Week Ending April 9, 2021

At Scotiabank CAPP Session, Policies in U.S., Canada Highlighted

This Article Appears as Published in Foster Report No 3344
At Scotiabank CAPP Session, Policies in U.S., Canada Highlighted

As oil markets in the U.S. and Canada have become more integrated, the policies adopted in both nations are affecting the energy sector’s rebound from the COVID-19 pandemic, with early moves from the Biden administration highlighted by speakers during a conference sponsored by the Canadian Association of Petroleum Producers (CAPP).

The American Petroleum Institute (API) released a study from ICF showing increased integration and oil transportation across the border in many forms, including substantial gains in U.S. oil being sent to Eastern Canadian refineries by rail, pipeline or marine vessels. The study illustrates the energy security gains made in U.S. and Canada, with reduced reliance from both countries on supplies from “OPEC plus” nations, said Frank Macchiarola, senior vice president of policy, economics and regulatory affairs at API.

In Canada, where a national carbon price has been upheld by Canada’s Supreme Court and increased $10 to $40/ton in April, there is “cautious optimism” that the oil sector has its best days ahead of it, said Tim McMillan, president and CEO of CAPP. A year ago, at the Scotiabank CAPP Energy Symposium, headlines made it sound like the oil industry would not recover from the effects of the COVID-19 pandemic, but this year’s symposium shows that market fundamentals are trending in a positive direction, McMillan said.

Alberta Minister of Energy Sonya Savage echoed McMillan’s optimism during her comments April 6, noting that West Texas Intermediate prices averaged about $63/barrel in March, energy demand forecasts show oil and natural gas are expected to dominate the energy mix for years to come and oil production in Alberta has increased to levels seen before the pandemic. Alberta is creating a secretariat to examine environmental, social and governance (ESG) issues and ensuring that policies attract investment and support oil production with environmental protection in mind, Savage noted.

McMillan noted that producers in U.S. and Canada are competing for scarce investment dollars, and government policies can affect those efforts.

Early steps by the Biden administration to pause oil and natural gas leasing on federal land, revoke the presidential permit for the Keystone XL pipeline, rejoin the Paris climate accord and emphasize policies to address climate change have made headlines. While long-term policies are being formulated, “this is not an administration that’s going to take small steps,” said Macchiarola. “They’re going to be bold” and push a transition away from fossil fuels, even though some of the policy moves will not bring greenhouse gas (GHG) emission reductions as planned, Macchiarola said of administration efforts.

Pembina Pipeline President and CEO Michael Dilger said he sees an investment advantage in Canada, compared with the U.S., based on the Trans Mountain Pipeline Project and Enbridge’s Line 3 under construction, along with regulations and policies from Biden administration that have been enacted in Canada. “They’re going to go through down there what we went through” in Canada in the past six years or so, perhaps with a carbon tax, higher income taxes and land restrictions, Dilger said during his presentation April 7. Referring to the U.S. sector, Dilger said “they’re coming into the world of hurt, the unlevel playing field, that we’ve had to overcome here” in Canada.

Canada’s role before the shale boom in the US. had been to produce what the U.S. upstream sector could not, with oil and natural gas exports to the U.S. rather steady. While that role diminished during the shale revolution and imposition of regulations in Canada, “I think that will re-emerge,” as Canada’s upstream sector has consolidated, improved balance sheets and will have increased export capacity, including LNG exports to Asia, Dilger said. He sees investment dollars moving away from the U.S. and north of the border, with an advantage for Canada for the first time in the past 10 years.

During a presentation and in response to questions from McMillan on the state of play in Washington, D.C., Macchiarola said he has seen energy issues become more subject to partisan politics and he does not have much hope for bipartisan measures from Congress. “I hate to be pessimistic about this,” as API works on a bipartisan basis and pushes for two-party solutions on energy matters, but energy issues that in the past were broken down by geographic differences are more often splitting along Republican and Democrat divisions, Macchiarola said. While geographic differences still are a factor, Republicans and Democrats fear being “primaried” from someone in their own party more so than an opposition party candidate, which breeds more polarization among issues within the parties, he said.

API’s pitch to the Biden administration is that the oil and natural gas industry can be part of the solution on climate challenges, as increased gas-fired power generation has reduced GHG emissions and can make similar gains abroad, Macchiarola said. API’s recent release of a Climate Action Framework includes support for an economy-wide price on carbon, tangible steps to reduce emissions from upstream and downstream operations, increased transparency on emissions reporting and accelerating technologies to lower GHG emissions, he noted.

The leasing moratorium on federal land under President Joe Biden’s executive order for the Department of Interior will have “serious and negative consequences” if it remains in place, with jobs lost and no emissions reduced as a result, Macchiarola said. The cancelation of the presidential permit for Keystone XL pipeline also results in jobs lost, while oil demand remains strong and transportation between the U.S. and Canada has become more important, he said.

Macchiarola referred to a new study from ICF that says Canadian imports of U.S. oil have increased over the past decade, just as U.S. refineries have gained from increased supplies of heavy oil from Canada. The oil and natural gas liquids being sent between the two countries accounts for about 10% to 20% of total U.S.-Canada trade in goods, with the value in 2019 of $96 billion almost as much as the nations’ vehicle trade, at $102 billion.

The petroleum liquids trade between U.S. and Canada nearly doubled over the past decade, according to the ICF study that was paid for by API. While the trade volumes have increased, the total value has fluctuated due to changes in oil prices, the report noted.

Although the largest trade flows are out of Western Canada, for oil making its way to refineries in the U.S. Midwest and the Gulf Coast, plenty of volumes of U.S. oil are moving in to Eastern Canada. U.S. crude oil made up 72% of Eastern Canada’s crude imports in 2019, and deliveries from the U.S. to Eastern Canada refineries increased tenfold from 2010 to 2019. Those deliveries went from 50,000 barrels/day in 2010 to 500,000 b/d in 2019, through rail, pipeline and marine vessel deliveries.

Canada’s increased imports from the U.S. helped crowd out imports from OPEC Plus and other sources, which declined more than 85% from 2010 to 2019.

“The integration of U.S. and Canadian energy markets has been a win-win for both countries, supporting economic growth and lowering energy costs for working families while bolstering North American energy security,” Macchiarola said in a statement. “None of this would be possible without the cross-border energy infrastructure that enables the safe and efficient transport of these energy resources. Continued development and maintenance of this critical infrastructure is essential to furthering the success and mutual benefits of this important trade relationship,” he said.

Other speakers at the Scotiabank CAPP Energy Symposium made similar comments on the importance of pipeline development and progress being made on the Enbridge Line 3 replacement project and the Trans Mountain expansion project. With the U.S. portion of the Line 3 project due to be completed later this year and Trans Mountain planning for completion in 2022, there is reason for optimism, Savage said.

By Tom Tiernan ttiernan@fosterreport.com

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