Canada’s Oil Ain’t Out of the Woods Yet
June 28, 2019
The past few months have brought a spate of positive news for Alberta’s oil industry. First and foremost, the differentials for Canadian crude to that of U.S. benchmarks have continued to remain at reasonable levels since the announced curtailment last year. At the same time, the government has gradually proceeded to relax the production caps, giving producers room to bring back on more supply as U.S. demand surges for heavy oil alternatives due to sanctions on Venezuela. These developments have resulted in a rebound in crude by rail numbers and the differential is now once again supporting private sector crude by rail investment. There have also been recent elections in Alberta, which has seen a very pro-oil and gas Jason Kenney take the premier slot. And finally, just last week, the Trudeau government once again approved the Trans Mountain expansion project.
Despite all these positive headlines for Canada’s oil patch, difficult times still lay ahead. Here’s why. The plans for the original production curtailment, which is set to last until the end of this year, were made under the assumption that new pipeline capacity would be added before the end of 2019 via the replacement of Line 3. That is no longer the case. Enbridge, the pipeline builder, announced at the start of March that receipt of final state permit approvals had delayed the in-service date to the second half of 2020. It gets worse. Despite having originally received those approvals shortly after the announced delay, just three weeks ago the Court of Appeals in Minnesota ruled that the pipeline’s environmental review was inadequate, which is likely to delay things even further.
Enter Premier Jason Kenney and his “energy war room,” can the Albertan save the day? The reality is that despite there being a new government, there is very little that his cabinet can do to solve the root of Alberta's oil problem, which is a lack of additional pipeline capacity. His administration will likely face a dilemma come the end of 2019 as to whether to extend the production cuts into the following year. If they expire, production growth will resume and push back up against maximum levels of takeaway capacity, which may well recreate the same scenario that necessitated the production cuts in the first place. Until a new pipeline is physically built and it’s turned online, Canada’s oil will not be fully getting out of woods just yet.