United States is largest consumer of heavy crude oil in the world, imports 2.5MM b/d from Canada
Today we’re mad as hell at Donald Trump. The United States is pushing us around like a school yard bully after our lunch money and even Prime Minister Sunny Ways is annoyed. Our instinct is to return fire immediately, but maybe we should step back a bit and think more strategically. We have one thing America still needs and will need for a long while yet: oil. The Canadian oil industry wants more markets in Asia, perhaps we should give them more markets in Asia in a very big way.
By now every Canadian knows that the President is chuffed about stalled NAFTA talks and decided to punish Canada with onerous tariffs on steel and aluminum.
“Let me be clear: These tariffs are totally unacceptable,” Justin Trudeau said in a speech before introducing Foreign Affairs Minister Chrystia Freeland to announce retaliatory measures.
Canada slapped tariffs on a long list of “quirky” products – maple syrup, yogurt, lawn movers, to name a few – that were deliberately targeted at the state and local economies of American congressional leaders, according to Maryscott Greenwood of the Canadian American Business Council, as reported by CBC.
Ok, smart strategy by Ottawa.
But here’s the problem with it: Canada can’t discount the possibility that the erratic and corrupt Trump won’t be re-elected in 2020 and that someone as bad – or even worse, given the sad state of American politics – won’t succeed him in 2024.
Barring a Road to Damascus experience by Trump, this trade war could drag on for years and denying American waffle eaters their maple syrup isn’t going to cut it.
Crude oil might.
In 2017, according to the National Energy Board, total crude oil exports from Canada reached 3.3 million b/d (99% of it to the United States), an increase of 6.5 per cent from the year previous.
Of that volume, 2.5 million b/d was heavy crude oil and 0.77 million b/d was light crude oil.
A few weeks ago, the Canadian Energy Research Institute released its annual oil sands supply forecast.
The results were eye-opening: by 2038 production from the oil sands will increase by 4.8 million b/d (from the current 2.8 million b/d) in the high case and by 2.5 million b/d in the medium case, and 1 million b/d in the low case.
All of it will be heavy crude oil derived from oil sands bitumen. The average production cost will be $28.66/b, which is competitive with the Tier 1 fields in the famed Permian Basin of West Texas.
Critics of the Trans Mountain Expansion pipeline deal with Kinder Morgan Canada claim there is no market in Asia for Alberta bitumen.
But energy economists and experts interviewed by Energi News say this is nonsense. There is about 10 million b/d of heavy crude oil refined globally, 23 per cent of it in Asia, according to IHS MarkIt.
Most importantly, if Canada can provide a stable, long-term supply of heavy crude oil then Asian refineries will invest in upgrades to their equipment that enable them to refine the cheaper and lower quality oil that yields bunker fuel, diesel, and other petroleum products in high demand in the rapidly expanding Asian economies.
Asia is the future.
The United States is the status quo, at best, with markets that are already well-supplied (according to IHS MarkIt, about 800,000 b/d of Canadian heavy is processed in the US Gulf Coast, which requires about 2.7 million b/d) and while the 830,000 b/d Keystone XL pipeline will carry large quantities to that market, if CERI is right there is still plenty left for Asia.
So, that should be Canada’s response to Donald Trump: you’re not a good trading partner, we don’t want to do any more business with you than we have to, and we’re turning our sights to Asia. Pay more for your heavy crude as supply from traditional suppliers Mexico (long-term production decline) and Venezuela (imploding national economy and falling oil production) dries up.
Now, astute readers will immediately respond that given the fractious battle with British Columbia over Trans Mountain Expansion, the odds of building even more pipeline to the West Coast are long, indeed.
And Trudeau can respond, “Sure, that’s absolutely true about Metro Vancouver, but what about Prince Rupert on the north coast?”
In 2016 a University of Calgary study recommended the creation of a northern economic infrastructure corridor from coast to coast. The corridor could include pipelines, power transmission lines, roads – whatever is required to prepare Canada for the economy of the future.
The far western leg of the corridor would run through Edmonton, Alberta hub for the oil sands, and Prince Rupert, home of the deepest port in Canada.
In 2017, the Canadian Senate endorsed the idea. In 2018, federal Transportation Minister Marc Garneau endorsed it.
But even more importantly, indigenous entrepreneur Calvin Helin and Eagle Spirit Energy have been working hard over the past five years to build relationships with First Nations roughly along the route of the corridor and has 35 of them already signed to support agreements.
Imagine that, if you will.
An infrastructure corridor owned by the Canadian government containing five to 10 pipelines co-owned by British Columbia First Nations shipping 2.7 million b/d to 4..8 million b/d day of crude oil to Asia.
Despite what industry critics claim, the United States needs our heavy crude oil.
But does Canada need the United States?
Look at it this way. Kinder Morgan bailed on Trans Mountain Expansion because the risk from inter-government squabbling over jurisdiction was too high. The risk of a stranded half-built project was too high.
The same argument now applies to Donald Trump.
The President has raised the risk of unwarranted interference in trade between the two countries too high. His bizarre tariffs on Canadian aluminum and steel are proof. What exports are next?
It’s time for Prime Minister Trudeau to make that point and turn the oil industry’s focus westward instead of southward.
If Trump wants to fight dirty, Canada has a response. Now, does it have the backbone to use it?