Lauerman: Biden Presidency Series Part 4 — Impact On Canadian Oil And Gas

Joe Biden, the Democratic Party nominee for the U.S. presidency, upped the ante for his Clean Energy Revolution yet again on August 11, by selecting California Senator Kamala Harris as his running mate. Harris is a hardcore backer of the Green New Deal — and supporter of a fracking ban as well —  having sponsored a draft legislative proposal related to it with Democrat firebrand Alexandria Ocasio-Cortez, the first-term House Representative from New York State.

Part One of this four-part series explored Biden’s plan to combat global climate change, based on his Clean Energy Revolution and a scaled-back version of the Green New Deal, while Part Two identified his probable policies for the U.S. oil and gas industry upon becoming president. The third part quantified the potential impact of these policies on global energy consumption, energy mix and U.S. oil and gas production under two scenarios, Medium Emissions and Low Emissions.

The fourth and final part of this series explores the potential impact of Biden’s anti-Keystone XL (KXL) pipeline position on the Canadian oil industry. To do so, the Canadian Association of Petroleum Producers’ (CAPP) June 2019 long-term outlook for western Canadian oil supply — CAPP deferred release of its 2020 outlook on June 2 due to global uncertainty associated with the COVID-19 pandemic — is compared to new capacity presently coming online from other pipeline projects to determine the need for KXL in the future.

In addition, Part Four quantifies the potential impact of Biden’s climate change policies on the Canadian oil and gas industry under the Medium Emissions and Low Emissions scenarios through 2035, again using the Reference Case from the U.S. Energy Information Administration’s (EIA) International Energy Outlook 2019 — the global equivalent of CAPP’s June 2019 outlook for western Canadian oil — as the basis for comparison.

Keystone XL

On May 18, the Biden election campaign vowed in a statement to kill TC Energy Corporation’s KXL pipeline project if he is elected president. This should have come as no great surprise since Vice President Biden stood next to President Barack Obama in the Oval Office when he killed KXL with an executive order in November 2015 — with President Donald Trump subsequently resurrecting it from the dead in January 2017.

Cancelling KXL is almost all upside for Biden from a political perspective. If he is to defeat President Trump in November, he needs to energize the progressive base of the Democratic Party and get them out to vote — something Hillary Clinton failed to do in the 2016 presidential election, after her long drawn out battle with Vermont Senator Bernie Sanders for the party’s nomination — and KXL is the ideal issue to do so.

Since TransCanada — as TC Energy was previously known — first proposed the KXL pipeline in July 2008, it has become a lightning rod for climate change campaigners in the U.S. The ‘tar sands’ is viewed as the “thin edge of the wedge” for producing oil from high-carbon sources by environmentalists — coal-to-oil being their greatest fear — and as the pipeline was to move 830,000 bbls/d of diluted bitumen from northern Alberta to refineries in the U.S. Gulf Coast region, it simply had to be stopped.

At the same time, there is no reason to believe Biden will renege on his KXL campaign promise if he wins. He had a solid track record of supporting climate change initiatives in the U.S. Senate, has more than tripled proposed spending on his Clean Energy Revolution in recent weeks, and just added a New Green Dealer as his vice presidential running mate.

Impact on Canadian oil

On the bright side, Biden killing KXL should not lead to a new shortage of oil pipeline capacity from Western Canada for a decade or more, despite regional producers suffering from a shortage for much of the past decade.

The current COVID-induced pipeline surplus should dissipate over the next year or so, as global and North American oil consumption rebounds, but reappear by 2023 with a large slate of small and large-scale pipeline projects moving forward besides KXL. And that is assuming CAPP’s relatively optimistic June 2019 outlook for regional supply — projections for Canadian oil output under the Medium Emissions and Low Emissions scenarios, to be discussed below, are far more negative (see Table 1).

Enbridge Inc.’s Line 3 Replacement and the Canadian government’s Trans Mountain expansion (TMX) projects should add almost one million bbls/d of pipeline capacity from Western Canada by December 2022 — 370,000 bbls/d and 590,000 bbls/d, respectively. In addition, there are several low-risk, small-scale projects to expand capacity, totaling another 440,000 bbls/d, scheduled to be online in a similar timeframe. In total, these projects should add 1.40 million bbls/d to regional oil pipeline capacity by the end of 2022.

Based on CAPP’s June 2019 supply outlook, and assuming 240,000 bbls/d of crude-by-rail is backed out — roughly the amount of western Canadian crude exported by rail in 2018 — there would be 520,000 bbls/d of surplus pipeline capacity in 2023. Even without KXL, a surplus would remain until 2030.

But capital spending by Canada’s oil and gas producers was $34 billion in 2019, almost a tenth less than originally forecast by CAPP, and a far cry from the record spend of $81 billion in 2014. On June 9, CAPP slashed its estimate for 2020 capital spending to $23 billion, compared a forecast of $37 billion in January, with the spending collapse suggesting Western Canada’s surplus of crude pipeline capacity could last long past 2030, with or without KXL.

Energy landscape

As discussed in Part Three of this series, the global energy market is very different through 2035 under the EIA Reference Case and the Medium and Low Emissions scenarios. Due to differing assumptions about global economic growth and improvements in energy intensity, average growth in global energy consumption ranges between 1.1 per cent per year for the EIA Reference and no growth under Low Emissions — with Medium Emissions roughly in the middle.

The shift in global energy mix is even more extreme over the projection period, with coal and oil especially hard hit under the Medium Emissions and Low Emissions scenarios, renewables the big winner, while natural gas maintains a relatively steady share of the market. In fact, coal consumption declines dramatically in both scenarios, oil consumption declines somewhat or more, and gas consumption increases either six per cent or one per cent (see Table 2).

In turn, relative weakness in global oil and gas consumption under Medium Emissions and Low Emissions weighs on prices for these two commodities through 2035. The EIA Reference Case assumes a West Texas Intermediate (WTI) equivalent price of around US$75/bbl in 2035, trending higher from US$65 in 2018. The Henry Hub (HH) price for natural gas is assumed to increase from US$3.15/mmBtu in 2018 to about US$3.50 in 2035.

In contrast, WTI is assumed to average US$50 over the projection period under Medium Emissions, and HH gas to average US$2.75. Average prices for the Low Emissions scenario are US$40/bbl and US$2.25/mmBtu, respectively.

Impact on Canadian oil and gas

These lower prices weigh heavily on Canadian oil and gas production, especially under the Low Emissions scenario, with oil production taking the brunt for two reasons. Relatively high costs for new production from Alberta’s oilsands compared to U.S. light-tight oil (LTO) — and many other sources of oil — and the potential for greater cost reductions for the latter than the former.

U.S. LTO resource is becoming increasingly dominated by deep-pocketed international oil companies (IOCs), allowing for greater research and development spending to cut costs, whereas Canada has seen an exodus of IOCs from the oilsands in recent years.

Canadian oil production declines 16 per cent to 4.4 million bbls/d between 2018 and 2035 under Low Emissions, a more modest three per cent for Medium Emissions, while increasing 17 per cent under the EIA Reference Case (see Table 3). The differences for Canadian gas production over the projection period are less extreme for the three scenarios, declining by six per cent to 5.3 tcf in 2035 under Low Emissions, compared to increases of two per cent and 14 per cent under Medium Emissions and the EIA business-as-usual case, respectively.