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Without Keystone XL, Canada set for record crude exports to the U.S.

Record volumes of Canadian crude are expected to flow to American refineries in the years following Joe Biden’s decision to nix a long-awaited and controversial cross-border pipeline project. The all-but-certain death of Keystone XL is another blow to the battered oil patch, but experts predict the expansion of other lines will be enough to support strong U.S. demand for Canada’s heavy crude.

Biden revoked TC Energy’s (TRP.TO)(TRP) construction permit hours after taking office last week, ending a four-year reprieve for the project granted by his predecessor Donald Trump in 2017. Biden’s move makes good on a campaign trail promise to kill the project, and recalls a similar decision by President Barack Obama, who issued an executive order in 2015 to halt the pipeline’s construction.

Jackie Forrest, executive director of the ARC Energy Research Institute, said what appears to be the final pass of the 12-year-old Keystone XL political football is less important to the Canadian energy sector than strong underlying trends for U.S. demand and other pipeline expansions currently in the works.

“The U.S. Gulf Coast is very short of heavy crude. There has been a big fall off of Venezuelan and Mexican supply. They’re paying even more for heavy oil than they were ten years ago relative to light oil,” she said in an interview.

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On the Canadian supply side, she said annual oil sands production growth is trending lower as more pipeline capacity is expected to come online. Several expansionary projects are underway, including Enbridge’s (ENB.TO)(ENB) Line 3, and of the government-owned Trans Mountain pipeline. The projects, which face their own opposition challenges, are slated for completion in late of 2021 and late 2022, respectively.

“Both of those seem like they’re going to occur. If they do, then there’s probably ample takeaway capacity for some time out of Western Canada. We also have 400,000 barrels per day (bpd) of partly-used crude-by-rail capacity right now,” said Forrest. “The thing that KXL would have offered is that direct connection to the Gulf Coast.”

Canada produces about five million bpd, and exports roughly 3.8 million of those to the United States, according to data from Natural Resources Canada. Canadian oil accounts for nearly half of America’s total oil imports.

Analysts expect U.S.-bound Canadian oil to rise to between 4.2 million and 4.4 million bpd over the next few years. According to Rystad Energy, pipeline expansions currently in progress will add more than 950,000 bpd of export capacity for Canadian producers before 2025.

Tudor Pickering Holt & Co. sees new pipeline capacity “drastically outpacing” new crude supply in Western Canada as producers in the region put off expansion plans due to high costs and low oil prices.

“KXL was not necessary,” the Texas-based investment bank wrote in a note to clients last week.

Rory Johnston, market economist and managing director at Price Street, has long-insisted that Canada needs just two out of three projects, between KXL, Line 3, and Trans Mountain, in order to effectively ease the pipeline congestion that has long-plagued Western Canadian oil.

“We could have a healthy egress situation with just Line 3 and TMX being built,” he said. “I think the feeling of loss from the Keystone XL expansion is going to be much greater than the actual economic consequences of the cancellation.”

Rachel Ziemba, an adjunct senior fellow at the Center for a New American Security, said while crude imports to the U.S. from Canada remain down year-over-year, she sees weekly shipment figures pushing higher. She expects that trend to accelerate once the world’s largest economy begins to recover from the massive demand hit brought on by the COVID-19 pandemic.

“I wouldn’t treat the Keystone XL rejection as necessarily meaning the U.S. is trying to rid itself of Canadian oil,” she said.

Johnston agrees. He said it’s worth noting that the new U.S. administration has not made decisive announcements about other cross-border pipeline projects, which he sees as carrying less political symbolism than Keystone XL.

“If their intent was to create a general veto across all pipelines crossing the border, you would have seen more commentary on it by now,” he said.

-with files from Reuters

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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