Canada’s Oil Crisis Could Hurt U.S. Consumers

By Irina Slav

Job losses, a chronic pipeline capacity shortage, a “bill for spills”, and a carbon tax – these are just some of the problems that the Canadian energy industry is wrestling with right now and are likely to continue wrestling with for the observable future. While some of these problems are shared by much of the global oil industry, some are uniquely Canadian and make the industry’s future quite murky.

Those pesky pipelines

Canadian crude oil exports by rail to its main client, the United States, have been on a substantial rise in recent months because pipelines remain in short supply. An expansion of Line 3 – one of the main oil arteries between Canada and the U.S. is in progress, facing opposition at every step. Line 5 – another big export channel – recently faced its biggest challenge when Michigan Governor Gretchen Whitmer ordered a shutdown of the infrastructure citing repeated violations of the easement and the need to protect the Great Lakes.

For now, work on Like 3 is ongoing, and Enbridge is suing Michigan for the suspension order, which it said was unlawful. Meanwhile, three other states have stepped into the dispute to defend the pipeline. The attorney generals of Ohio, Louisiana, and Indiana recently filed a request for amici status – where a party uninvolved in a case helps the court with information or insight into the issue at stake. In it, the Ohio official said there are few alternatives to Line 5, and shutting it down would hurt not just Ohio but whole regions in the Midwest. There also seem to be few alternatives to suing. In fact, according to energy consultant Adrian Travis, CEO of Canada-based Trindent Consulting, besides litigation, the only two options Canada’s oil industry has in the Line 5 dispute are arbitration, based on a 1977 bilateral agreement that prohibits pipeline interference, and retaliation, by making it “prohibitively expensive for Michigan residents to heat their homes due to Governor Whitmer’s decisions.”

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The latter option may sound like a radical move, but the saga with Line 5, while not as dramatic or long-running as that of Dakota Access or Keystone XL, has substantially contributed to the uncertainty that Canadian oil is facing and it really doesn’t need any more of that now. Besides, Travis says, Governor Whitmer’s actions are indeed hurting Michigan residents—something supported by recent testimony in the Michigan Congress.

“It’s no surprise that Michigan Governor Whitmer has timed her closure of the pipeline for May, because the pipeline feeds 55% of Michigan’s propane supply for winter heating,” Travis told Oilprice. “She is in all likelihood anticipating that the Trudeau government will stand by and will not respond with serious trade retaliation focused on the State of Michigan.”

Jobs on the line

The pipeline shortage has made it much costlier than before to export crude to the United States, but until the Trans Mountain expansion is finished – if it doesn’t encounter a terminal obstacle – Canadian oil companies have virtually no exposure to the global oil market. This is costing the industry jobs indirectly, as it makes Canadian crude uncompetitive on the biggest – and liveliest – oil market in the world, Asia.

The two last oil price crises have cost the Canadian oil industry 26 percent of its workforce, according to the Petroleum Labour Market Information division of Energy Safety Canada. More job losses are anticipated this year and next before some semblance of an improvement begins to emerge.

For one thing, Canadian crude continues to trade at a deep discount to West Texas Intermediate because of the pipeline troubles and global demand trends. More headwinds are coming for the industry, too, in the form of a carbon tax that the Supreme Court of Canada recently upheld, following challenges to its legitimacy by Alberta, Saskatchewan, and Ontario.

Canada’s oil province has argued against a carbon tax for a while. Still, it may now be forced to implement the federal rule, making life harder for its oil companies. These, by the way, are consolidating at a record pace, which is also costing jobs. Since the start of this year alone, mergers and acquisitions in the Canada oil patch hit a record $18 billion, and more are coming.

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Regulatory quagmire

Canada’s regulatory regime for the energy industry has become notorious in recent years as one of the main reasons, according to critics, for the state that the industry has found itself in: a tough regulatory environment does not just make everything harder and slower; it significantly discourages foreign investment, which is vital in times of crisis.

“Drilling new wells takes up to 12 months for pre-drilling regulatory and permitting,” Trindent’s Travis told Oilprice.com. “Drilling and completion typically takes another 3-6 months. Our energy services industry has been decimated since 2014, and is ill-equipped to respond if future capacity is needed.”

Then there is additional regulation coming under the federal clean fuel standards, which will increase an already substantial reporting and compliance burden placed on the oil industry. And as if domestic problems are not enough, two U.S. Congressmen earlier this month introduced a so-called “bill for spills” that could slap an excise tax on Canadian crude oil. The bill, if passed, would reverse an IRS ruling from 2011 that found Canadian heavy oil was not technically crude oil, so it could not be taxed as such.

Things are not looking up for the Canadian oil industry. Some might say the less oil the country produces, the better, but it needs to be noted that the oil produced in Canada is the main heavy oil feedstock for numerous U.S. refineries. An uncertain future for Canadian oil would inevitably affect U.S. prices at the pump years – if not decades – before prices at the pump stop mattering because most people would drive EVs.

By Irina Slav for Oilprice.com

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