Canada's PM Trudeau is facing a national energy crisis that's at the tipping point

Key Points
  • The province of Alberta is Canada's main oil producer: 97 percent of the country's proven reserves can be found in its oil sands.
  • The Alberta oil sands already produce 3.6 million barrels of oil per day, and plans are to increase that to 3.9 million by 2027.
  • Low oil prices has put the Alberta economy in crisis, Prime Minister Justin Trudeau has said.
  • A second oil pipeline that would run through British Columbia to the west coast could solve that problem and boost exports to Asia, helping to get the oil revenue-dependent province back on track.
Demonstrators hold signs during a protest against the Kinder Morgan Canada Ltd. Trans Mountain pipeline expansion., outside of the G7 finance ministers and central bank governors meeting in Whistler, British Columbia, Canada, on Saturday, June 2, 2018.
Darryl Dyck | Bloomberg | Getty Images

Far north of Texas, another great North American oil reserve sits, waiting — some say — to be further exploited. The province of Alberta is Canada's main oil producer: 97 percent of the country's proven reserves — 166.3 billion barrels — can be found in its oil sands. The reserve, buried beneath a layer of muskeg and forest in the northeastern part of the province, holds a reservoir of heavy crude oil known as bitumen, mixed with sand, clay and water. That oil is recovered by either mining or drilling: Both methods are more expensive than the means used to recover conventional oil reserves.

The Alberta oil sands already produce 3.6 million barrels of oil per day, and plans are to increase that to 3.9 million by 2027, but the province is facing a problem of oversupply. The infrastructure is in place to produce the oil, but the oil sands only have access to the North American market via crude-by-rail. The price differential between the unrefined bitumen produced in Canada and what American refineries can get for the synthetic crude they make out of it isn't favorable to the Canadian market.

The bottom line: "Low oil prices have put the Alberta economy in crisis," Prime Minister Justin Trudeau told the Chamber of Commerce in November.

Difficulties attracting investment and the price gap, which reached a record low late last year, are stymying efforts to ramp up production and boost exports beyond North America to lucrative markets in Asia.

A second oil pipeline that would run through neighboring British Columbia to the west coast could solve that problem and get the oil revenue-dependent province back on track. That's what the convoy that arrived in the Canadian capital two weeks ago drove 2,000 miles to demand from the federal government.

The United We Roll truckers' convoy numbered around 170 vehicles when it left Red Deer, Alberta. The motley band of semis, pickup trucks and cars driven by Alberta oil workers and supporters they picked up along the way arrived in Ottawa a few days later and staged several peaceful protests before departing.

"Alberta's hurting. We're hurting for jobs, and it shows," convoy member Mike Jepson told the CBC. Alberta's economy is heavily dependent on oil, and a spike or drop in the price of oil results in thousands of job losses, both in the oil sector and elsewhere. As of January 2019, unemployment in the province sits at 6.8 percent. The province's leadership, under Premier Rachel Notley, has been criticized for failing to prioritize diversifying the economy to provide some protection from volatile oil prices.

Ben Nelms | Bloomberg | Getty Images

The convoy members think that building the Trans Mountain Pipeline Expansion (TMX) is key to Canada's future economic competitiveness. Notley and Trudeau, her federal counterpart, have both said the same. But others say that making large capital investments in oil production is shortsighted. "It's sad for anyone looking at Alberta to see how long it's not been diversifying," said McGill University economist Chris Barrington-Leigh.

One thing is certain: The province can't continue as it is now.

To pipeline or not to pipeline

The TMX would follow the path of the existing Trans Mountain Pipeline, increasing throughput from 300 barrels per day to 890,000. It would cross British Columbia and travel almost 700 miles to terminate at a shipping site in Vancouver, as CNBC reported in June 2018. At that time, the federal government purchased the project at a cost of $4.5 billion CAD from Kinder Morgan Canada in June 2018. The costs of building the TMX are estimated to be $7.4 billion CAD, money that Ottawa is seeking from private backers. No backers for the project have yet emerged.

Kinder Morgan backed out of the pipeline venture because it was too risky. Vocal protests in British Columbia and a series of court challenges have delayed and complicated the project.

The protests surround the possible environmental impacts of the pipeline — everything from oil spills to the impact of increased shipping on the resident killer whales — to questions over indigenous sovereignty.

"Most land in British Columbia is unceded," said Simon Fraser University marine ecologist Anne Salomon. That means British Columbia's indigenous peoples, who didn't sign historical treaties, "have constitutionally protected rights to engage in decisions about their territories and resources," she said. The courts supported those rights in a 2018 decision that represented another setback for the TMX project.

The federal government remains committed to the pipeline. A new round of First Nations consultations is currently playing out, while the National Energy Board returned an environmentally-minded "Reconsideration Report" on Feb. 22 that supported the pipeline.

Justin Solomon | CNBC

"I think there's lots of both political capital and actual capital at stake here," said Jackie Forrest of the ARC Energy Research Institute, "and a lot of incentive for them to see the project through."

The pipeline saga is connected to a hard turn to the right in mainstream Canadian politics. The United We Roll protests framed themselves as being under the same banner as France's Yellow Vest movement, although protesting a national carbon tax rather than diesel pricing.

But over the course of their eastward trip, it became clear that the intent of the movement's supporters was more diffuse. Politically extreme viewpoints, including racist and anti-immigration messaging, became linked with the convoy.

"This anticarbon tax, anti-immigration, openly racist right wing movement is showing the world that Canada is not immune to this tide of far right politics," said University of Saskatchewan political scientist Charles Smith. United We Roll shows that this far right movement is materially tied to Canada's oil sector, he said.

Accessing the ROI of a new pipeline

In the short term a pipeline could attract investment capital to the oil sands, but it wouldn't necessarily represent a change in oil sands output right away. Forrest said the growth outlook would likely be similar to what's currently expected over the next four to five years, because of existing investments. Widely cited estimates from the Conference Board of Canada, a think tank, place the value of the pipeline at $18.5 billion in revenue for provincial and federal governments over the 20-year period.

But the pipeline may prove to be a bad investment, say experts. "These are damned expensive pieces of capital to put into play," said University of Wyoming oil economist Charles Mason.

Right now Canada is the world's fifth-largest crude oil producer. Ninety-nine percent of its crude oil exports go to the United States. The existing market for Canadian crude oil is likely to change because of the U.S. energy renaissance, he said. Currently, American refineries are configured to optimally handle heavier crude, such as that which comes from Canada and Venezuela.

But in-country oil production in North Dakota and the Permian Basin is likely to change the focus of investment toward processing for the "light, tight" crude oil that's produced in-country via hydraulic fracturing. This leads him to think demand for heavy crude from Canada and Venezuela will shrink over the next 20 years.

This anticarbon tax, anti-immigration, openly racist right wing movement is showing the world that Canada is not immune to this tide of far right politics.
Charles Smith
political scientist, University of Saskatchewan

That's an argument for Canada developing alternative markets in places like Asia. But Mason also questions if predictions for those markets are overly optimistic.

Other future costs are more difficult to quantify, but easier — at this late date — to predict. "If you take into account the social costs of releasing fossil fuels, there's no way it's economical [to build the Trans Mountain pipeline]," said McGill University's economist Barrington-Leigh.

Those costs could come home to roost in the form of a much feared oil spill on the coast. Tanker traffic will more than double because of increased throughput. There still isn't full understanding of the potential impacts of an oil spill, said Salomon, and proponents of the TMX, including Forrest, say that everything possible will be done to mitigate that possibility.

Environmental concerns and other spillover effects

But an oil spill isn't the only threat to coastal ecosystems, which the City of Vancouver directly links to more than 300,000 jobs in every field from tourism to fishing. The financial impact of burning fossil fuels themselves, though "often not accounted for in tradeoff analyses," needs to be taken into consideration on an infrastructure project such as this one, Salomon said.

Warming and acidifying oceans — consequences of climate change, which is directly linked to burning fossil fuels — impact Canada's fisheries, she said. For some species fished in Canada, like the Pacific herring and the Atlantic cod, impact estimates are as high as 30 percent to 60 percent stock loss in the next 50 years.

The Stockholm Environment Institute estimates expanding Canadian oil sands production "could increase global emissions by 50 million to 150 million tons of CO2 annually by 2030." Currently, oil sands production accounts for about one quarter of the country's greenhouse-gas emissions each year.

2030 is the same year by which the 2018 International Panel on Climate Change report warns warming could exceed the crucial 1.5 degree Celsius threshold, leading to devastating environmental and human consequences. If a pipeline is built, which will ramp up production over the longer term, it will be next to impossible for Canada to meet its Paris Climate Agreement commitments and help keep warming below this level, Barrington-Leigh said.

Expanding oil sands production in Canada could also drive down global oil prices in the long term, the institute said. Current predictions of a global slowdown in demand could lead to a global oversupply crisis. It's already true that demand trends in developed nations are steady or downward, Forrest said: Developing nation markets are where demand is on the rise.

Barrington-Leigh sees another path forward. Years of an oil boom have left Alberta in a great position to innovate, he said. Oil proponents like Forrest say that innovation could be channeled into making the oil sands greener — and the financial boost afforded by a pipeline and access to the Asian markets could fund that innovation. But more focus on oil is just the Dutch disease, Barrington-Leigh said.

The problem for the private sector remains uncertain. With a pipeline project surrounded by a complicated web of intergovernmental conflict and no clear federal leadership on a way forward that creates jobs for Albertans while also helping to diversify the province's economy, Barrington-Leigh said there's no way to attract investment.

For now, political tensions over this issue keep rising during Alberta's provincial election and Canada's federal election year.