The Globe and Mail
In Alberta, politicians and energy executives have long warned of the danger of depending on “dictator oil” from countries with authoritarian regimes hostile to the West.
Their warnings have come into sharp focus since Russia invaded Ukraine, and became sharper still this week as the United States announced a ban on imports of Russian oil.
Just two weeks ago, banning Russian energy supplies was a bridge too far for Western countries. Such a potent economic sanction would strike at the heart of President Vladimir Putin’s ability to fund his aggression against Ukraine. But analysts, economists and many politicians warned it would send global oil and gas prices skyrocketing, and put Western economies at risk of recession.
The world needs more Canadian oil and gas
Biden’s search for more oil ignores an obvious source
The risk is greatest for Europe, which has relied on Russia for a third of its oil and 40 per cent of its natural gas. But Russian supply is also significant in the United States. It was importing 700,000 barrels a day of oil and petroleum products from that country as demand surged from the depths of the COVID-19 pandemic and Americans got back into their cars as health restrictions were relaxed.
Then, as the bloodshed in Ukraine worsened this week, U.S. President Joe Biden took the drastic step of issuing a moratorium on Russian fuels. The move quickly put the spotlight on the country that supplies more than half of America’s oil and gas imports: Canada.
In short order, a fragile network of the global energy supply has been upended, and our country is forced to re-examine its role as a producer and exporter of fossil fuels after emphasizing ambitions to slash carbon emissions and eventually wean itself off oil and gas.
In the short run, Canada is limited in its ability to make big gains in oil and gas output owing to scarce new export pipeline capacity and a pullback in recent years in capital spending by producing companies. Even as oil prices have climbed in the past year, producers have directed their cash to paying down debt, and to boosting dividends and share buybacks.
But the latest run of oil prices to well above US$100 a barrel could reignite that spending.
Longer term, a major expansion of the Trans Mountain oil pipeline to the West Coast is being built, as is a massive liquefied natural gas terminal further north. Beyond those, Canadians must decide if they want to be a bigger fuel source in North America and beyond in the name of energy security, while moving to a net zero economy – and if achieving both is even possible.
The immediate need is acute. The U.S. ban on Russia’s oil has sent Mr. Biden seeking backup supplies from countries that have been anything but reliable allies, such as Venezuela and Saudi Arabia. Venezuela’s crude has been under U.S. sanction since 2019, when the Trump administration broke off relations with President Nicolas Maduro.
But friendly Canada? When it comes to increasing exports, the oil industry finds itself hamstrung after years of delayed and failed pipeline proposals, notably the controversial Keystone XL project, which Mr. Biden cancelled as one of his first acts as President in 2021. The frustration in Alberta is palpable.
“I find it absolutely astonishing that any country consuming oil seeking to maximize their imports from Venezuela before first exhausting all opportunities to get their oil from countries that are aligned with them politically and ethically,” Alex Pourbaix, chief executive officer of Cenovus Energy Inc., said in an interview. “So I would hope before any country looking for oil supply would first do anything humanly possible to fill that need from Canada, because I think Canada produces the most ethical oil in the world.”
His comments reflect a widely held view in the oil patch that companies do not get the credit they deserve for supplying energy when it is needed most, or for improving their environmental, social and governance (ESG) performance when producers in other jurisdictions don’t even try.
Years of uncertainty over Canada’s ability to expand export opportunities have also played a role in producers’ decisions to put the brakes on investing vast amounts of new capital to boost their output of oil and gas. They have worried the new supply would get backed up and prices crushed. The two large projects under construction – Trans Mountain and the LNG Canada terminal at the port of Kitimat, B.C. – are years from completion, after a number of delays.
Alberta Premier Jason Kenney, whose investment in Keystone XL cost his province’s taxpayers $1.3-billion when the project was cancelled, is calling for it to be resurrected, arguing it could be in operation in less than a year. However, the odds of that happening are slim at best, even if project proponent TC Energy Corp. wanted to do so, said Kristen van de Biezenbos, an associate professor at the University of Calgary’s law school.
As it stands, there is no U.S. permit to reissue. Approval by the Trump administration was effected through executive order, rather than normal regulatory procedure, so the Biden administration was able to quash the project. Seeking a new approval could take years, not months, Prof. van de Biezenbos said.
Meanwhile, White House spokeswoman Jen Psaki said last week the administration has no plan to reconsider Keystone XL, a proposal at the centre of the U.S. energy-versus-environment debate throughout the 2010s.
The real cost of gasoline in the U.S.
The national average retail price for gasoline hit all-time
records this week, but after adjusting for inflation, costs
were still higher during the 2008-09 financial crisis
Inflation-adjusted
Unadjusted
US$5 per gallon
4
3
2
1
0
1980
1985
1990
1995
2000
2005
2010
2015
2020
Note: Inflation-adjusted costs in 2022 dollars; data through Feb. 2022
the globe and mail, Source: reuters;
U.S. Energy Department
The real cost of gasoline in the U.S.
The national average retail price for gasoline hit all-time
records this week, but after adjusting for inflation, costs
were still higher during the 2008-09 financial crisis
Inflation-adjusted
Unadjusted
US$5 per gallon
4
3
2
1
0
1980
1985
1990
1995
2000
2005
2010
2015
2020
Note: Inflation-adjusted costs in 2022 dollars; data through Feb. 2022
the globe and mail, Source: reuters;
U.S. Energy Department
The real cost of gasoline in the U.S.
The national average retail price for gasoline hit all-time records this week, but after adjusting
for inflation, costs were still higher during the 2008-09 financial crisis
Inflation-adjusted
Unadjusted
US$5 per gallon
4
3
2
1
0
1980
1985
1990
1995
2000
2005
2010
2015
2020
Note: Inflation-adjusted costs in 2022 dollars; data through Feb. 2022
the globe and mail, Source: reuters; U.S. Energy Department
Since Russia invaded Ukraine, the Biden administration has taken what many people in the U.S. oil industry see as reversal to an anti-fossil fuel approach to domestic energy. As Americans face soaring gasoline prices, Washington has asked the shale oil industry to pump any supplies it can.
The oil, tapped using fracking technology, had lifted the United States to the position of top global producer, but since the depths of the pandemic, production growth has tailed off. And as international oil prices climbed back from their lows in recent years, Wall Street demanded payback in the form of richer dividends from producers, rather than increased output.
Mr. Pourbaix said the surging prices will likely prompt Canadian producers to plow more money into increasing output, which they have been hesitant to do, fearing their stock prices would get punished.
Even in the absence of Keystone XL, the oil could get to market. There is excess export capacity on the existing pipeline network after Enbridge Inc. put a replacement pipeline to the U.S. Midwest, known as Line 3, into service late last year.
Richard Masson, executive fellow of the University of Calgary’s school of public policy, said Alberta’s oil producers could send up to an additional 200,000 barrels a day south into the U.S. market with existing production and transportation infrastructure. Beyond that, however, Alberta can’t do much in the short term to fill the gap. “It would be helpful, but not enough,” he said.
Nor does he expect that Mexico or Venezuela will prove able to significantly increase exports. For the most part, he says, the supply gap will close not because of increased production, but reduced consumption resulting from higher prices. And, Mr. Masson notes, the pain of higher pump prices will bleed into Canada because the continental energy market is integrated.
Then there’s natural gas. In Europe, prices are already soaring because of worries that supplies from Russia will be cut off. Germany would have to pivot to imports of LNG to reduce its dependence on the Putin regime.
But Canada is faced with a mismatch in timing between when the country could theoretically export LNG and Europe’s immediate need for the fuel in 2022, said Clark Williams-Derry, an analyst with the Institute for Energy Economics and Financial Analysis. It would realistically take at least three years to build even a small-scale LNG project, so the window of opportunity for Canadian exports to flow is for the medium to long term, not in 2022 – or even 2023.
After years of false starts by a wide range of would-be developers in Canada, it’s also unclear how many LNG plants could get built in the next half decade.
The Shell PLC-led LNG Canada project in Kitimat is slated to start exports to Asia in 2025. That would indirectly help Europe because it could free up LNG supplies elsewhere in the world to be rerouted to Europe. Beyond that, just four proposals for exports on LNG tankers remain active in British Columbia. Another two have been proposed for Atlantic Canada.
Crucial to any long-term export plans is participation by Indigenous peoples. As Canadians have seen, not doing so from the start leads to opposition, regulatory and legal quagmires, and dashed hopes. If new projects are to be built or existing ones expanded, offers to First Nations communities for involvement – including ownership – are key.
This week, TC Energy announced it had struck a deal to sell a 10-per-cent stake in the contentious Coastal GasLink pipeline to Kitimat to two groups that together represent 16 of 20 First Nations along the pipeline route. Coastal GasLink would carry natural gas from northeastern B.C. to the LNG Canada terminal. First Nations groups also plan to bid for ownership stakes in Trans Mountain.
Leaders involved in the Coastal GasLink negotiations said the expected pipeline revenues would help pay for services such as elder care, road paving and a hockey rink. And they hoped the agreement would set a precedent for future partnerships.
“Our First Nations can help the economy, in a broad sense,” said Chief Corrina Leween of the Cheslatta Carrier Nation, which is part of one of the groups that have agreed to acquire an equity stake. “We’ve proven we can survive in the most devastating situations, so give us a chance to do it.”
Ottawa has made much of its plans to cap oil and gas industry greenhouse gas emissions as part of its target to achieve a cut of 40 per cent below 2005 levels by 2030. Prime Minister Justin Trudeau made a point of announcing that at the COP26 climate summit in Scotland last November. But the plans for doing so are still coming together.
Such moves on the environment file have often put the Trudeau Liberals at odds with the governments of Alberta and Saskatchewan and the oil patch. Federal carbon pricing has been a frequent source of friction – Mr. Kenney and Saskatchewan Premier Scott Moe fought against it in court, and lost.
Polices that could restrict oil and gas production and transport – including a tanker ban on the West Coast and a cap on energy industry emissions – are also political flashpoints.
In the wake of Russia’s invasion of Ukraine, Ottawa isn’t committing to any major revamp of its energy and climate policies that might allow for greater oil and gas production. But after discussions this week with German Chancellor Olaf Scholz, Prime Minister Justin Trudeau acknowledged Europe’s “heightened need” for fossil fuels because of the conflict.
The government is leaving the door open for some assistance to help Europe wean itself from Russian oil and gas. “We also talked about ways where we can partner not just in the short and medium term on energy supplies, but also staying focused every step of the way on that transition towards renewables, towards hydrogen, towards cleaner sources of energy,” Mr. Trudeau told reporters.
However, an increased need for fuels in North America need not necessitate relaxing the aims to slash emissions within the oil and gas industry, said Mark Little, CEO of Suncor Energy Inc., Canada’s largest oil sands producer.
Suncor, Cenovus and other big name oil sands producers have banded together in a coalition to invest and share technology with the aim of getting to net zero by 2050 – an alliance they call Oil Sands Pathways. A large part of the strategy involves major investments in carbon capture, utilization and storage (CCUS) technology, which requires contributions by governments as well, the industry says.
“We need our emissions need to start declining and so we are planning on doing both – continuing to produce the oil and get our emissions to net zero. We think this is great for the Canadian economy, we think it’s great for Alberta and it’s certainly great for the companies,” Mr. Little told The Globe and Mail.
“What we’re suggesting is a framework that allows us to take this money that we’re all benefiting from, from the industry right now, [and for] the federal government, provincial government and the industry to co-invest to achieve energy security, world-class ESG performance and net zero.”
The issue for future Canadian oil exports is the cost of the supply when technology such as CCUS is factored in. One glaring missing piece of the Oil Sands Pathways strategy is the U.S. refining industry, which would buy the carbon-reduced barrels, possibly at a premium price, said Robert Johnston, adjunct senior research scholar at the Columbia University Center for Global Energy Policy. Indeed, emissions come not just from extraction, but also from processing and end use.
“If we’re going to make this big investment in Canada in net-zero production, will U.S. refiners come along on that journey? We’re sending them lower-carbon oil, so how does that align with their goals?” Mr. Johnston said. “I’m really surprised there isn’t a more public discussion around those lines.”
In addition, the strategy’s success relies heavily on support from institutional investors, who are increasingly making buy, sell and hold decisions based partly on ESG metrics.
Mark Jaccard, a professor at Simon Fraser University’s School of Resource and Environmental Management, rejects any notion that an energy-security crisis justifies watering down long-term emissions reduction targets for fossil fuel producers.
Short-term crises have “always been our excuse” for favouring increased fossil fuel production over a transition to a lower-carbon economy, he said. “I bristle whenever industry trots that one out again, or the premier of Alberta, or whomever.”
However, Prof. Jaccard said subsidies for increased ethanol production in North America would be a feasible medium-term solution for increasing fuel supplies, and tighter fuel efficiency standards would also help deal with any shortfall in imported oil.
Canada and the United States are being forced to take a fresh look at their energy relationship in several areas. Oil and pipelines have often been a source of bilateral tension. In the 2010s, then-president Barack Obama and then prime minister Stephen Harper clashed over Mr. Obama’s hesitance, then refusal, to approve Keystone XL on environmental grounds.
Today, it appears the two governments are more closely aligned on major energy issues, especially the need to shift to lower-carbon economies and build up their capabilities to export clean technologies. As NATO members, the North American neighbours also agree on European security matters.
“It may not be exactly what Alberta wants but there is alignment. Ottawa and Washington see that there’s a need for oil and gas in the immediate term. They are less convinced of the need for oil and gas in the long term,” Mr. Johnston said. “And they want to make sure there’s a lot of emphasis on helping Europeans get to their climate goals and diversify away from Russian oil and gas through low-carbon and renewable investments.”
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