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In Canada, a Trade War Emerges

9 MINS READApr 25, 2018 | 12:00 GMT
The Suncor facility near Fort McMurray, Alberta, extracts bitumen from oil sands in Canada.

The Suncor facility near Fort McMurray, Alberta, extracts bitumen from oil sands in Canada during 2009. Environmentalists oppose the mining of oil sands in the region because of the greenhouse gas emissions.

(MARK RALSTON/AFP/Getty Images)
Highlights
  • No matter which party is in power in Ottawa or Edmonton, Canada and Alberta will be compelled to push for more pipeline options to unlock further growth for their energy exports. 
  • British Columbia's tendency to reject pipeline projects on environmental grounds will put it on a collision course with its neighbor and the federal government. 
  • While Alberta is threatening to cut off oil and fuel shipments to British Columbia, the courts will rule on the legality of such measures.

Canada has a trade war on its hands — and it is one entirely of its own making. For the past four months, two of its western provinces, Alberta and British Columbia, have been exchanging blows over an expansion to Kinder Morgan's Trans Mountain pipeline, which transports diluted bitumen from Edmonton, Alberta, to Burnaby, British Columbia. On April 16, the Alberta government introduced the Preserving Canada's Economic Prosperity Act, which would give Edmonton the power to cut off all crude oil, natural gas and refined product exports to its neighbor. That move could force British Columbians to pay about 30 percent more for gasoline, among other secondary effects. The willingness of Alberta Premier Rachel Notley to attempt such extreme measures to protect her province's greatest resource highlights the significance of the spat to both provinces — and to the rest of Canada, and even the United States. 

The Big Picture

Trade fights need not be limited to international spats, because battles can occur even within countries. Stratfor has noted before that provincial power remains strong in Canada. Now, as spring comes to the Great White North, a trade war is heating up amid threats by Alberta to halt energy exports to neighbor British Columbia. 

 

Frenemies: Alberta and British Columbia

Because of Canada's decentralized federal system, its provinces wield a great deal of autonomy. Such power allows each province to pursue its own objectives to the extent that they might clash with those of other provinces — as with Alberta and British Columbia — or even the national government in Ottawa. Abutting the Rocky Mountains, Alberta is the westernmost of Canada's prairie provinces, which include Saskatchewan and Manitoba. It is also home to more than 80 percent of Canada's oil production and over 95 percent of its oil reserves. On the other side of the Rockies, British Columbia shares a similar climate — both meteorologically and politically — with its Cascadian cousins in the United States: Oregon and Washington. The environmentalist movement is strong in the province, as are the voices of the indigenous First Nations. And although an April 18 poll by the Angus Reid Institute revealed that 54 percent of British Columbians now back the expansion, even supporters of the project have expressed worries about the consequences of an oil spill off the coast.

For much of the past two decades, the two provinces have enjoyed positive relations, signing a deal in 2006 to form an economic union between them. But as Alberta's options to export more crude oil to the United States encountered difficulties due to delays on the Keystone XL pipelines and others, the province has strived to send more oil through its West Coast neighbor. Alberta's oil production has also doubled since 2007, largely due to the exploitation of its oil sands — a source that environmentalists particularly abhor — which now make up 86 percent of its output. While he was prime minister from 2006 to 2015, Stephen Harper strongly supported Alberta's energy growth as part of his strategy to turn Canada into an energy superpower.

Relations between Alberta and British Columbia remained warm while the pro-business British Columbia Liberal Party ruled the latter, but a May 2017 election upended their relationship. The New Democratic Party (NDP) and the Green Party of British Columbia cobbled together a coalition government under the NDP's John Horgan. While the BC Liberals supported the Trans Mountain pipeline expansion to raise capacity from 300,000 to 890,000 barrels per day, the new government expressed its vociferous opposition to the proposal, in part because Horgan is dependent on Green support to maintain his power. 

A Map Showing Oil Pipeline Systems Originating in Western Canada

In December 2017, Canada's National Energy Board, the federal regulator, ruled that Kinder Morgan was under no obligation to heed bylaws from the city of Burnaby, a Vancouver suburb and the terminus of the pipeline expansion, regarding tree-cutting and other permit-related issues. One month later, Horgan's government proposed new environmental regulations in a bid to effectively kill the project by prohibiting the increased transportation of diluted bitumen until new studies could be done on containing spills. The proposal, however, lacked any timetable, hinting that the studies could last for years. Alberta's Notley — who is also a NDP member — perceived Horgan's move as a stalling tactic designed to dissuade Kinder Morgan from completing the project, leading her to retaliate. Alberta first withdrew from electricity trade talks between the two provinces before banning the import of British Columbian wine. Notley only lifted the ban near the end of February after Horgan said he would refer expansion to the courts.

Turning off the Tap

But even as Notley trumpeted her success in forcing Horgan "to blink," an announcement from Kinder Morgan ratcheted up the tension again between Edmonton and Victoria. On April 8, the Texas-based company declared that it would suspend all nonessential spending on the expansion amid threats to abandon the project if the federal government and the two provinces could not iron out their differences by May 31. Egged on by the opposition in her province, Notley responded with legislation to bar energy exports to British Columbia. The bill — whose constitutionality remains unclear — would require companies seeking to export oil to apply for permits from the provincial energy minister, who would have the authority to reject the applications based on pipeline availability, the status of supplies for the Albertan market and, critically, 'any other matters considered relevant.' Saskatchewan, which also produces some petroleum from oil sands in the north of the province, has compounded the threat to British Columbia by also promising to halt shipments to the coast. The government in Edmonton has previously threatened to turn off the taps in an inner-Canadian row over energy. In the early 1980s, Alberta reduced oil shipments to the rest of the country after the federal government implemented new price controls and revenue-sharing mechanisms for the energy sector. 

Canadian Prime Minister Justin Trudeau is seeking to reduce tensions, even though he has staked some of his political reputation on a vow to complete the pipeline expansion. After canceling part of a trip to the Summit of the Americas in Peru, Trudeau presided over an emergency meeting with Notley and Horgan on April 15 to try to hammer out a deal. The meeting, however, failed to produce a breakthrough, leading the federal government to launch a "formal financial discussion" with Kinder Morgan so Ottawa can "eliminate the uncertainty" around the project. To assuage Kinder Morgan's fears, Ottawa and Edmonton have pledged to provide financing for the project. In so doing, the national and provincial governments would acquire a stake in the pipeline expansion.

Comparison of Trading Prices for Select Crude Oil Benchmarks

Pipelines of Broken Dreams 

The factors motivating Ottawa and Edmonton to back the Trans Mountain pipeline expansion over Victoria's objections are obvious: Energy represents about 20 percent of Canada's overall exports and 17 percent of Alberta's gross domestic product. While increased U.S. production — thanks to shale oil — has received much publicity, Canada has also been a major contributor to the growth in global oil supplies. Its output grew by nearly 300,000 bpd in 2017 to an estimated 4.6 million bpd. Growth is expected to continue through 2030, because western Canada's — especially Alberta's — oil production is expected to expand by 39 percent to 5.4 million bpd. 

That jump, however, is contingent upon additional pipeline capacity. The growth has already been stymied by low oil prices, which have created headaches for Alberta and, to a lesser extent, for Saskatchewan. First, low prices have dissuaded companies from investing more in oil sands production, even as production costs have fallen. Over the past few years, major oil companies have divested themselves of assets in the region, including Royal Dutch/Shell's $7.25 billion sale last year, while some firms have canceled or delayed projects. Second, the lack of pipeline capacity has prompted prices for Canada's major oil benchmarks to plunge as companies have competed for limited capacity or settled for more expensive transportation options, such as rail. Highlighting the extent of the problem, the CEO of energy transportation company Enbridge Inc. has said that all of Canada's main oil export pipelines to the United States will be full for at least the next three years. 

Western Canadian Select, a benchmark for Canadian crude oil, has traded at a deficit of $17.25 per barrel to West Texas Intermediate, a benchmark for U.S. oil prices. Although the difference does not stem entirely from transportation problems (quality also separates the two oil types), current pipeline limitations have created a large gap, which rose to as much as $30 per barrel a few months ago.

Canada's Pipeline Capacity Is Falling Short of Export Demand

Various proposals over the years to increase Alberta's export capacity have encountered numerous challenges. Two years ago, the federal government blocked the 525,000 bpd Northern Gateway pipeline, which would have shipped oil from Alberta to Kitimat on British Columbia's northern coast, due to concerns from indigenous groups and environmentalists. TransCanada Corp., meanwhile, shelved the 1.1 million bpd Energy East pipeline because of costs. The cancellations leave just two alternatives in addition to the expansion of the Trans Mountain pipeline: Enbridge's Line 3 replacement project (760,000 bpd) and the Keystone XL pipeline (830,000 bpd), both of which would run through the United States. Achieving Alberta's full potential will likely require the construction of all three pipelines or alternative routes — rather than just Trans Mountain — and the two other proposals have also encountered difficulties. Delays in the approval process in Minnesota have bogged down the expansion of Enbridge's Line 3, while regulatory and legal challenges in Nebraska have obstructed progress on Keystone XL even though the White House approved the pipeline in March 2017.

The war of words between two of Canada's provinces over Kinder Morgan's pipeline expansion shows no sign of abating. Their battle will wend its way through the courts, but a resolution might not come before the company's May 31 deadline. Given the current squabble on the West Coast, Enbridge and TransCanada might offer less problematic options for Alberta to get its oil to market — suggesting that a Canada unable to iron out its difference on oil will only end up deepening its links to the U.S. market.

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