The Green Party of Canada has fired a shot across the bow of the other federal political parties. Leader Elizabeth May, a fierce pipeline foe, is calling for the roughly 600,000 barrels per day (b/d) of crude oil Eastern Canada imports to be replaced by oil from the West. Easier said than done according to energy economists, which makes one wonder why she’s pushing the idea.
“As we move off fossil fuels, we should only be using Canadian fossil fuels til 2050, which means shutting off imported oil from coming into Canada from Venezuela, Kazakhstan, the United States, Saudi Arabia,” she told reporters. “We’re saying to Albertans, we’re not out to get your sector. We will use your oil as long as we’re using oil and over time we’ll shift production.”
May is also proposing to “invest” in upgraders to change oil sands bitumen, which has the consistency of peanut butter, into synthetic crude oil. The crude oil import substitution plan is contained in the Green Party’s climate policy, “Mission Possible,” which calls for all Canadian bitumen to eventually be shifted “from fuel to feedstock for the petrochemical industry.”
That’s the plan. Judging by a 2018 study from the Canadian Energy Research Institute, implementing the plan could be difficult. “The study is designed to see what the impacts are when you substitute foreign oil with Canadian oil in Eastern Canada and Central Canada,” CERI CEO Allan Fogwill told Energi Media. “We tried to determine what would be the costs and the emissions associated with making those changes.”
According to the National Energy Board, in 2018 Eastern Canada imported 64 per cent of its crude oil from the United States, 18 per cent from Saudi Arabia, and the remainder from nine other countries. Why isn’t crude from the Western Canadian Sedimentary Basin, which stretches from the corner of northeastern BC into Saskatchewan, used in Eastern refineries? The answer is complicated, says Fogwill.
If buying decisions were made strictly on economics, Western light sweet crude oil would be cheaper than offshore imports but more expensive than American crude, which typically comes from the Bakken of North Dakota or from Texas. “Because it’s cheaper, in most of our scenarios that crude coming from the United States going into Ontario didn’t change,” said Fogwill.
Based upon last year’s data, that would mean almost two-thirds of Eastern Canadian oil could not be displaced unless Ottawa subsidized Western crude or restricted American exports to Canada in some way.
The CERI study considered only light oil because no Eastern refinery is able to process bitumen. May’s proposal gets around that problem by requiring the construction of upgraders to process the bitumen into synthetic crude oil. The problem, though, is the very high capital cost of upgraders.
A 2017 study from Kevin Birn of IHS MarkIt estimated the cost of a 100,000 b/d upgrader at $4.8 billion, with operating costs of $8 to $10 per barrel. Even if the 216,000 b/d of non-US crude was replaced by Western synthetic crude, capital costs would still run around $10 billion. Replacing all foreign crude would require $30 billion.
Is a federal government that just shelled out $4.5 billion for the Kinder Morgan Canada pipeline assets – and still has to spend as much as $9 billion to finish the Trans Mountain Expansion project – likely to be keen about spending more billions on upgraders?
Birn concluded that the best option was converting an existing refinery to process heavy crude at a cost of approximately $1 billion. “The economics are similar to a greenfield refinery, but this option is less capital intensive because it generally utilizes the existing refinery infrastructure and portions of the equipment,” the study said, noting that “the feasibility is dependent on the availability of a facility as a candidate for conversion.”
Fogwill did make one very interesting point: CERI’s analysis found that all non-US foreign imports could be displaced by Western crude using existing infrastructure. Why hasn’t that happened? Fogwill suggests non-economic factors may be in play, such as long-term contracts and the trust that comes with a reliable supplier. Sometimes, those relationships are hard to break for new market entrants.
Shipping more crude oil by rail to Eastern Canada will always run up against opposition inspired by the Lac-Mégantic disaster of July 6, 2013. A runaway 74-tanker car train carrying Bakken crude – the closest thing to gasoline out of the ground, according to one source I interviewed – crashed, exploded, and killed 47 people in the sleepy town in the Eastern Townships of Quebec.
And what mechanism might Canada us to bar imports from foreign suppliers? President Dwight Eisenhower invoked energy security to impose crude oil import quotas in 1959, though President Richard Nixon ended the quotas in 1973. Given Canada’s current rocky relationships with President Donald Trump and the House of Saud, import restrictions would almost certainly result in retaliatory measures.
Is Canada spoiling for a trade war? After Trump’s steel and aluminum tariffs, China’s pulling of Canadian canola permits over the dispute involving a Chinese telecom executive, and the unpleasant prospect of being sideswiped by the still-escalating trade war between the United States and China, probably not.
In addition to the economic and political issues that accompany pushing foreign oil out of Eastern markets, there is a larger global context to consider. Peak oil demand is coming. Unfortunately, we don’t know when. McKinsey and Company say it could arrive as early as 2025, Wood Mackenzie says 2036, Canada’s largest integrated energy company – Suncor – thinks by the late 2030s, but no one is betting on the long-term growth of global crude oil markets. Gasoline demand has already flatlined in most developed countries and diesel isn’t far behind.
For the next 20 years, only Asian markets – led by China and India – are forecast to grow rapidly, potentially boosting total global energy consumption as much as 30 per cent.
Unfortunately for May, tapping Asia requires pipelines to the West Coast, a strategy she is implacably opposed to. She even got herself arrested, along with now Vancouver Mayor Kennedy Stewart, for protesting the Trans Mountain Expansion pipeline project. Seen in this light, May’s sudden conversion to Alberta oil champion looks a bit more self-interested.
If Prime Minister Justin Trudeau approves Trans Mountain Expansion on June 18, the Green Party now has a ready response: go East!