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Boom or bust

Trump's signed off on Keystone, but his trade plans could spell trouble for Canadian oil

How Trump’s trade plans could spell trouble for Canadian oil

Following the first face-to-face meeting between Canadian Prime Minister Justin Trudeau and U.S. President Donald Trump, the pair issued a joint statement promoting the virtues of the “world’s largest energy trading relationship.” They lauded cooperation on energy and the environment, saying the two are “inextricably linked.”

It was just in the past decade that Canada became America’s number one source of oil, and it’s still on the rise: At the beginning of this year, Canada was exporting more oil to America than ever before.

One of the main reasons for that?

When Canada sells a barrel of oil to the United States, it does so at a 50 percent discount.

It amounts to a mutually beneficial trade-off: consumers in the United States get a cheap, reliable supply of crude oil, while Canadians get a dependable export market — for the most part. Canadian oil giants like Suncor and Enbridge work south of the border operating refineries, while American energy companies like ConocoPhilips earn huge profits pumping the oil out of the ground in the Alberta oilsands.

Together, with surging domestic production, the U.S. has cut its imports from the Saudi-dominated OPEC oil cartel by nearly half in the last decade, corresponding to a boost in Canadian oil imports by almost 50 percent. President Trump, on the campaign trail, vowed to continue that trend, writing in his platform that he wanted to be independent from the cartel and “any nations hostile to our interests.”

Given that, Canada’s oil industry should be celebrating.

Trump’s trade plans, however, could have the opposite effect, spelling disaster for the Alberta oil sands and the North American energy economy as a whole.

A better deal

The American president has wasted no time putting his domestic and economic policies into gear, signing an executive order giving the go-ahead to the Keystone XL pipeline in his first week in office.

The project, being pitched by pipeline giant TransCanada spans nearly 1,200 miles and would carry Albertan oil through Oklahoma and into Texas.

“It is a very big boost having Keystone approved,” University of Calgary economics professor Trevor Tombe said. “That’s the number one thing, by far, that the new administration will have an effect on, in terms of Alberta oil and gas production.”

But Trump’s signature came with a caveat. In speaking to the cameras at his signing, the President promised he would “renegotiate some of the terms and, if they like, we’re going to see if we can get that pipeline built.”

“That’s the number one thing, by far, that the new administration will have an effect on, in terms of Alberta oil and gas production.”

A joint statement published after their face-to-face meeting this week was no more specific about the line’s future.

“As the process continues for the Keystone XL pipeline, we remain committed to moving forward on energy infrastructure projects that will create jobs while respecting the environment,” the statement read.

Trump wasn’t specific about what terms he was seeking to renegotiate, but his electioneering offers some clues.

While on the campaign trail in Iowa in early 2016, Trump lauded the jobs that Keystone would bring. But he told supporters he wants a “25 percent of the deal for the United States.” He said he would either siphon profits from TransCanada’s project or have Washington take an equity in the project itself.

“I like Canada, I want these people to be happy, but I want the developers of the pipeline to give the United States a big big chunk of the profits, or even ownership rights,” he said.

Within a day of his Keystone executive order, TransCanada, the company behind the pipeline, had a new application in at the White House.

TransCanada has remained mum on Trump’s remarks, and has refused to release its most recent application — although a spokesperson says it is virtually identical to the one denied by President Obama in 2015.

“The Secretary of Commerce has to come up with a plan to implement the Executive Order,” a TransCanada spokesperson said in an email. “We will need time to review and analyze the plan when it is released to determine its impact to [Keystone XL].”

Canadian governments aren’t foreign to the idea of revenue-sharing in their energy projects. As Tombe points out, British Columbia Premier Christy Clark inked a deal last year with Kinder Morgan over the Trans Mountain pipeline for a revenue-sharing deal with the pipeline company worth up to $1-billion over 20 years, which the provincial government will use to fund clean energy projects. That, however, is far off from Trump’s proposed 20 percent cut.

It’s still too early to tell what a renegotiated Keystone will look like. But trying to take a bite out of TransCanada’s profits isn’t the only part of Trump’s plan that could spell trouble for Canadian oil.

A costly tax

Monday also saw the two leaders tout the virtues of open borders, but, inside Congress, a threat to the free flow of oil is taking shaping.

House Republicans are pitching Trump on a border tax that could make it more expensive for U.S. refineries to buy Canadian oil. The centre-piece of that plan is a 20 to 25 percent ‘border adjustment tax,’ which would re-imagine how America taxes goods that come into the country.

Under the proposed plan, America’s corporate income tax rate would drop from a maximum of 35 percent to 20 percent, or lower, while the government would eliminate a tax break for the cost of imported goods — in effect, slapping an import tax on all goods brought into America, while exempting exports from taxation altogether.

When Chrystia Freeland met with Rex Tillerson, her American counterpart at the State Department, she made it clear that Canada would fight tooth and nail against any plan that would add a tax on to Canadian exports.

And for good reason. Canada exports around 70 percent of its crude oil, with almost all of it going to the U.S. The C.D. Howe Institute estimates that Canada’s real GDP could drop by nearly a full percentage point if Trump institutes a border tax, while Canadian prices could drop by up to two percent.

“Bigger picture: we have to look at Canada.”

Carlos Murillo, economist with the Conference Board of Canada, said Keystone’s approval only increases Canada’s dependence on American markets — a relationship potentially worsened if oil prices don’t go up and Canadian exporters take a 20 percent hit.

“The short answer is, because we’re so reliant on that market for marketing our energy products, there would be significant repercussions if there was something that would affect trade prices or place some kind of restriction on trade,” Murillo said.

Again, Trump hasn’t announced any concrete policy on trade just yet. Murillo said there’s more risk and uncertainty than anything else at this point. But he said that’s why Canada needs to diversify its export market, “not just increase market access.”

“Especially when you have signals coming from our main customer that are about protectionism and trade tariffs,” Murillo said.

Taking our business elsewhere

“Bigger picture: we have to look at Canada. Do we want to have more customers than just the one south of the border?” Tim McMillan, president of the Canadian Association of Petroleum Producers says. “Having optionality could help insulate us against this changing policy environment.”

Looking “east and west,” he says — to India, China, and Europe — might be necessary during Trump’s administration.

The Canadian government, both under Trudeau and his Conservative predecessor, have moved forward with plans to do exactly that. If approved, the Energy East pipeline would ship 1.1 million barrels of oil per day to Canada’s east coast, and eventually on to Europe. The Trans Mountain project, on the west coast, will bring 890,000 barrels a day to a tanker port in Burnaby, British Columbia. The final destination is China and India.

There is one ace in the hole for Canada, however. As Trump weighs trading campaign promises — to either punish imports to boost domestic industry, or to undercut Saudi oil imports — Canada could provide some incentive.

Right now, senior staffers in the Trudeau government are readying for tense renegotiations over the North American Free Trade Agreement. Tucked in that agreement is something that means an awful lot to Washington.

“Do we want to have more customers than just the one south of the border?”

Chapter Six, article 605, of NAFTA maintains that member countries can opt to change their export of energy or oil to another member, so long as it “does not reduce the proportion of the total export.” It’s more commonly referred to as the dryly-worded “proportionality clause” and it essentially forbids a member of the three-country agreement from deliberately reducing the amount of energy or oil they export to another country in the agreement.

Mexico is exempted from the section.

Dropping that clause, in a context where Canada has established export routes to Europe and/or Asia, would free Ottawa to sell its oil at market rates — not the 50 percent discount enjoyed by the Americans — and would mean big business for Canadian oil companies.

But Murillo said diversifying our markets is easier said than done, not just because we don’t have the proper infrastructure right now, but also because you have to find where those markets are. The National Energy Board’s review of Energy East is starting from scratch after a controversial summer. Kinder Morgan won’t finish Trans Mountain until at least 2019, and there isn’t a huge market in Asia for heavy crude like Canada’s just yet.

“The U.S. is one of the largest markets for heavy crude, and there’s not a lot of markets that can handle the heavy crude that we have in Canada,” Murillo said.

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