But, What Do We Do About Oil?

A few weeks ago, I offered to help a friend paint their new house in Barrie. Its about a 45-minute drive from where I live in Etobicoke, and it had been a while since I last filled up on gas, so I figured I needed to fill up before I headed off. I’ve been blessed to live in a neighbourhood that has a Shell gas station right at the main intersection near my house. When I got to the gas station, I noticed that none of the pumps were working. I went inside to speak with he attendant and they told me that they had run out of regular and premium gas and so were offering their V-Power gas at the price of regular. I asked how they could’ve run out of gas and they told me that they were receiving a fresh delivery that night and they would be back to full inventory. I didn’t think much of it, filled my car up with V-Power, drove to Barrie, and painted my friend’s house.

However, it wasn’t long before I heard from family members and friends about more Shell gas stations having the same problem: out of all gas except V-Power. Then I started seeing it in the news that this issue wasn’t limited to Etobicoke. Two Shell stations in Windsor reported being out of all gas except diesel and the majority of stations in London reported the same thing while other stations in St. Thomas, Ingersoll, and, of course, Toronto reported experiencing gas shortages. Shell explained that the cause of the shortages was high customer demand coupled with supply disruptions from the recent storms that had afflicted Ontario. I wasn’t sure if I could live with that explanation so I decided to do a deep dive into oil and gas in Canada to see if I could find a more thorough reason.

I figured that in order to start this Moevestigation, I needed to first understand how oil and gas are produced in Canada. The picture below illustrates the process very well.

Firstly, crude oil is either imported from a foreign country or it’s pumped out of the ground. In Canada, it’s primarily pumped from the Western Canada Sedimentary Basin (WCSB) which consists of Manitoba, southern Saskatchewan, almost all of Alberta, Eastern and Northeastern British Columbia, and the southern Yukon and Northwest Territories. It’s then transported to a refinery which turns it into gasoline and other petroleum products. Refineries located near the WCSB primarily process crude oil sourced domestically from the WCSB while refineries in the Eastern and Atlantic provinces primarily process imported crude. This is due to the high transportation costs associated with moving crude from the WCSB to the Eastern provinces, in part because of a lack of west-east pipelines, and the Eastern/Atlantic provinces’ inability to process the heavy crude oil produced in the WCSB. The refined petroleum products are then transported to refinery storage or pipeline storage. Using pipelines, tankers, barges, or even trains, these products, along with imported products, are moved to bulk terminal storages located close to cities and towns. From those storages, gasoline is transported by tanker trucks to gas stations. Much of the process is vertically integrated which means a single company owns multiple aspects of the supply chain, oil production, refining, and distribution.

According to the federal government, there are seventeen total oil refineries in Canada; 14 of which produce gasoline. 6 are located in Western Canada, 4 are in Ontario, 2 are in Quebec, and another 2 are in the Atlantic provinces.

Since markets are localized and regionally produced oil tends to stay local, the majority of oil imported by Canada goes to the Eastern provinces. I know what you’re thinking: if Canada has the third largest oil reserves in the world, why are we importing it? Well, there’s two main reasons that go somewhat hand-in-hand: bitumen and pipeline access.

Bitumen is a thick, tar-like hydrocarbon that is produced by the Athabasca Oil Sands and the deposits of it found in Canada and Venezuela make up 55-65% of the global supply. Bitumen is high in carbon and low in hydrogen while high quality oils are the opposite (high hydrogen and low carbon) and can only be refined by specialized refineries that have a coker unit. The coker unit is used to heat bitumen at 480 degrees Celsius for a long period of time in order to burn away the excess carbon before hydrogen is added later. It costs approximately $2 billion to install a coker unit and none of the companies that own refineries in the Eastern and Atlantic provinces have indicated that they would be willing to make such an investment which means that as of right now, only Imperial’s refinery in Sarnia is capable of processing bitumen. This makes exporting bitumen to the US, where 59 out of 134 refineries are equipped with coker units, and then importing refined gasoline or refined crude oil much more efficient for the Eastern and Atlantic provinces.

Another factor influencing Canada’s importing of oil and gas is the lack of pipeline access to the Eastern and Atlantic provinces. As of right now, there is no pipeline access to the Atlantic provinces including the Irving Oil-owned refinery in Saint John, Newfoundland, and only limited pipeline access to Ontario and Quebec, particularly through the reversal of Enbridge’s Line 9 pipeline. Alongside the addition of the Energy East pipeline, it was believed that the reversal, which reversed the flow of oil to west-to-east, would allow more conventional crude oil to flow from the WCSB to Eastern and Atlantic refineries. However, this has not been the case, and was unlikely to be, since conventional oil sources are drying up and bitumen production has increased. With almost no refineries in the Eastern and Atlantic provinces capable of refining bitumen while also being accessible by pipelines, the Line 9 reversal and the Energy East pipeline would only ensure that bitumen would be able to flow to overseas markets through tankers leaving ports in the Atlantic and Eastern provinces. Jason Kenney, the former-but-staying-on-until-another-leader-is-chosen Premier of Alberta, encouraged the US to buy crude oil from Canada instead of Venezuela and so also proposed that President Biden restart the Keystone XL pipeline which would see an additional 830,000 bpd exported to the US. In this light, it seems Kenney sees Keystone XL as a measure to improve the ballooning prices of oil and gas. The only problem is that even with the engineering plans and regulations already being completed, the pipeline would still take roughly a year to be operational. While the completed pipeline would arguably be beneficial to Canada and the US during these unprecedented times, it would do nothing to alleviate the situation now.

Even with pipeline access and bitumen-refining capabilities, a third obstacle to refining Albertan crude in the Eastern and Atlantic provinces is that ultimately, it is a business. Transporting Canadian oil across land, whether by pipeline, rail, or truck, adds to its cost whereas shipping by tanker is relatively cheap. This means that even though Alberta is only 4,000 kilometers away from the easy coast, it is actually cheaper to import oil from Saudi Arabia, which is 10,000 kilometers away, by tanker. While Western Canada Select, the industry name for most oil sands bitumen, sold for an average of $52.10 USD per barrel in June of 2018, and West Texas Intermediate, a US industry name for conventional oil that’s similar in quality to Middle Eastern oils, soil for $67.87 USD per barrel during that same period, the additional costs associated with transporting domestic supply make importing more affordable. The tax for transporting light oil from Alberta and Bakken (located in North Dakota and Montana) is $4-6 per barrel while the Enbridge-owned-but-leased-to-Imperial Line 8 charges 34 cents per barrel as a tariff. The phenomenon of Eastern provinces preferring foreign oil imports over domestic supply has been occurring since the 1940s. So, if it’s so much cheaper to import foreign oil, where do we import it from?

Between 1988 and 2020, Canada imported $488 billion of oil with the majority of it going to Quebec. The two largest sources of imported oil from 2010 and 2020 were the United States and Saudi Arabia, whose imports totaled about $110 billion. In 2020, Canada imported about 555,000 barrels per day (bpd) which was down from 693,000 bpd in 2019. The United States made up 77% of oil imports in 2020, a 5% increase from the year prior, while Saudi Arabia represented 13%. It makes sense that we would be importing the majority of our oil from our closest neighbour but why Saudi Arabia? At this point in time, we might not have much of a choice. For the last ten years, Saudi Arabia has been our second biggest source of foreign oil and between 2014 and 2019, oil imports from Saudi Arabia grew by 66%. That’s not to say that our relationship with Saudi Araba is necessarily a friendly one. In the summer of 2018, then-Foreign Affairs Minister Chrystia Freeland publicly demanded the release of women’s rights activists that had been arrested for protesting against the Saudi regime.

This led to significant pushback from the Saudis and resulted in a bit of a standoff. Following Freeland’s demands, Saudi Araba suspended diplomatic ties with Canada, expelled the Canadian ambassador, and recalled their own envoy from Ottawa. According to a memo written for then-Trade Minister Jim Carr, the Saudis requested existing contracts be replaced by new contracts with non-Canadian suppliers, denied access to military bases, delayed payments, re-routed flights for product supplies, prevented a Canadian company from importing and selling medication, had ministries issue orders banning food and medication from Canada, and stopped several shipments from Canada at Saudi ports. In September of 2018, the Saudi Arabian foreign minister asked for a formal apology that him and his nation would not receive. It would have been perfectly understandable if this spat had caused a massive shakeup in Canada-Saudi relations, but it actually didn’t. The only thing Canada could have really done to try and hurt the Saudis would’ve been to stop buying their oil, but this simply wouldn’t have had the desired impact. Petroleum is the source of 70% of Saudi export earnings and makes up half of its Gross Domestic Product (GDP). They’re sitting on massive reserves of oil and produce a product that’s easy to transport and can be refined by almost anyone. If Canada were to stop importing Saudi oil, all it would do is further constrain our supply chain and the Saudi’s simply wouldn’t care. So, even through 2021-2022, Saudi Arabia remained a top exporter to Canada.

Between 1988 and 2020, Canada imported $488 billion of oil with the majority of it going to Quebec. The two largest sources of imported oil from 2010 and 2020 were the United States and Saudi Arabia, whose imports totaled about $110 billion. In 2020, Canada imported about 555,000 barrels per day (bpd) which was down from 693,000 bpd in 2019. The United States made up 77% of oil imports in 2020, a 5% increase from the year prior, while Saudi Arabia represented 13%. It makes sense that we would be importing the majority of our oil from our closest neighbour but why Saudi Arabia? At this point in time, we might not have much of a choice. For the last ten years, Saudi Arabia has been our second biggest source of foreign oil and between 2014 and 2019, oil imports from Saudi Arabia grew by 66%. That’s not to say that our relationship with Saudi Araba is necessarily a friendly one. In the summer of 2018, then-Foreign Affairs Minister Chrystia Freeland publicly demanded the release of women’s rights activists that had been arrested for protesting against the Saudi regime.

This led to significant pushback from the Saudis and resulted in a bit of a standoff. Following Freeland’s demands, Saudi Araba suspended diplomatic ties with Canada, expelled the Canadian ambassador, and recalled their own envoy from Ottawa. According to a memo written for then-Trade Minister Jim Carr, the Saudis requested existing contracts be replaced by new contracts with non-Canadian suppliers, denied access to military bases, delayed payments, re-routed flights for product supplies, prevented a Canadian company from importing and selling medication, had ministries issue orders banning food and medication from Canada, and stopped several shipments from Canada at Saudi ports. In September of 2018, the Saudi Arabian foreign minister asked for a formal apology that him and his nation would not receive. It would have been perfectly understandable if this spat had caused a massive shakeup in Canada-Saudi relations, but it actually didn’t. The only thing Canada could have really done to try and hurt the Saudis would’ve been to stop buying their oil, but this simply wouldn’t have had the desired impact. Petroleum is the source of 70% of Saudi export earnings and makes up half of its Gross Domestic Product (GDP). They’re sitting on massive reserves of oil and produce a product that’s easy to transport and can be refined by almost anyone. If Canada were to stop importing Saudi oil, all it would do is further constrain our supply chain and the Saudi’s simply wouldn’t care. So, even through 2021-2022, Saudi Arabia remained a top exporter to Canada.

They’re strategy has already been successfully modeled in the US where they discounted crude oil between the 1970s and early 2000s in order to become the US’ top supplier. Keeping pricing low for Europe would allow them to steer more crude into those countries’ economies in the hopes of becoming their top supplier as well, even if it means shrinking their OPEC+ ally Russia’s share of the market. So, if OPEC+ is more concerned with profits than alleviating the global situation, what can we do?

Well, honestly, not much. In light of these current circumstances, there’s been pressure placed on Canada to boost oil production in order to try and keep the European and US markets supplied. That goal is objectively unreachable. For starters, Canada does have the capacity to increase exports by roughly 300,000 bpd according to Natural Resources Minister Johnathan Wilkinson. Oil exports would increase by up to 200,000 bpd and natural gas exports would increase by up to 100,000 bpd. However, oil production in the WCSB is already at record levels so it’s not exactly clear where more oil would come from. Oil output can fluctuate between months due to factors like cold weather or facility maintenance and WCSB production already hit a record high last October and set a record for the most oil produced in the first 10 months of any year. In order to boost production at these already peaking sites, companies would probably have to develop new facilities or expand their sites. This could take several years to happen and would cost billions of investment dollars.

Plus, even if Canada was able to somehow generate enough production to supply the in-demand markets, how would we get it there? With limited pipelines flowing to the Eastern provinces, and no direct pipeline access to the East Coast, exported oil would need to be sent south to the US where it could then be shipped out of the Gulf Coast, and we already know that pipeline transit is expensive. Now that could be construed as an argument in favour of more pipelines like Energy East that would have increased access to the East Coast, but it really isn’t. As already discussed, more pipeline access would mean more bitumen would be able to reach the coast, but with no refineries capable of processing it, exporting bitumen to global markets with no bitumen-refining capacity would be pointless.

So, if Canada can’t do it, can anyone fill the void? OPEC+ has already refused, the US has sanctioned Venezuela and Iran, US production of shale oil is slowing down, and demand continues to spike around the world. Perhaps Brazil, Mexico, and Iraq could boost production and fill the void left by Russia or maybe the best solution to all this has already passed us by. As of right now, we are not energy independent. We are a net-exporter of oil, so it’s conceivable that we could be, but we aren’t. We are reliant on countries like the US and Saudi Arabia to sell us oil that’s easy and cheap to refine and without them, our supply chains would be absolutely decimated.

In order to break that dependency, the best solution would’ve been to invest greatly in renewable and clean energy. By making an active, genuine push to significantly improve our renewable and clean energy capacity, we would be able to reduce our foreign oil imports and truly become energy independent. But we missed our chance. Now, any investments in clean and renewable energy would take time to complete and wouldn’t help the immediate situation. It should still be done in order to better prepare us for any future crises that affect our energy supplies.

All of this uncertainty around supply contributes to why gas prices are so high. Increasing supply by boosting production would help keep costs down but that doesn’t seem like a likely solution. The federal government could suspend the carbon tax, which currently adds 11 cents to each liter of gas, and provincial governments across the country could suspend their provincial taxes imposed on gas purchases. While retailers are reporting profit margins being down by 20% over the last year, oil companies themselves are reporting massive profits. Shell reported a record quarterly profit of $9 billion; triple the income reported in the same fiscal quarter in 2021. Aramco, the Saudi-state owned oil company, grew their profits by 82%, or $40 billion, and could potentially swallow British Petroleum and Shell. Profit margins are part of the reason why Shell bought 100,000 barrels of Urals crude from Russia, which preceded the sanctions imposed by the West but still followed Russia’s invasion. They didn’t do it because they wanted to support Putin’s war machine although that was definitely a foreseeable side-effect; they did it because they couldn’t find alternative sources that would enable them to provide products to their customers. Even though Shell has since committed to withdrawing from all joint ventures with Gazprom, the Russian oil company, it’s still shocking to think a company would be willing to finance the atrocities committed by Putin’s army in order to maintain their profit margins. Perhaps mandating those privately owned refineries to use some of those profits to install coker units would help boost Canada’s domestic supply and drive down prices locally and globally. Maybe pushing for a similar version of the NOPEC Bill, which allows the US Attorney General to sue oil-producing countries under anti-trust laws, that passed the US Senate, or pressuring President Biden into actually signing it, would redistribute those record profits back to dependent consumers.

So we’ve explored how oil is produced in Canada, the factors affecting global oil prices and supplies, and how these impacts can be softened or negated, but we haven’t answered the fundamental question of this Moevestigation: why were those Shell stations out of gas? For starters, the Shell refinery that would have serviced the affected areas of Ontario is located in Sarnia and sources it’s crude from the US and the WCSB only. That rules out it being affected by the sanctions imposed on Russia. It was reported that the Shell Sarnia refinery would be undergoing a “turnaround” in mid-March. A “turnaround” involves shutting down refinery units, upgrading them, and then restarting them. It’s a process that was expected to cost $120 million and last for three months. That would bring its expected end time to be mid-June. If the refinery was not operating at 100% capacity due to the turnaround, and then faced delays or complications due to the severe storms that hit Southern Ontario, it’s probable that the supply lines would have been essentially non-existent.

It wasn’t just supply chain disruptions coupled with high customer demand; it was the result of even the best-laid plans hitting roadblocks and falling apart. It’s nice to know that some simple questions have relatively simple answers. If the “turnaround” is expected to be completed by mid-June, even providing an extension until July as a result of weather disruptions, then Shell should be back up to producing at full capacity and ensuring their stations don’t run dry again. It'll be interesting to see how the global oil situation plays out since it doesn’t seem like there’s much any one country or government can do.

We’ll keep you posted with any updates. Here’s to another completed Moevestigation. Cheers!