Wake-up call or final straw? What the Biden presidency means for Alberta's oil sands

On his first day in office, President Joe Biden revoked the Keystone XL (KXL) pipeline’s presidential permit, temporarily suspended new leases for oil and shale gas on federal land, and re-joined the Paris Agreement. The Biden administration also immediately began developing new plans to aggressively cut carbon in ways that have exceeded the expectations of many climate activists. For investors and the fossil fuel industry, these actions are blaring signals that the new administration is committed to its long-term goal of 100 per cent clean energy and net-zero emissions by 2050.

Since the United States accounts for virtually all of Canada’s crude oil exports, its commitment to move away from fossil fuels could be the final straw for Alberta’s oil sands. If the writing was on the wall for the industry before, now it’s in permanent marker. The Biden Presidency will not stop the two remaining mega oil sands pipeline projects—the federal government’s Trans Mountain Expansion (TMX) and Enbridge’s Line 3 Replacement (L3R) projects from being built. However, the Alberta oil sands must face a grim reality: transition yesterday or face eventual catastrophic loss.

Pipe dreams and realities

Although Biden cancelled KXL, the project had only just started last summer—and only with hefty financial support from the Alberta government to the tune of $1.5 billion (plus an additional $6 billion in loan guarantees). Initially cancelled by President Obama in 2015 and revived by President Trump in 2017, KXL had been delayed in the courts and state regulatory processes. The Alberta government’s pipe dream was not only incredibly risky—because of the 2020 presidential election, and legal and regulatory delays—but also misguided. The current market reality means KXL is not needed. Even former Husky Energy CEO Art Price said building oil sands pipelines like KXL today based on growing production is a “speculation that makes no sense.” Due to the Alberta government’s senseless decision, taxpayers are now on the hook for over $1 billion.

The death knell for KXL will likely redirect attention to the oil sands’ last remaining new pipelines, TMX and L3R. Oil and gas industry leaders will use the KXL cancellation as further evidence of unfair political interference and justification for greater intervention from sympathetic politicians. Campaigns against other pipelines like TMX or L3R will try to use the momentum from the KXL cancellation to support scrapping those projects as well. However, this is unlikely. Construction has begun on both projects, though both have faced enormous opposition and delays, and the proponents remain committed.

The commercial conditions for TMX and L3R are unlikely to change as a result of KXL’s cancellation. Unlike KXL, shippers (oil producers and refiners) have already committed to 15 and 20-year contracts or conditional agreements. These agreements won’t go into effect until the projects are in service. However, if climate action continues to proceed according to the net-zero emissions targets established by the Canadian federal government, either the TMX or L3R will provide sufficient capacity for the Canadian oil industry—a far cry from the hyper-optimistic domestic oil production projections long championed by the industry. A rapid move to achieve net-zero emissions would mean significant losses for the TMX and Canadian taxpayers.

‍Industry in purgatory?

Even before the 2020 U.S. election (or the COVID-19 pandemic, for that matter), it appeared likely that the era of new mega oil sands pipeline projects was over. In 2019, major transportation companies focused on other markets or incremental growth. Kinder Morgan sold its Trans Mountain pipeline system, exiting the Canadian market. TC Energy’s CEO Russ Girling told investors the company would expand existing infrastructure rather than proposing greenfield projects. And Enbridge shifted its focus to incremental improvements to its oil Mainline System and developing its natural gas transmission and utility businesses. These were responses to the changing economics of oil sands production and the immense difficulty of building greenfield linear infrastructure projects.

As pipeline development has stalled, provincial and federal governments in Canada have intervened to financially support or even outright buy projects, including the Trans Mountain, Coastal GasLink, and Keystone XL pipelines. This doubling down on fossil fuel infrastructure while promising greater climate action (at least at the federal level) sends mixed signals to the fossil fuel industry and its workers. In part due to such investments, the Canadian Association of Petroleum Producers expects capital expenditures to increase in upstream shale gas and oil in 2021 despite its indefinitely deferred long-term production forecast. Such projections are increasingly at odds with the leadership and direction of other industries and countries, now including the United States, and evidence of an industry caught between faulty optimism and trying to avoid an imminent crisis.

Two futures

Now that the United States is sending strong signals on climate change, a clearer and grimmer picture is emerging for Canada’s oil industry. If the Biden administration is bold and ambitious in putting in place policies that curb U.S. demand for Canadian oil, such as more stringent fuel economy standards, the downfall of the oil sands could be far swifter than most experts anticipate.

How might Canada’s oil sands survive? They could eke out a living if the Biden administration places new constraints on U.S. domestic oil production, effectively preserving a crucial export market for Canadian oil. However, it is politically unlikely that a president would constrain domestic production more rapidly than consumption.

The most realistic scenario that could prolong Canada’s oil industry is if Biden’s initial splash on climate action morphs into greenwashed inaction and if other countries provide strong demand for our costly oil and if the Conservative Party of Canada wins a majority government in 2021 and ushers in another era of hostility towards climate action in Canada.

Still, the unavoidable risk of the present situation is that bold climate action from either Canada or the United States—or both—will send the industry into a “death spiral” as its political and economic power continue to decline. The Canadian federal government’s strong signals with its carbon price, global peak demand projections (which would render the hoped-for rebound in oil prices unlikely), growing reluctance of financial institutions to bet on the oil sands, and the continuing pandemic also bode poorly for the industry’s recovery.

There is a rapidly closing window for Canada’s oil industry to manage its own decline or transformation. If the industry and its allies continue to rely on hyper-optimistic projections and ignore the writing on the wall, then its fall could be more painful and sudden than many think possible. And from experience, we know that workers and communities will pay the most.