Canada pushes to double LNG exports and build Pacific oil pipeline

West Coast pipeline approval tied to multibillion-dollar carbon-capture project

Canada is preparing to roughly double its liquefied-natural-gas exports by 2030 and to build a pipeline carrying crude oil to the Pacific coast, plans Prime Minister Mark Carney laid out at the Canada Investment Summit earlier this month. Speaking at the summit, Carney said: “We are unleashing our full potential as an energy superpower.” The expansion would shift Canadian energy exports toward Asian and other non-U.S. markets.

The push to diversify comes as President Trump’s trade war and the Iran conflict have prompted Canadian officials to look beyond their largest energy customer. The United States is also moving to import more Venezuelan oil, a heavy grade that competes with the Canadian kind.

Asian refiners are among those that might want to diversify their crude sources as a result of the instability in the Middle East. Global refining capacity that can process ultraheavy crude is split roughly evenly between the U.S. Gulf Coast and Asia, according to Jonah Resnick, an analyst at Wood Mackenzie.

Canada’s energy inertia has been, in part, market-driven. Rapid U.S. shale growth pushed oil prices down and stymied Canadian oil sands’ growth plans over the past decade. But policy was also to blame, making it more difficult to build the infrastructure needed to serve markets other than the U.S.

“Previously, infrastructure and resource development had really stalled out due to regulatory and permitting uncertainty,” said Robert Kwan, an equity analyst at RBC Capital Markets. He said both of those forces are now moving in the other direction.

At the summit, Carney pointed to two flagship projects: a West Coast Pipeline that would carry oil to Asian markets, and LNG export projects that would double the country’s liquefied-natural-gas exports by 2030. The federal government is also pushing to simplify the permitting process. Carney has said he aims to narrow the review process for projects and shorten it to one year. Historically, reviews of large infrastructure projects have taken two to three years or more, according to Resnick.

Canada is introducing investment incentives. A federal tax deduction would allow oil-and-gas companies to write off the full cost of new wells, pipelines and processing facilities, raising deduction rates — currently 25% to 30% — to 100% on new projects, according to a report from BMO Capital Markets. The report estimates that deduction could improve oil producers’ cash flow per share by 6% on average. Alberta’s government is separately planning to revise its oil royalty-fee structure to encourage more investment in production, according to local news reports.

Canada is the world’s fourth-largest oil producer and fifth-largest natural-gas producer, and the oil-and-gas sector represents about a fifth of the country’s exports, making it the largest contributor, according to Statistics Canada. But the country sends nearly all of its natural-gas exports and about 90% of crude-oil exports to the United States, limiting its global influence.

TD Economics estimates that if all of Canada’s major oil pipeline projects and expansions are built, total takeaway capacity could reach 6.8 million barrels a day by 2034. Of that capacity, some 30% would take oil to the West Coast, which has access to Asian markets. The actual share of oil going to Asia would be lower because westbound pipelines also carry oil to local refining capacity and the U.S. West Coast.

On the natural-gas side, proposed LNG export projects could enable Canada to send 55% of its natural-gas exports to non-U.S. markets by the early to mid-2030s, according to the government’s estimate. As more LNG export capacity is built, Canadian natural-gas prices could double by the late 2020s, according to Resnick. Canada’s biggest natural-gas producers include Tourmaline Oil, Arc Resources — which has been acquired by Shell — and Canadian Natural Resources. These producers could also benefit if oil sands production grows and pushes up demand for condensate, which is used to dilute oil sands’ output.

Oil pipeline build-outs could further narrow the discount between Canadian heavy oil and U.S. benchmark crude. The proposed West Coast pipeline could narrow the discount by up to $3 per barrel over time, according to an estimate from TD Economics. Existing pipelines are running at near-full utilization.

But the scale of the build-out will depend on oil producers’ willingness to invest in new production. Oil sands can take years to develop and require hefty upfront capital. Government approval of the West Coast pipeline project is conditional on oil producers funding a multibillion-dollar carbon-capture project.

Despite high oil prices and strong balance sheets, Canadian oil producers aren’t moving ahead with expansion projects, said Mike Dunn, an analyst at Novi Labs. “Until they know what framework they’re under, they can’t make multibillion-dollar project decisions,” he said. There might be more clarity by Nov. 15, the deadline by which the government and the big oil producers are expected to reach definitive agreements.

Over the longer term, there is at least one market-driven reason for Canadian oil producers to seek growth. As its shale resource matures, U.S. oil production is likely to peak in the early 2030s, with remaining wells becoming more expensive to drill, according to a recent analysis from Enverus. The shift “increases the importance of Canada,” the research firm said, where oil sands have high upfront costs but produce at a steady rate for decades.