New opportunities are emerging, says instructor – if they can be reached
Alberta may have one of the world’s largest proven oil reserves, but “the ability to get [it] out of the province has always been a bit of a challenge,” says JR Shaw School of Business instructor Dr. Ron Markowski.
An obvious but major obstacle, points out the expert in global supply chain studies, is that the province is landlocked, with no quick access to a port for shipping crude to foreign markets. Currently, most of Alberta’s oil exports go to the United States, with the remainder going to other parts of Canada. Almost none goes overseas. Globally, however, demand is on the rise.
In recent months, supply has been curtailed as countries implement bans on oil from Russia, the world’s third-largest oil producer, which invaded neighbouring Ukraine beginning on Feb. 24. The U.S. joined the ban on March 8, and Premier Jason Kenney offered to help make up the difference with Alberta crude.
But is there a greater opportunity at hand? Markowski (Management ’84) shares a common perspective that Russia will not soon shed its status as a pariah state. “Canada has a great strategic position to be able to start playing the long game,” he says. Taking full advantage of that will involve pipelines, production, and taking a page out of the history of the “silk road.”
Ramping up production
Before all else, Alberta needs to get more oil out of the ground. “Alberta’s oil production is recovering from the downturn due to the COVID crisis,” says Markowski. “Thus, there would appear to be extra capacity that could be ramped up to meet demand.”
Between 2019 and 2020, production of crude dropped 12% as the price of Western Canadian Select bottomed out in April 2020 at US$3.50 per barrel. Since then, prices have increased considerably, but production has yet to surpass pre-pandemic levels.
Though companies are generally reluctant to make costly infrastructure investments required to substantially boost output, many are in consultation with government to attempt to address the issue.
From the U.S. to the world
Currently, the U.S. is the primary gatekeeper between Alberta oil and the world, Markowski notes. Much of the province's output is exported south through pipelines for refining or re-export. “Pipeline infrastructure improvements have made it convenient to ship Alberta oil to the Gulf Coast,” says Markowski.
Outgoing volume from the coast has been increasing considerably in recent years. Should that trajectory continue, southern refineries and exporters could be fed by a greater supply from Canada owing to the “infrastructure improvements” Markowski mentions, including the upgrade of Enbridge’s Line 3.
Running from Hardisty to Superior, Wisconsin, which redistributes the oil to several regions, including the Gulf Coast, the refurbished pipeline can now move 760,000 barrels per day – roughly what was expected of the cancelled Keystone XL project.
From the Silk Road to the Northwest Passage
The U.S. is not Alberta’s sole potential path to global markets, says Markowski. Currently, the Trans Mountain pipeline moves oil from Stathcona County to Burnaby, B.C., on the West Coast, where it's transported to Asia and the Western U.S. Ongoing expansion is poised to increase Trans Mountain’s capacity to as much as 890,000 barrels per day.
This is where Markowski believes Alberta’s – and Canada’s – greatest opportunity may lie.
His reasoning brings together the east and north, as well as the past and future. “I might [liken] this to China building the Silk Road,” says Markowski.
In 138 BCE, a Han Dynasty emperor sent an expedition west from the imperial Chinese capital to confirm rumours of a new breed of horse for use in battle. The route, and the contacts made along the way, formed the basis for the Silk Road, a network of trading posts supported and protected by the Chinese empire. The network of routes directly contributed to the country’s development until the late 15th Century.
Our equivalent, suggests Markowski, is the Northwest Passage, a corridor through the islands of the Arctic archipelago. As a shipping route developed by the Canadian government, it could cut 7,000 kilometres off the trip between the Pacific (i.e., that Burnaby port) and North Atlantic oceans – and European Markets, for example – currently made via the Panama Canal. It represents a considerable saving of time and money, Markowski points out.
“It would take a lot of work,” he adds, cognizant of the incredible amount of new infrastructure that would be required in the form of pipelines and ports. “But why not build our potential to remove ourselves from being landlocked?”
Collaboration, not competition
Despite Alberta’s landlocked nature, moving its oil to market is not exclusively the province’s problem to solve, says Markowski. After all, billions of dollars in annual income generated from the oil sands alone leave the province in the form of taxes and payments for services provided by suppliers in other provinces.
Could greater mutual benefit be had were the beneficiaries more willing to work together? he wonders. They key, he adds, is cooperation between the provincial and federal governments. The Silk Road wasn’t built in a day; neither will be any route to move more Alberta oil to market.
“If there’s an ability for the two [governments] to work on the long-game in collaboration,” says Markowski, “that’s win-win.”
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