. Governments must be aware of the cost differences between conventional onshore oil production on the one hand, and production in the outer continental shelf and from non-conventional sources of supply (such as bitumen from oil sands and oil from kerogen contained in oil shale) on the other. In light of the substantial cost differences for exploration and production development, including in some cases the cost of essential research, policy makers need either to move to a flat tax methodology or, as a minimum, reduce royalties to reflect market realities.
  • Remove uncertainty surrounding oil sands environmental policy. Implementation of new environmental regulations that affect oil sands bitumen production and upgrading should be expedited in order to remove the cloud of uncertainty that has been hanging over the industry regarding potential compliance costs.
  • Remove uncertainty regarding environmental policies that affect conventional oil production. Federal, state, and provincial governments need to remove uncertainty over possible environmental policy changes related to atmospheric emissions that would affect conventional crude oil production. This is especially important in the case of heavy crude oil, because measures to curb greenhouse gas emissions will impose considerable costs and will influence investment decisions. For similar reasons, uncertainties over possible changes to environmental policies surrounding offshore oil exploration and production development need to be removed.
  • Remove moratoria on offshore exploration and development. Moratoria on petroleum exploration and production in areas such as the U.S. Pacific Offshore and the Queen Charlotte Basin should be lifted once the authorities are satisfied, having studied the cause of the BP Deepwater Horizon crude oil leak in the U.S. Gulf of Mexico, that the environmental risks can be mitigated. With the lifting of the moratoria, new areas for potential discoveries will be opened and additional indigenous oil supplies can be tapped.
  • Streamline regulatory processes for obtaining energy pipeline construction permits. Government involvement in the construction-permitting process should be confined to non-commercial aspects such as safety, the environmental impacts, and other matters of importance from a public interest perspective.
  • Adopt standard, consistent procedures for resolving aboriginal land claims. Such an approach will prevent these issues from delaying pipeline project construction and saddling the ultimate users of the energy commodities with inappropriate transportation costs.
  • Adopt measures to improve labour mobility. Extending the labour mobility clause in the North American Free Trade Agreement that applies to professionals to include the skilled trades would improve skilled worker mobility among the United States, Canada, and Mexico. The United States, Canada and Mexico should also explore the possibility of securing bilateral labour mobility arrangements with other countries, similar to the arrangement in place between Australia and New Zealand.
  • Reduce barriers to Mexican oil production growth. In Mexico, heavy taxation and constitutional restrictions on foreign direct investment severely limit the ability of PEMEX, the Mexican state-owned petroleum company, to invest in technology and resource exploration. Opening investment to foreign companies would significantly boost Mexican oil exploration and production development and help prevent Mexico from becoming dependent on oil imports for years to come.

The report notes that accelerated development would bring domestic oil demand and production into closer balance, helping to improve continental energy security by reducing the vulnerability of oil supply to disruptions in shipments from the Middle East and other regions.

"Government must avoid intervening in energy investment decisions because the allocation of resources is best left to those who are motivated by market forces, have an in-depth knowledge of the technologies involved, and are prepared to take risks based on their understanding of how energy requirements are likely to change," Angevine said.

Towards North American Energy Security: Removing Barriers to Oil Industry Development is the second instalment in the Institute's Continental Energy Strategy series, which will culminate in forthcoming studies examining the natural gas and electric power sectors, as well as a report analyzing the role of renewable policy. The complete study can be downloaded as a PDF, free of charge, from www.fraseramerica.org.

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The Fraser Institute is an independent Canadian public policy research and educational organization with offices in Vancouver, Calgary, Toronto, and Montreal and ties to a global network of 80 think-tanks. Its mission is to measure, study, and communicate the impact of competitive markets and government intervention on the welfare of individuals. To protect the Institute's independence, it does not accept grants from governments or contracts for research. Visit www.fraseramerica.org

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