Crisis for Canadian Oil

Researcher sheds light on smear campaign against oilsands

Suncor's base plant in Fort McMurray, Alta. in a file photo. Canada's oilsands industry has been suffering due to negative perceptions from marketing campaigns funded by certain U.S. progressive foundations. The Canadian Press/Jason Franson

NEWS ANALYSIS

Canada’s oilsands are being walloped by a perfect storm of self-inflicted wounds but also a powerful smear campaign that conspires to prevent badly needed pipelines from being built.

Canadian oil prices have fallen over 50 percent this year, in stark contrast with the U.S. benchmark price, which is only 10 percent lower in 2018. Canada has an oil glut and nowhere to go with it—other than south of the border—due to the lack of pipelines.

However, all is not well in global oil markets of late either. Supply overwhelms weakening demand as growth fears mount. Oil prices have fallen sharply since October.

The latest blow to Canada was dealt earlier in November when a Montana judge halted construction of the Keystone XL pipeline due to environmental concerns after U.S. President Donald Trump had long since green-lighted the project.

The Canadian standard Western Canada Select (WCS) dropped below US$14 a barrel days after the ruling while the U.S. standard West Texas Intermediate (WTI) traded at $56 a barrel. That enlarged discount of more than $40 a barrel amounts to a multi-billion-dollar wealth transfer from Canada to the United States. Estimates range up to $100 million lost per day due to not having pipelines to get Canadian oil to overseas markets.

Due to quality differences and transportation costs, WCS usually trades at a roughly $15 discount to WTI. That discount widens when the likelihood of pipelines being built diminishes. Other factors can also exacerbate the WCS discount such as refinery shutdowns and seasonal factors.

Shipping oil by rail is not a long-term solution for selling to foreign customers other than the United States.

Marketing War

Canada’s oilsands aren’t only on the losing end of a supply and demand imbalance, a regulatory battle with the Liberal government (those self-inflicted wounds), but also a marketing battle.

People listen during a protest against the Kinder Morgan Trans Mountain Pipeline expansion in Vancouver on May 29, 2018. The Canadian Press/Darryl Dyck

Independent researcher Vivian Krause has been exposing a smear campaign funded by certain American foundations and California-based billionaires to prevent Canadian oil from reaching global markets and getting a higher price.

Organizations such as the Tides Foundation, which works to advance progressive policies, and the Rockefeller Brothers Fund and others aim to brand the oilsands as “tar sands,” a dirty fuel. They pay millions of dollars to other firms to ramp up anti-pipeline activism by exaggerating the environmental impact.

In 2008, CorpEthics, a firm that creates and implements environmental and corporate campaigns, was employed to target Canada’s oilsands.

“From the very beginning, the campaign strategy was to land-lock the tarsands so their crude could not reach the international market where it could fetch a high price per barrel,” according to the CorpEthics website. “This meant national and grassroots organizing to block all proposed pipelines.”

In an interview with Global Edmonton, Krause said Alberta’s government has done everything the activists have asked for including putting a cap on production and increasing the carbon tax.

She said there’s no similar campaign against other jurisdictions and suggested the actions of the foundation actually do nothing to reduce overall global oil use. Instead they “bully” Alberta and Canada.

“It’s not helping the environment because the oil—if it doesn’t come from Alberta—it’s just coming from some other country,” Krause said. For example, both Canada and the United States import a significant amount of oil from Saudi Arabia.

As a result, Canadian oil is selling for the lowest prices in the world while following some of the strictest environmental standards and regulations.

That fact is not lost on the pro-pipelines side, which has much ground to make up in the marketing war. Keep Canada Working is attempting to raise awareness that a national pipeline is the most efficient and environmentally friendly way to get Canada’s oil to market.

In a podcast, Jackie Forrest and Peter Tertzakian of the ARC Energy Research Institute in Calgary question why other projects are not sanctioned the way Canadian ones are.

They say the narrative has been completely hijacked like a freight train in that Canada is still being vilified despite having tight regulations and reducing greenhouse gas emissions.

A short-term solution is a reduction in supply as Forrest and Tertzakian estimate that the market is 200,000 barrels a day oversupplied.

Country-Wide Impact

Estimates vary on how much per day the low prices of WCS are costing the Canadian economy. The WCS discount cost the Canadian economy at least $13 billion during the first 10 months of 2018 according to the Canadian Association of Petroleum Producers.

With less oil produced and lower prices, Canada’s exports will fall and drag economic growth lower.

As Canada remains economically uncompetitive as compared to the United States, businesses will choose not to invest in Canada.

The drop in business investment during the oil price shock of 2014 and 2015 brought the Canadian economy to its knees. The Bank of Canada cut rates twice in 2015 to stimulate the economy.

Without pipelines, the Canadian economy didn’t get the recovery in business investment after oil prices recovered starting in 2016.

But BMO chief economist Doug Porter doesn’t see the current WCS woes as something as bad as four years ago, though it is painful for Alberta.

“We expect WTI to average between $60 and $65 next year, and look for at least a partial recovery in Canadian prices,” he said in an interview.

BMO downgraded its forecast for Canada’s fourth-quarter GDP to 2.5 percent and expects November’s inflation to fall below 2 percent.

After the Bank of Canada’s October statement, which dropped the word “gradual” regarding future rate hikes, the market had reason to believe that rates could go up faster than 0.25 percent per quarter. But now, the bank’s oil price assumptions look too high and business sentiment appears to be waning in the oil patch.

“As a country, rather than sit on the sidelines, we’re better off to earn the money and spend it wisely,” Krause told Global. “Invest it R&D for better technology, make better use of the oil that we still do need to use.”

Canada’s lack of pipeline problem is mostly self-inflicted, but the combination of oversupply—not just domestically, but also globally—and an insidious smear campaign against the oilsands have all played a part in the Canadian product languishing like it rarely had before.

Follow Rahul on Twitter @RV_ETBiz