A 10% tariff on Canadian energy is coming. What now?

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There is a kind of joyless vindication in Canada’s oilpatch at United States President Donald Trump‘s decision to single out Canadian energy for a reduced 10 per cent tariff while other products are hit with a 25 per cent levy.

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“The fact that he went to 10 per cent on energy means that people have finally been able to get to him and explain how important it is,” Richard Masson, former chief executive of the Alberta Petroleum Marketing Commission, said amid uncertainty about a potential trade war. “There’s an admission of their dependence and that’s a good thing.”

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The tariff will hurt Canadian energy companies, disrupt commodity flows and raise costs for U.S. consumers and refiners, according to experts, but few expect it to crater demand for Canadian crude or trigger production shut-ins.

“A 10 per cent tariff would imply a $4 to $6 per-barrel levy and (a price discount on Canadian heavy oil) of $15 to $16,” RBC Capital Markets analyst Greg Pardy said in a research note on Sunday, based on a price of US$71 for benchmark U.S. West Texas Intermediate (WTI).

But key questions remain on how the tariff will be applied, including whether Canadian barrels going through the U.S. to Ontario, or to the U.S. Gulf Coast for re-export, will be hit.

There are also lingering fears over how energy could be leveraged in future retaliations by Ottawa.

“With this (U.S.) administration, we’re not exactly sure what we’re going to get until it actually gets implemented,” Tristan Goodman, president of the Explorers and Producers Association of Canada, said. “The U.S. administration has been very clear they will respond to a retaliation. This could get pretty out of hand, pretty quickly.”

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The U.S. tariff on Canadian energy includes a broad range of products. Trump’s executive order refers to crude oil, natural gas, condensate, natural gas liquids, refined petroleum products, uranium, coal, biofuels, geothermal heat, hydroelectricity and critical minerals.

In the short term, Canadian oil producers will undoubtedly turn to the country’s only export pipeline not directly tied to U.S. markets.

The expanded Trans Mountain pipeline (TMX) currently has contracts taking up about 80 per cent of its daily 890,000-barrel capacity to carry crude to tankers on the British Columbia coast.

Higher pipeline tolls on TMX, due to the project’s massive cost overruns, had previously meant shipping was cheaper on rival Enbridge Inc.’s Mainline pipeline.

“What happens on Tuesday, presumably, is that other 150,000-plus barrels a day fills up. Bang,” Masson said.

But there are other factors beyond TMX that could determine how Canadian oil and gas weather a trade war.

For example, the Canadian dollar has been weak in recent months and could fall further in response to Trump’s tariffs.

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A depreciating loonie tends to help the profitability of Canadian producers who sell their products in U.S. dollars and pay expenses in Canadian dollars.

Though U.S. importers pay the 10 per cent tariff, producers will bear a portion of the cost through price discounts on Canadian crude. Canada’s benchmark Western Canadian Select (WCS) was already trading at US$16.25 a barrel less than WTI late on Friday in anticipation of the new tariffs, Pardy said.

However, in cases where U.S. buyers or refiners can demand lower prices for Canadian supplies because of the availability of substitutes, a weaker loonie could play a significant role in offsetting the tariff burden on Canadian companies.

The exchange rate is the second-most important factor after commodity prices in determining the downside to the cash flows and stock prices of Canadian oil companies from the Trump tariffs, ATB Capital Markets analyst Patrick O’Rourke said in a recent research note. The Canadian dollar acts as a shock absorber for the tariffs when it goes down in value, he said.

Integrated producers, such as Cenovus Energy Inc., Imperial Oil Ltd. and Suncor Energy Inc., with downstream refining assets, could outperform their peers, he said, by recouping some of the lost margins through refining and product sales.

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Imperial chief executive Brad Corson on Friday said the company was acquiring light crudes to meet its refinery runs.

“We obviously produce a heavy crude,” he said. “If heavy crudes are impacted negatively … we would expect to see some offset of that with the light crudes that we’re running in our refineries. The strength of integration makes us much more resilient than others.”

Conversely, pure-play Canadian heavy oil producers are likely to feel the pressure first, including companies such as Athabasca Oil Corp., Canadian Natural Resources Ltd. and Meg Energy Corp.

“Some of our most oily producers will be very exposed,” O’Rourke said.

Another question gripping the sector is whether the new U.S. tariffs will apply to barrels originating in Canada that transit through the U.S. for re-export.

The Trump tariffs have highlighted Canada’s vulnerability on U.S. pipelines, since oil and gas extracted in the West cannot be directly shipped by pipeline to refineries in Ontario, Quebec and beyond.

For example, Enbridge’s Line 5 carries Canadian crude through Wisconsin and Michigan, with stopovers to feed U.S. refineries, before re-entering Canada in Sarnia, Ont.

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Some are wondering if the Canadian crude that transits Line 5, as well as a segment of Line 78, both terminating in Sarnia, could face tariffs, which will raise fuel prices in Ontario.

Trump’s tariff has also galvanized interest in boosting Canadian crude shipments to the U.S. Gulf Coast for re-export to overseas buyers, but proponents are uncertain whether those barrels would face U.S. tariffs.

Roughly 200,000 barrels a day of Canadian heavy crude oil are currently re-exported from the Gulf Coast and there have been calls to increase those volumes since the tariff was announced.

Ordinarily, Masson said, the economics tend to favour a flow of Canadian barrels to big U.S. refineries on the Gulf Coast.

“In order for you to put it on a ship and ship it somewhere, probably Europe, you need to be getting a heck of a price compared to the U.S. price,” he said. “But if the $6 unique to the U.S. tariff goes on, that trade would look a lot better.”

Trade experts and analysts have pointed to U.S. duty and duty deferral programs that allow importers to seek a deferral, refund, reduction or waiver of customs duties that were paid on goods that are re-exported from the U.S.

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Canada could also once again look at invoking a decades-old pipeline treaty if the U.S. elects to apply tariffs on barrels transiting the country for re-export, according to some industry experts. Canada invoked the treaty in 2021 after Michigan Governor Gretchen Whitmer attempted to shut down Enbridge’s Line 5 over spill concerns.

The 1977 treaty prohibits imposing duties on the use of transit pipelines, as well as any import or export taxes on transiting hydrocarbons.

“The reality is that there’s still a lot of mud in the water at the moment about how exactly these tariffs will work, how the retaliation might work (and) how secondary retaliation from the United States may work,” Scott Crockett with the Business Council of Alberta said.

He points out Trump’s executive order essentially says to Canada, “If you retaliate, things could get even worse on you.”

Even before the details were announced, Trump’s threats had resulted in calls to diversify away from the U.S. Both Natural Resources Minister Jonathan Wilkinson and B.C. Premier David Eby made separate public comments over the weekend about the importance of faster approvals for major projects.

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In a news conference, Eby said the province had identified 10 private-sector projects worth $20 billion to expedite, including mines, renewable energy and natural gas, and that his government is committed to fast-tracking approvals and permits to get them underway.

Wilkinson told Bloomberg there is a “renewed emphasis” on finding a way to double the capacity of LNG Canada, the country’s first natural gas export project in Kitimat, B.C., that will start shipping fuel to Asian markets this year.

Strathcona Resources Ltd. chief executive Adam Waterous said Canada could declare an energy emergency to streamline regulatory approvals for pipeline projects carrying energy to ports on Canada’s West and East coasts.

“Assemble private-sector consortiums to build the pipelines and set deadlines to complete the pipelines well before Trump’s term in office ends,” he said. “Trump thinks he’s Superman, but Canada can turn its oil into kryptonite by building pipelines to our coasts.”

• Email: mpotkins@postmedia.com

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