SATURDAY, FEBRUARY 22, 2020 | THEGLOBEANDMAIL O REPORTONBUSINESS | B17
In the five years since prices for oil
and other commodities crashed –
something that looks increasing-
ly to be a long-term decline, espe-
cially for oil – the Canadian econo-
my has drifted away from energy
investment, in part due to weak-
ened returns for investors and in
part due to thefederalgovern-
ment’s climate agenda. Statistics
Canada estimates that capital
spending in oil and gas extraction
last year was less than half of what
it was at its peak in 2014 – a loss of
nearly $40-billion in annual in-
vestment.
That story has largely over-
shadowed the signs that invest-
ment in non-resource sectors has
begun to fill the void. Capital
spending in the real-estate servic-
es, rental and leasing sector is up
nearly 60 per cent since 2012. In-
vestment in education infrastruc-
ture is up 33 per cent. Investment
in telecommunications technolo-
gy has more than doubled. Spend-
ing on public transit and rail
transportation has also doubled.
In fact, even with the dramatic
decline in capital investment in
the oil and gas sector since the oil
crash of 2014-2015, Canada’s total
capital spending is up 31 per cent
in the past decade.
On the surface, then, it does
look like investment has been
quite successfully rotating from
oil-economy resources to new-
economy services and the knowl-
edge economy – a success story
amid the resources tumult.
But consider those sources of
investment growth, and what
they indicate. Statscan’s gross do-
mestic product (GDP) data show
that the country’s capital spend-
ing growth in the past several
years has not come from business,
but rather fromgovernment (par-
ticularly Ottawa’s dramatically in-
creased infrastructure program)
and, to a lesser extent, residential
real estate. Non-residential busi-
ness gross fixed capital formation
–indicative of what the private
sector is investing – has recovered
little after its oil-shock slump, and
remains nearly 20 per cent below
its pre-oil-shock peak.
“There really isn’t anything else
picking up the slack” for the loss
of oil and gas investment, said Bill
Robson, president and CEO of the
C.D. Howe Institute, a Toronto-
based economic think tank. Mr.
Robson noted that in past cycles,
slowdowns in the oil and gas sec-
tor were typically accompanied
by pick-ups in manufacturing in-
vestment, as the benefits of
cheaper energy costs made that
sector more attractive. But that
traditional investment rotation
has been largely absent this time
around.
“It is striking that the adjust-
ment has been as painful and in-
complete as it has been. ... There
really just hasn’t been that kind of
shift of [business] resources into
other productive uses,” Mr. Rob-
son said.
“It does speak to the idea that
there’s something else going on
that has prevented us from
switching over.”
It hasn’t helped that all of this
has come during an extended pe-
riod of weak business investment
globally, amid tepid growth, rising
trade protectionism and geopolit-
ical uncertainties. In Canada, the
three-year drama surrounding
the North American trade pact
had a serious chilling effect on in-
vestment commitments, weigh-
ing particularly hard on the ex-
port-intensive manufacturing
sector.
But Canada’s business invest-
ment problem may go deeper
than that–aweakness that for
years was masked by the lure of
booming energy prices. In a study
published by C.D. Howe last Au-
gust, Mr. Robson reported that on
a per-worker basis, Canadian
business invests nearly 30 per
cent less than the average among
Organization for Economic Co-
operation and Development(OECD) countries.
Critics say the boom of the oil
and gas sector masked Canada’s
competitive weaknesses in at-
tracting investment in general,
because the returns for investors
were so glaringly apparent in the
oil patch. With that advantage in
the rear-view mirror, the country
is going to need to rethink some
things – in areas like regulatory
red tape, corporate tax structure,
innovation policy – to attract new
kinds of investors.
“You have to compete to get
those investment dollars,” said
economist Paul Boothe, deputy
director of the Trillium Network
for Advanced Manufacturing, an
Ontario-based non-profit. “What
governments need to turn their
minds to is, what’s the next big
thing?”
Patterns in foreign direct in-
vesting into Canada may already
provide some direction to that.
While foreign direct investment
(FDI) in Canada’s oil and gas in-
dustry has been essentially flat
since the oil crash, total FDI ex-
cluding the oil and gas extraction
sector grew a healthy 14 per cent
from 2015 to 2018. Sectors that
have seen strong FDI growth in-
clude chemicals manufacturing,
transportation equipment, com-
munication technology and key
service industries such as scientif-
ic and technical services and man-agement consulting.
That suggests that foreign in-
vestors are already seeking out
ways to tap into the parts of the
economy that have been sup-
planting natural resources as
sources of growth – something
that predates the oil shock. Em-
ployment in resource sectors has
been slowly declining as an over-
all share of Canada’s labour mar-
kets for decades. With the excep-
tion of the oil boom, resources’
share of GDP has also generally
trended lower, as the services sec-
tor long ago supplanted goods as
the largest part of the Canadian
economy. Bank of Canada Gover-
nor Stephen Poloz pointed out in
a recent public address that Cana-
da’s fastest-growing source of
both exports and employment to-
day is the information technology
(IT) services sector; it now makes
up about 5 per cent of GDP – about
the same as oil and gas extraction.
There is one critical area of the
economy in which natural re-
sources remain a dominant com-
ponent: They account for nearly
40 per cent of Canada’s goods ex-
ports, on a value basis.
“The need for what it is that we
are endowed with is determined
by the stage of development of
countries around the world. ... We
have to remind ourselves that 50
per cent of the world is still grow-
ing at a much faster pace than we
developed economies are – and at
that stage of development, they
need a lot of resources,” said Peter
Hall, chief economist at Export
Development Canada, a federal
export credit agency.
“It’s maybe not fashionable to
talk about it in that way, but that’s
exactly where we are at.”
While that suggests a contin-
ued role for resource extraction
and exports even as the country’s
knowledge-based economy con-
tinues its emergence, economist
Mel Watkins worries that the
country will continue to pursue
policies focused on resource ex-
traction at the expense of pro-
moting investment elsewhere. It’s
something he has been arguing
about since he popularized the
phrase “staples trap” to describe
this Canadian phenomenon in
1963.
“A business class, a business
culture, had been implanted that
was satisfied with exporting re-
sources as the leading sector of
the economy,” Mr. Watkins said,
arguing that the boom of the en-
ergy sector in the early part of this
century re-entrenched this eco-
nomic bias. “There was an insist-
ence that resource export must be
encouraged as the best way to cre-
ate jobs.”Parkinson:Canada’stotalcapitalspendingisup31percentinthepastdecade
FROMB1Cargo ships sit at anchor on English Bay in Vancouver on Thursday. Rail blockades stemming from theCoastal
GasLink protests will no doubt have an economic impact, but once the blockades are inevitably cleared,
the economy will bounce back.DARRYL DYCK/THE CANADIAN PRESSWe have to remind
ourselves that 50 per
cent of the world is
still growing at a
much faster pace
than we developed
economies are – and
at that stage of
development, they
need a lot of
resources.PETER HALL
CHIEF ECONOMIST AT
EXPORT DEVELOPMENT
CANADAI
n a simpler time, just two months ago, three
of the world’s largest asset managers cham-
pioned their proposed investment in Coast-
al GasLink’s pipeline as part of the solution
to the climate crisis.
Then, protests kicked off, first in northern
British Columbia, then across Canada. Now,
governments are dithering with their response
to the protests and pipeline construction is
stalled.
This all raises the question: Could this trio of
investors walk away from the $6.6-billion pro-
ject, dealing a high-profile setback to Canada’s
strategy of using its resource wealth to build a
lower-carbon economy?
Coastal GasLink’s current owner is TC Energy
Corp., the Calgary-based utility
that dropped the words “Trans
Canada” from its name last year as
part of a strategy to highlight
North American ambitions. In De-
cember, TC Energy announced
plans to sell a 65-per-cent stake in
the pipeline. The buyers are A-list
investors: New York-based KKR &
Co. Inc. ofBa×Ya×ianÛ aå åe aåe
fame, along with the National
Pension Service of Korea (NPS),
the world’s third-largest pension
fund with US$620-billion of as-
sets, and the Alberta Investment
Management Corp.
The deal is scheduled to close
by the summer. TC Energy plans to
offer an additional 10-per-cent
stake in Coastal GasLink to the 20
B.C. First Nations that support the pipeline, in-
cluding the Wet’suwet’en, where elected leaders
are in favour of the project, but a group of hered-
itary chiefs is opposed.
Fund managers are increasingly focused on
making a positive environmental and social im-
pact with their money.
When KKR and friends announced plans to
take a stake in Coastal GasLink, executives went
out of their way to stress its green credentials.
The 670-kilometre pipeline will feed natural
gas to an LNG terminal in Kitimat, B.C., that will
in turn export fuel to power plants, displacing
production from coal-fired stations. Once the
pipeline and LNG facility are running, the pro-
ject is expected to lower global greenhouse gas
emissions by between 60 and 90 million tonnes
a year, equivalent to shutting down between 20
and 40 coal plants.
Brandon Freiman, KKR’s head of North
American infrastructure, said: “We believe the
export of Canadian natural gas to global mar-
kets will deliver significant benefits for the Can-
adian economy and local communities in West-
ern Canada, and enable meaningful progress to-
ward reducing global emissions.”
Officially, everyone involved is still working
toward closing the Coastal GasLink deal. Last
week, TC Energy and the three prospective in-
vestors declined to comment on what contin-
ued protests might mean for their transaction.
The pipeline contract is a confidential docu-
ment. But it is safe to assume that the agree-
ment includes what is known as a “material ad-
verse change,” or MAC clause, that allows KKR
and partners to exit if it becomes clear that the
pipeline cannot be completed on a timely basis.
KKR’s lawyers on this invest-
ment come from Osler, Hoskin &
Harcourt LLP, a firm that literally
wrote the rules for getting out out
deals gone bad. In report sent to
clients 14 months ago, Osler head
of mergers and acquisitions Jere-
my Fraiberg spelled out how to
best make use of MAC clauses. He
added that where a specific risk
exists – such as a construction
shutdown – it should also be di-
rectly addressed in the purchase
agreement.
Against this backdrop, KKR
and its lawyers had every oppor-
tunity to see the potential for pro-
tests, and cut a deal that allows
the fund managers to bail out of
Coastal GasLink with minimal
fuss.
It would be a dark day for Canada if deep-
pocketed investors walk away from a signature
national infrastructure project. Politicians of
every stripe – Prime Minister Justin Trudeau,
B.C.’s John Horgan and Alberta’s Jason Kenney –
pitch the concept of using the money earned
from selling fossil fuels to help pay for the tran-
sition to a low-carbon future.
The journey to green power is going to be ex-
pensive. It involves using natural gas to displace
coal. It means building another pipeline
through B.C. And it requires tapping investors
around the world. That’s all at risk if KKR and its
partners quit Coastal GasLink.IsthereachancethatCoastalGasLinkpipeline
investorswillwalkawayfromtheproject?
Fund managers are
increasingly focused
on making a positive
environmental and
social impact with
their money. When
KKR and friends
announced plans to
take a stake in
Coastal GasLink,
executives went out
of their way to stress
its green credentials.ANDREW
WILLIS
OPINION“We would look at doing some-
thing to realize that value,
whether it’s a spinoff, or some
sort of transaction,” he said
about Fort Hills.
“If we did that, then probably
Frontier would go with it,” he
added.
Teck is a junior partner in Fort
Hills with a 21.3-per-cent stake.
Suncor Energy Inc. is the major-
ity owner and operator with a
54.1-per-cent stake. Total SA of
France owns 24.6 per cent.
Teck is mulling giving up on
oil sands a little over a week be-
fore a deadline expires for the
federal government to approve
or reject the Frontier project, or
delay a decision.
Over the past few months,
Frontier has become a political
flashpoint in Canada. Its propo-
nents, such as Alberta Premier
Jason Kenney, argue that approv-
ing the project would boost the
ailing provincial economy, but its
detractors point out that Fron-
tier would significantly set back
Canada’s attempts to reduce its
carbon footprint and meet inter-
national emissions benchmarks.
Last month, Mr. Lindsay told
investors at a conference that for
the project to go ahead, it would
need higher oil prices, sufficient
pipeline capacity and a partner
to help shoulder the burden.
On Friday, Teck talked up the
potential economics of the pro-
ject, but offered no hard data,
saying in a statement that be-
cause of technological and oper-
ational improvements, the min-
er believes Frontier will be “tech-
nically feasible and commercial-
ly viable.”
Outside of its energy unit,
which is only a small component
of Teck’s overall business, the
company is grappling with myr-
iad problems.
Teck’s fourth-quarter results
were drastically weaker than ex-
pected, as well as its 2020 out-
look for its core metallurgicalcoal business.
Teck’s shares fell by 15.5 per
cent on Friday to close at $14.45
apiece on the Toronto Stock Ex-
change, its biggest one-day drop
in almost four years.
The company reported a $891-
million net loss in the quarter
ending Dec. 31, compared with a
profit of $433-million during the
same period last year.
After adjustments and impair-
ments, the company earned 22
cents a share, far short of the 39
cents a share analysts expected.
Production at Teck’s core met-
allurgical coal business fell by
more than 8 per cent during the
quarter and the price it earned
for selling the commodity fell by
31 per cent. The company pinned
the blame partly on the impact
of the novel coronavirus for
dragging down commodity pric-
es.
Teck reduced its coal forecast
for the first quarter of 2020 to
roughly five million tonnes from
5.25 million tonnes, attributing
the softness to bad weather and
the rail blockades in British Co-
lumbia that are affecting ship-
ments.
The weak coal outlook sur-
prised Bay Street, and some anal-
ysts pointed the finger at man-
agement, rather than external
factors.
Scotia Capital Inc. analyst Or-
est Wowkodaw wrote in a report
to clients on Friday that the dis-
appointing coal forecast “serves
to further erode management
credibility” at Teck.
Teck also warned the market
that its QB2 copper project in
Chile will likely be facing a cap-
ital cost increase. The company
has started construction on the
$4.7-billion copper mine, but
says that a number of obstacles
have materialized, including “so-
cial unrest,” which has affected
the movement of equipment
and people.TECKRESOURCES (TECK.B)
CLOSE: $14.45, DOWN $2.64Teck:Resourcescompanyhas
a21.3-per-centstakeinFortHills
FROMB1