Home Commodities Canada’s oil industry cuts reliance on US market as pipeline expands

Canada’s oil industry cuts reliance on US market as pipeline expands

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The Canadian oil industry lost a promising outlet for its crude when the controversial Keystone XL pipeline south to the US was cancelled in 2021.

This week it gained another route. A newly expanded Trans Mountain pipeline started commercial operations on Wednesday, funnelling more barrels from landlocked Alberta towards tanker berths on the Pacific coast in British Columbia.

The most expensive infrastructure project in Canada’s history, the C$34bn ($25bn) pipeline expansion was first proposed a dozen years ago. After lawsuits, permitting delays, vast cost overruns and a federal government takeover, its price tag has nearly quintupled from a forecast of C$7.4bn in 2017.

Now complete, the project has also almost tripled the system’s capacity to 890,000 barrels a day — more than Keystone XL was supposed to carry.

“This is a significant expansion of the country’s pipeline network, and it’s the first with direct access without having to rely on the United States,” said Lisa Baiton, chief executive of the Canadian Association of Petroleum Producers, a lobby group.

The expansion speaks to the persistence of Canada’s oil industry, the world’s fourth largest by production volume. It also highlights the tensions in the climate and energy policy of Canadian Prime Minister Justin Trudeau.

Trudeau’s government bought the pipeline for C$4.5bn in 2018 from Kinder Morgan when the Texas-based energy infrastructure company threatened to scrap it in the face of protests and lawsuits meant to block construction. While he called the project “in the national interest”, critics saw it as a betrayal of his climate-friendly bona fides.

Canada Oil map

Most of the oil will flow from Alberta’s oil sands, whose energy-hungry methods of extraction make it the source of some of the planet’s most carbon-intensive crude. Halting further development of the oil sands was a central aim of climate campaigners’ successful fight to persuade the White House to kill Keystone XL, which US President Joe Biden did by revoking a permit in his first days in office.

The soaring cost of the Trans Mountain project, worsened by supply chain bottlenecks, wildfires along its route and inflation, heightened frustrations among climate activists and fiscal hawks.

Canada could have implemented a truly massive green energy program that prepared us for the new economy with the C$34 billion,” said Keith Stewart, a senior energy strategist at Greenpeace Canada. “Instead, taxpayers are being forced to subsidise the sale of more high-carbon oil.”

But for Canada’s oil companies, it means diversifying sales that have long been yoked to refineries in US Midwest and Gulf coast states.

“I wouldn’t want to taint today with the discussion about the difficulty of getting projects built, because this is a great day for Canada to get this pipeline up and running, get it producing,” Jonathan McKenzie, chief executive of Canadian oil producer Cenovus, said on a company earnings call as the expanded line entered service on Wednesday.

Limited pipeline and storage capacity contributed to a discount for Western Canadian Select oil that was as wide as $50 a barrel relative to the US benchmark in 2018, and had “led to competition among producers to sell their oil, with refiners taking the lowest bid”, BMO Capital Markets analysts wrote.

Chinese energy groups Sinochem and Sinopec will be among the first customers for cargoes to be delivered from the expanded Trans Mountain, Baiton said. Katherine Cuplinskas, press secretary for Canada’s deputy prime minister and finance minister Chrystia Freeland, said the project will provide a reliable energy source to global buyers, in contrast with countries such as Russia, which now faces international sanctions and a price cap on its oil over its invasion of Ukraine. 

The bigger pipeline will also enable more Canadian oil volumes to hit US west coast states such as California, potentially replacing some supplies imported from Latin America and the Middle East.

Line chart of $ per barrel showing Trans Mountain's expansion is expected to ease the discount for Canadian crude

Oil production in Alberta has recently climbed to record levels in anticipation of the pipeline expansion. The discount for Western Canadian Select has started to shrink from about $19 a barrel at the start of 2024 to about $12 at the end of April. A recent report published by the Bank of Canada expects Trans Mountain will contribute roughly 0.25 percentage points to the country’s second-quarter economic growth.

Despite the high costs, Rory Johnston, a Canadian energy analyst who writes the Commodity Context newsletter, believes the state intervention was necessary. 

“It would be much worse had the Trudeau government not stepped in to buy the pipeline . . . because we wouldn’t have a pipeline,” he said.

Oil shippers have worried about pipeline tolls that amount to C$10.88 a barrel — almost twice a 2017 estimate — will cut into profit margins. Trans Mountain contends that cheaper fees could affect its “ability to meet its financial obligations”.

“The tolls are much higher than many of the shippers initially agreed to,” Johnston said, referring to 15-to 20-year deals that large producers signed from about 2012 to 2014 that allowed for “uncapped costs” that have since ballooned. “Now they’re locked into these arrangements.”

The last section of the Trans Mountain pipeline expansion project being assembled
The last section of the Trans Mountain pipeline expansion project being assembled © Chris Helgren/Reuters

Cuplinskas told the Financial Times that the tolls would boost revenues, making the pipeline more attractive to potential buyers. She said Ottawa will “launch a divestment process in due course” and added that the new pipeline will “ensure Canada receives fair market value for our resources”. 

Johnston said he expects the pipeline to sell for roughly half the C$34bn in construction costs.

The pipeline runs through many Indigenous communities. The government is planning to sell ownership stakes to these communities along the route and provide access to capital. 

While some groups remain stridently opposed to the project, almost 70 Indigenous communities have signed confidential benefit agreements regarding the pipeline, with the deals cumulatively worth C$580mn, according to the federal government. 

Analysts at BMO have singled out Chinook Pathways, a partnership between Calgary-based Pembina Pipeline and Indigenous groups, to buy a sizeable minority stake, but said any sale would be unlikely until later this year. 

“Investors need to see the pipeline in operation and certainty on final tolls prior to a transaction taking place,” they wrote. 

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