National Post (National Edition)
Why a Biden victory may be good for the Canadian oilpatch
In what may prove to be a pivotal moment in the United States' election campaign, President Donald Trump goaded former vice-president Joe Biden into an exchange in their final debate on whether the Democratic nominee would “close down the oil industry,” as Trump put it.
“I would transition from the oil industry, yes,” said Biden, drawing a clear distinction between his energy policy and his counterpart's for the U.S., which remains the world's largest oil-producing country at 11.2 million barrels per day despite massive production declines this year. “That is a big statement, because the oil industry pollutes significantly,” he added.
Trump, who has deregulated aspects of the U.S. oil industry and played an active role in oil markets during his first term, turned to the camera to make the comparison as stark as possible for voters in oil-and-gas-rich states that have emerged as battlegrounds in the race to the White House. “Will you remember that, Texas? Will you remember that Pennsylvania, Oklahoma, Ohio?”
Next week's election could have greater implications for oil markets globally, including producers in Canada, than previous presidential contests. This is partly a result of the difference between the two candidates on major issues such as the Alberta-to-Nebraska Keystone XL pipeline and sanctions on oil-producing Iran.
More crucially, the election could affect the outlook for U.S. oil supply.
Fracking technologies have unlocked U.S. shale oil production over the past 12 years and turned the country into the world's largest oil producer in 2018, before its production peaked earlier this year at 13 million bpd. The country's rapid output growth has been the major disrupter of global oil markets since 2014, and sparked an oil price war and major crude price correction.
“Given the position the U.S. has, and the degree to which its position would be affected, and what a factor it is in the global market, the degree to which the outcome of this election affects future production will have a big impact on the global market,” said Daniel Yergin, vice-chairman of researcher IHS Markit and author of touchstone energy books including The Prize and, most recently, The New Map.
“In the U.S., up until shale, the question was: how much more would U.S. oil imports grow?” Yergin added in an interview. “Today, the question that has the greatest effect on global oil markets is: How much more oil will the U.S. produce?”
The outcome of the election will determine the answer to that question.
Biden, who has consistently led Trump in polls, has promised to ban fracking on U.S. federal lands, restrict the issuance of new licences on federal lands, federal waters and, before becoming the Democratic nominee, had talked about banning fracking altogether.
His vice-presidential pick, Kamala Harris, has backed the Green New Deal, an ambitious proposal sponsored by a number of high-profile Democrats, that aims to accelerate investment in renewable energy and move away from fossil fuels.
Currently, 90 per cent of U.S. oil production comes from private lands, just 10 per cent from federal lands. But Yergin said that if new restrictions on fracking limit future oil supply growth out of the U.S., the “law of unintended consequences” would come into play on the country's oil industry.
“Shale is, by definition, what's called short-cycle oil and that means it's more susceptible to political pressures than other types of oil production,” he said.
In particular, a ban would hit oil production in the portion of the Permian basin that stretches into New Mexico particularly hard.
“Oil exporting countries would welcome a greater restriction on U.S. oil production, because it would mean the U.S. would start importing more oil again and it would mean less competition in the global market,” Yergin said.
For the first time in a decade, regardless of who wins the election, U.S. oil production is set to decline thanks to the oil price crash and demands by major institutional investors for better returns from the U.S. shale industry, said Richard Masson, chief commercial officer at Fractal Systems Inc., a Calgary-based energy technology provider, and executive fellow at the University of Calgary's School of Public Policy.
“The U.S. has been sucking up all the air in the room in the last few years,” he said of how U.S. oil producers have been able to access capital and grow production, frequently at the expense of producers in other jurisdictions, including Canada.
Masson said it's possible that new restrictions on fracking in the U.S. could further impair U.S. producers' access to capital during an already challenging time.
“If the U.S. sits out the
next phase of growth, it will leave more pressure on countries like Saudi Arabia, Iran and Canada to fill the void,” he said.
Citigroup Inc. analyst Prashant Rao estimates that Canadian heavy barrels have made up the majority of the 700,000-bpd void left by the end of Venezuelan supply to U.S. Gulf Coast refineries.
“The underlying dynamics that drove this opportunity for WCS (Western Canada Select) barrels are unchanged — on pause in the current environment. Looking ahead, as (Gulf Coast refinery) demand recovers, we expect limited competition for these barrels from other sources,” Rao said in a note to clients. “Canadian producers could capture more than 75 per cent share of the incremental demand — an anomalous pocket of growth in a gradually receding global upstream.”
While a reduction of U.S. oil supplies would have a bullish effect on global oil markets, there are also far more bearish implications of a Biden win on competing oil producers such as Canada.
Biden has stated he would rescind the presidential permit issued by Trump for TC Energy Corp.'s long-delayed Keystone XL pipeline, which would carry 830,000 bpd of heavy oil from Alberta to refineries in the U.S. Gulf.
Furthermore, a Biden presidency is widely expected to engage with Iran in a fresh round of negotiations on a nuclear deal, potentially paving the way for another two million bpd of oil production from the Middle East country to return to the market.
A new administration might also take a new approach to sanctions on Venezuela and that heavy-oil producing country's output.
All these factors — especially the impact of a Keystone cancellation — would have a dramatic effect on Canada, where oil and gas remains the largest export.
Alberta Energy Minister Sonya Savage said she believes Keystone XL is “vital” to an economic recovery from the coronavirus pandemic
in both Canada and the U.S. It would create 17,000 jobs in Canada and “nearly 60,000 unionized jobs in the United States at a time when they are needed the most,” she said in an emailed statement.
One week before election, TC Energy announced it had awarded US$1.6-billion worth of contracts to American union contractors to hire an additional 7,000 union workers in 2021 for the project.
Earlier this year, Alberta invested $1.5 billion in Keystone XL and provided a $6-billion loan guarantee for the 2021 construction season. The province also appointed a new envoy to
Washington, D.C., to lobby for its interests and the pipeline project.
“The Government of Alberta's special representative to the U.S., James Rajotte, continues to reinforce the fact Canada has the strongest record of climate action among major oil producers, Indigenous participation in the project, and the clear benefits of North American energy security to U.S. lawmakers,” Savage said.
Whether Rajotte's presence will help prevent a
Biden administration from revoking the permit for Keystone XL remains to be seen.
“If you didn't get Keystone XL, you probably wouldn't get as much growth out of Western Canada,” said Jackie Forrest, executive director of ARC Energy Research Institute.
Keystone XL would deliver heavy oil from Alberta to refineries in Texas and Louisiana, which are currently facing a shortage of heavy oil because of sanctions on Venezuela and declining production in Mexico.
“The U.S. is processing about a million barrels per day less heavy oil than they were a few years ago,” Forrest said.
However, a Biden win wouldn't necessarily spell the end of the Keystone XL pipeline, says Edward Morse, Citigroup Inc.'s head of commodities research.
“In part, it depends, ironically, on whether there's a potential Democratic majority in the Senate,” he said, noting that a Biden administration will need Senate votes on legislative packages he'd like to see and he'll need to keep centrist lawmakers happy.
“To the degree that there
are these centrist politicians going to the Senate Energy Committee, he's going to be put in a position where he will have to provide votes for not just green energy projects, but all-ofthe-above energy projects,” Morse said.
The same considerations would limit the potential of an outright fracking ban, which would require legislation, he said.
As a result, Biden in the White House would be able to limit the issuance of new licences on federal lands, but would need Congress to pass an outright ban on fracking.
Morse is more confident that a Biden administration would engage with Iran to renegotiate a nuclear agreement, potentially paving the way for that country's production to come back to the market in stages in 2021 or later.
Currently, two million barrels of Iranian oil production are sitting out of the market as a result of U.S. sanctions on the country. Should those barrels come back into the market, even in stages, it would have a bearish effect on global oil prices at a time of anemic consumption.
Global oil demand is currently about eight million bpd lower than it was at the beginning of the year, so adding production from either Iran or Venezuela would be “disruptive,” said Ian Nieboer, managing director of Enverus, an energy analytics provider.
“A disruptive amount of volume could be re-entering the market at a time when we probably least need it,” he said. “It's not only the magnitude of the volumes that can come back, we're in this COVID-19 period and the sensitivity to supply in the market is big.”
Nieboer said various policy factors in the U.S. are in flux, so what effect a Biden presidency would have on global oil markets is extremely uncertain.
“It's an important moment in the energy industry, full stop,” he said. “It's an important moment in U.S. history, full stop.”
DEPENDS, IRONICALLY, ON ... DEMOCRATIC MAJORITY.