By Irina Slav
“The worst possible outcome”: that’s how one analyst called Canada’s national election results for the country’s troubled oil industry. Besides being the worst, it is also unpleasantly ironic.
The pro-oil Conservative party won more votes than the Liberals, but these votes translated into fewer seats, so the Liberals ended up victorious. And now, they will need the support of other left parties in parliament to pass key legislation. All-round bad news for Canada’s oil.
“We have got a Liberal minority and the balance of power shifts to the NDP and the Greens, who are completely opposed to any progressive energy policies.” The chief executive of Auspice Capital Advisors, Tim Pickering, told Reuters.
It doesn’t take a lot to see how this distribution of power in the new federal parliament could end up spelling doom for the Trans Mountain pipeline expansion project and any hope for other new oil infrastructure for the duration of its term.
And it’s not just infrastructure. The NDP and the Greens are both strongly in favor of stricter emission rules, which is at odds with the production growth plans of Albertan oil companies. What this will do is widen an already Marked divide between the oil-rich western Canadian province and the rest of Canada. Last month, the chief executive of MEG Energy slammed the Trudeau government for its “extreme” lack of leadership that has led to a polarization in the climate change debate and has pressured an already strained industry. The sentiment is shared widely in Western Canada, where the Conservatives unsurprisingly won the vote.
Reuters reported earlier this week that the Liberals won zero seats in both Alberta and Saskatchewan, with 13.7 percent of the vote in Alberta and 11.6 percent in Saskatchewan. The Tories, on the other hand, won more than 69 percent in Alberta and 64.3 percent in Saskatchewan.
“There will be greater alienation and it’ll be a challenge for Justin Trudeau,” one political science scholar from a Calgary university told Reuters. No wonder the hashtag “Wexit” was trending on Twitter after the election results started coming in.
Of course, Trudeau was quick to address the Western Canadian oil provinces by calling them “an essential part of our great country.” This will, however, hardly be enough to close the growing divide between East and West.
Canada’s oil industry has had to deal with superlow prices resulting from the lack of pipeline capacity, and with production cuts that have shrunk bottom lines. Now the production cuts are being relaxed, but with the new parliament set up, chances are Albertan producers may never see the completion of the Trans Mountain pipeline or the replacement of Line 3, not to mention Keystone XL, which is facing strong opposition on both sides of the border.
Western Canadian Select is trading below $40 a barrel, at a more than $15 discount to West Texas Intermediate. This is nowhere near the $50 discount WCS suffered last year, before Alberta ordered the production cuts. It’s a comfortable discount that keeps Canadian crude attractive for U.S. refiners. Unfortunately, demand for it may decline next year as the IMO enforces its new sulfur emissions rules. And because of lack of pipelines to other export markets, Canadian crude will be pressured further and the East-West divide will expand.