A battery of legal obstacles still stands in the path of the un-built Keystone XL pipeline that would ferry crude oil from Canada to Steele City, Nebraska. But that didn’t stop Jason Kenney, the premier of Alberta, from standing in front of a small lectern in the middle of a construction site in Oyen, Alberta, earlier this month to announce the start of work on the Canada section of the would-be pipeline.
There is a reason Kenney is eager to get started. Canada’s oil production fell nearly 20% in the first half of 2020 from its average last year of 5.5 million barrels per day (b/d), battered by the oil demand-destroying economic crisis set off by COVID-19, the U.S. government’s Energy Information Administration (EIA) said on Thursday. (The U.S. produces around 10-12 million b/d of crude oil.)
Between March and April alone, Canada’s production of oil and other petroleum liquids fell from 5.6 million b/d to 4.9 million b/d, the EIA said. The last time it suffered a drop of that speed and magnitude was when wildfires swept into the Fort McMurray area in Alberta in 2016, forcing evacuations and shutdowns of oil sands projects.
As devastating as the COVID-19 pandemic has proved for Canada’s oil industry, still more challenges lie ahead.
Canada’s oil industry is not in a position to restore output quickly if demand soon recovers. Canadian oil comes largely in the form of bitumen, a molasses-like substance that is more expensive to refine into finished products such as gasoline than most kinds of crude oil. As a result, Canada’s oil producers need to be able to sell the stuff at relatively high prices to justify extracting it. If oil prices remain at current levels of around $40 per barrel, Canada might only be able to pump out less than one-fifth of its total extractable reserves — the lowest such share in the world among major oil-producing countries, according to consultancy Rystad Energy.
More problematic still are pipeline constraints. For years, Canada has resorted to shipping its oil by rail or even by truck because there are not enough pipelines available to transport its oil to refineries, many of them in southern Texas. Keystone XL is among the projects that were supposed to fix that, but opposition to oil and gas pipelines has grown stronger and more sophisticated, meaning that the Keystone XL pipeline and others may never see the light of day. (Presidential candidate Joe Biden — whom polls show has a commanding lead over President Donald Trump less than four months before the election — has vowed to cancel the pipeline.)
Lately, the pandemic has meant that once-crammed oil pipelines are now available to accommodate more shipments. But this is not a luxury that any of Alberta’s oil producers want right now. If the oil-depressing effects of the pandemic linger much longer, Canada’s oil industry will soon be wishing for its old problems back.