A global movement to permanently separate the oil and gas industry from the public purse appears to be gaining momentum, with an overarching objective of repurposing funds to promote renewable energy
PUBLISHEDJANUARY 10, 2022
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Mexican state oil firm Pemex's Cadereyta refinery on the outskirts of Monterrey, Mexico on April 20, 2020. Export Development Canada has provided 19 loans to Mexico’s state-owned oil company over 15 years, totalling somewhere between $3-billion and $5.7-billion.DANIEL BECERRIL/REUTERS
Of all the recipients of Canadian government support in recent years, Petroleos Mexicanos (Pemex) ranks among the strangest. Export Development Canada, a Crown corporation, provided 19 loans to Mexico’s state-owned oil company over 15 years, totalling somewhere between $3-billion and $5.7-billion (EDC only discloses ranges, not precise amounts). The Indian Oil Company received somewhere between $190-million and $425-million. Petrobras, Brazil’s state-owned oil company, got at least $1-billion.
State-owned enterprises control most of the world’s oil reserves and are heavily supported by their own governments, so their need for Canada’s money wasn’t obvious. EDC’s objective was to entice these oil giants to make purchases from Canadian suppliers.
Providing that kind of support just got a whole lot more complicated. At last year’s UN COP26 climate conference in Glasgow, Scotland, Canada joined 23 other countries in committing to end certain types of support for foreign oil and gas activity by the end of 2022. During a news conference, Minister of Natural Resources Jonathan Wilkinson said Canada would also end public financing of “domestic” fossil fuel projects, reiterating an election campaign pledge made by the Liberal Party.
Ottawa pledges to end financing for foreign fossil-fuel projects in 2022
A global movement to permanently separate the oil and gas industry from the public purse appears to be gathering steam, with an overarching objective of repurposing funds to promote renewable energy. A phalanx of supportive prominent organizations include the UN’s Intergovernmental Panel on Climate Change, the International Energy Agency (IEA) and the Organization for Economic Co-operation and Development (OECD).
Bloomberg reported in December that the Biden administration had sent a cable to U.S. embassies ordering “an immediate halt to new federal support for coal plants and other carbon-intensive projects overseas.” And 13 member countries of the World Trade Organization (including the European Union, Norway and Britain, but not Canada) issued a joint statement seeking “the rationalization and phase-out of inefficient fossil fuel subsidies.”
Canada is the world’s fourth-largest oil producer and exporter. Ottawa’s generosity is difficult to measure precisely, but large loans and investments for pipelines and liquefied natural gas terminals are recent examples. Oil Change International, an NGO that tracks fossil fuel subsidies, reported that from 2018 to 2020, Canada’s support for fossil fuels averaged US$11-billion annually, the highest among G20 countries.
“Per capita, we’re often the worst,” said Julia Levin, senior program manager for climate and energy with Environmental Defence, a Toronto-based organization. “But to be the absolute worst, with a much smaller economy and much smaller population, is even more shameful.”
Prime Minister Justin Trudeau’s mandate letter to new Environment Minister Steven Guilbeault, dated Dec. 16, ordered him to “develop a plan to phase out public financing to the fossil fuel sector, including by federal Crown corporations.” But if federal officials and industry lobbyists are perturbed, they’re not showing it. And EDC said it can meet the 2022 deadline.
In part, that’s probably because EDC’s support has already been in transition for several years. More importantly, the fine print hasn’t been written yet. While the manner in which Ottawa assists the industry seems likely to change, it’s unclear whether that will result in a net reduction in overall support.
Canada: a world leader in fossil fuel finance
Preferential tax treatment is a popular support channel. In December, the Parliamentary Budget Officer issued a report that showed that federal income tax deductions for costs relating to finding, acquiring and developing resource properties were the most significant deductions for the fossil fuel sector. They amounted to between $1.3-billion and $2.4-billion in foregone tax revenues annually from 2015 to 2019.
The IEA dubs these “consumption subsidies.” According to its data, the leading providers include Iran, China, India, Saudi Arabia and Russia. Canada’s numbers seem tiny by comparison. The office of Deputy Prime Minister Chrystia Freeland said in a statement that the federal government has “phased out or rationalized” eight tax measures supporting the fossil fuel sector since 2007.
Where Canada stands out is in so-called “direct transfers,” typically through EDC. Its main activity is providing or guaranteeing loans that benefit Canadian exporters. Bronwen Tucker, Oil Change International’s public finance campaign manager, said this support is worth more than raw numbers would suggest: EDC provides better borrowing rates than private banks do, and its involvement reduces risk for private financiers, especially on large infrastructure projects.
“Having a government or multiple government institutions involved really helps projects go forward,” she said, especially “those projects [that] have much less social licence and are having trouble getting to the finish line.”
In 2008, EDC’s mandate was broadened to support domestic business. It also administers the Canada Account, separate from its own books, which is used to provide financing the Minister of International Trade deems to be in the national interest. Used in combination, these powers made EDC an important conduit for emergency relief to the oil and gas sector during tough times – and to megaprojects Ottawa wants to advance.
The Globe and Mail assembled a database of nearly 20,000 EDC and Canada Account transactions between 2001 and the end of 2020. The Globe’s analysis shows that oil and gas customers consistently ranked among the clients that EDC has funded most generously: Trans Mountain Pipeline, Enbridge, TransCanada Pipelines (now TC Energy) and Husky Energy are among those that received a minimum of $1-billion each.
Enbridge, for example, was listed as the beneficiary in more than 30 EDC transactions this century, collectively worth at least $3.5-billion. In addition, EDC has provided a minimum of around $4.1-billion to recipients identified only as “Various Canadian Exporters-Oil & Gas.”
In a statement, Enbridge said EDC has primarily supplied “backup credit facilities that in the majority of cases were not used. EDC is one of our smallest lenders currently and we have relationships with nearly 50 banks globally.”
EDC has gradually reduced assistance to oil and gas in recent years. In a statement, it said that by the middle of 2021, its support amounted to “less than half of 2020 levels,” continuing a downward trend over several years. Certain activities seem to have ceased altogether: Pemex and Indian Oil Co. received their last EDC dollars in 2017.
EDC's support for the oil and gas sector has declined
EDC also said it had “divested many existing international loan assets and ceased new support to existing international business relationships,” which halved its international fossil fuel assets in just a few years.
Other institutions are moving faster, however. According to Oil Change International, the World Bank and the European Investment Bank drastically decreased their financing directed to oil and gas, and will reach near zero by the end of this year.
Watch the fine print
History has shown that sweeping commitments about fossil fuel subsidies mean little until key terms are defined.
In September, 2009, G20 leaders met at a summit in Pittsburgh in the aftermath of the financial crisis. They agreed to “phase out and rationalize over the medium term inefficient fossil fuel subsidies.” That, they claimed, would reduce global greenhouse gas emissions by one-10th
Any celebration was premature. First, there was that “medium term” language. It wasn’t until late 2015 that Canada’s environment minister, then Catherine McKenna, was tasked with fulfilling the commitment. Her department set a 2025 deadline.
The term “inefficient” proved even more crucial. The department’s review, as described in a 2019 discussion paper, identified 36 measures that might be considered “subsidies.” But upon close inspection, it found that just four actually met that definition. Of those, none were deemed to be inefficient. (That contrasts starkly with the U.K. Climate Change Committee’s position, which recently declared it “does not consider that any fossil fuel subsidies should be classed as ‘efficient’ in the U.K.”)
Echoing EDC’s thinking, the department also concluded the Crown corporation’s financings and services didn’t qualify as subsidies because they were provided “on commercial terms” and were not specifically directed at the fossil fuel sector. Using these definitions, Ottawa’s obligations seemingly amounted to very little. At COP26 in Glasgow last year, Mr. Wilkinson moved the deadline closer by two years.
With that history in mind, it’s worth parsing Ottawa’s latest commitments carefully.
In Glasgow, Canada declared it would “end new direct public support for the international unabated fossil fuel sector by the end of 2022.” The term “international” is key. In a statement, EDC said it provided about $800-million in direct financing to international companies and projects in 2020. That’s a fraction of its overall oil and gas support.
The word “unabated” could also prove significant. “That’s a sneaky loophole,” Ms. Levin said. “That word ‘unabated’ leaves a window open for governments to say, ‘Hey, we’re going to support this oil and gas refinery because there’s a promise of one day attaching carbon capture technology.’” Carbon capture is largely untested and controversial: While proponents applaud the prospect of locking away carbon emissions underground, critics regard the technology as a dangerous facilitator of the status quo.
As for Mr. Wilkinson’s commitment to end “domestic” support, even fewer details are available. Ian Cameron, a spokesperson for his office, said details will be forthcoming.
What’s clear is that EDC shows no intention of abandoning the oil and gas sector, which it has long regarded as “a critical element of Canada’s economy.” According to Natural Resources Canada, the sector directly employs 176,500 people, and accounts for 5.3 per cent of GDP. From EDC’s perspective, the more important fact is that it represents nearly a quarter of Canada’s exports.
It seems more likely that EDC will pivot to supporting industry efforts to reduce emissions, such as carbon capture. “We are turning our focus to working with our Canadian customers,” EDC said in a statement, “to help them innovate to lower their emissions, while increasing our support for businesses aligned with a low-carbon transition.”
International pressure remains a wild card. Vanessa Corkal, an Ottawa-based policy adviser on energy transitions for the International Institute for Sustainable Development, predicted the federal government’s latest promises will have more impact than the 2009 commitment, mainly because pressure from Canadian voters and governments of other countries has increased.
“The global conversation has shifted,” she said. “Canada, in order to catch up and be considered a climate leader, has to move faster and more boldly.”
