Canada is pursuing a partial energy decoupling from the United States in the wake of President Trump’s “America First” agenda.
The US-Canada relationship has historically been very close, but with President Trump seeking to renegotiate the terms of our relationships with many of our closest allies and partners in a manner that many of them view as unfavorable, even Canada has found itself trying to become less connected to the United States.
The big headline on Friday, June 27, was Trump ending US-Canada negotiations toward a new trade deal due to Canada’s insistence on maintaining its digital services tax. But also important is the effort by Canada to reduce its dependence on the United States as a market for its energy commodities and other extractive industries — sectors that play a bigger role in Canada than in other advanced economies. On Thursday, June 24, Canada’s upper house of Parliament passed a bill, the One Canada Economy Act, to streamline and “fast track” approval of major energy and infrastructure projects in an effort to speed up Canada’s attempt to reduce its dependency on its southern neighbor.
Since 1994, under the North American Free Trade Agreement (NAFTA) and Trump’s replacement, the US Mexico Canada Agreement (USMCA), Canada has been extensively tied into the United States by energy infrastructure. Oil and natural gas pipelines, as well as electric power transmission lines, crisscross the US-Canada border in a way where one can’t tell where the border runs by looking solely at a map of energy infrastructure. But that also hardwired Canada into dependence on the huge American market for their exports. For some things, particularly oil and gas, Canada has had either no or only very small-volume alternative export channels due to these infrastructure limitations.
Now that President Trump has threatened to leave the USMCA and imposed substantial tariffs on imports from Canada, including a somewhat lower ten percent tariff on energy commodities, Canada is looking to rapidly get rid of the bottlenecks to exporting elsewhere.
One major project that had already germinated due to concerns about the stability of the relationship from Trump’s first term was the Trans-Mountain Expansion (TMX), which tripled the capacity of the Trans-Mountain Pipeline to 890,000 bpd. The Trans-Mountain Pipeline connects Canada’s major oil production area in Alberta to the Pacific via British Columbia. Much of that volume goes to China, though some has ended up on the US West Coast, which may now fall off due to the tariffs.
The government of Alberta also is seeking private backers for another one million bpd pipeline to the Port of Prince Rupert on the northwest coast of British Columbia. Previously, it had been politically difficult to build pipelines to the west coast of Canada from Alberta due to opposition from environmentalists and indigenous groups, which is why the capacity of the initial Trans-Mountain pipeline was so small at 300,000 bpd.
The need to offset policy shifts in the United States, however, has effectively overcome the relative unpopularity of fossil fuel projects in liberal British Columbia through the new “fast track” legislation, which undermines the ability of provincial opposition or indigenous groups to stop a project from moving forward. There is even talk of pipeline projects that might extend to the East Coast of Canada to export oil to Europe or India.
For natural gas, Canada has only exported this via pipeline to the United States, and liquefied natural gas (LNG) has been limited to very small-scale domestic uses, such as supplying energy to remote communities. That changed on June 22, however, as Shell’s Kitimat LNG project in British Columbia produced its first natural gas for export.
Given the current state of US-Canada relations and the threat that the ten percent tariff on energy commodities might rise at some point, there is going to be a renewed impetus for additional projects to begin construction. If all seven of Canada’s LNG projects move forward, Resources Canada puts the total capacity at 6.62 billion cubic feet per day (bcf/d), with most coming online between 2027 and 2030.
Given that both the United States and Canada are gas-surplus countries, it makes sense that Canada would develop exports outside the United States. But tariff barriers could result in that volume being higher than otherwise would be economically rational.
About the Author: Greg Priddy
Greg Priddy is a Senior Fellow at the Center for the National Interest and does consulting work related to political risk for the energy sector and financial clients. Previously, he was director of global oil at Eurasia Group and worked at the U.S. Department of Energy.
Image: Shutterstock/Sean Pavone
