Desperate to ship crude oil from the oil-rich province of Alberta to the Irving Oil Refinery on Canada’s east coast, Cenovus Energy took the path of least resistance last summer. It sent oil 710 miles through the Trans Mountain Pipeline to its west coast terminal in British Columbia, loaded it on a tanker, and began a 7,500-mile journey – through the Panama Canal – and up the eastern seaboard to New Brunswick.
“It’s encouraging to see more Canadian-produced oil refined at a Canadian refinery,” said Keith Chiasson of Cenovus in a July 2020 publication of Global News.
To an outsider, that statement might seem absurd, when the distance between Alberta’s prolific oil sands and the refinery is 2,600 miles – less than a third of the distance traveled by Cenovus.
Yet, it was considered a successful transaction, given the fact that there is no pipeline connecting Alberta, the location of the world’s third largest oil reserves, to Canada’s east coast, the location of the country’s largest refinery.
In addition to a lack of long-needed cross-country pipelines, pipeline capacity to U.S. refineries has been limited for years, said Chris Bloomer, president and CEO of the Canadian Energy Pipeline Association.
It has been widely reported that in landlocked Alberta, both issues have created detrimental constraints for Canadian producers – and they may soon affect the United States, the No. 1 consumer of Canadian crude.
For the last several years, U.S. refineries – particularly those on the Gulf Coast that require heavy oil and bitumen – have been increasingly relying on Canadian crude as supplies from Mexico and Venezuela dry up.
At the time of Cenovus’ circuitous journey, all eyes were on the Keystone XL Pipeline, approved by the Trump administration after the Obama administration rejected it. The 1,200-mile addition to the existing Keystone Pipeline was intended to help alleviate bottlenecks that have made, at times, shipments of oil to the United States feel more like drops than barrels, severely devaluing the price of Western Canadian Select.
However, since the Biden administration revoked its presidential permit in January, citing climate issues – a move that prompted 21 states to sue the administration on March 17 – many wonder how Canada, which is starting to see an uptick in production in its oil sands, will economically move its product to the United States.
“The U.S. market is critically important to Canada and has become more critical over time,” Bloomer said. “Likewise, Canada has filled an important gap for the United States, giving it a secure supply of heavy crude.”
Although it is expected that Canada will continue to export to the United States, some believe Canada will begin searching for new markets and the United States for new suppliers.
Pipelines have long been a source of public debate in Canada. Since the 1970s, both environmentalists and indigenous groups have fought them. Yet opposition has grown exponentially over the last decade as production in the oil sands – known for their heavy oil and bitumen – took off, said Brad Hayes, director of the Canadian Society for Unconventional Resources and president of Petrel Robertson Consulting.
“There is a concerted effort to paint any new pipelines as deleterious to the environment and the First Nations’ interests,” Hayes said. “Yet, there is never any comment on the fact that we will all be using oil and gas in the years to come.”
“We’ve got a country that’s more divided than you would ever see in the United States,” said John Hogg, past AAPG president, past president of the Canadian Society of Petroleum Geologists and president of Skybattle Resources.
In the last several years, changes in Canada’s pipeline approval process – which requires stringent environmental assessments and support from indigenous communities – have in some cases stretched the timeline from proposal to authorization for major projects to roughly 10 years, Bloomer said.
When you consider that final decisions can now be influenced by politics, pipeline projects in Canada are becoming too risky for investors, Hogg added.
A 2013 proposal by Kinder Morgan to expand Canada’s Trans Mountain Pipeline – its only artery from Alberta to its west coast – was mired in Canada’s most rigorous design, approval and consultation process in history, according to the Trans Mountain website. With 156 conditions placed on the project and a load of legal hurdles to jump, the company called it quits, forcing the Canadian government to purchase the pipeline for $4.5 billion in 2018 and continue the expansion project itself.
The Energy East Pipeline, proposed in 2013 by TransCanada, now TC Energy, would have created a desperately needed artery from Alberta to the Irving Oil Refinery in New Brunswick. Yet in 2017, the company abandoned the project, citing “existing and likely future delays resulting from the regulatory process, the associated cost implications and the increasingly challenging issues and obstacles” in a regulatory filing.
Had it been built, Cenovus never would have hauled oil through the Panama Canal.
And, in 2016, the Canadian government rejected the Northern Gateway Pipeline, proposed by Enbridge in 2008 to take diluted bitumen from Alberta to the west coast, concluding the project was not in the best interest of indigenous communities or the environment.
Canada is the largest foreign supplier of crude oil to the United States. According to the Energy Information Administration, Canadian crude oil and petroleum products accounted for 91 percent of the value of U.S. energy imports from Canada (and 89 percent of the value of U.S. energy exports). Furthermore, U.S. crude imports from Canada accounted for 56 percent of all crude imports to the United states in 2019, averaging 3.8 million barrels per day – an increase from 2018.
To send oil to the United States, Canada relies on four major pipelines: the Trans Mountain, which carries crude to Washington State, and the Express, Enbridge Mainline and Keystone, all arteries to the refineries in the Midwest and key hubs where crude is ultimately funneled to the Gulf Coast. Although not ideal, some shipments are sent by rail.
Typically speaking, when oil prices are favorable, production increases in the Canadian oil sands and can max out pipeline capacity. Canadian producers must then opt to move crude by rail or put it in storage – both of which are costly options, causing the value of WCS to drop, furthering the price differential between WCS and West Texas Intermediate. Ultimately, Canada must offer its oil at great discounts to the United States or curtail production in the oil sands, as Alberta elected to do in 2019 for nearly two years.
In 2018, for example, when WTI was trading at $43 a barrel, WCS was trading at $6. The large differential made it uneconomical to produce from the sands, and bitumen was pumping at a loss, according to a January 2021 report from OilPrice.com.
Now that oil prices are rebounding, the Canadian Association of Petroleum Producers anticipates that production in the oil sands will reach record heights of 4.25 million barrels per day by 2035 – and will likely encounter multiple repeats of the 2018-19 crisis.
Because 98 percent of Canada’s crude oil exports go to the United States, “we live and die by what happens in the U.S. market and the ability to get oil to the refineries in the U.S.,” Bloomer said. “If there are bottlenecks, if WTI drops and storage capacity is filled, the differential with Canadian oil expands dramatically. Having access to the market and the pipelines that can deliver, that’s everything.”
The Keystone XL would have allowed an additional 830,000 barrels per day into the United States. Now, no longer a possibility, Canada is looking to the current expansion project of the Trans Mountain line, which will increase capacity from 300,000 to 890,000 barrels a day when it is operational in December 2022. A second project to increase capacity of Enbridge’s Line 3, spanning from Alberta to Superior, Wis., by 370,000 barrels a day, also is expected to be operational in late 2022.
Bloomer believes that “even with those new lines, production is forecasted to increase, and this will lead to another capacity shortage in the next two to three years.”
The issue might lead one to wonder if building additional refineries in Canada might be a solution. Yet Hogg said that would merely add to the current problem.
“We are a small country in terms of population. There are just 4 million people alone in Alberta. If we build five new refineries, what do we do with the product? We can’t use it all. Gasoline, jet fuel, diesel, butane – what do we do with it?” he asked. “We would need to put it in a pipeline and export it.”
Since the shale boom, particularly in the Permian Basin, Texas has been producing more light oil than crude. Because many Gulf Coast refineries were optimized for heavy crude and bitumen, they began relying more on imports from Canada, Venezuela and Mexico.
Although Venezuela is home to the largest reserves of heavy oil in the world, years of corruption, neglect and, ultimately, sanctions placed on the country by the United States have all but crushed production.
Furthermore, Mexico is currently experiencing a significant decline in production from its world-class Cantarell Field and has not invested in exploration for other petroleum sources.
As a result, the United States is leaning strongly on Canada.
Some believe that once Canada’s Trans Mountain Pipeline expansion is completed, it will be more economical to ship crude to Asia. “China, India and Pakistan are all sourcing oil and gas because they know they need it,” Hayes said. “They are concerned about their people being able to live with adequate energy supplies.”
If Canada can find a more lucrative market, “the U.S. will have to change where it sources its heavy oil,” Hogg said.
According to the EIA, the United States does not have many options, except adversarial nations, including Russia, Saudi Arabia and Iraq – some the world’s top crude-producing countries.
“There is a strong mutual, economic benefit for our pipeline infrastructure and the U.S. refining infrastructure,” Bloomer reminded. “The Keystone project has been a political football and a victim of political symbolism.”
For two countries that thrive on mutual support, he said that burning the bridges that connect them seems counterproductive on every level.