Canada stands at oil crossroads

The new Mideast war and its effective closure of the Strait of Hormuz have provided Canada with another “golden opportunity” to massively expand production from its world-class oil and gas resources, IEA Executive Director Fatih Birol said at a policy conference in Toronto on 7 May.

But the country has an international reputation for lengthy timelines and even cancellations on major infrastructure and natural resource projects, in part because of its multiple levels of government, and “Canada does not have the luxury to be slow,” Birol added.

Even before the latest global energy crisis, Canadian Prime Minister Mark Carney and Alberta Premier Danielle Smith had begun negotiations to lay the regulatory and fiscal foundation for speedier development of the infrastructure and resource projects needed to export substantially more oil and gas from the country.

Since taking over as leader of the federal Liberal Party and prime minister of Canada from Justin Trudeau in March 2025, Carney has adopted two interrelated goals as part of his Build Canada Strong plan, making his country an energy superpower and doubling exports to non-US markets within a decade in response to Trump trade tariffs and threats to Canadian sovereignty.

“Canada and Alberta must urgently reform their regulatory and fiscal frameworks to support the long-term competitiveness of the industry and attract the billions of dollars of investment required to realise the full economic potential of the resource” Oil Sands Alliance

In January 2025, Smith announced the goal of doubling Alberta’s oil and gas production. The province, home to the oil sands, is the dominant oil producer in Canada, while producing about 60% of its natural gas.

To do so, the Carney government created the Major Projects Office in August 2025 to bypass the federal government’s own bureaucratic red tape for major infrastructure and natural resource projects, much of it due to legislation promulgated by the Trudeau government.

In addition, the federal government is establishing “one project, one review” agreements with provincial and territorial governments and has proposed a strict one-year timeline for federal project approvals. This includes a process reversal to have cabinet approve new projects prior to a single comprehensive federal decision on permits and technical assessments, to provide investors with greater certainty of political buy-in prior to the expensive and time-consuming review process.

The federal and Alberta governments also signed a memorandum of understanding (MOU) in November 2025 to increase Western Canada’s export infrastructure, reduce oil and gas emissions, and diversify exports to overseas markets. In essence, Alberta agreed to reduce oil and gas industry emissions, partly through the proposed Pathways CCS project, in return for a greenfield 1m b/d pipeline from the oil sands in northern Alberta to the British Columbia (BC) coast.

Alberta and Ottawa reached agreement on two of four major provisions in the MOU by their 1 April deadline: streamlining environmental impact assessments for projects and agreeing to cut methane emissions from Canadian oil and gas production by 75% from 2014 levels by 2035.

On 15 May, the federal government and Alberta announced an implementation agreement on the third provision, a schedule to increase the effective/market industrial carbon price in the province to C$130/t from about C$40/t presently. The effective price, the market value of carbon credits and offsets through the province’s Technology Innovation and Emissions Reduction programme, is to increase in annual increments to C$130/t by 2040, compared with the Trudeau government’s headline price increasing to C$170/t by 2030.

The fourth and final provision, still to be negotiated, is a trilateral MOU between the two levels of government and the Oil Sands Alliance—representing five of the largest oil sands operators, including Canadian Natural Resources Ltd. (CNRL), Cenovus Energy and Suncor Energy—on the proposed Pathways CCS project.

It appeared this would be a relatively straightforward negotiation when the federal-Alberta MOU was signed last November, with the oil sands industry widely viewed to be onboard with its basic premises. But over the past few weeks, the Oil Sands Alliance and its members have ramped up their opposition to an industrial carbon tax.

This is putting not just the Pathways CCS project at risk, but the proposed 1m b/d pipeline to the west coast, the greenfield oil sands projects needed to fill it and hence the goals of both the Alberta and federal governments on the oil front.

Shifting goal posts

On 4 May, as details of a possible federal-Alberta deal on industrial carbon prices began to leak to the media, the Oil Sands Alliance released a document suggesting greenfield investment is needed in the oil sands for Canada to realise its full potential as an energy superpower and to achieve Smith’s goal of doubling Alberta’s oil production, while implicitly warning an industrial carbon tax could stand in its way and derail investment in the Pathways CCS project.

Because of complex regulatory processes, uncompetitive carbon frameworks and fiscal systems that do not incentivise growth, there has not been a major new greenfield oil sands project sanctioned in Canada since 2013, and investment has dramatically declined, according to the Oil Sands Alliance.

“The capital-intensive nature of the oil sands industry requires predictable, durable and competitive regulatory and fiscal frameworks that attract investment,” the Oil Sands Alliance said. “Canada and Alberta must urgently reform their regulatory and fiscal frameworks to support the long-term competitiveness of the industry and attract the billions of dollars of investment required to realise the full economic potential of the resource.”

The Oil Sands Alliance said its members are committed to continuing to reduce their emissions intensity, including advancing the Pathways CCS project, but “a project of this size requires supportive regulatory and fiscal frameworks, not an uncompetitive industrial carbon tax that no other major heavy oil producing jurisdiction faces, which would limit our industry’s ability to attract investment and grow.”

John McKenzie, the president and CEO of Cenovus, was more direct during his company’s first-quarter 2026 earnings call the same day.

“The national dialogue on further development of the oilsands has been myopically focused on the climate agenda and climate policy,” he said. This has “created a set of national policies and regulations that make resource development and investment in Canada uncompetitive with the rest of the world”.

And the industrial carbon tax will only make this worse, because “no other major oil producing nation in the world has one,” McKenzie said. “The result is this tax does not incent decarbonisation of the Canadian industry but instead incents industry to invest outside of Canada.”

“If we are going to fill a million barrel-a-day pipeline to the West Coast, it is got to come with growth, and that growth has to come with capital, and that capital has to be competitively advantaged to where else it can go,” he added.

In a press release in response to the federal-Alberta announcement on 15 May, Kendall Dilling, president of the Oil Sands Alliance, echoed McKenzie’s more direct view about the industrial carbon tax while hardening his group’s bargaining position with regards to the federal government.

“Oil Sands Alliance is committed to advancing the Pathways carbon capture and storage project provided the necessary regulatory and fiscal terms are in place to support the project and new oil sands growth in Canada,” Dilling said. “An industrial carbon tax only adds uncompetitive costs to industry on top of the costs of a carbon capture project.”

“While today’s announcement provides greater clarity on the industrial carbon tax and the next steps between the two governments to advance a strategic oil pipeline project to Asian markets, it is critical that the overall regulatory and fiscal frameworks be put in place to enable the long-term competitiveness of the industry and to attract the billions of dollars required to grow production and fill future pipelines,” the Oil Sands Alliance added.

Need for greenfield

If the federal and Alberta governments are to achieve their ambitious goals for Canadian oil production, including the federal government’s goal to ramp up exports to overseas markets, the Oil Sands Alliance is correct to suggest greenfield projects, including new oil sands mines, are needed to fill planned and proposed export pipelines from Western Canada over the next decade.

As can be seen in Fig.1, there is 4.9m b/d of pipeline egress from Western Canada, with another 2.9m b/d of capacity either planned or proposed through 2034. More than three-quarters of capacity flows directly to the US market, with the final quarter to the BC coast for shipment to Washington state, California and overseas markets. In terms of planned and proposed pipelines, the split is much closer to 50/50.

However, based on timelines for the pipeline projects and planned increases in oil sands—which are all brownfield projects—and other liquids production through 2035, the increase in Western Canadian oil production will fall far short of potential increases in pipeline capacity.

“The national dialogue on further development of the oilsands has been myopically focused on the climate agenda and climate policy” McKenzie, Cenovus

Western Canadian liquids production from CNRL, Suncor and Cenovus—accounting for over half of total production in 2025—should increase by more than 700,000b/d over the next decade based on planned projects, despite production from Suncor’s Base Mine collapsing from 280,000b/d to zero over this period.

Assuming similar growth plans by other producers in the region, Western Canadian oil production should increase by about 1.3m b/d by 2035—for comparison’s sake, information provider S&P Global Energy is projecting a 600,000b/d increase by 2030—less than half the potential increase in export pipeline capacity.

The most likely pipeline projects to move forward due to timeline and their relatively low cost are the brownfields—Express/Platte, Enbridge Mainline and Trans Mountain—for a sub-total of 790,000b/d of incremental capacity. Next up is the 550,000b/d Bridger Pipeline Phase 1, a quasi-brownfield project, since South Bow’s contribution is already laid pipe for the Canadian segment of the ill-fated Keystone XL pipeline, while producers have committed to move at least 400,000b/d on the line to date.

Barring oil sands producers again investing in greenfield projects, that leaves Bridger Pipeline Phase 2 and the Alberta government’s proposed bitumen pipeline without the oil needed to move the projects forward, and hence Alberta without even a private sector champion for its greenfield west coast project.

In this case, new pipeline capacity to BC would account for only a quarter of total new export capacity from Western Canada, the same proportion as current capacity.

Rock and hard place

Although the Oil Sands Alliance’s about-face on the industrial carbon tax is threatening the goals of both the federal and Alberta governments, it is only leaving Carney between a rock and a hard place because Smith would gladly ditch the tax given the chance. She is climate agnostic at best and only negotiated the new carbon pricing regime thinking it had the support of the oil sands industry.

In contrast, Carney’s Build Canada Strong plan is quickly becoming a one trick pony: that trick being oil and gas. Canada’s industrial base is continuing its decades long decline—for example, manufacturing’s share of total employment declined to 9% in April 2026 compared with 19% in December 1979, based on Bloomberg data—its branch plant automotive sector is in freefall with the demise of free trade with the US, while the Canadian economy shed 112,000 jobs in the first four months of this year, its weakest four-month performance since the Covid-19 pandemic in 2021.

At the same time, it would be hard for Carney to drop the industrial carbon tax or negotiate an even weaker pricing regime. Since becoming prime minister in April 2025, he has dropped or scaled back many of his predecessor’s climate policies, including the consumer carbon tax, the mandatory zero-emissions vehicle sales targets, and the cap on oil and gas emissions.

And in the fine print of the recently announced MOU implementation agreement, the Pathways CCS project needs to capture and store only 6mt/yr by 2035, compared with 22mt/yr by 2030 previously, with the Oil Sands Alliance required to reduce emissions an additional 10mt/yr via a range of technologies by 2045.

Carney’s gutting of many of his predecessor’s climate policies last year led to the resignation of several Trudeau-era cabinet ministers, including his good friend Chrystia Freeland, Canada’s deputy prime minister and minister of finance in the first half of this decade.

FIG.1: CURRENT, PLANNED AND PROPOSED WESTERN CANADIAN OIL PIPELINE EXPORT CAPACITY