Canada needs a pipeline to the future

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Donald Trump is vowing to use Venezuela’s oil exports to drive down oil prices in the United States in what would be a major blow to the profit margins of Alberta’s oilpatch, and the province’s coffers.

Resumed shipments of high volumes of Venezuelan heavy oil to the refineries on the U.S. Gulf Coast after a near seven-year absence would oversaturate the North American market for Alberta’s own heavy oil, driving down its price relative to lighter crude oils.

Existing production from Venezuela is the immediate threat confronting Alberta and its oil producers. That threat could grow in coming years, if U.S. capital and expertise rejuvenates Venezuela’s existing infrastructure and surge even more if unexploited reserves are tapped.

Anyone that shrugs off that threat should look at the historical prices for Western Canada Select (WCS) heavy oil and West Texas Intermediate (WTI) light crude.

In December, 2018, a barrel of WCS sold for just 12 per cent of the value of a barrel of WTI. But starting in 2019, Venezuelan exports to the United States began to plummet as sanctions tightened, withdrawing a significant source of heavy oil from North America.

Venezuelan oil affects Canada only a little. But even a little is too much

Exports dropped from 19.5 million barrels for the month of January to zero by July. And by July, Alberta’s WCS was selling for 78 per cent of the value of WTI. (Five years later, the opening of the Trans Mountain pipeline expansion had a similar effect, by allowing Canada to access new markets in Asia, siphoning off supplies of heavy oil from North America.)

Venezuela’s production in recent years has been shipped to Chinese refiners. But it appears that Mr. Trump intends to steer that oil into the U.S. market. Mr. Trump’s geopolitical machinations threaten to send that math into reverse, driving down the price of heavy oil. That would be an enormous boon to U.S. refiners and, most likely, American consumers.

Alberta and its oilpatch would suffer, with the pain growing with each new barrel of Venezuelan crude. Domestic producers have been improving their cost-competitiveness, but a glut of heavy oil would at a minimum hurt profitability. A big enough glut could have much worse effects.

Add to that the politically driven risk of continuing to depend so heavily on the U.S. market for Canadian energy exports.

The correct policy response is obvious, as we have previously argued: more pipeline capacity to Asia – where Chinese refiners, among others, will be thirsting for heavy oil to replace Venezuelan shipments.

Increasing the capacity of the Trans Mountain pipeline would be a quick first step. Beyond that, a new pipeline to the West Coast will be needed for Canada to connect with new Asian markets, perhaps including Japan.

Andrew Willis: Canadian energy producers face an oil glut that undermines the case for more pipelines

Heather Exner-Pirot, senior fellow and director of energy, natural resources and environment at the Macdonald-Laurier Institute, makes the unexpected point that Alberta’s heavy oil is particularly suited to the Japanese market, where gasoline demand is in long-term decline. Typically, Alberta’s heavy oil sells at a discount because it is harder to refine, and each barrel produces relatively less gasoline and more asphalt and petrochemicals.

But that calculus could be turned on its ear in Japan. Declining Japanese demand for gasoline means that refiners would be able to satisfy other petroleum product demands with relatively fewer barrels – making more efficient use of each barrel of Alberta heavy crude.

It will take political commitment (and billions of dollars) to connect with such markets. The rhetoric, at least, from political leaders is evolving. Prime Minister Mark Carney this week touted the “competitiveness of Canadian oil.” Still, Mr. Carney is only willing to say that his government is “working toward” a new pipeline. Meanwhile, Alberta Premier Danielle Smith has come up with a name (the Northwest Coast Oil pipeline), a website and a promise to submit a proposal to the federal Major Projects Office by July 1.

The two governments need to show, and soon, a plan for building a pipeline to the West Coast, including the not-small matter of who in the private sector will be footing the bill.

It may seem like Canada has all the time it needs, with the Trans Mountain expansion not yet fully utilized, and the prospects for expanded Venezuelan oil production hazy at best. But the events of the last year – and especially this week – have demonstrated the folly in dallying too long to safeguard the national interest.