Alberta Premier Jason Kenney’s decision to invest in the Keystone XL pipeline project is the kind of good news the industry needs right now.
But the question is will the federal government follow suit?
Kenney told reporters earlier this week that the provincial government will take a $1.5 billion equity stake in the project as well as provide a $6 billion loan guarantee to enable TC Energy to get moving on construction and ensure it continues.
The premier said that the deal was six months in the making and he hoped the deal would give the economy a boost at a time when it is reeling from the effects of the oil price war between Saudi Arabia and Russia and the loss of demand caused by the corona virus outbreak.
There’s no question the industry is hurting. The Saudis are pumping oil at a rate of 12 million barrels per day (bdp) in an effort to steal market share from the Russians and crush shale oil production in the United States. But global demand for oil has fallen from 100 million bpd to 80 million bpd.
In other words, the world is awash in oil. That oversupply is depressing prices. West Texas Intermediate is hovering around US$20 per barrel while Western Canada Select (what producers in Alberta get) has dropped below US$5.
At those prices levels, North American producers cannot make money pumping oil.
As for the Saudis, they can push prices even lower. It only costs them about US$10 a barrel to pump oil out of the ground.
The problem for the Saudis, however, is that they can’t sell their oil even at these low prices. They might not even be able to give away oil right now.
With the world basically shut down because of the Wuhan virus, major importers have begun taking the unusual step of refusing shipments.
India’s refineries, for example are turning back shipments because demand has fallen. Gasoline sales are down eight per cent, while diesel was down 16 per cent.
US President Donald Trump is meeting with oil CEOs this week to come up with a plan to address the twin threats facing the sector. The president has already made it known that he is not willing to allow American producers to go under.
The president has committed the country to buying domestic oil to replenish its strategic reserve, but industry watchers are also expecting Washington to slap hefty tariffs on Saudi oil and offer bridging loans to keep companies afloat until demand returns.
In Canada, only Kenney appears to understand what’s at stake.
And make no mistake about it, there’s a lot at stake.
The energy sector contributes 11 per cent to the country’s GDP. Alberta alone contributes $76 billion toward the national GDP.
The oil and gas sector directly employs about 170,000 people and indirectly employs another 500,000.
Oil and natural, too, are two of our biggest exports, worth in excess of $119 billion.
Most of the oil and natural gas exported, however, is shipped to the United States. Fully 95 per cent is exported to American refineries.
That’s why the Keystone XL pipeline is of such great importance. The pipeline will feed the Gulf Coast refineries.
Successive Alberta governments have also understood that our reliance on the US needed to be addressed, that new markets needed to be developed.
That is the rationale behind TransMountain. It was the rationale behind Northern Gateway and Energy East.
Unfortunately, the latter two pipelines were canceled by Prime Minister Justin Trudeau and any future pipeline construction was effectively curtailed by onerous legislation.
With that Alberta and Canada have lost billions of dollars in investment at a time when we will need investment dollars to come out of virus induced depression the likes of which we have never seen.
There are, of course, elements within Canadian society that are cheering the predicament in which energy producers find themselves.
Politicians on the Left are arguing against any efforts to keep the industry alive during these difficult times and calling for investment in renewables.
This is the time, they argue, to make the transition from fossil fuels to renewables.
It’s a foolish argument. First, demand for oil will recover. Current demand is about 100 million bpd. It is expected to rise by another 20 million bpd by 2050. At that point, demand will likely level off. Second, renewables are a dead end. The wind does not always blow and the sun does not always shine. There is just no getting around that fact.
In other words, there will be a demand for Canadian oil for decades to come, if we do not kill off the industry.
That’s the big if. Trump gets it. Kenney gets it. Will Trudeau finally see the light?
Will the rest of Canada?
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