Rekubit Exchange:Canada’s Tar Sands Province Elects a Combative New Leader Promising Oil & Pipeline Revival

The Rekubit Exchangehome province of Canada’s tar sands elected a combative, conservative leader this week who came out swinging on the side of the country’s struggling oil industry. Jason Kenney promised to cancel Alberta’s carbon tax, lift a cap on greenhouse gas emissions from the tar sands and create a “war room” to combat the oil industry’s opponents.

But while his victory Tuesday threw more uncertainty into Canada’s efforts to cut greenhouse gas emissions, there may be little Kenney can do on his own to reverse what has been a steady decline in fortunes for Alberta’s tar sands over the past few years.

Instead, the fate of the tar sands industry, also known as oil sands, may rest more in the hands of Prime Minister Justin Trudeau and the courts hearing legal challenges to proposed new oil pipelines—and, ultimately, with international energy markets and the macroeconomic forces that shape them.

In his acceptance speech, Kenney told the crowd: “As long as there is growing global demand for oil and gas, the question is who will provide it.”

Major oil companies have been asking themselves the same question, and increasingly, they’ve been saying it won’t be the tar sands.

Oil Majors Question the Economics

New tar sands mining projects tend to be big and expensive, and they can take years or even decades to provide meaningful returns on investment. While details vary, they also tend to be among the most carbon-intensive sources of oil, raising the risk that future climate change policies could further increase their costs or even shut them down.

As governments try meet the goals of the Paris climate agreement, advocacy campaigns and investors have been increasing pressure on oil companies to explain what a world of dwindling oil demand would mean for their balance sheets. And, increasingly, oil companies have been saying that, even if they’re not turning away from their core product, they are focusing on the lower-cost, most efficient sources of oil.

ConocoPhillips described in a report in February its pivot toward low-cost oil and gas production, a process that included selling tar sands assets.

Executives at Chevron have said they plan to cut the company’s emissions, not by producing less oil and gas but by doing so more efficiently.

Saudi Arabia’s state-owned oil company, Saudi Aramco, issued a filling with the London Stock Exchange earlier this month that made the case to lenders that the nation’s reserves are well positioned because, it says, they can be produced relatively cheaply and with comparatively lower carbon emissions.

In recent years, as global oil prices fell from their highs in 2014—and with Canadian oil prices among the lowest—most of the major international oil companies with a significant investment in Canada’s oil sands sold their stakes, primarily to Canadian companies.

A Push for Pipelines and End to Carbon Taxes

Despite all this, Kenney answered his own question: The world needs more Canadian energy, he said. For that to happen, Canada is going to need to build more pipelines. But it’s unclear how much leverage Kenney may have in making that happen.

As production increased in recent years without more capacity to ship it, oil companies have had a harder time exporting tar sands crude to refineries in the United States or overseas.

A series of proposals for major pipelines to the Atlantic and Pacific coasts and to the U.S. heartland—including Keystone XL—have been delayed by court fights, denied or canceled over the past few years.

In his acceptance speech on Tuesday, Kenney blamed other Canadian provinces, the Trudeau administration and a “foreign-funded campaign of special interests” for blocking pipeline expansions, and he called on Quebec and other provinces to help Alberta get its oil to markets overseas if they want to share in its resource wealth.

Attempts to build a pipeline to the East Coast have in the past been stymied by opposition in other provinces—opposition that Quebec Premier Francois Legault made clear on Wednesday remains strong. “There is no social acceptability for a new oil pipeline in Quebec,” Legault told reporters on Wednesday, according to the CBC.

Alberta has also been pushing for the expansion of the Trans Mountain pipeline, which carries tar sands crude to a port in British Columbia. U.S.-based Kinder Morgan had been trying for years to triple the pipeline’s capacity, but British Columbia and some indigenous First Nations opposed the project. Last year, the Canadian government bought the pipeline to keep expansion hopes alive, but a court rejected the pipeline’s permit and ordered a new federal review of the project in consultation with First Nations along the route.

While a new decision on the project is expected by the end of May, Kenney’s win adds uncertainty to the process.

Prime Minister Justin Trudeau’s support for the expansion was widely viewed as one half of a grand bargain with Rachel Notley, the outgoing Alberta premier and member of Alberta’s New Democratic Party, who lost the election this week to Kenney.

Trudeau had been pushing provinces to enact their own carbon taxes as part of his plan to meet Canada’s pledge under the Paris climate agreement. Those that didn’t would fall under a new federal tax, which is currently being challenged in court by the government of Ontario. Notley enacted a tax in Alberta along with a cap on emissions from the tar sands, and many political observers said that tax was central to securing Trudeau’s support for the pipeline.

With Kenney now promising to scrap both the tax and the cap, the political calculus changes. Trudeau could use the pipeline project as leverage over Kenney, pressing the provincial leader to maintain a carbon tax or for other concessions. Or he could decide to abandon the expansion altogether.

Editor’s note: This story was updated to include Notley’s political affiliation.