Hit Saudi Arabia where it hurts: ban its crude oil exports to Eastern Canada

Chrystia Freeland, foreign affairs minister

Saudi Arabia exports 100,000 b/d of crude oil to Eastern Canada. Total imports by Eastern refiners are 315,000 b/d

Prime Minister Justin Trudeau has the perfect response to Saudi Arabia’s explusion of the Canadian ambassador and the cessation of new trade and investment with Canada: ban its oil from Eastern markets. A recent study suggests it can be done without a single kilometre of new pipeline.

“Canada is gravely concerned about additional arrests of civil society and women’s rights activists in #SaudiArabia, including Samar Badawi. We urge the Saudi authorities to immediately release them and all other peaceful #humanrights activists,” the account for Global Affairs Canada, which is responsible for foreign policy, tweeted Friday.

Foreign Affairs Minister Chrystia Freeland also protested the arrest via Twitter, no doubt compounding Canada’s offense for the criticism-sensitive Saudis, who have responded aggressive to other Western complaints about their absymal human rights record, which of late includes arresting up women protesting oppressive government policies.

The connection to Canada is Badawi’s sister-in-law Ensaf Haidar, who lives in Quebec and is a Canadian citizen. Haidar’s husband is dissident blogger Raif Badawi, who was arrested by Saudi authorities and remains in jail.

“…the Canadian statement is a blatant interference in the Kingdom’s domestic affairs, against basic international norms and all international protocols. It is a major, unacceptable affront to the Kingdom’s laws and judicial process, as well as a violation of the Kingdom’s sovereignty,” its foreign affairs ministry responded in a statement, adding that the affront ” requires a sharp response to prevent any party from attempting to meddle with Saudi sovereignty.”

The Kingdom also “put on hold” all new business and investment transactions with Canada and retained “its right to take further action.”

Further action could conceivably include reviewing the $11 billion contract awarded to the Canadian subsidiary of an American defense contractor to build light-armoured vehicles for Saudi Arabia.

“This message is obviously not just being sent to Ottawa,” said Giorgio Cafiero, the CEO of Gulf State Analytics, a Washington-based risk consultancy, as reported by Global News, who added that the Saudis have been emboldened by their close relationship with American President Donald Trump.

“It’s a message to countries across Europe and across the rest of the world that criticism of Saudi Arabia has consequences.”

Perhaps it’s time criticizing Canada incurred consequences.

According to the National Energy Board, in 2017 Canada imported an average of 670,000 b/d of crude oil for Eastern Canadian refineries. About 15 per cent, or 100,000 b/d, of that total came from Saudi Arabia.

Assuming Canadian customers paid the Brent price of US$73.45 (CDN$95.50), Canada sent CDN$9.5 million off to Saudi Arabia every day, almost CDN$3.5 billion for the year.

Perhaps Canada has some leverage, after all.

Alberta and Saskathewan have complained bitterly in the past about the huge market in the East denied to producers in the West. TransCanada’s Energy East pipeline might have displaced some imports, but the 1.1 million b/d project was cancelled by the proponent last fall.

But Dr. Allan Fogwill of the Canadian Energy Research Institute says Western oil could still be substituted for the 47 per cent of imports that do not originate in the United States.

“The US market, where Canada gets a lot of its oil from, is the Bakken basin in North Dakota and it’s light oil, so easy and cheap to produce compared to Canadian crude. In most of our scenarios, that crude coming from the United States going into Ontario didn’t change,” he told Energi News in a Feb. interview.

But there is an opportunity to replace non-US imported crude oil with Western Canadian product, particularly in Quebec, New Brunswick, and Newfoundland if it’s shipped by rail, though not in Ontario.

“In Quebec and New Brunswick, it’s a mix of Western Canadian oil and Eastern Canadian oil,” said Fogwill. 

“The Irving Oil refinery in New Brunswick has its own offloading rail facility and it’s not being used to a large extent. So if [bitumen] was being transported by rail, there’s definitely capacity in that refinery to handle that input.”

Fogwill says the CERI study shows the economics of transporting Western crude oil east by rail makes plenty of sense.

But the one variable researchers couldn’t model is long-term relationships between buyers and sellers.

“If someone was looking from a purely economic perspective, the choice would be clear and the Canadian crude would win. But a decision on the part of a company to purchase crude is not just about economics, it is all about relationships, it’s about security, it’s about trust,” he said. 

As an economist, Fogwill not surprisingly thinks that if those relationships between crude exporters and Canadian refineries were to be broken, and Western crude substituted for current sources, then the market should always lead the change and government should only play a supporting role.

“I would only see the government needing to come in when there are restrictions that need to be considered given a new policy objective,” he said.

Fair point, but who says the new Canadian policy objective has to be purely energy-oriented? Why can’t the new objective be motivated by diplomatic goals?

In this case, the Trudeau Liberals could achieve both diplomatic and energy objectives by banning Saudi oil from Canadian markets and making it clear to the affected customers that Western crude oil must be the replacement.

Western producers would in short order secure an additional 100,000 b/d of market at a time when oil-by-rail exports to the United States are pushing 200,000 b/d.

If the move proves successful, then Ottawa can look at doing the same for the 54,000 b/d from Azerbaijan, the 40,000 b/d each from Norway and Nigeria, and the host of smaller importers.

In total, there is 315,000 b/d of new market just waiting to be served by Western Canada at a time when delays on the construction of the 590,000 b/d Trans Mountain Expansion (which the Canadian government had to buy in order to advance the project) and replacement of the 390,000 b/d Line 3 pipeline are causing serious problems for domestic producers.

Can Canada take the lemons served up by Saudia Arabia and make lemonade?

History suggests probably not, but Trudeau and his government should at least consider the option.

And if the Prime Minister refuses to do so, then Alberta and Saskatchewan should loudly and publicly ask why not.