A Ten Point Action Plan – Canada Oil Industry Response to War in Ukraine

The war in Ukraine is now a month old. It is not over, nor does it show serious signs of ending anytime soon, despite attempts at peace talks.

We, as a nation, have had a month to determine our response. Even if the shooting stops, Russia’s oil and gas exports must be replaced by that from other nations for the long term. You don’t give money to the bully to buy the stick to beat you with.

I am coming at this as a father whose daughter is just turning 18 and graduating this June. She also has six years of experience as an air cadet. She is of perfect draft age, and the military these days is no longer a boys club. I absolutely do not want her to go to Europe to, as my late grandfather said, “stop a bullet.”

To the oil producer executives who are more concerned these days about dividends and share buybacks than increasing production, I say this: Give your kid a rifle, and tell them to pack their bags for Europe. Because that’s what this could come down to. This is not a joke or hyperbole. Unless you are willing to hand your own son or daughter a C7 should a draft be implemented, reconsider your priorities. You’re still going to make enormous amounts of money, just not as much as you will with your current shareholder-focused plans. Start focussing on the geopolitical issues here.

It is much better for Canadians to send tankers full of oil and LNG to Europe then tanks full of our kids.

There needs to be a national imperative to do this. It may take orders-in-council. Hopefully most of industry can come it its own conclusions without being pushed. But to get the pipeline built, the federal government will have to say there’s no more fooling around. This is going to happen, now.

With all these caveats, this is the plan I am proposing Canada should implement to respond to the Ukraine War. Much of it is focused on our own energy independence, should global shipping become disrupted by Russian action. One torpedo from one Russian submarine can upset the entire global shipping order. By becoming entirely energy independent ourselves, we free up global cargoes to go to Europe. Eventually, we would be able to export our own oil to Europe.

If any of this sounds familiar, its because these actions, particularly on Energy East, should have taken place eight years ago. We would be in a much better position today than we currently are if that had occurred.

Here is a ten point action plan:

1. Assume that every incremental barrel of oil produced in Western Canada and Newfoundland will displace one barrel of oil incoming to Eastern and Central Canada, particularly Saint John, NB, and Montreal refineries. Canada imports roughly 475,000 to 675,000 barrels per day (bpd). Two-thirds to three-quarters are from the USA. Overseas imports are ~160,000 to 250,000 bpd.
2. Every displaced barrel frees up a barrel that can go to Europe instead of Canada.
3. Federal and provincial governments need to suggest, cajole and implore oil producers to increase oil production across the spectrum, but particularly in light oil.
   1. Oil companies should shift their laser focus on dividends and share buybacks to increasing vendor workforce wages to attract people to the industry. There are lots of idle service rigs in Saskatchewan, but not enough staff to man them all. This is why the pay must go up substantially. They will still make lots of money, just not as much.
   2. Additional service rigs will allow for increased production through workovers. This is the lowest hanging fruit to increase incremental production in the quickest time.
   3. No tax incentives should be required. WTI is US$110 and WCS is $101 per barrel on any given day now. They will be making plenty of money and should not require additional incentives.
   4. There are many drilling rigs in Saskatchewan that did not work this winter. Despite high oil prices, many companies, including Cenovus and Crescent Point, had dramatically reduced drilling programs. This needs to be reversed.
   5. Enhanced oil recovery, such as waterfloods, can be implemented to boost production
4. The argument has been “We don’t have pipelines to tidewater.” The reality is by 2014, Saskatchewan had enough crude-by-rail infrastructure in place to ship every barrel we produce by rail, if we chose to. This needs to be reactivated to ship additional, incremental oil to Central and Eastern Canada. A typical crude-by-rail train is around 70,000 bbls. Facilities here include:
   1. Crescent Point Stoughton                 45,000 bpd
   2. Altex Lashburn                 88,000 bpd
   3. Altex Unity                 29,000 bpd
   4. Plaines All American Kerrobert 80,000 bpd
   5. Kindersley                 Unknown but sizeable.
   6. Additional sites                 https://www.oilsandsmagazine.com/projects/crude-oil-by-rail
   7. Total 461,000 bpd province-wide if all implemented/reactivated
5. Alberta has also built sizeable crude-by-rail facilities including loop tracks at Edmonton, Hardisty and Bruderheim. Total 802,000 province-wide if all implemented/reactivated.
6. Manitoba has an idle 60,000 bpd facility at Cromer meant for Saskatchewan and Manitoba oil. It is directly tied to the Westspur System from southeast Saskatchewan.
7. Additional rail tankers and engines will need to be built and crewed.
8. Start by shipping incremental oil by rail to Montreal, and then St. John. Eventually all incoming tanker traffic will be displaced. At this point, Canada has become energy independent, and we have freed up 675,000 barrels from the world market for Europe. Russia exports 4.5 million bpd to Europe.
9. The same hardware that offloads oil from tankers should be capable, with minimal work, of loading tankers. As our production increases, we start exporting oil to Europe via tanker.
10. Concurrently, we build the Energy East Pipeline, or at least parts of it.
    1. TC Energy has all the plans for Energy East sitting in storage, including all the surveys.
    2. All the pipe from Hardisty to Kingston is already in the ground. When TC Energy built the Alberta portion of Keystone XL, they built it from Hardisty to the Bindloss Pump Station near the Saskatchewan border, including two pumping stations. That pump station is where Energy East was supposed to begin using the existing TC Energy Mainline. It was no accident that TC Energy built that portion first. They clearly planned for this possibility.
    3. Unless they have already disposed of it, TC Energy should have in its possession all or most of the long-lead hardware for the pumping stations that were meant for Keystone XL. This includes the pumps, valves, pre-fab buildings, transformers, etc. Re-deploy this to build the pumping stations through Saskatchewan, Manitoba and Ontario. KXL had 41 pumping stations planned, so most, if not all, of that hardware should be available.
    4. The Cromer-Moosomin lateral would allow southeast Saskatchewan and Manitoba oil to be shipped on Energy East.
    5. Build the Kingston to Montreal portion of new pipe, at minimum. In the interim, crude by rail could be used from Kingston to Montreal and Saint John.
    6. Build the tanker terminal originally planned for Cacouna on the St. Lawrence River.
    7. Continue the pipeline to the Saint John Irving Refinery, and switch it to entirely Canadian slate. This may require refinery upgrades such as a coker.

In summation, increasing Canadian oil production and displacing imported oil results in Canadian energy security in a world where energy security is now everything, including to Canada. Under this plan, we are taken care of and cannot be threatened. Every displaced ocean-going barrel becomes one more barrel available for Europe. Once we displace all incoming oil, we can begin exporting additional barrels to Europe, with the caveat that anything on the high seas is now at risk.

Brian Zinchuk is editor and owner of Pipeline Online. He can be reached at brian.zinchuk@pipelineonline.ca.