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Alberta’s survival at stake Province weighs salt caverns for excess storage, lobbies for tri-lateral North American pact to ban imports from Saudi Arabia, Russia Gary Park for Petroleum News
The search for answers to the collapse of oil demand, prices and storage capacity is turning frantic in Canada, where the industry’s key lobby organization has warned the outcome of the current turmoil could turn grim.
Canada’s storage capacity of 40 million-45 million barrels (compared with up to 800 million barrels in the United States) is estimated by the Canadian Association of Petroleum Producers to be 75% full with the remaining 25% likely be claimed “in just a matter of weeks.”
Ben Brunnen, CAPP’s vice president of fiscal and economic policy, suggested to the Globe and Mail that the rise in storage volumes poses a “very substantial risk to the survivability of Canada’s oil and gas sector.”
He said producers are “confronted with very difficult decisions and ultimately will be forced to shut in some of their production.”
As of now, the industry says shut-ins are at 400,000 barrels per day of total output capacity of 4.3 million bpd, though analysts believe the actual figure is closer to 700,000 bpd and could top 1 million bpd if commodity prices remain in a slump.
Extreme storage pressures in the U.S. have seen traders fill tankers with volumes exceeding those needed by refiners and estimated at 160 million barrels.
The dramatic slide in demand is forcing producers and pipelines to “review every option,” including the creation of reserve storage, said a spokesman for Alberta Energy Minister Sonya Savage.
ATCO Group, a diversified global corporation based in Calgary, said it is trying to determine whether salt caverns north of Edmonton could hold 10 million barrels, but noted that conversion could take up to three years to drill and clean.
However, Bob Myles, an executive vice president at ATCO, said shrugging off the idea because of the time-lag would be a poor excuse if the industry faced another oil price downturn in three years.
Trilateral pact proposed The other solution is the creation of a trilateral Canada-United States-Mexico oil pact, which supporters - mostly in Alberta in Saskatchewan - believe would ensure security of supply and a more sensible pricing arrangement than hoping for commonsense to take hold in OPEC and Russia.
While that idea is so far triggering little debate in the U.S., it is being vigorously promoted by Alberta Premier Jason Kenney.
On the flipside, a number of analysts are cautioning against any attempt to negotiate a continental price-fixing arrangement.
Grant Bishop, associated director of research at the highly regarded C.D. Howe Institute, warned that a “Fortress North America” oil market would require tariffs on oil imports, thus creating a “price floor” on barrels sold.
He said such a plan would likely violate international trade treaties, though he noted that President Donald Trump is not known for observing multilateral trade rules.
Bishop said “a price floor is bad economics and it’s the wrong policy to support Canada’s oil producers.”
He said any attempt to tie Canadian oil to a cartel arrangement “would inefficiently subsidize high-cost producers, interfere with market structure, discourage petrochemical investment and impose a hidden transfer from consumers to oil producers.”
Bishop said governments should “enable market access and provide a bridge over (the current) collapse of demand. However, if governments protect high-cost oil producers that cannot compete that cannot compete with lower-cost oil supply, they risk building a bridge to nowhere.”
Other agreements reached But the chances of negotiating a trilateral deal, whether permanent or just long enough to ride out the COVID-19 crisis, should pose no qualms given the success among the three partners of initially agreeing to the North American Free Trade Agreement and lately of achieving a revised version of NAFTA that is tentatively scheduled for implementation on July 1.
Advocates of a trilateral oil pact insist that is the only way to end price shocks and ensure regional energy independence, the ingredients of which already exist with the U.S. and Canada producing as much oil as Saudi Arabia and Russia combined and able to raise those volumes to meet domestic demand.
In 2019, Canada exported about 3 million bpd to the U.S. and the U.S. shipped 1 million bpd to Eastern Canada, whose Irving Oil refinery in Saint John, New Brunswick, imported 500,000 bpd from Saudi Arabia, Norway, the United Kingdom, Nigeria and Azerbaijan.
U.S. output of 12 million bpd was bolstered by imports from Canada and another 2 million bpd from Saudi Arabia, Russia, Mexico and Colombia.
Closing the door to offshore oil would free up 2.5 million bpd for U.S. and Canadian producers.
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