Tara Weber

BNN Bloomberg Western Bureau Chief

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With a ban on Russian oil imports leaving the U.S. short on supply, Canada’s energy heartland is making it clear it’s ready to step up and fill that void.

“We have got to rethink how we get more barrels across the border,” Alberta Energy Minister Sonya Savage said in a phone interview. “[We] can increase supply, and I think the irony of this is when the U.S. loses Russian barrels, they’re looking to Venezuela and Saudi Arabia to replace those barrels and we’re right next door.”

Savage was doing the rounds at CERAWeek in Houston the last couple of days, delivering Alberta’s message to American politicians and industry leaders that the U.S. shouldn’t have to ask countries like Venezuela, Iran, and Saudi Arabia for help when Canada has vast amounts of resources. She said there are a number of solutions Canada can put forward – some in the near-term, others will take longer.

“We do have some additional pipeline capacity and we have optimization programs on existing pipelines – how to use them more efficiently to move more barrels on the same infrastructure,” she said. “Right now, we believe there is an ability to move an additional 200,000 to 400,000 barrels per day to the U.S.”

Savage acknowledged the work Enbridge Inc. is doing to increase throughput on its Mainline pipeline system, which moves about 70 per cent of Western Canada’s energy products.

“We have been talking to government about how the industry can help relieve the current energy crisis,” Enbridge Spokesperson Jesse Semko said in a statement. “At the moment, both our liquids and natural gas systems are at or near capacity, but we’re exploring options that may be taken to provide more energy to the U.S. and Europe. That includes using export facilities on the Gulf Coast for crude and natural gas.”

However, there is only so much pipeline space and once it is filled, experts say we’re likely to see crude-by-rail shipments to the U.S. ramping back up to meet demand. In February 2020, Canadian crude-by-rail exports reached a record high of 412,000 barrels a day before falling back sharply.

“There is about 350,000 barrels per day of [crude-by-rail] capacity in Alberta,” Savage said. “Our latest numbers that we looked at for the week of March 4 were volumes of about 140,000 to 150,000 barrels per day moving by rail. So there is significant capacity there.”

It’s become so important to takeaway capacity that in 2019, the provincial government got involved. Alberta’s then-NDP government leased 4,400 train cars to help move the oversupply of oil in the province while curtailing production. But eventually the economics no longer made sense, and prompted the current United Conservative government to sell those crude-by-rail contracts to the private sector at a loss of $2.1 billion, according to the most recent government estimate. 

PREPARING FOR 'A LOT OF CRUDE' ON THE RAILS 

Now, with so much uncertainty in the oil market, many in the industry are eyeing rail capacity again as a potential solution. 

“At the end of the day, we’re two weeks into this mess and every day there’s news – one day crude’s up $20 and the next day it’s down $15 – and people are trying to get their heads wrapped around it. But the inquiries into our sites and our capabilities are certainly 10 times what they were a month ago,” said Kent McDougall, the chief commercial officer at Torq Energy Logistics Ltd., a Calgary-based midstream company that oversees terminals, storage, trucking, and rail operations.

That interest is still preliminary while pipeline space, which is far more affordable than shipping by rail, remains available.

McDougall said the differential, or discount per barrel, on Canadian crude is key to making crude-by-rail feasible. Currently, the Western Canadian Select (WCS) differential against West Texas Intermediate is hovering around US$12 per barrel, a level where shipping by pipe makes the most sense.

He pointed out that the cost to ship a barrel of crude by rail from Hardisty, Alta., to the U.S. Gulf Coast, for example, costs about US$15 per barrel. If and when the differential widens to exceed that dollar figure, “a lot of crude starts to move” along the tracks.

“Really that differential is an expression of spare capacity and it goes up real quick when there is massive demand for that product,” McDougall said. “At US$100 oil, everybody is going to be drilling their brains out and there will be more production. The question is, when does that incremental production exceed the incremental takeaway capacity? And at that point, your differentials probably go to US$30 and you’re moving all the crude you can by rail.”

“If Canada ramped up production, that would incentivize a bunch of rail to come back on,” said Rory Johnston, managing director and market economist at Price Street Inc., in an interview. He added that Canadian oil production was set to increase even before the recent surge in prices.

“The [International Energy Agency] has Canada growing at just shy of 300,000 barrels per day this year, which would make it effectively one of the largest growth engines outside of OPEC and the U.S.” Johnston said.

“But, I mean, with these prices, I would expect there would be even more pressure to continue ramping up. How quickly you could do it, how quickly you could de-bottleneck, I don’t know. But obviously the price incentive will be there.”

While Canada generally has long lifecycle projects that can’t be started up quickly, the oil patch’s giant already had plans to increase production this year. In December, Suncor Energy Inc. announced plans to raise its annual production to a range of 750,000 to 790,000 barrels per day, a five per cent increase from 2021. And Cenovus Energy Inc. planned to raise 2022 total upstream production by six per cent.

Speaking at CERAWeek, the chief executives of both companies said they’re now looking at what else they can do, including delaying turnaround maintenance where possible to capitalize on the current higher price of oil.

“In this price environment, every single producer is trying to find opportunities to maximize the utilization of their physical assets,” said Suncor Chief Executive Mark Little.

“Everyone is looking for opportunities to de-bottleneck the facilities. We do have some facilities – like Fort Hills – that are ramping up production this year, and we’ve seen that just the last couple of months, so I think that can help,” he said. “So I do expect that Canada will increase production by a few hundred thousand barrels this year.”

“From a pricing perspective, we’re obviously in a very buoyant pricing environment,” said Alex Pourbaix, CEO of Cenovus. “My expectation is we’re going to see, at these kinds of prices, I think every possible barrel of production is going to come on. And also I think these prices will do what high prices generally have done throughout history and they will impact demand. And I think we’ll find in a relatively short period, we’re down to a much more modest price environment.”

In the meantime, the companies also expect crude-by-rail shipments to the United States will grow.

“In the absence of pipelines, the countries have traded off of rail,” Little said. “I would expect that in the near term, that will be the best opportunity for us to increase beyond current pipeline capacities.”

U.S. 'PAYING A PRICE' FOR KXL DECISION 

But pipelines are never far from the discussion, specifically Keystone XL – a symbol of the roadblocks Canada’s energy industry faces. When first proposed in 2008, the project’s in-service date was estimated to be in 2012, at which time it would begin moving an additional 500,000 barrels per day from Canada to the U.S. But it faced pushback, multiple project delays, revivals, and cancellations over the next decade before being scrapped by TC Energy Corp. last year.

“I think the Keystone XL saga more than anything shows the importance of dialogue about energy infrastructure,” said Pourbaix, who spent more than two decades at TransCanada before the company changed its name to TC Energy. “I began working on Keystone, I think it was 12 years ago, and these projects now take decades to come to fruition and I think anybody when they’re looking at the future energy needs of any country, any jurisdiction, you have to be very, very thoughtful of the time it takes to permit, build, and get these facilities into service.”

“Now the U.S. is really paying a price by a decision I think that, had it been made a different way, the U.S. would be well supplied by Canadian oil right now,” Pourbaix said.

Alberta’s energy minister said the current reality the world is facing has reignited the dialogue that Pourbaix alluded to. 

“There is a space right now to have a conversation, an honest conversation about the pace and scale and the time it will take to transition off of oil and gas and it’s going to take time,” Savage said.

“We’re able to have that conversation now because we have a real live demonstration of the things that Alberta has been saying for quite some time.”