April 2022, Vol. 249, No. 4


European Markets Looking to Canada, but More Pipe Needed First

 By Jeff Awalt, Executive Editor 

When Justin Trudeau became Canada’s prime minister in 2015, the Syrian civil war had reached its violent peak and refugees were streaming across the Atlantic. Speaking to the United Nations General Assembly for the first time a few months later, he pledged a new level of international engagement on migrant issues, economic disparity and environmental action. 

“We’re Canadian, and we’re here to help,” Trudeau told the enthusiastic crowd. As millions of refugees flee Russia’s invasion of Ukraine and the West seeks alternatives to Russian oil and gas, Canada’s energy industry is calling on Trudeau’s government to live up to that 2016 promise with policies that support production and infrastructure expansion. 

“The crisis in Europe really emphasizes the need for Western democracies to take another look at where they are sourcing supply, and that’s where Canada can really play a role,” said Ben Brunnen, vice president, Oil Sands and Fiscal & Economic Policy for the Canadian Association of Petroleum Producers (CAPP). 

“There is a path Canada can choose to take where we can displace Russian oil, help wean European countries off of this product and still maintain our ESG [environmental, social and governance] commitments globally,” Brunnen told P&GJ. “I think that there is even a compelling obligation for Canada to look hard at what it can incrementally do to support security of supply.”  

It’s a tall order, but one that Canadian energy experts believe is viable if government embraces it as a matter of national and global security. 

Naysayers point out that Russia supplies Europe with about 3 MMbpd of oil, while Canada’s total output is projected to average about 6 MMbpd in 2022, with most of that production going to the United States. 

“Unless Canada wants to abruptly reroute its supply to a new overseas market, the country would have to increase its output at levels not even the oil industry itself considers plausible to fill the Russian gap,” Washington Post columnist J.J. McCullough, a Canadian, wrote in March.  

He acknowledged, however, that natural gas “should provoke more optimism, given that the Europeans don’t seem to have as well-developed a strategy to phase out gas.”

Such optimism was on display at the 2022 CERAWeek industry conference in Houston, where Canadian energy leaders described their record on ESG issues as potential selling points in green-minded European markets.  

Canada’s energy industry has made progress methane and carbon emissions, and the six companies who represent 95% of oil sands production have collaborated on a plan to achieve net-zero emissions by 2050 with specific, incremental targets along the way. But the oil sands still represent 10% of all Canadian emissions, and the industry, as a whole, accounts for over 20%. 

“I think that when you look at what Canada produces from an energy perspective, we actually underestimate how we fit into the global matrix,” Deborah Yedlin, chancellor of the University of Calgary, said during a panel discussion on Canada’s energy future. 

“And now this tragedy involving Ukraine has sort of changed the psyche,” Yedlin said, emphasizing that “the potential for Canada making a difference is significant.” 

“In Canada, we do ‘E’ well. We do ‘S&G’ well. The fact that we’ve seen Exxon, BP, Shell and Equinor exit Russia tells us in Canada that ‘S&G’ matter,” she added. 

European supply threats aren’t the only worry with Russian sanctions, of course. U.S. President Joe Biden, who is still derided in North American midstream circles for his cancellation of Keystone XL pipeline, halted all exports of Russian crude to the United States. Europe plans to sever energy ties, as well. 

Reinforcing Brunnen’s point about short-term, incremental advances, Yedlin noted that Canada has capacity to replace a third of the United States’ Russian oil imports using only rail. 

The desire among Canadians to contribute to global emissions reductions and fuel shortages is having a meaningful effect on its energy sector, said Tristan Goodman, president and CEO of the Explorers and Producers Association of Canada. He pointed out the country’s vast oil and gas reserves and the need to expand drilling and infrastructure development to produce and export more. “We’re not the solution, but we’re part of it,” he said. 

“We have a lot of natural gas that we can bring online fairly quickly,” Goodman said. “We do have the obvious transport problem, but there is some additional capacity that we can move into the U.S. and displace, so they can continue to push off to the Gulf (of Mexico) and elsewhere. 

Long term, Goodman said, there is a need for significant LNG liquefaction and export expansion on both of Canada’s coasts: “I think there's no question that over the coming years you will see more LNG out of Canada.”  

But some recent events in Canada’s midstream sector signal there are still serious obstacles to overcome before the country can respond on a meaningful scale to global supply shortages.  

Among notable examples, the Quebec government last year rejected a $14 billion project that would have seen natural gas from Western Canada exported to Europe and Asia. The Saguenay project called for construction of an LNG export plant in Port Saguenay and a 485-mile (780-km) pipeline to connect the plant to existing natural gas pipelines in Ontario. 

Last month, Canada’s federal government delayed for 40 days a critical decision on Equinor’s Bay du Nord oil development offshore Newfoundland. The US$9.4 billion (C$12 billion) project would use a floating production unit for storage and offshore offloading (FPSO). 

While Canadian oil and gas infrastructure projects have encountered increasingly fierce opposition from environmental advocacy groups, some Canadian projects have fared better than similar ones in the United States by simply surviving. 

The Trans Mountain pipeline expansion program was a Kinder Morgan project until incessant legal and regulatory challenges made it uneconomically unfeasible for private industry. But the Canadian government to complete, and Canada took over the project to the tune of US$3.8 billion(C$4.5 billion) in 2018.  

When lawmakers saw the bill had surged 70% to US$16.8 billion (C$21.4 billion) by early 2022, they shut down funding and sent developers in search of new financing from public debt markets or financial institutions. But, unlike numerous projects in U.S. soil – Penn East, Atlantic Coast and Keystone XL among them – Trans Mountain is still alive and due to come online in the third quarter of 2023. 

The Coastal GasLink natural gas pipeline also has weathered storms, but construction is proceeding on the 420-mile (670-km) project, which will deliver natural gas to the LNG Canada liquefaction and export facility now under construction in Kitmat, British Columbia. 

LNG Canada, a joint venture of Shell, Petronas, PetroChina, Mitsubishi and KOGAS, will initially produce and export LNG from two trains totaling 14 million mpta. The project is now approaching the 60% completion mark and remains on track to deliver its first cargo by the middle of this decade. 

For all of its impressive engineering and construction milestones, one of Coastal GasLink’s most important accomplishments may prove to be the precedent it set for Indigenous relations. TC Energy in March announced an agreement to sell a 10% stake in the project to Indigenous communities, sharing authority over the pipeline with groups who traditionally held the land it will traverse. 

“For many of us,” Chief Corrina Leween of the Cheslatta Carrier Nation said, “this marks the first time that our Nations have been included as owners in a major natural resource project that is crossing our territories.” 

Whether it proves to be a model for future collaborations or just a one-off solution for Coastal GasLink, it suggests that Canadian pipeline operators have evolved from recognizing the importance of Indigenous stakeholders, to embracing them as economic partners.  

Should those relations thaw further, and First Nations continue to participate in infrastructure development, it could make pipeline construction in Canada less contentious than has been seen in recent years and enable higher production and exports. 

Aside from the perennial opposition that all major energy projects now face in North America, one of the greater hurdles to increased exports is Canada’s limited infrastructure. Canadian pipelines are already running at or near capacity, and it will take significant investment to achieve the scale of infrastructure buildout required to materially impact global supplies of oil and gas. 

Big midstream players like TC Energy and Enbridge are flush with cash and have announced multibillion-dollar capital programs but they are largely pursuing energy transition-oriented investments while seeking incremental expansions of existing oil and gas pipeline systems within Canada. 

“On the conventional side, we’ll expand and modernize gas systems, which will displace coal and support renewables growth,” Enbridge CEO Al Monaco told investors during a February discussion of its 2021 financial results. “We’ll continue to build out our LNG and export positions and invest in the gas utility. We’ll also pursue capital-efficient liquids pipeline optimizations.” 

Enbridge, whose Line 3 replacement project was completed in 2021 and is now “running pretty much full” at roughly 3.1 MMbpd capacity, has prioritized adding more downstream egress to the Gulf of Mexico on its Flanagan-Seaway systems, Monaco said. “We’re now seeing interest in Western Canada LNG, plus local market demand is picking up, so that should drive expansion on our West Coast system.” 

Accordingly, Enbridge is eyeing a potential $2.5 billion expansion of its BC pipeline system, with potential in-service by 2025-26, although that project is contingent on Woodfibre LNG receiving a final investment decision, “at which time we’d then need to hold an open season on our BC Pipeline to see what the market wanted in terms of capacity,” spokesperson Jesse Semko told P&GJ

Canada exports more than 4 MMbpd of oil to the United States, with most of that transported on Enbridge’s Mainline system and another 590,000 barrels a day flowing on TC Energy's Keystone pipeline. Of those totals, a small portion is then re-exported to other countries. Those volumes reached record levels by the end of 2021, with most going to India, China and South Korea. 

“On balance, (Canadian pipeline) egress is really at capacity, and it takes a significant amount of time, effort, and intervention even to build and bring a new pipeline onstream, CAPP’s Brunnen said.  

“Unless we see the federal government convey a very concerted level of support for new energy infrastructure and production to help displace Russian oil out of Europe, (midstream) companies aren't going to be in a position to make any substantial new announcements or investments,” he said. 

Initial government response has been considerably more muted to date. Natural Resources Minister Jonathan Wilkinson said his agency was studying ways to increase utilization of existing pipelines in order to boost crude exports to the United States. 

None of that is to say that Canada’s energy industry can’t successfully rise to the aid of its European allies. It can, industry leaders contend, if government lends support. 

“If we don't see the government shift in its policy stance, there's not going to be any incremental (pipeline) egress, which is necessary for incremental production,” Brunnen said.  

The Ukraine crisis has renewed faint murmurs that Keystone XL could somehow be resurrected, although TC Energy officially abandoned that project and there are no signs of change. But Suncor Chief Climate Officer Martha Hall Findlay is quick to point out the irony of killing a project that could have ultimately delivered 1.4 MMbpd to the United States. 

“When we negotiated the first free trade agreement between Canada and the U.S., energy security was a critical component,” she said of a deal that pre-dated the U.S. shale revolution. “The United States was so worried about energy security at the time that we actually ended up with a clause in that free trade agreement that prevented Canada from taking any actions that could jeopardize its access to our oil. 

“All of a sudden, we’re finding ourselves back in the situation of having a not-very-different conversation,” Findlay said. 


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