The Fuse

Oil Sands Industry Sees Setback In Canada’s Election Results

by Nick Cunningham | October 23, 2019

Canadian Prime Minister Justin Trudeau won reelection on Monday, but he lost his majority in parliament, which forces him to form a coalition with another party.

Canada’s oil industry was eager to weaken Trudeau, but even as the Prime Minister lost seats, the election result could create even bigger challenges for an industry struggling with pipeline bottlenecks, investor skepticism and growing scrutiny over climate change.

Pipeline problems
For the oil industry, if there has been one overarching issue dominating the discussion in both Alberta and Ottawa, it has been the inability to build a long-distance pipeline. Several proposed projects were killed off in recent years – such as the Northern Gateway and Energy East pipelines – and several more have been in legal limbo for even longer. In the case of Keystone XL, the project has been on the drawing board for a decade and counting.

The bottleneck forced Alberta to announce mandatory production cuts in order to rescue the industry from crisis. Prices for Western Canada Select collapsed below $20 per barrel a year ago as rising production ran into a wall of unavailable pipeline capacity.

Some in the oil industry blame the federal government for its woes, with particular ire aimed at the federal carbon tax. But Prime Minister Justin Trudeau, even as he has spoken eloquently on the urgency of climate change, effectively nationalized the Trans Mountain Expansion in 2018, a pipeline project that would have otherwise died after Kinder Morgan signaled its desire to scrap it. The Canadian government became a direct owner in the project and is seeking to force it through despite opposition from First Nations, environmental groups, and the provincial government in British Columbia.

The oil industry hoped that the oil-friendly Conservative Party would gain seats at Trudeau’s expense, and on that mark they succeeded. However, the Conservatives didn’t win as many seats as they hoped for. Crucially, while the Liberals lost their majority, Trudeau now appears set to form a coalition with the New Democratic Party, a party that can be described as to the left of the Liberals. As a result, some in the oil industry feel they are in a worse spot than before. A coalition government could create new problems for the Trans Mountain Expansion, and furthermore, additional policies meant to crack down on Canada’s oil sands might be forthcoming.

“This truly is the worst possible outcome”

“This truly is the worst possible outcome,” Tim Pickering, chief executive of Auspice Capital Advisers, which manages a Canadian crude oil exchange-traded fund, told Reuters.

“For the energy sector, this is a massive impact… Many are not only disenchanted with our current federal (Liberal) government and not trusting them, but understandably frustrated and outright angry,” Grant Fagerheim, CEO of Whitecap Resources, told the Calgary Herald. “Companies have to be more cautious and pull back and be more restrictive on spending … We have to make sure that we get our products to market.”

“I think we have a pipeline in peril if we have a minority government,” Alberta’s Energy Minister Sonya Savage said before the results were tallied on Monday, referring to the Trans Mountain Expansion.

Environmental groups hope to capitalize on the results. A column in Canada’s National Observer called it a “landslide win for climate politics,” noting that seventy percent of Canadians voted for parties pledging to tackle greenhouse gas emissions.

Uncertain outlook for Canadian oil sands
The immediate reaction from analysts was that the election result could translate into lower spending and production growth from Canada’s oil sands. “After growing 210 kbpd, on average, in the past five years, we see Canada slowing to only 50 kbpd on average in the next five years,” Goldman Sachs said in a note.

As always, though, much depends on the pipeline front. “We also note that risk to our production forecasts is skewed to the upside if we see progress with Enbridge Line 3, Keystone XL or TransMountain,” Goldman analysts added.

Others agreed. “The lack of pipeline capacities is likely to slow the growth in Canadian oil production,” Commerzbank said in a note. “The oil that is produced in the province of Alberta has to be transported by rail, which is only profitable at substantial discounts as compared with WTI.”

The timing might have been coincidental, but the day after the election, Calgary-based Husky Energy announced that it would make a series of layoffs.

But even as industry proponents denounce the election result as a disaster, it’s not clear that much will change.

But even as industry proponents denounce the election result as a disaster, it’s not clear that much will change. The Liberals can turn to any of three parties on a vote-by-vote basis to secure certain legislative priorities, which means that they are still in a relatively comfortable position and may not need to concede too much. Prime Minister Trudeau has implemented a carbon price, and that is expected to rise in the years ahead, but he has also very publicly supported the Trans Mountain Expansion. And while the NDP has opposed it, there are fewer decisions left to be made on the project at the federal level.

In short, Trudeau’s strategy of trying to satisfy all sides might stick around. That may not be great news for the oil industry, but it’s not clear it is a disaster either.

Nevertheless, there are broader problems with Canada’s oil sands than the composition of the parliament. Investors have soured on the energy sector in the past year, selling off stocks large and small. Major oil sands producers have not been spared.

Concern about climate change is also rapidly rising. At the Oil & Money Conference in London a few weeks ago, a major forum for the world’s oil titans, the mood was palpably different compared to years past. Oil executives talked about the material risk to their businesses from climate change and the need to begin the transition. While companies have paid lip service to this at various points in the recent past, reporters from Energy Intelligence said it was unlike anything they have heard before.

The urgency to address greenhouse gas emissions is growing, and that means that the environment in which Canada’s oil sector is operating in may not get any friendlier, regardless of who controls power in Ottawa.