Pipelines and Canada’s Dependency on a Single Export Market
Over the past decade, the shale/fracking revolution disrupted “Peak Oil” theories and facilitated rapid growth in both oil and natural gas production in the U.S. In 2017, the U.S. became a net exporter of natural gas and in 2018, also became a net exporter of oil and refined fuels for the first time in decades. This article is the second part of a January 2020 release which focused on Natural Gas and LNG. These developments have resulted in the U.S. becoming not only Canada’s biggest customer but also Canada’s number one competitor!
Because of limited pipeline capacity and export infrastructure, Canada is forced to sell its oil and gas into a saturated North American market, resulting in widening differentials to U.S. benchmark pricing. It is vital to diversify markets for Canada’s oil production to ensure Canada receives full value for its natural resources.
Part 2 (Oil)
Over the past ten years, U.S. imports of Canadian Crude Oil and Petroleum Products increased steadily from 925 million barrels in 2010 to about 1,600 million barrels in 2019. Almost two-thirds of Canada’s exports (over 3 million Bbl/day) are shipped to the U.S. Midwest through Enbridge’s Mainline. Having a single buyer for Canadian crude exports restricts Canada’s ability to compete for higher prices. Canadians are getting hosed and appear unable to see that new pipelines are needed to address this inequity!
Although crude prices largely rise and fall together, there are significant price differences (differential) between different streams, depending on the quality of crude, supply and demand fundamentals, and the cost to transport the crude to the final customer. Back in 2013 when WTI prices were hovering above US$100/Bbl, the differential between Western Canada Select (WCS) was US$25/Bbl and Canadian producers were receiving about US$75/Bbl. However, by 2020, and WTI trading around US$50/Bbl, the differential has barely changed at US$20/Bbl. resulting in WCS selling at around US$30/Bbl! Since Midwest refineries are largely at capacity, Canada must find other buyers, or face deeper discounts. In an effort to address the crushing differential problem, the Alberta Government imposed crude production limits 2019 in the hope that restrictions would address the oversupply situation and reduce the differential on Canadian exports. After years of delay in addressing protests from environmentalists and indigenous groups, two oil pipeline projects have recently received necessary approvals and construction has recommenced even as protests continue.
The world’s largest market for heavy, sour crude is the US Gulf Coast, where a multi-billion dollar refinery complex has been created to specifically process heavy crudes, but currently has very limited access from Western Canada. The proposed Keystone XL Pipeline to the Gulf Coast offers Canada the opportunity to access this market! Since Canada’s export pipelines are at capacity, incremental barrels of oil is being shipped by rail, which has a higher transportation cost and drives up pricing discounts. Shipping oil by rail is known to be more dangerous than by pipeline. TC Energy Corp. is ramping up activity on the Keystone XL pipeline which would allow Alberta’s heavy oil sands production to move about 500,000 Bbl/day to Gulf Coast refining complex. The project was proposed more than a decade ago and may still face legal challenges even after the Trump Administration approved a right-of-way across U.S. land early in 2020.
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More importantly, in our view, is the opportunity for Canada to break free from the U.S. export monopoly through the proposed Trans Mountain Expansion (TMX) project, which would access new Asian markets through BC’s West Coast. Canadian Government agreement and support at both Federal and inter-Provincial levels for oil and gas pipelines is vital. The recent Federal Court of Appeal ruling that the Government’s duty to consult with indigenous peoples did not grant them veto powers, has removed much uncertainty from the $9 billion projects. Government at all levels face escalating environmental opposition and resistance from indigenous (First Nations) on concerns over land claims and territorial rights. The tension between oil patch projects, indigenous land claims, and the desire to reduce greenhouse gas emissions is expected to fuel continuing debate and require a degree of finesse and cooperation from the Government not seen heretofore.
The recent injunction from a BC Supreme Court judge, ordering members of the Wet’suwet’en Nation to cease blocking construction of Coastal GasLink Pipeline has resulted in arrests in BC and further demonstrations as far away as Ontario on the Tyendinaga Mohawk Territory reserve. The de facto blockade, effectively blocking all rail traffic between Montreal and Toronto will affect transportation and the economy, and raises questions on how Provincial and Federal Governments deal with Indigenous rights, environmentalist protests and the rule of law!
Three pipeline projects are currently underway which would realize multi-billion dollar benefits for Canada’s Oil and Gas industry. In order of importance, we view Trans Mountain Expansion (TMX) first, Coastal GasLink second and Keystone XL third. In May 2018, the Federal Govt acquired TMX for $4.5 billion and will be spending more billions of taxpayer dollars before any chance of outside financing is possible, likely upon completion.
The Federal Government has an opportunity to balance existing pipeline project development with carbon emission reduction targets by rejecting further Oil Sands developments such as Teck’s $20 billion Frontier mine, and promoting investment incentives for sustainable, renewable energy. For Alberta, British Columbia and Canada as a whole, the future of the Energy Sector is posing existential questions.
Founder and President of Clarke Energy Consulting Inc. since 2004, John has over 35 years of international experience in industry and financial services for the ... <Read more about John Clarke>