Canada is North America's Great Oil Security Blanket

Jude Clemente

The Keystone XL pipeline debate that unfortunately continues to drag on has pushed Canada’s oil production potential into the spotlight. Canada is our neighbor and leading trade partner, with U.S. goods and private services trade with Canada totaling around $750 billion a year, interestingly equal parts imports and exports. More oil connections are a natural match. The U.S. is the largest consumer in the world, 80% above second place China, and Canada is an emerging powerhouse, now producing 4.1 million b/d, 33% more than in 2005. U.S. energy policy must realize Canadian oil for what it is: North America’s great oil security blanket. Canadian oil is also “ethical oil” since Canada is a democracy and free market sought by investors that desire less risk. This is in contrast to members of OPEC, an “oil cartel” that holds 6 of the top 7 oil reserve holders. For the U.S., the real importance of Canada is an expanding capacity to export oil – rising production, amid flat demand. All three categories of oil production continue to increase, crude oil, natural gas liquids, and unconventional oil sands. Canada’s growing ability to export is unique compared to the other top exporters, countries that are young andconsuming more of their own oil. To illustrate, of the top 10 crude oil exporters, Canada has the highest median age at 42 years, versus 39 for Russia and the other eight nations all below age 30. Canada is a well developed economy, where incremental oil needs are slow growing. Competition for liquid fuels will be increasingly fierce, with global demand rising a Saudi Arabia worth of production by 2025 (12 million b/d).

 The Enormity and Importance of Canadian Oil

Source: BP

Energy Security

Although the U.S. has made great progress in reducing the crude requirement from outside North America in recent years, imports from OPEC have fallen 33% to 3.2 million b/d since 2009, OPEC still supplies about 35% of our imports and 17% of our total use. From an energy security perspective, the U.S. only lost 6% of oil supplies during the 1973 Arab OPEC Oil Embargo. As the U.S. economy continues to grow, oil consumption will increase or at least stay “very high.” Oil security is based on securing safe, reliable access to diverse, abundant, and reasonably priced resources (ask Winston Churchill). Canadian oil alleviates our dependence on distant tankers, often from less stable regions that are more susceptible to disruption. As opposed to waterborne shipments that can be diverted even en route, pipelines are “hardwired” links that would help connect the U.S. and Canadian oil markets for the long-term. There is also an ongoing legal rationality for Keystone XL under NAFTA, as Canadian energy companies must be afforded the same opportunities as American companies operating in the U.S. (see here, here, and here). TransCanada’s Keystone XL would be the safest pipeline ever built, and the rail that has become the default transport mode is more dangerous andprone to spills. U.S. Department of Transportation statistics indicate that pipelines are over 450 times safer than rail on a per-mile basis.

With or without Keystone XL, Canada’s heavier oil will still be developed and reach available markets: oil sands contributenearly $100 billion to Canada’s GDP. Even without Enbridge’s Northern Gateway pipeline, the westbound portion of which will run diluted bitumen from the Athabasca oil sands in Alberta to the marine terminal in Kitimat, British Columbia for transport to the Asian markets via tanker, Canada will still be getting its oil to China. The IEA reports that Canada could ship as much as 300,000 b/d to China by 2019, volumes that don’t depend on new pipelines to send Albertan oil to the Pacific Coast. Per the IEA, “It is presumed that volumes will grow in the event of an expansion of Canadian companies being permitted to re-export crude via the United States or by increasing volumes being railed to the Pacific Coast.” Albeit with a slightly confusing 209 conditions, the Canadian government last June approved the Northern Gateway, but the 2018 start-up date is unlikelyto be reached. Prime Minister Stephen Harper, in a battle to win reelection to a rare fourth term in October, has long pushed for Alberta’s booming oil sector to have access to West Coast ports, especially since the Obama administration continues to delay Keystone XL. Some 99% of Canada’s oil exports go to the U.S. Northern Gateway would deliver 525,000 b/d of diluted bitumen to export terminals in Kitimat where it can board supertankers headed for the fast-growing Asian markets.

Environmental groups should thus know that liquid fuels are better consumed in the U.S. than in China. China has emerging high standards for petroleum-based fuels, but like most environmental laws, implementation and enforcement are the problem. “The vague wording of regulations often leaves room for interpretation, and without a fully independent legal system, the effectiveness of reforms depends on local enforcement” (see here). Less pipeline connections from Canada to the U.S. mean more tankers across oceans to China, a more risky environmental choice with higher life-cycle GHG emissions. As of 2014, China had a current diesel sulfur limit of 350 ppm and an adopted standard of 10, compared to 15 current and 15 adopted for the U.S. For gasoline, China’s current sulfur limit is 50 ppm, with adopted at 10 ppm, compared to 30 ppm and 10 ppm respectively for the U.S. As for the notion that Keystone XL oil to the U.S. will just get exported: according to the U.S. State Department, exports of Canadian crude are “unlikely to be economically justified for any significant durable trade given transport costs and market conditions.”

Looking Forward

The Gulf Coast refinery region relies on heavy crude oil from Mexico and Venezuela, both facing production problems from investment shortages. From 2006-2014, Gulf Coast imports from Mexico fell 53% to 765,000 b/d, while imports from Venezuela fell 35% to 717,000 b/d. Heavy crude supply from neighbor Canada is a key alternative, just one of the many “national interest” justifications for Keystone XL. Even without Keystone XL, the U.S. is absorbing record amounts of Canadian oil. In 2014, imports from Canada to the Gulf Coast reached 210,000 b/d, versus just 76,000 b/d in 2006. Theprojection for 2015 is that Canadian oil processed at Gulf Coast refineries will hit 400,000 b/d, as Enbridge’s Flanagan South and an expanded Seaway pipeline raise their capacity. The emerging Russia-China energy relationship, signing a $270-billion oil deal in 2013 and a $400 billion natural gas deal in 2014, is just another example of how those that block energy links between Canada and the U.S. are actually blocking North American energy security. Some cannot get past their harsh reality: oil and gas will supply at least half of the world’s energy through 2040. The Canadian Association of Petroleum Producers expects oil sands output to increase over 150% to 4.8 million b/d by 2030. And the national forecasts keep rising. The EIA’s International Energy Outlook 2009 projected that Canada would produce 5.4 million b/d in 2030; the 2014 edition has 2030 production at 6.2 million b/d.

Rising U.S. Oil Imports from Canada…Canada’s Rising Capacity to Export Oil

Source: EIA