By Keith Norbury

There’s an oil and gas boom in the U.S. and it’s “for real,” acknowledges Jean-Sébastien Rioux, a political science professor at University of Calgary. The boom has enabled the U.S. to meet about half of its domestic oil consumption, said Mr. Rioux, who spent three and half years with Imperial Oil before joining the University’s School of Public Policy in 2012. But that still means the U.S. has to get half of its oil from elsewhere. And that ‘elsewhere’ includes Canada. “The volumes we’re talking about are absolutely astounding and significant,” Mr. Rioux said. “And the tight oil boom in the Bakken also is the real deal. However, the U.S. is still very far from being energy self-sufficient. Very far.”

U.S. ramps up domestic production

According to the U.S. Energy Information Administration, “In December 2012, the U.S. produced about 7.03 million barrels of crude oil per day and imported about 7.58 million barrels per day.” Overall in 2012, the U.S. imported about 40 per cent of the oil it consumed, the lowest level of imports since 1991, EIA reported.

Canada is the biggest source of U.S. oil imports, accounting for 28 per cent of gross imports in 2012. The U.S. is far and away Canada’s biggest foreign customer for oil. In fact, at present it is practically Canada’s only foreign customer of crude oil. In the second quarter of 2013, for example, Canada exported 2.42 million barrels of oil a day to the U.S., according to Canada’s National Energy Board. That represented 96.2 per cent of Canada’s total oil exports of 2.51 million barrels in that period. The previous quarter, volumes were slightly higher – 2.6 million barrels to the U.S. out of 2.7 million barrels – and so was the proportion that went to the U.S.: 96.7 per cent.

Figures from Industry Canada’s Trade Data Online website reveal that this has been the way since at least 2003. In that year, Canada exported 99.8 per cent of its $20.5 billion in exports of “crude petroleum oils and oils obtained from bituminous minerals” to the U.S. Since then, the dollar value of those oil exports rose to $67.4 billion in 2008, stumbled to $42.8 billion in 2009, and rebounded to $74.4 billion in 2012. In all that time, the proportion of those exports that went to the U.S. has stayed above 99 per cent.

It’s a nuanced market

On the surface, the figures indicate that Canada relies a lot more on the U.S. as an oil customer than the U.S. does on Canada as an oil supplier. However, the oil market is much more nuanced than that, Mr. Rioux and others interviewed for this article pointed out. The fact that the U.S. now produces more of its own oil doesn’t mean it’s going to stop buying Canadian oil any time soon. Nor does Mr. Rioux think that it removes the imperative to go ahead with the controversial $7 billion Keystone XL pipeline that would bring more Alberta crude to refineries on the U.S. Gulf Coast. However, others who follow the industry don’t share that view.

The main reason in favour of the U.S. continuing to rely on Canadian crude is that those Gulf Coast refineries are engineered to process heavy crude, currently sourced from Venezuela and others. “The job of any refinery manager or any large company involved in refining is to maximize margins, Mr. Rioux explained. A refinery that’s geared up to take in light sweet crude from Texas will not be able process Canadian oil sands crude, or other heavy crude from Venezuela or Mexico, he said. “So because their refineries are configured as such, and probably because the range of products that they would refine is pretty much optimized by the inputs of crude, that’s why Keystone XL is seen as a natural outlet for Canadian heavy oil,” Mr. Rioux said. “But that’s only part of the story.”

Other U.S. refineries are also calibrated to handle heavy crude, while others still are set up for lighter crude, such as North Sea or Arabian oil. Keystone XL would “definitely” displace Venezuela and Mexican oil, but not necessarily light sweet crude from other parts of the world or even from the booming Bakken formation centered around North Dakota, Mr. Rioux said. “It’s a complicated picture but essentially Canadian crude heavy oil does not compete with North Sea or Arabian (oil),” he said.

Oil sands producers covet Gulf access

Clare Demerse, Director of Federal Policy for the Pembina Institute, a Canadian energy and environmental think tank, also noted that refineries on the Gulf Coast are specifically configured to process oil sands crude. And that creates “very favourable conditions for oil sands expansion” should the 2,700-kilometre Keystone XL pipeline go ahead. “They want to get access to tidewater so they can command better prices for their products,” Ms. Demerse said.

Far from being a proponent of oil sands expansion, or pipelines that might facilitate that, the Pembina Institute is concerned about implications for the environment, such as the potential for oil spills and increased production of greenhouse gases. Ms. Demerse suspects U.S. President Barack Obama shares those concerns, which is why he hasn’t yet approved Keystone XL. She also noted that increasing U.S. energy production enables Mr. Obama to lean toward that side of the equation.

“Certainly in terms of a cross-border pipeline the implication is that there is no urgency by any means for the U.S. to be importing more oil from Canada, particularly from the oil sands,” Ms. Demerse said. “So I think it’s absolutely fair for President Obama to look at this situation on the ground and say this (Keystone XL) isn’t something we need.”

Mr. Rioux, however, doesn’t buy the environmentalists’ argument that stopping the pipeline will “choke off the rest of the snake.” That’s because the U.S. still needs Canadian oil. The pipeline “makes a huge amount of commercial sense” because it would bring less expensive Canadian crude to those Gulf Coast refineries, which are now running at less than capacity, he said.

“It’s a political dilemma for Obama, and the fact that he hasn’t decided in two years just goes to show you the depth of his political dilemma,” said Mr. Rioux, who now thinks there’s less than a 50 per cent that Mr. Obama will approve Keystone XL.

Oil infrastructure bottlenecks cost billions

Economist Sherry Cooper doubts the odds are even that high. Just looking at what has happened, it appears to be stalled,” Ms. Cooper said of Keystone XL. “And I don’t know that it’s high on his list of priorities, frankly.” In August, Ms. Cooper wrote an opinion piece titled, “The world will not wait for Canada’s oil” for the Globe and Mail. In that article, she cited a recent bank report that found a lack of pipeline infrastructure and other bottlenecks cost Canada $25 billion in oil revenue in 2012. Ms. Cooper told Canadian Sailings that the whole point of the article was that Canada needs to develop ways to transport oil to Asia and other developing economies. “Obviously, given that the United States is Canada’s dominant trading partner in energy, in fact nearly our sole trading partner in energy, it certainly is very important that we expand our customer base,” said Ms. Cooper, who is President of Sherry Cooper Associates, financial advisor to MDC Partners Inc., and former Executive Vice-President and Chief Economist at Bank of Montreal. On the other hand, Ms Cooper confessed, “We have to address the global warming issue as though it was a life or death situation, which I think it is.”

President praised and chided for indecision

Mr. Rioux said he could buy the argument that Mr. Obama didn’t want to anger his supporters in the environmental movement in advance of his 2012 re-election bid. But his successful re-election defused that. Mr. Rioux doubts that the President is continuing to stall over concerns about the 2014 mid-term elections, because they are still over a year away. “Good decisions are obvious and easy to make,” Mr. Rioux said. “This one’s a bad decision and the fact that he’s just been delaying it over a year and half can’t be for good reasons.”

But Mr. Rioux doesn’t buy the argument that Mr. Obama’s indecision is because the U.S. oil boom has reduced any urgency to get Keystone XL built. And Mr. Rioux shrugs off the notion that avoiding Keystone XL is a key environmental imperative. The oil sands “represents just over 6 per cent of Canada’s GHG emissions,” Mr. Rioux said. “The transportation sector alone is over 25 per cent … but we’re not taking cars off the street.”

Ms. Demerse, however, noted that in a climate speech Mr. Obama delivered in June he talked about American energy independence and reducing U.S. dependency on oil. While the shale gas revolution is contributing to that energy independence, Mr. Obama’s strategy also includes higher fuel efficiency standards. “So you could absolutely see demand for U.S. oil dropping further, “ Ms. Demerse said.

It’s important for the U.S. President to talk about the U.S. weaning itself off oil in the long term, she said, pointing to what the International Energy Agency’s 2012 World Energy Outlook report had to say about what it would take to avoid dangerous global warming of 2 degrees C or higher. “No more than one-third of proven reserves of fossil fuels can be consumed prior to 2050 if the world is to achieve the 2 °C goal, unless carbon capture and storage (CCS) technology is widely deployed,” the report said.

Ethical oil argued

Mr. Rioux, however, borrows the ethical oil argument of Sun News pundit Ezra Levant (although he’s not a big fan of Levant) that buying from democratic Canadian producers is better than trading with producers in tyrannical and unfriendly countries like Venezuela or Iran, or corrupt regimes like Nigeria. And despite what environmentalists might argue, Alberta’s oil patch is “heavily regulated” and included a $15 carbon tax on heavy emitters, Mr. Rioux said. “This is not wildcatters doing whatever they want any place any time,” he said. “On the contrary. So the argument is buy from Canada, a liberal democracy with a highly regulated system, versus Saudi Arabia that mistreats women and minorities and homosexuals.”

Oil patch implications for pipeline delays

Regardless of what’s holding up Keystone XL, it has been delayed. So what are the implications of that for Alberta’s oil patch? Mr. Rioux said the biggest impact will be on future development of oil sands projects, which can each take $20 billion to $30 billion and 30 to 50 years to complete. “The companies have to do the math 100 different ways and then one of the calculations is, OK, so we produce X number of thousands of barrels a day, where are the customers and how do we get the stuff to them?” Mr. Rioux said. “This uncertainty about the pipeline is definitely a huge risk, not necessarily for the existing projects, but for future investments.” While he couldn’t quantify that risk, he speculated that some projects have been delayed until either Keystone or another pipeline is built. “It’s not as if we’re in a recession because of it. But companies are nervous,” Mr. Rioux said. “This is a variable in their model that has just taken on much more significance.”

Alternative proposals also face hurdles

What about other pipelines, such as Enbridge’s Northern Gateway project proposed for northern B.C. or Keystone XL proponent TransCanada Corporation’s more recent eastern access proposal to pipe oil sands crude to New Brunswick? The major problem with those is that they are at best several years away because they still have to go through all the regulatory and environmental approvals before construction can even begin, Mr. Rioux pointed out. “On the other hand, if Obama says yes tomorrow, they’ll be laying pipe the day after for Keystone,” Mr. Rioux said.

But Ms. Demerse, noting the increase in U.S. domestic production, said, “There’s no case to be made that the U.S. needs this to actually fill the tanks of American cars.” Nor has Mr. Obama been swayed by arguments about the pipeline creating jobs. In fact, in a recent speech he was dismissive, saying that Keystone would create only 50 permanent full-time jobs. (TransCanada, the project developer, has said it would create 6,500 jobs a year during the two years of construction, according to CBC News.) Most significantly, though, Obama has said the decision on whether or not to approve Keystone “will hinge on the greenhouse gas implications of the new pipeline,” Ms. Demerse said, adding that “in the politics around this proposal, people who support the pipeline will tend to talk a lot less about climate change.” The Pembina Institute estimates that Keystone XL would increase oil sands production by 36 per cent from today’s levels. “And the greenhouse gas emissions associated with that are equivalent to 4 million new cars on the road,” Ms. Demerse said. “So, it’s significant.”

How will oil find its markets?

The dissenting view is that those oil sands reserves will be developed with or without Keystone XL because the oil will eventually find its way to markets. That was a key finding of the U.S. State Department’s environmental review of Keystone, something that Mr. Rioux also referenced. Since that report, the Canadian government has modified its rationale for supporting Keystone XL from it being a catalyst of growth in Canadian crude oil production to an argument that it might as well be built because it won’t affect production, or climate impacts, anyway, Ms. Demerse pointed out.

Ms. Cooper certainly doesn’t see the logic in that. Without new pipelines, she said, “We obviously would have major, major reduction in our export flows.”

A pipeline to eastern Canada might provide access to international markets, Mr. Rioux said. “But it seems to me like a very roundabout and inefficient way of getting it to the U.S. market because the pipeline from Alberta to New Brunswick would be longer than the pipeline from Alberta to Texas,” he added. The eastern route would also be a much more complicated project, not the least because the pipeline would cross the Canadian Shield. TransCanada has an existing natural gas right-of-way it could use for part of the route, Mr. Rioux said. “But they don’t have anything going from Montreal to Quebec City or all the way down to Saint John’s. That would be brand new holes in the ground.”

Kinder Morgan’s route cited as less risky bet

While public opposition to the proposed Enbridge Northern Gateway pipeline is high in B.C. from across the political spectrum, there’s evidence of support in the province for Kinder Morgan’s plan to twin its existing pipeline to Vancouver.

Ms. Cooper said it’s up to engineers to figure out the best route for a pipeline. “But what I do feel strongly about is that it’s essential that we provide a capability to get the oil from the oil sands to the deep sea ports of British Columbia,” she said.

Rail options explored despite tragedy

An alternative to pipelines is to ship the oil by rail. That form of transport, however, lost its lustre this summer with the deadly explosion of an oil-laden train in Lac-Megantic, Quebec. Not only is rail seen as more hazardous than pipelines, it also costs two to three times as much to ship oil by rail than by pipeline, Ms. Demerse pointed out. “If you’re an engineer and your job is to figure out how to get this stuff from northern Alberta to market, you like pipelines,” Mr. Rioux agreed.

In the absence of pipelines, though, oil has been moving by rail. According to an Aug. 15 report on the Motley Fool, Canadian Pacific Railway reported that “revenue from oil transportation popped 150 per cent in the second quarter, to nearly $100 million” up from zero as recently as 2010. Asked for an update on that, CP spokesperson Ed Greenberg provided a direct quote that CP’s Senior Executive and Chief Marketing Officer Jane O’Hagan gave during a second quarter results call with analysts in July. “Our crude by rail model continues to expand with growth momentum built on the expansion of our loading network, diversification of the destination network for optionality and on the commitments of our customers to capital,” Ms. O’Hagan said. “In terms of our outlook, crude by rail remains a complementary and important supply-chain option for producers, refiners and transloaders looking to benefit from the flexibility of moving any type of crude to any North American market,” Ms. O’Hagan said.

Meanwhile, Canadian National Railway is considering transporting Alberta bitumen to Prince Rupert by rail, according to a Sept. 22 Canadian Press report that cited documents obtained by Greenpeace. CN spokesperson Mark Hallman said the company “does not disclose publicly its commercial discussions with customers.” However, he added that CN would consider a crude-by-rail proposal for Prince Rupert, although the port currently lacks infrastructure to transfer the crude to vessels.

Can any pipeline be built?

If neither Keystone XL nor Enbridge’s Northern Gateway goes ahead, that is going to cause oil company executives to wonder if any pipeline can be built in Canada, Mr. Rioux said. “And if the answer is maybe we’ll look at eastern access, well that’s a little bit of a relief,” he said. “But, as I said, it will be at least five years until that pipeline might be built.” In any case, Mr. Rioux doesn’t expect Canadian pipelines, if they’re built, to have much impact on Canadian oil sales to the U.S. market. The goal of a pipeline isn’t to substitute one customer for another, he said. It is to add new customers.

“I don’t think trade with the U.S. will diminish,” Mr. Rioux said, adding that any incremental increase in oil sands production would go likely go to Asia.”