reflections

Aug 2, 2013 | 06:32 GMT

5 mins read

Canada's Evolution in Oil

(Stratfor)
It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.

TransCanada announced Thursday that it is moving forward with the $12 billion Energy East Pipeline project, which is expected to send 1.1 million barrels per day of oil from Alberta to Saint John, New Brunswick, where a deep-water port is slated for construction. The pipeline is intended to facilitate exports from North America. While the project will not be finished until 2018, TransCanada's decision highlights one of several impediments to the United States' vision of North American energy independence because it opens the chance for some of Canada's oil to go elsewhere. The announcement also underscores an important evolution in Canada's oil industry.

Canada's oil production increased from 2.7 million barrels per day in 2000 to 3.7 million barrels per day in 2013, an upward trend that is expected to continue until at least 2030 as the country continues to develop its unconventional reserves. By the time the Energy East Pipeline becomes operational, Canada could be the world's fourth-largest oil producer, behind Saudi Arabia, Russia and the United States. Simply put, Canada's transformation from a North American oil player to a potentially global one has implications for the rest of North America. 

What is a Geopolitical Diary? George Friedman explains.

By virtue of geography, Canada's energy industry has always been tied to the U.S. energy sector. In fact, Canada's current oil and natural gas exports to countries other than the United States are virtually nonexistent. But the Energy East Pipeline — which has a capacity equal to about a third of Canada's oil exports to the United States — is the first step in connecting Canada's energy to the rest of the world. Canada is also exploring pipelines that would take oil to the Pacific Coast. In addition, Canada's natural gas production is losing value in the United States due to the increase in U.S. shale gas production. Shell, Chevron and other oil and natural gas companies plan to build natural gas liquefaction plants in Canada, eyeing the country as a possibly significant exporter of oil and liquefied natural gas to important markets such as Europe and East Asia. 

The possibility of large-scale exports of Canadian oil outside North America is not in the United States' interests. This is because the United States has been attempting to enhance its energy security by increasing domestic production of oil and taking advantage of heightened Canadian production. The United States has good reasons for wanting Canadian oil to stay on the continent. First, it is more likely that a dollar spent on oil produced in Canada will be reintroduced back into the U.S. economy than will a dollar spent on Venezuelan crude. Second, Canada's landlocked oil has been trading at levels far lower than oil of similar quality being traded internationally, and companies like TransCanada are in search of higher profits abroad.

The prospect of Canadian oil going to non-U.S. consumers will increase U.S. interest in the revival of Mexico's energy sector. After decades of underinvestment, Mexico is looking to make the reforms needed to attract foreign technology and capital in order to move forward with much-needed exploration and production. Even if Mexico quickly enacts these reforms, it will take time to implement and increase production levels. This may not happen until 2020 or later, meaning Mexico's oil exports to the U.S. Gulf Coast could drift downward to zero over the rest of the decade. Canada's oil could have displaced some of Mexico's exports to the southern United States, but now that Canada is looking at exporting oil after 2018, a Mexican revival could be underway. First Mexico must clear enough political hurdles to pass the necessary reforms to revive the sector.

Most of Canada's current exports to the United States go to the Midwest. As Canada's production increases, it will surpass the demand in that region. Future Canadian exports to the United States will need to penetrate farther south — namely to the Gulf of Mexico — to find a market, and Canada will seek to achieve this by using pipelines such as Keystone XL, as well as rail transport. Canadian crude could then replace imports from countries such as Venezuela, Ecuador and other OPEC producers, sources from which Washington had hoped it could diversify away while achieving so-called North American energy independence. With Ottawa expanding its options to export crude, the United States will now have to compete with the rest of the world for Canadian oil, a fundamental change in how the U.S. government, economy and energy sector have interacted with Canadian energy industries for the past century. 

The prospect of energy independence is extremely attractive to the United States. Oil is the largest globally traded product in the world, and it forms the foundation for global economic activity. As the dominant military power in international waters and the largest consumer of the commodity, the United States has a keen interest in the global oil market and the places where oil is produced. Though the prospect of complete isolation from international markets is slim, rising oil and natural gas production in the United States raises the possibility that U.S. foreign policy choices may be less driven by their effects on oil markets. The reality of the matter — as Canada's pipeline shows us — is that a globalized market is not only difficult to control, but also difficult to escape. The interests of other nation states seeking profitable markets and the interconnected nature of the global economy will keep changing the parameters and will continue to keep Washington involved in global oil affairs. 

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