Canada’s oil industry suffers another blow

Author: Stefan Baumgarten

2021/06/11

TORONTO (ICIS)--Canada's oil industry has suffered yet another blow as the Keystone XL oil pipeline was formally cancelled this week, leaving taxpayers in oil-rich Alberta province with a Canadian dollar (C$) 1.3bn ($1.1bn) loss on their government's investment in the project.

The 830,000 bbl/day, nearly 2,000km pipeline has often been described as critical for the future of Alberta’s oil industry.

Due to start up in 2023, the long-delayed project would have provided direct access for producers to US Gulf Coast refining markets.

However, on Wednesday, Canadian energy infrastructure major TC Energy (formerly TransCanada), officially terminated the project - ending a 13-year battle for regulatory approval, a battle that underlines the challenges of getting major oil and gas infrastructure projects built in North America.

TC Energy proposed the project back in 2008, starting a long, eventually unsuccessful regulatory process.

While the project has had strong support from the US refining and petrochemicals industry right up to its termination, it quickly became a focus for environmentalists on both sides of the border - especially as it would have shipped oil sands-based crude, which has a worse environmental footprint than conventional crude oil.

As the pipeline would have crossed the US-Canada border, it required White House approval, in addition to state and provincial clearances from the Alberta and Saskatchewan provinces, the US states of Montana, South Dakota and Nebraska, as well as various other approvals.

The long and complicated regulatory process provided many opportunities for opponents to intervene and make their voices heard.

Former President Barack Obama rejected Keystone XL twice, but Donald Trump revived it with an executive order after he took office in 2017.

Then last year, when the project appeared to falter amid the coronavirus pandemic and recession, the Alberta government stepped in and took an ownership stake, saying that the project was “essential” to Alberta’s future prosperity.

However, in January 2021 US President Joe Biden revoked Keystone XL’s presidential permit as one of his first acts on assuming office.

As for Alberta’s financial loss from the Keystone XL investment, premier (governor) Jason Kenney said this week that the government may seek to sue the US under the Chapter 11 investor protection provisions of the North American Free Trade Agreement (NAFTA).

While NAFTA has been replaced with the US-Mexico-Canada Agreement (USMCA), its investor protection rules remain in effect until July 2023.

ONLY TWO LEFT
Without Keystone XL, and after the previous cancellations of other important projects, Alberta’s oil industry is now left with only two pipeline projects to support its access to export markets.

Both projects are nearing completion, but environmentalists, encouraged by the Keystone XL termination, have pledged to continue opposing them.

One project is the federal government-owned Trans Mountain expansion project of an existing pipeline from Alberta to an export terminal near Vancouver.

Prime Minister Justin Trudeau’s government bought Trans Mountain from US energy infrastructure firm Kinder Morgan when the expansion project ran into opposition from environmental and indigenous peoples’ groups.

The other project is the Enbridge’s Line 3 replacement and expansion, running from Alberta to Superior, Wisconsin. The Canadian section has been completed, while work in Minnesota is ongoing.

There were two other big projects Alberta’s oil industry had been looking to for market access, but both got cancelled amid resistance and pressure from environmentalists and others.

Those were Enbridge’s Northern Gateway from Alberta to an export terminal at Kitimat, British Columbia, and TC Energy’s west-to-east Energy East project from Alberta to an export terminal in the seaport city of Saint John, New Brunswick, on Canada’s Atlantic coast.

MORE TROUBLES …
Meanwhile, Canada is having yet more pipeline troubles with the US, this time over Enbridge’s existing Line 5.

The Michigan government, fearing oil spills at a section where the nearly 70-year-old pipeline crosses the Straits of Mackinac into Michigan on its way to the Sarnia refining and petrochemicals hub in Canada’s Ontario province, ordered Enbridge to shut down Line 5 by 12 May.

However, despite the order, Enbridge is defying Michigan and keeps operating Line 5.

The company has challenged Michigan’s order in a US federal court and says it will keep operating Line 5 – unless ordered by a court to shut it down.

Canada’s federal government has supported Enbridge in the US court proceedings, and it has lobbied the Biden administration to intervene.

While President Biden could issue an executive order to prevent Michigan from shutting down Line 5 oil, he may not want to do so as, politically, Biden and Michigan Governor Gretchen Whitmer are seen as close allies, political commentators have said.

Whitmer, in her 2018 campaign for governor, committed to shutting down Line 5, and Biden would be unwilling to prevent Whitmer from fulfilling this campaign promise, they said.

The case remains undecided, and years of court battles could be looming - along with continued uncertainties for the refining and petrochemicals industries in eastern Canada, which rely on feedstock supplied through Line 5.

As for Alberta, while the Keystone XL cancellation is clearly a setback, longer-term it may yet be seen as an opportunity.

Pressure keeps building on the oil industry in a world that aims to turn away from conventional oil and gas, and even Alberta, sometimes seen as lagging behind on the environmental agenda, is catching on.

Notably, this week's Keystone termination coincided with the announcement of an initiative by Alberta's major oil sands producers to reach net-zero greenhouse gas emissions by 2050, and with Air Products’ announcement of plans for a major net-zero hydrogen production complex in Alberta.

Meanwhile, the Biden administration is fully committed to its environmental agenda, making it hard to get new pipelines or other oil and gas projects approved south of the border.

"Given the Biden administration’s all-government approach to combatting climate change, fossil fuel projects will likely have an uphill battle to obtain any required federal government permits or authorisations," said Steve Weiler, a partner at Dorsey & Whitney, a US-based international law firm.

Additional reporting by Al Greenwood and Adam Yanelli in Houston

Thumbnail image: map of cancelled Keystone XL, from Hardisty, Alberta, to Steele City, Nebraska, from where it would have connected to the US Gulf Coast. Source: TC Energy

($1 = C1.21)

Focus article by Stefan Baumgarten