Benefits to Canada From Oil Production and Exports are Threatened by Tariffs. But There’s a Way Forward

The benefits Canada reaps from its status as the world’s fourth-largest oil producer and exporter have been threatened by tariffs, leading many to call for diversification away from the U.S. market. The Prime Minister has talked about the need for another oil pipeline to the Pacific. But the facts about our existing production, infrastructure and market dependencies will influence what we can realistically do, and when.

Canada produces five million barrels per day (MB/d), of which 4.2 MB/d is exported. This generates hundreds of thousands of jobs and billions in provincial and federal government revenues. Canada clearly has the potential to significantly grow these benefits by increasing production. For example, Canada has 2.4 times the oil reserves of the U.S., but produces only one third the amount of oil per day that that country produces.

Growing production will require some combination of maintaining current sales to Canadian and U.S. refiners, increasing those sales, or increasing sales to international markets via tanker ship deliveries.

We are heavily dependent on sales to U.S. refiners. On average in 2024, exports to the U.S. were 3.9 MB/d, mainly by pipeline. The next largest sales of Canadian oil were to Canadian refiners, at 0.8 MB/d. Lastly, there were 0.3 MB/d of sales to non-U.S. international markets, reached via tanker ships leaving Vancouver, Newfoundland, and U.S. ports (Canadian oil by pipeline into the U.S., and then shipped to Asia).

Our current concentration in U.S. markets poses obvious risks. But U.S. refiners still need Canada’s heavy oil, and U.S. trade policies may change in four years. We have large-capacity pipelines to the U.S., which could be expanded and tolls on these lines are relatively low. So, over the short to medium term, we can expect sales to the U.S. to continue to grow.

The potential for incremental sales within Canada isn’t great. Canada imports only 0.5 MB/d, mainly for the two largest refineries in Canada (Irving Oil Ltd.’s Saint John, N.B., refinery and Texas-based Valero Energy Corp.’s Quebec refinery). Both these refineries import most of their oil supply by ship. To replace those imports with Canadian oil supply, more infrastructure would be needed. Pipeline companies are increasingly reluctant to build unless someone, such as refiners or producers, signs agreements promising to make regular toll payments to the pipeline into the future. Refiners are reluctant to take on such major liabilities. Meanwhile, those refineries have ready access to competitively priced global oil supplies. Given this, it’s not clear who would be willing to sign the contracts necessary to support a project. A pipeline to the east is not likely.

That leaves exports to non-U.S. international markets, mainly in Asia and Europe. This market is very large, and could take any incremental oil production we develop. We sold only about 0.3 MB/d to non-U.S. markets in 2024: Newfoundland oil to Europe, and Alberta oil to Asia. But these volumes are rising. Initial reports are that 0.35 MB/d is now going to Asia alone, via the Trans Mountain pipeline and ships leaving Vancouver.

As Trans Mountain’s capacity is reached, more capacity to the Pacific will be needed in order to significantly increase exports to Asia. A further modest Trans Mountain expansion is likely over the short to medium term, such as more pump stations, and longer term there will be pressure for a second pipeline to the coast.

Someone will have to pay for any new pipeline. Before the federal purchase of the Trans Mountain Pipeline in 2018 we relied on private sector companies to finance and build most pipelines in Canada.

If we want private companies to build pipelines, there are challenges.

First, our regulatory system for pipelines is needlessly onerous and political. A pipeline company should be able to assume that once the federal regulator holds public hearings, hears arguments and applies its expertise to the question of whether a project makes Canada better off or not, the government will generally agree with the decision. This did not happen with the Northern Gateway project. The government denied it in November 2016, after receiving a positive recommendation from the Joint Review Panel. Then, the government made pipeline approvals even harder by introducing bill C-69.

Second, large swaths of the public — Indigenous and non-Indigenous — dislike pipelines, and some use civil disobedience to disrupt construction, leading to higher costs and delaying or even killing some projects.

Third, the courts sometimes disagree with the government on whether legislative requirements have been satisfied, quashing approvals granted by the elected government of the day. Governments will have to deal with all these problems if they expect the private sector to propose and build pipelines.

Canadian oil production has growth potential. With the U.S. an unpredictable trading partner we need to be strategic in deciding what markets to target. Pipelines to the Pacific would give us access to the world. It’s time to push this and to secure the benefits: increased negotiating power with the U.S.; global influence; jobs for Canadians and revenues for governments. This will require the federal government to address the three problems listed above. This won’t be easy, or quick.

John Foran was the director of the Pipeline, Gas and LNG division of Natural Resources Canada from 2015-2017.