A week ago, President Joe Biden did what many in Alberta feared: he revoked the permit for the Keystone XL pipeline—on his first day as President, no less. The move angered many in Alberta. After all, oil producers in the province are already starved for pipelines, and TV Energy had just started inviting bids for capacity on the new pipeline.
Alberta Premier Kenney called the revocation a gut punch and an insult, and threatened to sue. Meanwhile, Federal PM Justin Trudeau expressed mild disappointment. Just a few days later, the Alberta Energy Regulator reported record-high oil sands production at the end of last year.
Alberta’s oil industry is in a very strange place. There is plenty of demand for its product, and many see this demand rising, largely thanks to a decline in Mexican heavy oil production that normally goes to U.S. Gulf Coast refineries. And now, there is plenty of production—at 3.16 million bpd as of November 2020—to go around.
It’s not just more production but also lower-emissions production, as Alberta oil producers join the ranks of companies with growing environmental consciousness. Two Alberta companies have even gone net-negative in the emissions segment by using carbon capture and storage technology. In other words, Enhance Energy and Whitecap Resources are capturing more CO2 emissions than they are producing with their oil extraction business.
But for all the positive trends in demand and supply of Canadian oil, getting the oil to those who need it remains a problem. This problem was recently highlighted yet again when new data showed that oil-by-rail exports surged by 87 percent on the month in November—the same month Alberta’s oil production hit an all-time high. Transporting crude oil by rail is a lot riskier and costlier than using pipelines, but there are no pipelines, and it’s unlikely that there will be new ones anytime soon.
Related: Oil Majors Are Eyeing A Suriname Offshore Boom Sure, the Trans-Mountain expansion may still happen, despite strong opposition. But, as Bloomberg’s Julian lee noted in a recent column, even if in four years Biden is replaced by a pipeline-friendly president, it would be too late. The ironic twist is that consensus among analysts has it that the United States will continue to need millions of barrels of Canadian oil during these four years, despite the strong green energy agenda of the new administration.
The question for Alberta’s oil industry is pretty simple: should they soldier on, pump more oil, and pay more to ship it south by rail, always risking a derailment that could lead to a curb in this export option, too, or should they maybe diversify?
Take the two companies mentioned earlier, Enhance Energy and Whitecap Resources. Enhance Energy makes money both from producing oil and from carbon sequestration, which earns it carbon credits that it then sells to polluters. Its CEO calls it a “carbon mitigation company”. Whitecap also collects more CO2 emissions than it produces, and its chief executive boasts growing interest in its way of producing oil from investors.
Carbon capture may be one alternative for Alberta producers. Last year the federal government in Ottawa set a net-zero target for the economy by 2050 and said it would hike the carbon tax from $30 per ton now to as much as $170 per ton in 2030. This opens up a whole new carbon credit market that could become a flourishing one, just like the one in Europe. Companies that know how to capture carbon dioxide emissions and out them to secondary use or store them will be well placed in such a future Canada.
But eventually, Canada’s oil heartland might need to start thinking about a post-oil future. This future is still distant, and all the renewable energy and EV revolution forecasts may turn out to be wrong as forecasts so often are, but it usually pays to be prepared. As one commenter said recently, those hoping for a long-term recovery in Canadian crude prices will need to make a lot of assumptions that sound quite unrealistic, such as EVs becoming more expensive and more unpopular, and fracking in the U.S. becoming less efficient. It’s not impossible, but it’s unlikely.
So, what is an industry that has been largely struggling for years with a few big-player exceptions to do? Start thinking beyond oil, according to observers. Even Alberta’s former Premier, NDP leader Rachel Notley recently said that the oil province needed to take better advantage of the investment surge in renewable energy if it wanted to continue to be a factor in global energy.
“We have to recognize where the world’s going, and we must move with it,” Notley said in an address to the Edmonton Chamber of Commerce, as quoted by Edmonton Journal. “Which is why it’s so critically important that this government make their front-and-centre daily focus on how we diversify the economy.”
Demand for Canadian oil will recover this year but most forecasters seem to expect global oil demand to peak within ten years. The green transition just got a huge boost from the pandemic, and there is little chance governments will suddenly reverse their priorities. This means that diversification may be worth a thought. Even the greenest U.S. administration is unlikely to have a problem with carbon capture, renewables, or low-emission petrochemicals. And these won’t require pipelines to export.
By Irina Slav for Oilprice.com
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