With this pipeline cancellation oil sands projects accumulate another really negative signal for their outlook. These projects have high upfront and operating costs, so closing the option to pipeline transportation for an additional 830 mmbd of production, means that costs to reach certain US markets will be permanently high. It also means that frequent bottlenecks in Alberta due to a lack of pipeline capacity won’t go away and will continue to put a large discount to Canadian heavy crude oil.
Most major oil and gas companies have already opted out of Oil Sands projects not only because of their high breakeven oil price, but also because of its association with dirty and non-sustainable oil, since traditional oil sands require mining and consume high volumes of water. At the same time, this type of crude is still needed across the US and particularly in the complex refineries of the US Gulf Coast. Other supplying countries of these heavy grades, such as Mexico and Venezuela, now have much less export capability.
Currently approximately 3.6 mmbd of Canadian oil is exported to the US, of which around 75% is heavy crude, and as long as there is demand for transportation fuel in the US these flows from Canada will continue. In fact, this volume could grow if rail exports increase. However, to put this in perspective, the major implication of a challenging future for oil sands projects is that roughly 165 billion barrels of oil reserves, one of the largest in the world, will likely never be developed at its full capacity.
Together, with re-joining the Paris Climate Accord and reviewing several oil and gas industry regulations that President Trump had lifted, the cancelling of the Keystone pipeline is indeed a clear message on the direction the new administration wants to follow, with respect to transitioning away from fossil fuels and into cleaner energy sources. Yet, it is still to be seen how measures, such as restricting drilling in federal lands will impact US production, and how oil and gas companies will react to defend their interests.
