Image: Johannes Ko/Flickr

At the end of March, Premier Jason Kenney announced his Alberta government would underwrite the Keystone XL pipeline construction costs for this year, with a $1.5-billion equity investment, and $6 billion in loan guarantees for its builder TC Energy. 

Formerly known as TransCanada, TC Energy was certainly pleased to see Kenney — on behalf of the citizens of Alberta — take the risk of adding Texas to its existing Hardisty, Alberta to the U.S. pipeline network. 

In early April, you could buy a barrel of Alberta heavy crude for less than US$5. It cost about US$30 a barrel to extract it from the bitumen sands.

What Keystone XL carries — heavy oil — can only be sold at a huge loss, so the project is an obvious loser at anywhere near current prices. 

As TC Energy has indicated, and Kenney knows full well, the permission to build Keystone XL could be revoked by a Montana court, or Joe Biden in the White House. 

Opposition from the Sierra Club and other environmental organizations is strong and continuous.

After four days of video conferencing, beginning last Thursday, OPEC-plus (Organization of the Petroleum Exporting Countries plus Russia and others) decided to reduce their oil production by 9.7 million barrels of oil per day. This may sound like a lot, but world demand, which was 98.7 million barrels a day in 2018, has declined by an estimated 30 million barrels a day because of the COVID-19 world economic slowdown. 

The highly publicized production cut by OPEC-plus leaves 20 million barrels of oil per day going into storage because it cannot be sold. Downward pressure on oil prices will not go away until the world economic shutdown relents, despite the announced production cuts.

Press reports suggest that a dispute between Russia and Saudi Arabia over how to set production levels has fuelled the oil price slump that followed the COVID-19 pandemic. 

Both countries did crank up production. But the Saudis and the Russians had the same objective: drive high-cost competitors in North America — U.S. fracked oil, and Canadian bitumen sands — out of the market; and, why not, eventually out of business. The price slump has also provoked collateral damage in other relatively high-cost producers such as Venezuela, Algeria and Nigeria.

In recent years, while OPEC has been curbing oil sales to maintain prices, the U.S. and Canada have been investing in new production, and have earned no sympathy from OPEC producers.

Neither Russia nor Saudi Arabia wanted to incur the wrath of the Trump administration by announcing they had joined forces to bury the U.S. fracked oil industry. However, the Saudis did catch the attention of some Republican senators who threatened to remove U.S. troops from Saudi Arabia.

Russia and Saudi Arabia are two very low-cost oil producers. Saudi oil is produced at a cost of US$2.80 a barrel; the Russian production costs are in weak roubles (heavily devalued because of U.S. led sanctions) while their revenues from oil sales are in strong dollars. Even at low oil prices, Russian sales are profitable thanks to this premium dollar advantage for the oil sold. 

Producing petroleum from Alberta bitumen is a high cost operation. High costs kept development of the Alberta sands from taking place for nearly two decades after the 1948 success of the Alberta Research Council bitumen sands separation project revealed the sands had vast potential, but poor prospects for commercialization. 

High production costs have stymied bitumen expansion for now, and probably as long at it takes for the world to run down known conventional oil and gas reserves, which could be as much as 50 years. 

On a recent visit to Washington, Kenney lashed out at U.S. Democratic party presidential hopefuls for favouring oil imports from Middle Eastern dictatorships, and blocking pipeline access to the U.S. from Canada, its liberal democratic neighbour and long time ally.

No amount of name calling and finger pointing by Jason Kenney will make bitumen production competitive against low-cost producers determined to price competitors out of the market. That low pricing was a business decision, made in a competitive market.

With low-cost Saudi Arabia and Russia squeezing high-cost producers, the Alberta government made a bad bet to subsidize building the Keystone XL pipeline. 

Saudi Arabia and Russia have considerable support for providing world markets with low cost petroleum. World GDP is collapsing. Low-cost fuel oil and gasoline look very attractive to consumers, businesse, and non-petroleum producing countries.

Ironically, since he has dismissed their potential, Kenney’s best allies are the alternative energy producers, who need higher oil prices as an incentive to make renewable energy projects profitable and the transition to a low-carbon future a reality. 

Duncan Cameron is president emeritus of and writes a weekly column on politics and current affairs.

Image: Johannes Ko/Flickr

Duncan Cameron

Duncan Cameron

Born in Victoria B.C. in 1944, Duncan now lives in Vancouver. Following graduation from the University of Alberta he joined the Department of Finance (Ottawa) in 1966 and was financial advisor to the...