Lauerman: Shrewd Move By Irving Oil An Indictment On The Feds

Irving Oil Limited’s recent move to source western Canadian crude oil for its 320,000 bbl/d Saint John refinery, the largest in the country, using foreign tanker ships rather than rail or non-existent pipeline is nothing short of genius and an indictment on Canadian energy policy (see Irving Oil Applies To CTA For Tankers To Ship Canadian Crude To Its Saint John Refinery).

Irving Oil has been granted a one-year waiver to the 1992 Coasting Trade Act by the Canadian Transportation Agency (CTA) to hire a foreign mid-size tanker to transport oil from the Westridge Marine Terminal in Burnaby, B.C. to its New Brunswick refinery, by way of the Panama Canal. The company awaits a similar waiver from the CTA to transport western Canadian oil from either Louisiana or Texas — and a third to hire a foreign tanker to source greater volumes of crude from offshore Newfoundland and Labrador fields.

The novel coronavirus pandemic opened the door for Irving’s waiver requests by threatening its source of foreign supply as demand destruction has led to mandated output cuts by OPEC+ countries and a collapse in drilling and voluntary cuts in the U.S. At the same time, voluntary cuts by western Canadian producers have led to a surplus of pipeline capacity, a rarity in recent decades, opening the door for Irving to contract more substantial volumes of low-cost crude oil from the region.

“It is critical to our customers, to our business, and to energy security throughout Atlantic Canada that we are able to use foreign crude oil tankers to access western Canadian crude oil on an urgent basis and going forward for one year to allow for effective and flexible supply chain planning and to strengthen the link between Canadian oil producers and our refinery in this challenging and uncertain time,” Irving chief refining and supply officer Kevin Scott wrote in the April 16 application to the CTA.

Canadian oil presently represents about a fifth of the Saint John refinery’s crude slate, most of which comes from offshore NL by domestic tankers, and a “small amount” from Western Canada by rail — and disrupted by nationwide rail blockades earlier this year. Irving suggested a start date of April 21 for the one-year tanker waivers in its application.

Irving has not said whether the sourcing of western Canadian oil by tanker is part of a long-term strategy by the company, but as threats to foreign sources of oil rise in our increasingly geopolitically-charged world, the potential is there. One-year waivers for lower cost foreign tankers set a precedent for ongoing waivers to the Coasting Trade Act in the name of energy security, while substantial new pipeline capacity to Burnaby and the U.S. Gulf Coast would provide the means.

Both the 590,000 bbls/d Trans Mountain expansion (TMX) to the West Coast and TC Energy Corporation’s 830,000 bbls/d Keystone XL (KXL) pipeline to the U.S. Gulf Coast continue to face significant obstacles to their construction, but now that they are at least partly owned and backed by Canadian governments — the federal government owning the former and the Alberta government buying a $1.5 billion stake and providing a $6 billion loan guarantee for the latter — their likelihood of eventually being completed has increased immensely.

At the present time, the configuration of Irving’s Saint John refinery is such that it should be able to process large amounts of western Canadian conventional light and medium crude, some synthetic crude oil (SCO) because hydrocracking capacity represents over a tenth of total crude capacity — allowing the company to boost the cetane level of diesel to specification — but fairly limited amounts of conventional heavy and dilbit.

The refinery has no coking capacity at the present time, but based on the experience of a number of refineries in the U.S. Midwest, the addition of significant coking capacity is possible if Irving management were to believe they could secure substantial amounts of western Canadian heavy at attractive prices — including the cost of transportation — over the long term.

Indictment on the feds

Irving Oil having to resort to such circuitous routes to source western Canadian crude oil to ensure security of supply of its Saint John refinery during the COVID-19 pandemic is an indictment on the Trudeau government.

The global pandemic may have come out of left field, but geopolitical threats to Canadian oil imports have been on the rise since Prime Minister Justin Trudeau first gained power in October 2015. Despite this fact, the Trudeau government has allowed environmental issues in general, and climate change in particular, to dictate energy policy in Canada.

The geopolitical rivalry between China and the U.S. was beginning to rev up at the end of the Obama administration, as the Chinese leadership became increasingly assertive in East Asia and elsewhere, but went into hyperdrive with the election of Trump. There is a great deal of speculation regarding the rationale for Trump’s trade war with China, but it is increasingly looking like an attempt to thwart the continued rise of a geopolitical competitor.

In the past week, both The Wall Street Journal and Financial Times have warned we are edging towards a new Cold War. There is no reason to believe a new one will be identical to the original one between the Soviet Union and the West, but with the continued breakdown of economic globalization the world could easily again split into trading blocs. This may not negatively impact Canadian energy security per se, but it increases the likelihood of the U.S. and Canada imposing tariffs on foreign oil imports to protect our domestic oil industries if Russian President Vladimir Putin restarts his oil price war once the worst of the global pandemic passes (see Oil Price War 4.0 Series Part 5 – Putin’s Masterstroke).

At the same time, foreign oil imported into the eastern half of Canada, with the notable exceptions of Norway and the U.S., is from countries located in war-torn regions such as the Middle East — for example, Saudi Arabia and Iraq — or countries with long histories of civil strife such as Angola, Algeria, Mexico, Nigeria and Ivory Coast. As these countries are all heavily reliant on oil revenue, the recent oil price collapse only makes them more fragile, increasing the probability of war and civil unrest, and hence, disruptions to their oil production.

On a related note, the U.S. starving Iran of cash by blockading its oil exports through economic sanctions could lead to more substantial armed drone and cruise missile attacks on oil infrastructure in the Persian Gulf region than the one against Saudi Arabia’s Abqaiq oil processing plant and Khurais oil field in mid-September (see Drone Revolution Threatens Eastern Canadian Oil Imports), if not an attempt to close the Strait of Hormuz to maritime traffic (see Three Scenarios For A Strait of Hormuz Closure).

To conclude, Irving was an early backer of the 1.1 million bbls/d Energy East pipeline project, first proposed by TC Energy in 2014. Had the Trudeau government put energy security at least on par with environmental issues when crafting Canadian energy policy back in 2017, it would have argued the $15.7 billion Energy East project was in the national interest — as it did for TMX in 2018, after originally botching regulatory approval of the project — to overcome opposition by the Quebec government and environmental groups, instead of allowing it to die on the vine.

In that case Irving Oil would now be sourcing western Canadian oil via the Energy East pipeline, rather than by foreign tanker through the Panama Canal in the near future. Russ Girling, president and CEO of TC Energy, has previously stated that the Energy East project is unlikely to be revived given passage of Bill C-69 — the stricter new regulatory regime for natural resource projects under federal jurisdiction — by the Trudeau government last June.