The first of a two-part series on energy options.

So where does Canada go from here?

The combination of a presidential veto threat on the Keystone XL pipeline, an uncertain State Department outcome, low oil prices and environmental challenges to alternative pipeline proposals has put the northern nation in a financial and policy bind. The uncertainty raises the question of whether Canada will make a renewed push to develop new oil sands pipelines in its own country that have also stalled or are moving slowly.

Yet many analysts say that is not likely to happen, at least not this year, because of looming national elections in Canada, regulatory processes that could take years and lingering environmental challenges.

"We're less than a year away from an election. ... It's hard for me to see the current government deciding that the right thing to do is to invoke a pipeline war," said Andrew Leach, a professor at the University of Alberta School of Business.

Indeed, Canadian officials continue to say they are expecting a KXL approval when asked about a Plan B. At the Canadian Embassy in Washington, D.C., last week, Canadian Minister of Natural Resources Greg Rickford repeatedly said that nothing has changed his mind about an approval after meeting directly with State Department officials. "Prime Minister [Stephen] Harper and myself believe this is a question of when as opposed to if," he said when asked what Canada was doing to prepare for a possible rejection.

Looming over the government's oil sands policy is Canada's first national election in four years to select a prime minister and Parliament. The elections are scheduled for October, although they could occur before then.

Currently, Harper's Conservative Party—which has made oil sands development a central objective—is running close in polls with the Liberal Party, which supports some oil sands pipelines but not all of them. The New Democratic Party—which is opposed to TransCanada Corp.'s KXL—is also a factor. There are no term limits for Harper.

Because of the dynamic in 2015, Harper's Conservative government may not push hard on new oil conduits out of risk of irking voters in provinces like Ontario with mixed or negative views on the subject, some analysts say.

In British Columbia, for example, there is an aggressive environmental movement challenging Kinder Morgan Inc.'s proposed expansion of its existing Trans Mountain line and another line that would run to Canada's Pacific coast to carry oil to Asia, Enbridge Inc.'s Northern Gateway. Gateway has been approved by the national government, but with conditions. It is facing more than a dozen lawsuits that could take years to sort out, including from First Nations groups with significant legal rights under the constitution.

The tricky routes west
If Harper travels to British Columbia, "he'll be perhaps less likely to be as vociferous as his ministers have been in the past," said Ian Urquhart, an associate professor in the department of political science at the University of Alberta.

British Columbia also happens to be a province where a close election could be decided, noted Nelson Wiseman, a professor of political science at University of Toronto. "A year ago, the Harper government was really beating the drums for the Northern Gateway project. In my opinion, they've given up on it," said Wiseman, noting that ministers in recent speeches have sometimes talked about resource extraction more broadly rather than specific pipelines.

Additionally, pipeline proposals are being considered under a law that allows 15 months of hearings before Canada's National Energy Board and is not easy for Harper to undo.

"I don't think there's anything politically that can be done to speed up the process," Urquhart said.

The next major proposed pipeline set for a decision from the government is Kinder Morgan's Trans Mountain proposal—which would add pipe on an existing route to the Vancouver area—but that decision is not expected until 2016, with actual operations occurring closer to 2018. "There really isn't a pipeline that is sitting there ready to go," Leach said.

Which is not to say that Canada's government does not have various tools in its arsenal to promote the oil sands. One factor is how President Obama might frame a rejection of Keystone XL, if it occurs, according to Leach.

Some of Obama's recent comments about Canadian oil mainly being good for Canadians raise "NAFTA flags," he said. In theory, that reasoning could run counter to the North American Free Trade Agreement, as the United States is continuing to expand and approve pipelines within its borders, including the southern leg of Keystone XL in 2012. Last year, Rickford said at a news conference that the Canadian government would not launch a NAFTA challenge over KXL alone.

But if the president made it a clear policy that no new oil sands pipelines would be permitted across the border, "then I think Canada would have to make a challenge," Leach said.

The government also can engage in quiet diplomacy to nudge things along, regardless of what happens with KXL. Rickford, for example, mentioned recent government talks with Japan, China and Ukraine as part of an ongoing effort to bring Canadian oil to other markets. At a speech at the Calgary Chamber of Commerce last week, Finance Minister Joe Oliver made a similar point, saying, "It is a matter of urgent national interest that we move our oil to tidewater because our only customer, the United States, has found vast amounts of shale oil and gas and will need us less and less."

According to Urquhart, the conservatives undoubtedly will be talking to leaders in British Columbia and Quebec so that the provinces don't slow things down more with their own lengthy environmental reviews of planned pipelines. It's also important to remember that Harper and the Conservatives already have sped up the pipeline approval process by supporting a 2012 law that set a definitive timeline of 18 months for a national decision on projects, he said.

In many ways, the government has been successful in trying "to declaw environmental opposition," Urquhart said.

The long haul East
There are three main proposed Canadian pipelines that could serve as a "backup" for Keystone XL: the two planned routes to the west coast for ultimate Asia transport—Northern Gateway and Trans Mountain—as well as TransCanada's larger-than-KXL Energy East line that would cost 12 billion Canadian dollars and run along the country's Eastern Corridor if built.

Energy East is not undergoing regulatory hearings yet and won't face a decision from the national government until the middle of 2016 at the earliest.

 
Canada's proposed Energy East pipeline project. Map courtesy of the National Energy Board of Canada.

 

There's also a few smaller proposals, such as one to move expanded oil sands product across the border on Enbridge Line 3 and then connect it to the existing Alberta Clipper in the United States—a plan provoking an environmental legal challenge of the U.S. State Department.

In a final environmental impact statement of Keystone XL last year, the State Department concluded that the TransCanada project would not have a significant climate impact, as long as oil prices stayed above $65 to $75 per barrel—the point at which alternative oil-by-rail options become less viable. Rail is more expensive than pipe.

With prices far below that threshold, environmentalists argue that a Keystone XL rejection now satisfies Obama's stated climate litmus test.

In Canada, greens also are planning to spend much of the year organizing protests to undercut State's other argument—that alternative pipelines and rail would pick up the slack without Keystone XL. One focal point of that will be a premier meeting in Quebec in April, said one environmentalist. "Quebec has banned fracking. ... The movement against Energy East has many of the same people," added Keith Stewart, head of the energy campaign at Greenpeace Canada.

Meanwhile, the actual numbers of how much oil sands product is leaving the country with the KXL delay continue to buttress arguments on both sides.

While the amount of Canadian oil sands reaching the Gulf is behind initial State Department predictions, there has been a pickup. That supports industry arguments that alternative rail and pipeline capacity can step in when needed.

According to Canada's National Energy Board, approximately 158,000 barrels per day of oil sands exported product reached the Gulf of Mexico in the third quarter of 2014—about double the average over the past five years.

However, the most recent numbers do not reflect the full decline of oil prices, which is a particular challenge for rail. "If the Gulf Coast is where the market expansion is ... rail does not make you a profit," said Lorne Stockman, research director at Oil Change International, who did a thorough analysis of the export numbers. It's not going to be a profitable choice over the long term to move larger amounts of oil, he said.

Yesterday, the Canadian Association of Petroleum Producers emphasized a need for new oil pipelines in an updated production forecast. While low oil prices are hitting capital spending, oil sands production still is set to increase to 2.3 million barrels per day this year because of projects coming online from earlier investments, the industry group said.

Many financial analysts remain optimistic about the oil sands in the long term, even if they predict a potential Canadian recession or hardships for the Alberta budget this year. Energy consultancy Wood Mackenzie, for one, continues to predict a doubling of oil sands production before 2025, according to Peter Argiris, a senior analyst of North American upstream research at Wood Mackenzie.

When will expensive plans make a profit?
He emphasized that the industry thinks with multi-decade time horizons. Among other things, it's not like shale oil, where there is a decline in productivity of wells over time. With some oil sands projects, operators can't cut production from the wellbore out of risk of losing production ability because of the way the geology works, and it "becomes almost impossible to get it back."

There were several high-profile cancellations of oil sands mines in 2014, but the driver of those cancellations was not always as simple as the industry being pinched by costs and pipeline uncertainty, according to Argiris. Total SA's shelving of the massive Joslyn oil sands mine, for instance, stemmed not just from cost pressures, but Total's partnering in another project and not wanting to compete for expensive labor, he said.

There are other industry options to weather low oil prices, such as improving efficiency of existing operations to get more resources out of the ground. The Canadian-U.S. exchange rate also is cushioning the industry somewhat, Argiris said. "The cost of bringing things online is still pretty economic," he said.

However, if low oil prices continue, it could be a very different conversation in a year, he said. For now, it's more of a case of expansions being delayed a little bit and production projections perhaps being off by a year or two, but "if prices are $40 in a year, we start to see drastic changes," he said.

Of course, the outcome of the elections could change the oil sands trajectory, too. If Harper remains prime minister, that could be viewed as a confirmation of the Conservative Party's pro-oil-sands policies heading into next year, when critical pipeline decisions are expected.

A Keystone XL rejection actually could work in Harper's advantage politically, in that it plays into a narrative of "the Americans let us down," and it's more important than ever to have a pro-oil-sands party, Urquhart said. According to pollster Ipsos Reid, the low oil prices also may work in Harper's favor as voters tend to turn to Conservatives when the economy is shaky.

The Liberal Party has stated positions that are seemingly more challenging for the industry—it supports Keystone XL but not Northern Gateway, for example. Its leader, Justin Trudeau, also has pushed for greenhouse gas regulations on oil and gas.

Yet, it's not a given that the Liberal Party would be a negative for the oil sands industry if it becomes the new party in power, according to Leach.

Historically, the governments that arguably have been the most friendly to oil sands actually have been led by the Liberal Party, which is pro-trade and is known for investing a lot in research and development, Leach said. Also, a Liberal government likely would bring a different tone during visits to D.C. that perhaps could help break the impasse on Keystone XL, he said.

"Are the Liberals more likely to be able to present a regulatory-diplomatic solution jointly with the United States? The answer to that is an open question. It would be hard to have worse relations," he said.

Tomorrow: How the pipeline issue will overhang U.S. politics.

Reprinted from Climatewire with permission from Environment & Energy Publishing, LLC. www.eenews.net, 202-628-6500