Canadian Prime Minister Stephen Harper has made increasing oil exports an economic priority, describing Canada as an emerging energy superpower. To support his vision, his administration overhauled the country's pipeline regulatory system, making it easier to approve pipeline proposals, and simplified the environmental review process for pipeline projects. These measures could pave the way for increased pipeline development in Western Canada.
Energy accounts for 25 percent of Canada's overall exports, and energy exports are expected to grow over the next decade. Since 2000, Canada's crude oil production has increased from about 2 million to roughly 3.5 million barrels per day, largely due to increased oil sands development in Alberta. By the mid-2020s, Canada could produce 5.5 million barrels of oil per day — 3.5 million of which would come from oil sands.
The Canadian oil industry's biggest problem is that it is completely tied to the United States. Inadequate pipeline infrastructure throughout North America has led to higher transportation costs and a supply surplus, causing Canada's benchmark crude, West Canada Select, to be sold at around $75 per barrel — about 25 percent below the going rate for international crude of similar quality. Oil sands development is expensive and energy-intensive, and over the past 15 years, production costs for oil sands have tripled. Thus, according to consulting firm Wood Mackenzie, break-even costs for projects using newer technologies range from $65 to $70 per barrel, while more conventional methods remain more costly. This dynamic has led some companies to shelve certain projects or leave the Canadian oil industry altogether.
The Albertan government, led by Premier Alison Redford, has increased diplomatic pressure on the United States and British Columbia to support the construction of pipelines. One such proposal is TransCanada Corp.'s Keystone XL project. The pipeline could transport 830,000 barrels of oil per day, but it has faced political obstacles in the United States, and TransCanada announced in April the postponement of the pipeline's start date by a year — if it is indeed ever built. Another proposal is to double the capacity of the Enbridge's existing Alberta Clipper oil pipeline to 880,000 barrels per day, but this project could face similar political obstacles. Pipelines are vital to Alberta's economic health, and Redford has visited Washington four times in the past year and a half to rally support for Keystone, but Alberta is exploring alternatives in case the U.S. pipelines never materialize.
Canada's oil industry is unlikely to provide the benefits that Ottawa expects unless it reaches beyond North America. Harper and Redford have been working to secure access to lucrative markets outside the continent, including those in East Asia. Should the Keystone XL and Alberta Clipper projects materialize, they will connect Canada only to U.S. markets, which means Canada's oil industry would still be fully dependent on the U.S. economy. Gaining access to alternative markets would help lessen this vulnerability, while also alleviating the supply glut that has kept prices low.
There are several proposals pending for pipelines connecting Albertan oil fields with ports in British Columbia. Kinder Morgan has proposed a $5.4 billion expansion to increase capacity on its 60-year-old Trans Mountain pipeline, which currently delivers 300,000 barrels per day of crude to the Pacific coast. Meanwhile, Enbridge has proposed building a 550,000-barrel-per-day Northern Gateway pipeline to the coastal city of Kitimat — a project supported by Harper. Any new capacity could facilitate transports to either California or East Asia.
Canada's Pipeline Politics
Canada's energy situation has heightened interest in British Columbia's upcoming general elections. Many voters in British Columbia, much like those in the U.S. Pacific Northwest, oppose pipelines due to environmental concerns. The opposition New Democratic Party appears to have a substantial lead over the British Columbia Liberal Party, which is led by Premier Christy Clark. Although she has had made it difficult for pipeline projects to proceed, her party is willing to support them if their demands are met. Meanwhile, the New Democratic Party has lobbied Washington to stop Keystone XL and may force Alberta to give larger concessions.
Should the New Democratic Party win, Alberta will continue to face stiff opposition on both logical export routes — to the United States and through British Columbia. Redford, Alberta's premier, has been at odds with Clark over the pipelines. One of Clark's demands for supporting the Northern Gateway pipeline was a greater share of oil sands royalties. Alberta is highly dependent on oil production, which makes up nearly a third of the province's gross domestic product, but British Columbia is not.
The Albertan government has come under financial strain. Redford has said that the revenue lost due to transportation bottlenecks will cost the province $6 billion (Alberta's budget is $38 billion). The premier was recently forced to implement strict austerity measures, putting her in a political bind over the province's sluggish economy. She will need to leverage Harper's vision in her battles with either Dix or Clark. Getting pipeline access to international markets would reduce the bubble of Alberta's oil production, raise oil prices closer to international levels and solve many of the province's problems.
Under Canadian law, British Columbia cannot prevent the pipelines from being built if approved by Canada's National Energy Board. Clark threatened to circumvent jurisdiction issues by withholding electricity from the pipeline operators. Canada's Constitution gives the federal parliament jurisdiction over pipelines. The federal Liberal Party has been reinvigorated under the new leadership of Justin Trudeau, and other left-wing parties have also been making things difficult for the conservative Harper administration. Federal elections are set for 2015 but can be called earlier, and a new government in Ottawa could affect the future of the pipeline projects.
Because none of the preferred projects seem to be moving forward, Alberta's government is getting creative. In April, Albertan Energy Minister Ken Hughes began talking with the government of Northwestern Territories about possibly building a pipeline to the Arctic Ocean. Also in April, TransCanada began holding a "binding season" — basically an assessment of prospective buyers for a proposed Energy East oil pipeline that would send 500,000 to 850,000 barrels per day to Eastern Canada. Neither pipeline solution is ideal for Alberta, but either could deliver Albertan crude to the seaborne oil market and increase the profitability of the province's oil sector.
While Alberta and Canada could expand oil production, interprovincial politics between Alberta and British Columbia, as well as United States' internal politics, could limit the ability to get such crude to market. Alberta's fight with British Columbia could become tougher if Adrian Dix and the New Democratic Party win the general elections. Alberta's political, geographic and geologic constraints are undermining Canada's goal of reducing reliance on U.S. energy infrastructure and markets, as well as Harper's goal of Canada becoming an energy superpower.
Editor's Note: An earlier version of this analysis mischaracterized the relationship between Canada's federal Liberal Party and the provincial Liberal Party of British Columbia.