Cenovus Energy Inc. Chief Executive Officer Alex Pourbaix was in his office in downtown Calgary, Canada in late August when he checked his phone and noticed his company’s shares were plunging for no apparent reason.
That’s when he learned that a federal appeals court in Ottawa had overturned the government’s approval of an expansion of the Trans Mountain Pipeline, potentially stalling for another year a key project that would help energy companies in western Canada ship oil to new customers in Asia. For Pourbaix’s company, one of the country’s largest oil sands producers, the ruling threatened to prolong a shortage of pipeline capacity that has weighed on prices for Canadian crude and kept Cenovus and its peers dependent on U.S. refineries.
The court decision was only the latest in a string of failed or delayed pipeline projects that have stymied the Canadian oil patch while competitors around the globe have enjoyed a steady recovery. “It’s a great tragedy, that in this environment where the commodity demand continues to grow unabated, Canada is missing out,” says Pourbaix. The industry has waged a year-long battle to add new transport capacity with not much success. The most visible symbol of this struggle is Keystone XL: President Barack Obama rejected the $8 billion project, bowing to pressure from environmental groups and indigenous communities on the pipeline’s path. TransCanada Corp. won approval from the Trump administration last year, but construction may not start until next year—about a decade after the project was first proposed.
Pipelines that don’t stray outside Canada’s borders—like Trans Mountain—have also run into opposition. The proposed Northern Gateway line, which, similar to Trans Mountain, would have carried crude to a shipping terminal on the Pacific coast, was halted by Prime Minister Justin Trudeau’s government in 2016. And TransCanada pulled the plug on its proposed Energy East line last year after pushback from green groups in Quebec.
Strangled by the pipeline shortage, the price of Canadian crude has climbed less than 5 percent in the past two years, compared with 57 percent for the U.S. benchmark. The current $39-a-barrel discount to the U.S. price is near the widest it’s been in about five years. (The differential also reflects the fact that Canada’s heavy grade of crude is more costly to process into gasoline and other refined products).
The lower prices represent a missed opportunity for Canada’s economy, which is heavily dependent on the oil and gas industry. Energy products accounted for about one-fifth of the country’s exports in July, the most recent month for which data are available. U.S. crude production has more than doubled in the past decade, from about 5 million barrels a day to more than 10 million this year. In Canada, output has climbed a more modest 64 percent, to 4.46 million barrels, over the same period.
The trend isn’t likely to reverse anytime soon. U.S. capital expenditures on exploration and production may increase 9 percent, to $132.5 billion, this year, according to a survey by the Oil & Gas Journal. In Canada, spending may drop 2 percent, to C$40.1 billion ($31 billion).
Suncor Energy Inc. CEO Steve Williams, at a ceremony in early September to celebrate the opening of its Fort Hills oil sands mine, a C$17 billion project in northern Alberta, said his company probably wouldn’t attempt another large-scale undertaking in the next decade.
“We were able to, with confidence, build this project because we already had market access by pipeline for all of the products that are produced from here,” said Williams in an interview. “If you’re coming to that point where you need to make a decision for the next growth phase, you need to have confidence that the next pipelines are coming.”
In previous oil downturns, the industry had to contend only with supply and demand fluctuations, says Brett Wilson, chairman of Prairie Merchant Corp., a private merchant bank, and Canoe Financial LP, an investment management firm. The current obstacles are deeper and more permanent. “We seem to be fighting structural issues now,” he says. “Canada has been de-linked from the global markets, and we are no longer participants in the normal cycle of energy.” Wilson blames the government for giving too much weight to environmental concerns.
Trudeau’s administration typically counters such criticism by saying that its environmental initiatives have allowed the industry to continue growing without jeopardizing the country’s commitments to curb carbon emissions. Trudeau has also thrown the government’s full backing behind the Trans Mountain project, spending $3.5 billion to buy the project from Kinder Morgan Inc. to ensure it gets built.
Alberta’s center-left New Democratic Party has also supported Trans Mountain, even starting an ad campaign promoting the pipeline in neighboring British Columbia, a stronghold of opposition to the project.
Alberta Energy Minister Marg McCuaig-Boyd says the government is revamping regulations and making other changes to save the industry about C$600 million by 2021. She pointed to the Fort Hills opening and China-owned Nexen’s C$400 million expansion of an oil sands project as signs that companies are still investing in the province. “I think we are going to see more investment, and I think there is a confidence in Alberta,” she says.
Even Pourbaix sees cause for hope. Before taking the helm at Cenovus, he was the chief operating officer at TransCanada, where he spearheaded the Keystone XL pipeline. That project has overcome its biggest regulatory hurdles, and another pipeline—Enbridge Inc.’s Line 3 expansion—is moving ahead as well.
In the meantime, Cenovus is shipping more of its crude via costlier rail and occasionally throttling back production when the Canadian oil discount gets too wide. “I refuse to believe that Canada as a country will not be able to get its act together and ultimately get these pipelines built,” says Pourbaix. “We stand at risk of being shut out entirely on this global demand.”
Credit: Kevin Orland and Robert Tuttle at Bloomberg with assistance from Erik Hertxberg in Ottowa