Published on Tuesday, October 29 2019
Authors : Ed Koshka and John Auers

Perhaps following the advice of their iconic rock band, Bachman Turner Overdrive (BTO), Canadian voters chose to “Let it Ride” with incumbent Prime Minister (PM) Justin Trudeau in last week’s national elections.  Despite all the scandal, controversy and personal low popularity, Trudeau’s Liberal Party garnered the plurality of seats (157) in the House of Commons when Canadians voted on Monday October 21.  Together with the 24 seats won by their prospective allies in the New Democratic Party (NDP), Trudeau (the son of Pierre who was PM during the height of BTO’s popularity in the 1970’s), has enough support to retain control of the 338 seat Parliament; however, the results certainly weren’t a rousing affirmation of the Liberal government, as they received less than 35% of the vote (losing 27 seats vs. the 2015 election) and will have to depend on the continued support of the farther left (and extremely anti-oil) NDP to gain sufficient votes to pass legislation and budgets.  As such, this election is potentially very bad news for the energy industry centered in the West and particularly worrisome for prospects in Alberta’s vast Oil Sands region. 

“I’ve been waiting half the night” – Pipeline delays hinder Western Canadian oil production

Canadian pipeline egress has been problematic for several years as environmentalism has slowed necessary expansion projects such as the Keystone XL pipeline and Enbridge Line 3 replacement into the U.S. and the Transmountain Pipeline Expansion in Canada (TMX).  Other pipeline projects were abandoned by proponents after several years and hundreds of millions spent.  The Northern Gateway Pipeline would have carried over 800,000 barrels per day of crude oil from the Edmonton Hub to the West Coast, but was cancelled in 2015 by the newly elected, Trudeau lead Liberal government despite having received both regulatory approval and Federal approval with the previous conservative lead government. 

The Energy East project was proposed to carry over 1 million barrels per day of crude oil across Canada to East Coast ports and refineries, but was abandoned by TransCanada even before regulatory hearings began due to opposition from environmentalists: First Nations, the City of Montreal and Quebec.  Any one of these projects would have provided for years of Oil Sands growth and reduced significant discounts caused by supply exceeding the available pipeline capacity.  This discounting was clearly demonstrated in 2018 when the increase in supply triggered by the Fort Hills Mining project began to supply the Edmonton hub with over 150,000 barrels per day of diluted bitumen.  This tipping point forced producers to look to rail, the only other available outlet, but a shortage of engines, railcars and rail-loading caused the WCS price differential to widen from $12 off WTI to over $40 in just two months.  The provincial government then had to impose a mandatory curtailment on crude production of around 300,000 barrels per day in order to bring the supply and pipeline capacity demand in balance.  The curtailment program currently sits at around 80,000 barrels per day and will likely be lifted altogether as crude-by-rail capacity increases and the differential increases to make crude-by-rail economics more attractive or around $18 (note- WCS forward curve for Q1 2020 is currently trading at $20 off WTI).

So oil pipelines have become a significant issue in Canada and were one of the main topics debated in the Federal Election.  Let’s examine how each political party viewed the pipeline problem. The Conservative Party is and has been a supporter of pipeline development and had stated that it would push ahead with the TMX project since TMX had received regulatory approval, and in June 2019 Federal approval.  The only remaining roadblock (if any) for TMX is related to the B.C. Provincial Court of Appeal which had opined on an application by the City of Burnaby, Vancouver, and First Nations to have the application quashed, and recommended  that further consultation with First Nations be conducted.  As mentioned, the Conservative Party (circa 2014 while in power) approved the Northern Gateway pipeline project to the Westcoast.

“You can’t see the morning, but I can see the light” – Conflicting priorities and interest groups hinder policy making

The Liberal party has a publically stated platform of protecting the environment and encouraging resource development.  In practice though, it has become increasingly difficult for them to balance these at times of conflicting views.  One of the policies implemented by the Liberal Government was a carbon tax of $20 per tonne that would increase to $50 per tonne in 2022.  The Liberal platform in the recent election calls for Canada to be net carbon neutral by 2050.  In order to accomplish this goal, many of those in favor of this policy call for the eventual elimination of the oil industry, thus citing the need for no new pipeline developments.  On the other side, the oil industry, supported by the Conservative, pro-industrial development Alberta government, see the carbon tax as a major threat to Canada’s largest contributor to national revenue and job creation.  Further complicating the issue is the “Not in my Backyard (NIMBY)”opposition to pipelines by First Nations groups, environmentalists and local municipalities.   This is particularly intense in regard to the expansion of TMX into the Westridge terminal at the mouth of Burrard Inlet, which by the way is already one of the busiest ports on the West coast (and also draft limited to Aframax vessels).  This is going to be a difficult balance for the Liberals to maintain made even more difficult since the Liberal’s now have only minority power and will have to negotiate with the NDP party, who are opposed to any new pipeline development.   In 2018, Kinder Morgan (TMX’s owner and operator) threatened to cancel the project due to frustration on the length and uncertainty of the regulatory process and risk that the judiciary process would halt or further delay the project.  This prompted the Federal government to step in and purchase the existing 300,000 barrel- per-day pipeline for CAD$4.5 billion and assume the development of its expansion. 

“Would you let it ride?” – What’s next?

So where does Canada, Alberta and the Oil Industry go from here?  TMX development is likely to continue to be delayed despite it being shovel ready.  Will the Liberal minority government have the political nerve to move forward with its development?  If it does, it faces the serious risk of a non-confidence vote in Parliament in the next year or two, which would trigger another federal election process.  The Liberals who want to maintain power will have to make concessions to the left leaning NDP to gain their support.  So if TMX does not proceed, what other options exist to oil producers?  The Enbridge Line 3 Replacement project will add another 400,000 barrels per day of capacity and much needed relief by 2H 2020.  KXL development is still in question.  Crude-by-rail is the fall back, but rail costs are traditionally higher than pipeline.  Other options exist for processing bitumen in order to lessen or eliminate diluent, thereby increasing the value of the bitumen and reducing transportation costs associated with diluent.

Turner, Mason & Company (TM&C) recently published a multi-client report that highlights options for the Oil Sands industry for bitumen marketing, transportation, upgrading, partial upgrading and refining.  This report includes an analysis of crude-by-rail and options including diluent reduction that make bitumen by rail safer and a more economic transportation option for producers.  Bitumen-by-rail is also more desirable to refiners that allow them to tailor-blend the bitumen as feed for their specific refinery configuration.  Contact TM&C for more information.