Faced with a potentially fatal delay on a multibillion-dollar oil pipeline carrying crude to the US, it was time for Canada to start looking east. “This does underscore the necessity of Canada making sure that we are able to access Asia markets for our energy products,” Canadian Prime Minister Stephen Harper told reporters on the sidelines of the Asia-Pacific Economic Cooperation forum.
“That will be an important priority of this government going forward,” Canadian Prime Minister said last weekend, noting he raised the issue of energy exports in his meeting with Chinese President Hu Jintao.
The US State department last week announced deferring the 2,700-kilometer TransCanada’s Keystone XL project that was to bring crude from the new oil sands expansions in northern Alberta to Texas, the hub of the American refining industry, for converting it into gasoline and other fuels. State Department said a final decision will be made later after conducting more studies on the environmental impact of the proposed pipeline. President Obama also publicly supported the decision, so as “to ensure that all questions are properly addressed and all the potential impacts are properly understood.”
The broader dilemma in the entire equation for Canada seems its economy remains caught between a close neighbor that doesn’t always share its priorities, and distant customers in Asia who want its natural resources but can’t easily get them.
Many in Ottawa were disappointed at the Washington decision. Top Harper government ministers also characterized the Keystone delay as a wake-up call. Speaking from Honolulu, Finance Minister Jim Flaherty told CTV’s Question Period: “We’ve got to go where the trade is,” adding that Canada needs to work harder to “emphasize” its trading relationships with Asia.
Natural Resources Minister Joe Oliver similarly told CBC-TV that diversifying away from the United States, particularly in energy, is “right at the centre of our thinking. ... It is a major, fundamental strategic objective for Canada.”
And thus in the immediate aftermath of the US announcement, Canada further signaled the importance it placed on ensuring access to Asian markets by reversing an earlier decision that membership in the Trans Pacific Partnership was not necessarily in Canadian interests.
With an estimated 170 billion barrels, the oil sands of Canada are the world’s third-largest oil deposit, after Saudi Arabia and Venezuela. Harper and his Conservative government have said their goal is to turn the country into a global energy superpower.
For now, the United States is its only export market and last week’s Keystone XL delay laid bare the risks in that. Canada cannot depend just on one market, industry leaders echoed all around the vast country. Canada is already the biggest oil supplier to the United States, shipping more than 2 million barrels a day, much of it from oil sands. But the industry’s promise — and problem — are the projections that output from the tar sands alone could double to 3 million barrels a day by 2020 and jump to 3.7 million by 2025. The issue remains where to sell this growing output and indeed how?
The industry will move quickly to tap Asian markets in the absence of the pipeline, said Steve Laut, president of Canadian Natural Resources Ltd, which has committed 120,000 barrels a day of oil to Keystone XL.
Should no other pipelines get built, production could overwhelm the capacity to export the crude within four years, says Jackie Forrest, the lead oil sands analysis at IHS CERA. The result could be stalled growth and delays to multibillion-dollar projects as producers deal with a glut in supply and no new demand, Forrest underlined.
Without new pipe of some form, it will only be a few years before Canada’s oil gets backed up and begins selling at a deep discount, a prospect that stands to erode corporate and government revenues by billions of dollars a year. “If nothing else happens between now and 2015, you’ll see steeper and steeper discounts for Canadian crudes as they saturate the U.S. Midwest market,” Forrest said. Some have warned that prices could fall by $10 to $20 a barrel. With Western Canada now producing 2.6 million barrels per day, even a $10 discount threatens some $9.5-billion a year.
The stakes are high. And diversifying is not be to be an easy option.
“We’ve entered a whole new context that absolutely is going to be a challenging context for any infrastructure project, for any new oil sands project,” said Dan Woynillowicz, spokesman for the Pembina Institute, an environmental think tank. “There’s just going to be much more scrutiny and debate that is driven by these projects.”
The industry’s next big infrastructure proposal is Enbridge Inc’s $5.4 billion Northern Gateway pipeline, which would extend to the Pacific Coast from Alberta. From there more than half a million barrels a day could be shipped on tankers across the Pacific to China and other Asian nations.
This too faces significant opposition.
Harper and his natural resources minister, Joe Oliver, are already under fire from green groups and aboriginal people for promoting it before public hearings begin in January. More than 3,000 people have already registered to make comments during proceedings.
Native groups, including the Yinka Dene Alliance, whose lands make up a quarter of the proposed British Columbia route, say they will oppose the line under all circumstances and they promise court challenges should it win approval.
Much opposition is centered on carbon emissions. Studies comparing emissions of oil sands crude against conventional oil vary, and are at the heart of a push by the European Union to tag sand oil as inherently polluting, another threat to expanding Canada’s markets.
Pembina quotes research showing that oil sands emissions are 10-15 percent higher than conventional oil production. A much-quoted report from IHS CERA, combining several studies, puts the average at 6 percent above regular oil, measured from the point of production through to end use. Canada does not export oil to Europe, but worries that the European tag could turn other markets against it.
Indeed Canada isn’t about to abandon the United States. Geography commands; it has to continue playing — though hardball at times — with its dominating neighbor. Yet the fact remains that State department doesn’t seem to have bought the very idea of ethical oil — Canadian oil being ethical than Arab oil — so vehemently portrayed by some in Canada, over recent weeks and months. After all oil remains oil — irrespective of the title given — one cannot deny!