Canadian oil is running low on foreign friends, is the U.S. next to turn?

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Flag of Canada and the USA against the background of the blue sky

Whether it’s climate activist Greta Thunberg roasting Alberta’s energy minister on Twitter, or Norway’s US$1-trillion sovereign wealth fund blacklisting major oil and gas firms, Canada’s energy patch is being hit with a fresh round of foreign jabs as weak oil prices batter the sector.

Joe Biden upped the stakes earlier this month when he vowed to cancel the permit allowing operation of the Keystone XL pipeline. The leading U.S. Democratic presidential candidate derided the planned 1,947 kilometre project as carrying “tarsands we don’t need” under his promised transition to cleaner energy.

For Biden, the move, if elected, would establish clear continuity from his tenure as vice president. The Obama administration cancelled the much-delayed Keystone XL project in 2015 after being pressed by environmental groups, only to see the decision reversed by President Donald Trump in early 2017.

Canadian energy observers predict a return to the Obama-era ruling under a Biden presidency would invite billions of dollars in lawsuits against Washington. The project’s owner, Calgary-based TC Energy (TRP.TO)(TRP), has thus-far ignored Biden’s campaign trail comments.

The U.S. presidential permit for Keystone XL grants the White House sweeping powers over the “construction, connection, operation, and maintenance” of the cross-border project.

It can be revoked at any time, and could even require TC Energy to remove the multi-billion dollar heavy oil line, that once completed would transport 830,000 barrels of crude from Alberta to Gulf Coast refineries.

“The permittee shall have no claim for damages caused by any such possession, removal, or other action,” the permit reads.

Much of the risk for Keystone XL depends on the outcome of the U.S. presidential election in November. Even then, it remains to be seen what actions a Biden administration would take against the project in anticipation of opposition from Ottawa and a protracted legal skirmish.

What’s more clear is Canada’s de facto export market for crude oil could suddenly become less friendly, risking the future of the cross-border pipelines essential to the industry.

“It’s increasingly looking like our number one consumer for well over 90 per cent of our crude increasingly doesn’t want it,” Rory Johnston, managing director at Price Street and a former commodities analyst at Scotiabank, told Yahoo Finance Canada. “That’s far more concerning than any one pipeline.”

Johnston has spent years analyzing the politically-sensitive Keystone XL project. For many, he said it has become a “loaded environmental signal divorced from context and scale,” a sort of yes/no vote on the ethical virtues of Canada’s oil sands in an increasingly climate-sensitive North American political arena.

Johnston estimates Keystone XL will allow about 20 per cent more Canadian heavy crude to flow to refineries in the the United States, helping to relieve the persistent glut trapped in Western Canada due to a lack of egress options. He said opponents objecting on the basis of “keep it in the ground” are ignoring other transport options, such as crude-by-rail.

But given Canada’s exposure to shifts in U.S. politics driven by those looking to win office by capitalizing on rising concerns about the environment, he worries the reputational baggage of high-emissions oil sands production will be an ongoing challenge.

“It does seem in this regard that the Canadian industry is completely at the mercy of the White House,” Johnston said of the rules governing cross-border pipelines. “I don’t think we can continue to rely on the U.S.-Canada border as a reliable, secure avenue for our oil. It’s not just Keystone, it’s Line 3, and any time you need to repair or refurbish a mainline. I think these things are going to come to the fore.”

Christopher Sands, director of the Canada Institute at the D.C.-based Woodrow Wilson International Center for Scholars, also worries that Keystone XL has taken on a symbolic status for environmental advocates. The situation underscores the need for Canada to export oil internationally from refineries and terminals within its own borders, rather than through the U.S., he said.

Sands viewed the Obama administration’s move to cancel Keystone XL as a “consolation prize” to environmentalists whose hopes were dashed after the United States failed to embrace resolutions from the Paris and Copenhagen climate summits.

“The smart money in the U.S. is starting to think that there is not much hope of getting back on that Paris bandwagon, even under President Biden. That’s another worrisome signal,” he told Yahoo Finance Canada, suggesting a revival of the Keystone XL “consolation prize” could be in the cards.

Keystone XL Goes Viral

Construction on Keystone XL started in late March, just as the COVID-19 pandemic took hold in North America, following financial commitments by the Alberta government. The project has already crossed the Montana border on its way to its endpoint in Nebraska.

Sands is betting construction will continue unimpeded as a result of economic pain in the wake of the virus, which he believes will shift public attention away from the warming plant and towards job creation in a recession.

TC Energy said the project amounts to an US$8 billion investment in the North American economy.

“COVID is going to have such a dramatic effect on the economy in the short term that we can’t afford the luxury of saying no to an oil pipeline,” Sands said. “We've been seeing a lot of progress on our pipelines ,in part because nobody can get out to protest.”

A similar comment by Alberta Energy Minister Sonya Savage on a podcast last week about now being “a great time to be building a pipeline” as social distancing rules hamper protests drew widely-publicized backlash from 17-year-old Swedish climate activist Thunberg.

Sands likens the expected shift in public focus amid a COVID-driven economic downturn to U.S. media fascination with shark attacks in the summer of 2001, weeks prior to the horrific terror attacks on the United States.

“Suddenly we didn’t care about sharks anymore,” he said. “Climate in general is at risk of being crowded out by the urgency of some of the other problems we are facing.”

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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