Ottawa’s regulatory crackdown on mining sector and its impact on investment

From the Fraser Institute

By Kenneth P. Green

Business investment is a fundamental requirement for a thriving economy. It provides the resources to start new businesses, expand existing ones, and invest in new plants, machinery, and technology. Business investment in Canada has declined significantly for more than a decade. This is a major reason why Canada’s standard of living has stagnated in absolute terms and is falling relative to many of its partner countries, particularly the United States.1

One factor in the decline in business investment is the heavy regulatory burden placed by the current federal government on the extractive sector, which includes mining, quarrying, and oil and gas. Since 1990, this sector has averaged 17.3 percent of total nonresidential business investment, and in 2013, it reached 28.7 percent of the total.2

The federal government has been particularly critical of the oil and gas sector. As an example of this attitude, Prime Minister Trudeau’s 2017 speech stated that “phasing out” the oil sands would take time, indicating the federal government’s long-term goal of eliminating the fossil fuel industry (Music, 2017). The Prime Minister’s comments were accompanied by a series of new regulations that directly or indirectly affected the oil and gas sector:

• In 2019, Bill C-69 amended and introduced federal legislation to fundamentally overhaul the government review process for approving major infrastructure projects (Parliament of Canada, 2018). These changes were heavily criticized for lengthening the already lengthy approval process, increasing uncertainty, and further politicizing the process (Green, 2019).

• In 2019, Bill C-48 changed the regulations governing vessels transporting crude oil to and from ports on British Columbia’s north coast, effectively banning such shipments and thereby limiting Canadian companies’ ability to export (Parliament of Canada, 2019).

• The federal government’s indication that a mandatory hard cap on greenhouse gas emissions will eventually be introduced for the oil and gas sector. Such a cap was introduced in 2023 (Kane and Orland, 2023), excluding other sectors of the economy that emit greenhouse gases (Watson, 2022).

• In early 2023, the government announced new fuel regulations that will further increase fuel costs beyond the carbon tax (ECCC, 2023).

• In late 2023, the Trudeau government, after limited consultation with industry and the provinces, announced significant new regulations on methane emissions in the oil and gas sector, which will almost inevitably raise costs and reduce production (Tasker, 2016).

The growing regulatory burden has a number of implications that make it harder or impossible to invest in oil and gas, increasing costs and uncertainty, making investing in Canada less attractive. Both the 2022 Mining Company Survey and the 2023 Oil Company Survey identified the same three risks that are inhibiting investment in Canadian provinces—uncertainty over disputed land claims, protected areas, and environmental regulations.3

It is also important to note that the Trudeau government introduced a carbon tax in 2016 that is intended to replace greenhouse gas (GHG) regulations such as those mentioned earlier, rather than being an additional policy tool to manage GHG emissions.4

The regulations discussed above, as well as direct decisions by the federal government, have had tangible consequences for the oil and gas sector:

• In late 2016, the Trudeau government cancelled construction of the Northern Gateway pipeline from northern Alberta to Kitimat, British Columbia, further limiting the ability of Alberta companies to get their products to export markets (Tasker, 2016).

• In 2017, TransCanada Corp. cancelled its $15.7 billion Energy East pipeline, which was to carry oil from Alberta to Saint John, New Brunswick. The project was cancelled in large part because of changes in national policy regarding approval of large infrastructure projects (Canadian Press, 2017).

• While the Trans Mountain pipeline from Edmonton to Burnaby, British Columbia, was approved, Kinder Morgan withdrew from the project in 2018 due to uncertainty and questions about the economics of the project, forcing the Trudeau government to take ownership. The cost of the project has since more than quadrupled its original estimate to $30.9 billion (Globe and Mail Editorial Board, 2023).

• In 2019, US company Devon Energy announced plans to exit the Canadian oil sands and pursue more profitable opportunities in the United States (Healing, 2019).

• In 2020, Teck Resources abandoned its $20 billion Frontier oilsands mine in Alberta due to growing regulatory uncertainty (Connolly, 2020).

• In 2020, Warren Buffett’s Berkshire Hathaway decided not to invest $4 billion in Saguenay LNG, a natural gas liquefaction plant and pipeline, due to political and regulatory risks (CBC News, 2020).

The above sell-offs are not an exhaustive list. Other companies, including Norwegian Equinor (formerly Statoil), France’s TotalEnergies SE (formerly Total SA), the U.S.’s Murphy Oil and ConocoPhillips, have all reduced their investments in the Canadian oil and gas sector.

The growing regulation and government hostility toward the oil and gas sector has not gone unnoticed outside of Canada. A 2018 article in The Economist cited the many failures of Canada’s pipeline infrastructure to bring much-needed oil and gas to market. In fact, the article called it a “three-track circus” that threatened to “scare away foreign investors who are already pulling out of Canada” (Economist, 2018).

First, it is important to note the overall decline in business investment in Canada since 2014. Overall, total non-residential business investment (adjusted for inflation) fell by 7.3 per cent between 2014 and 2022.5, 6

The decline in business investment in the extractive sector (mining, quarrying, oil and gas) is even more pronounced. Since 2014, business investment excluding residential buildings and adjusted for inflation has fallen from $101.9 billion to $49.7 billion in 2022, a 51.2 percent decline (Figure 1).7

A similar 52.1 percent decline in business investment was observed for conventional oil and gas, falling from $46.6 billion in 2014 to $22.3 billion in 2022 (after adjusting for inflation) (Figure 1). In percentage terms, the decline in unconventional oil production was even greater, at 71.2 percent, falling from $37.3 billion in 2014 to $10.7 billion in 2022.8

In short, the declines in the mining sector are greater than the total decline in all non-residential activity.
investments between 2014 and 2022, illustrating the scale of the overall impact of the decline in business investment in this sector.

The importance of business investment to the health of the economy and the growth of the living standards of its citizens cannot be overstated. One of the major challenges to Canada’s prosperity is regulatory barriers, particularly in the oil and gas sector.

In this light, most of the regulatory burdens added to the oil and gas sector over the past eight years should simply be eliminated. In some ways, this is already being imposed on the federal government through court decisions. For example, in October 2023, the Supreme Court of Canada ruled that parts of Bill C-69 were unconstitutional because they infringed on areas of exclusive provincial jurisdiction, requiring a review of the Act (Dryden, 2023).

A careful and clear analysis of the costs and benefits of regulatory measures imposed on the oil and gas sector, including Bill C-48, the recent methane legislation and the emissions cap, is needed. Based on this analysis, regulatory measures should be tailored to help improve the ability of the Canadian energy sector to attract and retain investment.

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