Feb. 10 (Bloomberg) -- As far as Stephen Harper is concerned, history and economics carry far more weight in Canada-U.S. relations than whoever happens to occupy the White House at a given moment.
That’s why Canada’s prime minister remains relatively unperturbed about the drawn-out Keystone XL pipeline review, maintaining its approval is “inevitable.”
In a wide-ranging interview on energy policy in his Ottawa office last month, Harper described how historical and economic forces and broad-based support for resource development determine whether projects like Keystone get built, rather than short-term political calculations. If Barack Obama doesn’t approve the pipeline, another president will.
“It is, in my judgment, a necessary and inevitable victory,” Harper said in a Jan. 16 interview as he awaited a State Department environmental assessment of the project. “I absolutely believe that. I can’t see how it will be otherwise.”
“It takes a lot of energy to repress and to block a decision that is clearly and overwhelmingly in the national interest of the country,” he said.
Harper has been openly critical of Obama for repeatedly “punting” on Keystone and interfering with a long-standing and mutually beneficial energy relationship forged in war and codified in peace.
After Japan attacked Pearl Harbor in 1941, the U.S. War Department quickly secured agreement to build a 600-mile (965-kilometer) pipeline across Canada’s north to supply a military base in Fairbanks, Alaska.
Almost five decades later, former Prime Minister Brian Mulroney incited the wrath of nationalists by accepting in the historic 1988 Free Trade Agreement between the two countries that Canada would not reduce supplies of oil to the U.S. in times of shortages. Energy security would be a continental affair, with Canada enjoying market access while the U.S. gained security of supply.
Today, Canada ships 99 percent of its oil exports to the U.S., and U.S. companies are the largest foreign investors in Canadian oil and gas. Over the past two decades, more than half of the $103 billion in foreign acquisitions by U.S.-based oil and gas companies have been of Canadian producers, according to data compiled by Bloomberg.
Harper’s energy policy is informed by convictions that global demand for oil is surpassing supply, market forces override politics and the western world would rather buy energy from stable democracies like Canada. He also harbors an aversion to government intervention in the industry -- including policies to curb carbon emissions -- while being focused on the economic growth potential of further energy development.
“As an economic conservative, he knows what it takes to create better jobs for Canadians,” said Dimitri Soudas, Harper’s former director of communications and now executive director of Harper’s Conservative Party. “Imagine for one second had we not built the railroad across the country. Natural resource development is nation building, all natural resources, and we have an abundance of them.”
It’s a set of beliefs that will guide his actions in coming months as the Obama administration deliberates the national interest of Keystone and Harper’s government determines the fate of another proposed pipeline to transport oil to Canada’s Pacific coast.
The U.S. State Department’s environmental assessment of Keystone, released Jan. 31, sets the stage for possible further disagreement over the pipeline between Obama and Harper, who are scheduled to see each other in Mexico next week as part of a trilateral meeting with Mexican President Enrique Pena Nieto.
In his public comments, Obama portrays any Keystone outcome as the product of a review with many inputs, its conclusion anything but inevitable. Asked by Fox News on Feb. 2 whether he would approve the project, based on the environmental report, Obama said he was awaiting completion of the process in which “agencies comment on what the State Department did,” after which Secretary of State John Kerry’s going to “give me a recommendation.”
From a Canadian perspective, the report’s critical finding that the pipeline won’t significantly exacerbate climate change could put Obama in a position of having to choose between appeasing environmentalists opposed to the project, a key constituency, or maintaining good relations with his nation’s biggest trading partner.
Harper could potentially give Obama some political cover to approve the $5.4 billion pipeline if Canada pressed ahead with climate-change regulations for the oil and gas industry. He’s reluctant to move unilaterally though without a matching effort from the U.S. that would keep the two countries on an equal competitive footing.
“The energy sector in particular is one where we need to see continental action, particularly given that the Americans are now a growing supplier of energy resources and in competition with us,” Harper said.
Alberta Premier Alison Redford agrees, saying in a Feb. 6 interview she won’t toughen existing rules to cut carbon emissions from oil producers in her province until the U.S. takes similar steps. Redford warned that the process is not “a game of chicken.”
“I don’t know why the U.S. wouldn’t move ahead given that the administration is a regime that’s committed to combating climate change and seems to have particular concerns about the energy sector,” Harper said. “It would seem to me they would be a logical partner” for joint emissions rules.
Asked whether he’s encouraging Obama to move ahead with new regulations, Harper said: “Absolutely.”
Harper’s critics say he should move ahead on carbon rules regardless because Canada’s reputation as an environmental laggard is undermining public acceptance for new infrastructure projects like Keystone, first proposed in 2008 by Calgary-based TransCanada Corp. (TRP) It’s a view that’s held not only by opposition parties and environmentalists, but business groups such as the Canadian Council of Chief Executives and even former Conservative cabinet ministers.
“On the environmental front, clearly we do need to show progress,” said David Emerson, who held both the trade and foreign affairs portfolios under Harper. “It’s critical to have it and candidly that hasn’t progressed very well or clearly in Canada and I think we’re paying a price for it.”
To date, no regulatory regime has been palatable to Harper for reasons ranging from a reluctance to impose new taxes, distaste for central planning, concerns about competitiveness and a political base that lies in his energy-rich home province of Alberta. In any case, he disputes that Canada, which has harmonized greenhouse-gas regulations with the U.S. for autos and introduced emission rules for coal-fired power plants, has fallen behind on climate change.
“While many other countries have been much more grandiose in their promises on climate change, actual results across the world have been much more modest,” he said.
As it awaits Obama’s decision on Keystone, the Harper government will need to make a key decision of its own in the coming months on a controversial pipeline within Canada.
Enbridge Inc. (ENB)’s proposed Northern Gateway would take Alberta oil sands bitumen to the Pacific coast to supply Asian markets. The project, conditionally approved by Canadian regulators, would cross ecologically sensitive aboriginal lands and has drawn loud protests from a coalition of First Nations and environmental groups.
Harper declined in the interview to comment on the Gateway project while his government prepares a response to the regulatory review. He expressed confidence there will be more pipeline construction in Canada, allowing for increased energy exports to a variety of markets.
“Canadians reject the view, the vast majority, that the only way to protect the environment is to shut down economic development,” he said.
Still it is Keystone -- largely beyond his control -- that is closest to the finish line. Harper, who once called it a “no-brainer,” remains confident that history and economics are on his side.
“The decision is overwhelmingly supported in the United States, throughout American society, in labor, business and in all of the people who are along the route,” he said. “So this administration may continue to be difficult for reasons of internal politics, but I do believe that one way or another these decisions will go ahead at some point.”
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