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U.S. And Canada At Odds In Oil Sands Schism

As one of his first acts in office, President Biden revoked TC Energy Corp.’s (NYSE:TRP) license on the controversial Keystone XL pipeline project. The project ran into trouble soon after TC proposed the pipeline in 2008, with environmental groups mainly citing the threat of spills. 

Many were also keen on reducing the amount of oil extracted from Canada’s oil sands, widely regarded as one of the worst polluters among oil-producing regions anywhere in the world. The 1,700-mile pipeline is an expansion of an existing pipeline, called Keystone, meant to move 800,000 barrels of oil a day from eastern Alberta to Nebraska.

But Biden’s administration is about to deal Canada’s crown jewel yet another sucker punch: Taxing Canada’s oil sands crude. 

On March 8th, Congressman Earl Blumenauer (D) Oregon and Ed Markey (D) Massachusetts, introduced a ‘bill for spills’ that aims to slap an excise tax that could amount to a 5.5 U.S. cents tax on a barrel of oil sands crude to be paid into a fund for cleaning up oil spills. 

Bill for spills

The bill for spills is a 180-degree reversal on a 2011 ruling by the U.S. Internal Revenue Service that oil sands crude is not technically considered crude and is therefore not subject to an excise tax. Blumenauer wants the tax code changed to specifically label oilsands products as crude oil.

According to Rep. Blumenauer, the United States is clearly in a climate emergency and must take action by holding fossil fuel polluters accountable. Blumenauer says the excise tax will generate US$665 million in additional taxes for the U.S. government over a decade.

Meanwhile, Sen. Markey has lamented the regulatory loopholes that give Canada’s tar sands a free pass taxwise despite being a major source of greenhouse gases.

We cannot allow any oil company to evade the bill for spills. The dirtiest fuels must have the strictest requirements, not the largest regulatory loopholes. We need to close this tax loophole for tar sands and make sure every Big Oil company pays for their clean-up costs.”

But their Canadian peers have warned that it’s the U.S.  that will eventually have to bear the extra costs.

The hundreds of millions of Americans who depend on Canadian oil should know that such a move would ultimately result in their paying this tax at the pumps,’’Kavi Bal, spokesperson for Alberta Energy Minister Sonya Savage, has said. Related: The 3 Nations Vying For Global LNG Dominance

Crude oil is Canada’s largest export category, with oil sands production in 2020 clocking in at 1.8 million barrels per day, good for 40% of Canada’s production of 4.5 million barrels per day. Canada is the largest exporter of crude oil to the United States, shipping 3.63 million barrels of petroleum products to U.S. refineries daily.

The Jones Act

The latest U.S.-Canada oil saga brings into sharp focus an antiquated law that places limits on shipping oil and gas to customers in the U.S.: The Merchant Marine Act of 1920.

The century-old law, colloquially known as the Jones Act or simply JA, regulates maritime commerce in the United States in a way that could curtail the nation’s efforts at energy independence.

The JA demands that vessels undertaking shipments between two U.S. ports be U.S.-built, U.S.- owned, and U.S.-manned. Even foreign steel used in repair work on a JA vessel should not exceed 10% of the vessel’s original weight. However, that same requirement does not apply to shipments going from a U.S. port to a foreign port or vice versa, meaning any ship can make that trip. 

Originally meant to protect U.S. fleets after suffering heavy losses in World War I, JA is now coming under scrutiny because it limits shipping oil and gas to customers in U.S. ports, encouraging American producers to send their low-cost oil and gas to consumers abroad. 

In many cases, it’s much cheaper to ship U.S. products to foreign buyers in foreign ports considering that JA ships cost up to five times as much as their foreign-built counterparts. Further, a 2010 study by the US Maritime Administration (MARAD) revealed that the average operating cost of a US-flag ship was 2.7x greater than that of a foreign-flag ship. Obviously, this can lead to significantly higher prices for goods transported domestically, making them less competitive against imported products.

The JA has been detrimental for the U.S. energy industry because it limits inter-state trade in oil products and LNG with the high costs for US-built vessels forcing producers to turn to less efficient forms of transportation for crude and products. 

The average cost of oil transport by huge oil tankers amounts to only US$5 to $8 per cubic meter ($0.02 to $0.03 per US gallon), the second cheapest after pipeline transport.  Related: Texas Freeze Creates Global Plastics Shortage

Noncontiguous states and territories, like Puerto Rico, Alaska or Hawaii, are even more disadvantaged since no pipeline, rail, or truck transport of U.S. energy products can reach them forcing them to rely on imports. This problem is particularly salient in Puerto Rico, with economists estimating that the Jones Act cost Puerto Rico’s economy $29 billion between 1970-2012. 

Refineries searching for light oil make up the principal demand for America’s fracked oil. 

The refineries at the epicenter of the shale boom are mainly located in the Midwest and the Gulf Coast, where many have upgraded to handle heavy oil from Canada, Venezuela, and Mexico. This leaves refineries on the U.S. east coast as the most obvious destination for light fracked oil. 

Unfortunately, it costs ~3x to ship oil from Texas to refineries on the U.S. East Coast compared to shipping it further to refineries in Canada, thanks to the Jones Act. There are simply not enough JA-compliant ships to transport oil from Texas to the U.S. East Coast, meaning it must be shipped abroad. Similarly, it costs more than 3x for northeastern U.S. refineries to ship oil from Texas compared to shipping from West Africa or Saudi Arabia. 

JA’s basic structure has remained unchanged for decades, with the last major challenge to the law coming two decades ago when free-market advocates sought to weaken or repeal the act. Unfortunately, they were soundly defeated by a maritime industry coalition consisting of US-flag domestic carriers as well as shipyards and their suppliers. They did score a minor victory, though, in 2017 after forcing the US Customs and Border Protection (CBP) to withdraw a proposal that would have tightened US-flag shipping requirements by redefining components such as pipes and valves used in domestic offshore oil and gas construction as “merchandise” subject to JA. 

By Alex Kimani for Oilprice.com

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