Friday 'Read': Canadian Editorial Cartoons

Source:  The Chronicle Herald, 9/26/12

Source:  The Chronicle Herald, 9/27/2012

Canada and the Underground Economy

A 'new' spin tactic for politicians dealing with a rough economy: count the underground economy!

The Underground Economy and Canada: A Hoovering ~2% of GDP From 1992-2009

Statistics Canada yesterday released an update to its early September study on the underground economy in Canada from 1992 - 2009. Here are the main takeaways from the report:

In 2009, total underground activity in Canada was estimated at $35 billion, an increase of 77% from 1992, whereas nominal GDP grew by 118% over that same period. This estimate of underground economic activity was equivalent to 2.3% of GDP in 2009, down from 2.9% in 1992. 

The main reason for the slower growth of the UE compared to the total economy is that industries traditionally considered to be involved in the UE activity did not grow as fast as the overall economy, or as fast as other industries less impacted by the UE.

UE activity may be found in any industry. However, the three most significant industry sectors in terms of UE activity in 2009 were construction (29%), retail trade (20%), and accommodation and food services (12%). These industry sectors accounted for 61% of the total UE estimate.

To get a sense of comparison, the EU has estimated Italy's underground economy to represent 17% of Italy's total GDP.

The Pros and Cons of a Thriving Underground Economy

So what is this an interesting/vexing issue for policy makers. From page 2 of the introductory essay 2005's Size, Causes And Consequences of the Underground Economy: An International Perspective, by Christopher Bajada and Friedrich Schneider:

1.  Saps tax coffers, triggering increased taxes, which then saps tax coffers even more as the underground economy grows.  

"...If the growth of underground activities is caused by a rise in the overall tax and social security burden, together with institutional sclerosis, then the consecutive 'flight' into the underground economy may erode the tax and social security bases further adversely affecting the future provision of public goods and services.  The result can be a vicious circle..."

2.  Can't Make Good Economy Policy if You Don't Have Good Economic Data.

"A growing underground economy may cause severe difficulties for politicians, particularly their use of official indicators -- unemployment rates, labour force participation rates, income and consumption figures, just to mention a few -- that are unreliable in the presence of a growing underground economy.  Policy based on erroneous official indicators is likely to be ineffective or in the worse case, counter-productive."

3.  But the Underground Economy Still Helps, and Hurts, the Legitimate Economy.

"The effects of a growing underground economy of legitimate activity is quite important to consider.  On the one hand, a prospering underground economy may attract (domestic and foreign) workers away from legitimate employment and create competition for legitimate firms.  On the other hand, a significant portion of income (at least 2/3) earned in the underground economy is immediately spent in the legitimate economy, generating a positive impact in the legitimate sector that may otherwise not have come about."

Will Trans-Pacific Partnership Talks Update or Downgrade NAFTA?

By Keith Edmund White, Editor-in-Chief

New Zealand's trade minister thinks Trans-Pacific Partnership (TPP) trade talks could be a springboard for opening up NAFTA.  Is he right?  CUSLI-Nexus looks at how TPP talks could update NAFTA, but then asks the tough trade question:  do bilateral and regional free trade agreements help international trade, or do they just kick the can on the big divides within the international trading system?  Thanks to iPolitics, Rabble.ca, Skynews.com.au, and Tax-News.com from their excellent reporting that stretches from Toronto to Singapore.

On Monday, New Zealand’s trade minister—at a convention hosted by the Canadian Council of Chief Executives—“said the TPP [Trans-Pacific Partnership] talks could allow negotiators for Canada, the United States and Mexico to update the 18-year old NAFTA deal.”

How would TPP update NAFTA?  From an excellent iPolitics report by Elizabeth Thompson:

In an interview with iPolitics following his speech, [NZ trade minister Tim] Groser said changes to NAFTA wouldn’t be part of the formal TPP agenda but the TPP agreement could trump NAFTA provisions the same way NAFTA superceded the original Canada-U.S. free trade deal.

So what is there to update in NAFTA? U.S. chicken and dairy sectors want more access to the Canadian market, with other U.S. industries wanting to keep pushing Canada on strengthening their intellectual property regime. From a Rabble.ca Wednesday article reviewing the lingering Canada-U.S. trade barriers in the NAFTA-era:

U.S. industry groups, including the main poultry and dairy associations, complained about Canada's supply management policies and intellectual property regime during a Monday hearing at the United States Trade Representative on Canada's entry to the ongoing Trans-Pacific Partnership trade negotiations. Meanwhile, in its presentation to the USTR, the AFL-CIO urged the U.S. government to incorporate "a new approach to trade policy, one that prioritizes benefits for working families, not simply benefits for multi-national or global enterprises (MNEs)."

Reuters reported Monday that the U.S. dairy and chicken sectors are sore they never received access to Canada's market as promised in NAFTA. High tariff walls and low quotas prevent exports of these goods from any country from flooding the Canadian market, which is supplied mainly by Canadian farmers and farm production.

Now getting a TPP agreement is by no means a sure thing.  From an excellent article in today’s SkyNews.com.au emphasizing that 2013 will be the make-or-break year for TPP:

While it's believed around half of the TPP's 29 chapters are finished, Australian Trade Minister Craig Emerson concedes most of the low-hanging fruit has been picked.

'It'll be 2013 when the big negotiations on the hard issues are conducted,' Emerson told AAP on the sidelines of the APEC Summit in Russia this month.

Emerson points to market access as the toughest nut to crack.

And, of course, what about the macro-question:  Do ‘small’ regional trade pacts or possibly ‘big’ regional trade pacts like TPP good or bad for encouraging a free-flow of trade world-wide?  From this there’s perhaps no better—if perhaps biased—source than Pascal Lamy, the Director General of the World Trade Organization (from today’s Tax-News.com):

While noting that the increased negotiation of regional trade agreements has contributed to freer trade, he drew attention to the fact that regional trade agreements have sprung up due to an impasse in global free trade talks under the auspices of the Doha Development Agenda.

He reiterated that on average, each member of the WTO belongs to no fewer than 13 separate preferential trade agreements. "This means that in addition to their multilateral commitments, WTO members on average have to manage an additional 13 separate trade regimes. I do not think you will disagree with me that this cannot be the most efficient way to trade and to do business across national frontiers."

In addition, Lamy—talking at a Singapore event hosted by the European Chamber of Commerce—lists five drawbacks of pursuing free trade agreements (FTAs) on a bilateral and regional level, skipping over WTO talks:

• FTAs create trade costs:  multiple, overlapping trade pacts create their own trade costs.

• New FTAs undermine old FTAs.  Newer FTAs-instead of building on past ones--lower of the value of existing trade pacts.

• The FTA box-out factor:  If you’re not in the FTA club, the FTA is—in effect—now a trade barrier to non-members.

• FTAs reward procrastination:  Countries are selectively picking how to pursue free trade, skipping over tougher issues, which mainly impact smaller, weaker members of the world trading system.

• FTAs Undermine WTO consensus:  the more bilateral and regional FTAs you make, the harder it can be to get countries to agree to world-wide agreements on trade.

Naturally, there's an easy rejoinder these concerns:  let's have freer trade where we can have it. 

In any case, international trade may be the big, under-reported story of 2013.  And it will be interesting to see if TPP can be finalized, and what impact a finalized TPP agreement--a trans-Pacific trade pact that would exclude China--might have on trade disputes between China and the United States, and--from that--on divisions at the WTO.

Harnessing Canadian Innovation: Looking at the MaRS Discovery District in Toronto

By Keith Edmund White, Editor-in-Chief

We all know the obvious:  the world, along with the technologies that make it run, is moving at a faster and faster clip.  As such, the governments of advanced economies are facing a common challenge:  how can they not only maintain the important mainstays of their economies, but also harness future technologies?  Today's press release from the government on Ontario shows one such model:  a government-funded nonprofit, MaRS DD, that provides funding and other business services to potential-filled early-stage start-ups.  CUSLI-Nexus explores how MaRS DD fosters innovative businesses in Canada, and if these innovation incubator/accelerator organizations can solve Canada's innovation challenge.

Yesterday the government of Ontario heralded its support of 12 innovative businesses, giving particular focus to a social responsibility start-up Better the World.  What’s most interesting about this news-release is how Ontario's provincial government went about supporting these tech ventures.  The government established a $7 million fund Investment Accelerator Fund (IAF), and then had MaRS (short for “medical and related sciences”) Discovery District (MaRS DD) administer this fund to worthy Canadian start-ups.  The non-profit organization, which was founded in 2005 and provides business services to science, technology, and social entrepreneurs, doles out grants up to $1 million to get early-stage start-ups up and running.  And the IAF also takes in funds from private sources.  As such, MaRS DD is an example of a public-private partnership geared to spurring tomorrow’s in-demand industries and technologies in Canada.  How’s MaRS DD doing?  Well in 2010 alone, MaRS DD has pumped over $108 million in capital for Canadian start-ups.

To get a sense of what MaRS provides to Canadian tech entrepreneurs, check out this article by MaRS CEO Ilse Treurnicht:

Every day, more than 2,500 people from the worlds of science and technology, entrepreneurship and business, as well as investors and the innovation community come to work at the 750,000-square-foot complex. And we’re still growing. By the fall of 2013, MaRS will more than double in size to become one of the world’s largest urban innovation hubs, commercializing research and accelerating the growth of startups in life sciences, ICT, cleantech and social enterprise. MaRS is also an active member of the Ontario Network of Excellence (ONE), a regional platform that supports the fast growth of technology ventures in over a dozen communities across the province.

So why is this particularly important to Canada, and what has MaRS DD accomplished?

First, MaRS DD is a important piece of protecting Canadian prosperity in the 21^st century.  As I discussed last month, today’s relatively rosy Canadian economic performance faces a long-term innovation challenge.  Now, that August post focused on the structural problems getting in the way of current Canadian businesses innovating their business practices (think making a widget 5 seconds faster), and not the ‘MaRS DD’ angle on innovation.  MaRS DD is doing the start-up slice of innovation:  funding new businesses that—if they succeed—will provide new products or ways to deliver in-demand services.  The end-result:  a start-up working at MaRS DD becomes the next big bio-tech or tech company, or simply gets bought-out from an established company, which—in turn—generates increased corporate profits.  

As such, business incubators like MaRS DD—based in a city with $1 billion in annual science and technology research spending are a small, but critical piece of building the Canadian economy of the future.  And, most interesting to me, it shows an attempt to combine the long-term funding capability of government with academic and real-world business expertise to create successful Canadian start-ups.

As to how MaRS DD is doing, it’s clear that MaRS DD is doing good work. MaRS DD has provided 900 research requests for companies and entrepreneurs, 13 market intelligent reports, and has created 600 jobs in 2010 alone.  A $7 million government expenditure to create 600 jobs isn’t bad (~$11,667.00/per job), especially if some of these then lead to either big start-up buy outs or permanent businesses.  So, it’s clear MaRS DD hasn’t been a waste of tax-payer money.  

But, the most interesting—and vexing question—is how one can analyze how a start-up incubator can measure its effectiveness.  Most start-ups fail; at least with government funding, we’re not forcing would-be entrepreneurs to be stuck paying back debts—and not trying to succeed again.  But judging a start-up incubator by the number of jobs created, while a key political indicator of success, has little—if anything—to do with whether MaRS DD is fulfilling a need the private sector can’t provide.  This is not to throw cold water on the project, as MaRS DD’s expansion and track-record of success shows that MaRS BB is a model for successfully spurring tech start-ups.   

But, to get a sense of start-up incubator/accelerator skepticism, check out Lyn Blandchard's article at Your Capital Edge:

This research led to a few broad conclusions: while there are plenty of startup success stories to provide anecdotal evidence of incubators and accelerators having success on a regional basis, there is no broad consensus on just how effective these programs are.

So, will MaRS DD—and similar organizations—solve Canada’s innovation challenge?  Ultimately, only time will tell.  But MaRS DD sure looks like a part of the solution.

Canada, Divorce, and Anonymity: The Toronto Star Reports on the Privacy Divorce Debate

By Keith Edmund White, Editor-in-Chief

 

Is the Scarlet Letter alive and well when it comes to divorce?  The Toronto Star reports on whether Ontario should follow Quebec’s practice of only using initials when referring to parties in divorce proceedings.  Is this sensible privacy protection, or a lamentable proposal to erode judicial transparency?  With help from Fareen Jamal, CUSLI-Nexus explores Canada’s legal pluralism when it comes to a balancing privacy and transparency in divorce proceedings.  

In Sunday’s Toronto Star (and CBC.com), Allison Jones reports on whether “the rest of [Canada] should follow Quebec’s model of only referring to parties in family law decisions by their initials.”

A pillar of open court systems is that court records are public.  Why is this so important?  Well, first, it ensures that developments in the law can be followed by the public.  Second, it keeps the courts accountable.  While a thoroughly undemocratic institution, court records do keep the judicial system from running amok:  since any wrong move will be seen by the general public, and—perhaps more importantly—by the legislators who have the power to reshape the court system.

But, as any first-year law student can tell you (or avid ‘Law and Order’ watcher), there are times where privacy trumps transparency.  Two obvious examples:  sexual assault and crimes perpetrated by minors.  But how should privacy and judicial transparency be weighed when it comes to the sensitive and, perhaps, special case of divorce proceedings?

Using the initials of parties, instead of full names, can protect individuals from having their neighbors going on search engines and reading the sultry—and perhaps embarrassing and baseless—accusations and admissions that sometimes come about during divorce proceedings.  And privacy protection may be more at play since these proceedings may have a special impact on the litigants’ children, who might be suffering the collateral damage of divorce litigation.

Right now, in Ontario, the decision of whether to grant anonymity to parties in divorce litigation is up to the judge.  And even if the judge grants anonymity, the order can—according to Jones’ report—include “a recitation of the allegations each side has made against the other.”  Two natural outcomes appear to flow from this approach to divorce proceeding anonymity:  (1) a lack of institutionalized consistency when it comes to what parties are given anonymity, and (2) a privacy shield that likely doesn’t go far enough for some divorce litigants.

Fareen Jamal, a family law attorney in Ontario, adds some substance to this topic in a 2011 Ontario bar association article.  Boiled down—with some interwoven thoughts of my own—the article adds three issues to the mix:

(1)     Why keep a 21^st century ‘Scarlet Letter’?  Jamal argues that the naming process in divorce, historically, was used to shame the ignominious party.  Or, as he puts it, is “a vestige of the fault-era that should be eliminated.”  (OK...but is this really a factor's in 21st century divorces?)

(2)    Due process/fair trials concerns are fundamentally different in divorce cases.  Jamal argues that divorce cases are a ‘special’ category of litigation not needing the due process protections that judicial transparency ordinarily is relied on to give litigants.  Result:  if publishing the names of divorce litigants in court records does not help litigants in any way, why keep it?  So, how is divorce  ‘special’?  Jamal has three reasons:  

a.       divorce is not a crime anymore—so why identify parties like courts do for crimes?;

b.      lives aren’t on the line—divorce cases don’t result in people going to jail; result:  the need to protect parties from not receiving due process and keeping the vigilant eye of the public on crazy courts seem less needed here than, say, a murder case or multi-million civil case; and

c.       there’s no impact on costs to the judicial system—in law review speak, there’s no need to fret over ‘conservation over limited judicial resources’ because there’s no cost to changing the parties names to initials.  (To be fair, Jamal doesn’t give a fair shake to this argument.  Why?  In contentious divorces, dueling spouses don’t have to go to court, there’s always arbitration.  Interesting thought question:  If the publicity aspect of divorce litigation is removed, would that incentivize more or less cases to shift from judicial to arbitral settings?)  

(3)    Identity theft concerns.  Ontario divorce litigation forces parties to publicly release financial information—through mandatory financial disclosure forms—that is ordinary private—and can be the first tool used by savvy financial swindlers.  (This is a concern that has been seen in the United States as well—but is this more actual concern of identity theft, or simply an aspect of making it harder for neighbors to see your financials?)

So will Ontario and the rest of Canada follow Quebec’s lead?  There doesn’t yet seem to be a groundswell of support for a change.  But in the age of online court records, I wouldn’t be surprised if this gets more attention in the near future.  Though, in the era of overexposure (read:  iPad, Google, and Facebook) is privacy, not the purported shaming aspect of divorce, the true relic of the 21^st century?  

Like this post?  Be sure to check out Justin McNeil's related post on Ontario's new privacy tort.

Canada in the Pacific Century: The Canadian Council of Chief Executives Puts on a Stellar Discussion on Canada's Role in China-Heavy Global Economy

The Canadian Council of Chief Executives is hosting a conference on Canada's role in Asia, appropriately titled 'Canada in the Pacific Century.'  The event is wrapping up its two-day agenda with some great workshops.

Check out the live-stream here, and here's the schedule for the event.  I would recommend checking out the Anthony Germain hosted panel.

I'll try to get a hold of archives to give readers more digestible, written summaries of these presentations.

Update:  For a primer on Canada's Asia strategy, check out Securing Canada's Place in Asia, a 52-page August 2012 report from the Project of the National Conversation in Asia.  Don't have time for 52-pages?  Check out this brief summary of the report at Mondaq.com.  There's also this February 2012 report from the World Bank:  China 2030.  Check out the report's executive summary here.

Monday Morning News Round-Up: The Housing Bubble, What's On Parliament's Agenda, Fossil Fun, B.C. Mayor Summit, and the U.K.-Canada Embassy BFF Agreemnt

Some attention-grabbing Canadian headlines.

Canada’s Housing Bubble Is Bursting—and This Time We Mean It!  Canadian Business on why, this time, Canadians really should worry about the housing bubble:

People have been predicting a crash in Vancouver for years, of course. What’s different now is the growing number of trends suggesting its imminence. The poor global economy is souring foreign investors’ appetite for expensive property overseas. The federal government, meanwhile, is trying to tame the market by tightening mortgage lending standards and warning the public at every opportunity that Vancouver is a risky city for buying real estate. Interest rates are still low, but the Bank of Canada keeps promising to raise them, which would quickly lower affordability. All of which leads David Madani, an economist with Capital Economics, to conclude: “The Vancouver market has cracked.”

Vancouver won’t be the only one. The next market to crack will be Toronto, starting with the city’s overheated condo segment. Overall sales of existing homes were down by 12.4% this August over last, and condo sales have fallen by double digits for three months in a row. The pre-construction condo sector is also weakening, with sales down 21% in the second quarter. Overbuilding is a major concern: a record 52,695 units are currently under construction, with another 35,000 in the pipeline, a rate that economists say is well ahead of demographic trends in the region. Investors also play a big role in the Toronto condo market, raising concerns that waves of them will try to cash out at the same time.

The Talk of Ottawa this Week (and Beyond).  The Hill Times lays out the Parliamentary schedule in brief here.  Items on notice:  house committees will meet to elect their chairs, some criminal law debates, and the Senate talks conflict of interest and Canadian language rights in the Facebook-era.   To get the low-down on this parliamentary session’s ‘hot topics,’ read the Library of Parliament’s 41^st Parliament Current and Emerging Issues.

Fossil Fun.  A group of scientists exploring the world-renown, fossil-filled Burgess Shale preserves in Canada's Rookies has found a new bevy of fossils! For fossil lovers, this is big news:  the newly discovered site might be the most important ‘fossil find’ in the last three decades, reports the Calgary Herald.

BC Mayors Talk ‘Tax Fatigue’ (and Marijuana Decriminalization) at Victoria Meet-Up.  Mayors from British Columbia (B.C.), drained for cash but swamped with federal demands to provide public services, are gathering today at the Union of B.C. Municipalities convention, reports the Vancouver Sun.  This isn’t just a group therapy session:  the mayors will be sharing ideas on how to prioritize public services, and get more bang for their buck (along with some less heady topics--scroll down for more.  From the Vancouver Sun's report:

“Spending has gone up for local governments over the past 10 years but predominantly because the province and federal governments are asking more of local governments through policies or regulations,” Moore said. “It affects everything from core utilities to police services.”

The convention comes on the heels of a business taxation report that suggests provincial and federal government decisions have had negative financial implications for local government.

The report by an expert panel also suggests the province doesn’t have any more money to dole out, Moore said. But he takes heart in a recommendation that the province work with municipalities to find alternate forms of funding to provide services.

“We really feel there hasn’t been a lot of cooperation,” he said.

Learn more about the Convention—whose annual theme is In Conversation—at the Convention’s website.  Right now, the Convention is likely wrapping up its Marijuana Decriminalization debate (assuming a bit of real-time lag-time from the published schedule available here). 

Canada and the United Kingdom Become Embassy BBFs.  In a cost-cutting and diplomacy-maximizing move, Yahoo! News Canada reports that the U.K. and Canada will agree today to sharing one another’s embassies in nations where one nation has an embassy and the other does not.  But not everyone is thrilled with the move.  From yesterday’s Globe and Mail:

Paul Heinbecker, the former Canadian ambassador to Germany and permanent representative of Canada to the United Nations in New York, warned that the relationship with a former colonial power in many parts of Asia and Africa could be a net negative.

“We have an incompatible brand with the U.K.,” said Mr. Heinbecker, citing past disagreements, including Canada’s support for sanctions to fight apartheid in South Africa, and Britain’s reluctance to get involved in Bosnia militarily.

The agreement, according to sources, will include not just sharing real estate, but working together in other areas – representing civilians abroad, providing passports and visas, and dealing with emergencies such as revolutions, disasters and evacuations. The two countries will not share diplomatic representation, sources said – so British diplomats would not present Canadian views to foreign governments, or vice versa.

Friday 'Read': Political Cartoon Web Roundup

It's Friday afternoon.  Relax for a minute by laughing at some of our favorite Canadian political cartoons.

Harper's PQ pain.  Dolighan cartoons.

The trickiness of parliamentarian compensation reform, Donato.

The NHL:  Canada's NFL, John Fewings.

News Round-Up

Some attention-grabbing Canadian headlines.

Why Canada’s Start-Ups Run South.  In a thoughtful piece, Canadian Business explores one Canadian start-up online billing start-up that has resisted relocating to the United States.  The piece also explores why Canada is losing its home-grown success stories to the States:

Roger Martin, dean of the Rotman School of Management at the University of Toronto, has been studying this phenomenon in frustration for years. He’s concerned that policy-makers mistakenly continue to cultivate scientific and technical expertise at the expense of managerial skills: “Companies are going to continue to move to the U.S. to access the managerial talent they need to grow their technology businesses. We’ve been showing this data since 2005, and little or nothing is being done in Canada to help it out.”

For his part, McDerment has been able to capitalize on Canadian talent that’s gone abroad and now wants to return home, often for reasons—they want to be near family, or they don’t want to raise their kids in the U.S.—that are as personal as McDerment’s are. He also maintains that FreshBooks’ corporate culture has been key to attracting, and retaining, that talent. “You’re not just building some technology in the bowels of some mega-corporation that may or may not see the light of day. And if you’re working in a high-performing team with a bunch of top performers, why budge?”

Harper Government Shows Support for Nunavut’s International Airport’s Getting a Big P-3 Styled Facelift.  Showing the Canadian government’s continued commitment to develop Canada’s North, the Canada News Centre reports on a $70 million + investment in the Iqaluit International Airport Improvement Project.  The one missing link: finding a private partner to build the various improvements to meet the increased demands of Nunavut’s business gateway.  To learn more about the airport, check out the check the Nunavut Department of Economic Development & Transportation and skim over this 4-pager on Iqaluit’s history and future.  Interesting fact: while doubling passengers served since 1985 to 125,000 in 2011, Dulles International Airport in Virginia had, in 2011, 23.2 million annual passengers.

Quebec’s Corruption Probe Continues to Expose Canada’s Mafia Ties.  Macleans reports on York Regional Police officer Mike Amato’s 2-hour discussion on Canada’s ties to the Mafia to the Charbonneau Commission—the Quebec government’s corruption probe into the province’s construction industry (named after the inquiry’s head, Justice France Charbonneau).  Learn more about the commission, which is now in its second phase, in Sept. 17 articles published by Montreal’s Gazette and Ontario’s Toronto Star.  One interesting note: while the Commission has its own lawyers (Commission attorney Sonia Lebel has been speaking for the prosecution, but Sylvain Lussier is chief prosecutor), Quebec’s governing party—formerly the Liberals and now the PQ—have official representation on the Commission, meaning the party has government paid for lawyers who can participate in the hearings (other parties can applied and be granted participant or intervener status).  A fascinating topic, and a interesting legal-political set-up to tackle a sensitive subject.

Government Approval for Cnooc's Nexen Bid Will Being Starting Soon.  With Canadian energy producer Nexen shareholder approving a take-over by Chinese-owned Cnooc by a hefty margin, the Canadian government will now have to review the bid.  Speaking to Bloomberg, Peter Harder, senior policy advisor at Fraser Milner Casgrain LLP and president of the Canada China Business Council, says the Cnooc offer is “well constructed” to meet Canada’s net-benefit test for big foreign investment in Canadian industries.

North America's Natural Gas Binge: Canada-U.S. Natural Gas Race Is On--But New York-Based Nymex Is the Clear Winner

By Keith Edmund White
Editor-in-Chief

The United States and Canada seem to be racing to see who can export more natural gas—particularly liquefied natural gas (LNG)—to Asia first.  CBC reports on the five natural gas plant projects in B.C. up and running, and then exporting to Asia.  Of particular note:  these projects  aren’t getting the opposition faced by plans for a B.C. Northern Gateway pipeline—which, according to a Globe and Mail article yesterday, is opposed by 60% of B.C. residents. 

(For fans of regulatory news:  check out this elegant breakdown of Canada's regulation of natural gas on pages 4-6 of a 2010 Natural Resources Canada presentation.)

And Risk.net reports on U.S. firms developing natural gas projects:

There are currently more than half a dozen projects to build LNG export terminals in the US, which are in various stages of the regulatory approval process. The one that appears to be furthest along – Cheniere Energy's proposed $5 billion LNG facility in Sabine Pass, Louisiana – is scheduled to begin exporting cargoes in late 2015 or early 2016, according to the company.

There are two drivers for the North American gas rush according to Risk.net:

(1) Price. Natural gas is much cheaper in North America than Asia, by a lot:

“…the price of the Henry Hub front-month contract has dropped from more than $13 per million British thermal units (/MMBtu) in 2008 to less than $3/MMBtu today. By comparison, spot natural gas prices in Japan were as high as $18/MMBtu earlier this year. “

(2) Simplified natural gas international marketplace. While the international trade of natural gas has been hampered by the lack of one market for natural gas (for a backgrounder, check out this previous CUSLI-Nexus posting). But Risk.net contends that the NY is now becoming the global place to trade futures contracts on natural gas, lower barriers for Canadian and U.S. exporters. The one big exception: China.

From the Risk.net article:

"Given the growth in LNG, and the creation of an international market in natural gas, we assume that the oil price link will gradually have less importance," the analysts from Citi write. "Instead, we see Europe as sourcing its natural gas in the international market, with the long-term driver of natural gas prices in Europe being the Henry Hub benchmark."

…

Similarly, Henry Hub pricing will become more prevalent in Asia, the Citi report said. "In Asia (excluding China), the key markets of Japan and South Korea are dependent on LNG imports, and so already purchase natural gas on the international market. Again, we see the long-term driver of this market as being the Henry Hub benchmark," the report says, adding that Chinese natural gas prices will be less linked to Henry Hub because China will eventually tap its own abundant shale gas reserves.

…

Henry Hub is named after a pipeline interconnection point in Louisiana that serves as the physical delivery location for natural gas futures contracts traded on Nymex, the New York-based commodities exchange owned by CME Group.

Two interesting—albeit tentative—conclusions can be drawn from looking at these two articles.  First, the Canada-U.S. energy relationship is complex:  Canada is America’s #1 source of foreign oil, but a U.S. competitor when it comes to the emerging natural gas market.  Second, regardless of what nations certain natural gas producer firms are based in, the U.S.-based Nymex commodities exchange looks like the big winner of North America’s natural gas binge.  In fact, Nymex—as reported by Bloomberg Businessweek—earlier this month launched “a broad suite of new natural gas and power markets.”