On the day that Prime Minister Justin Trudeau approved the Trans Mountain pipeline expansion project in late 2016, Alberta Premier Rachel Notley hailed the decision as a turning point for her province.
The collapse of oil commodity prices had ushered in a “long dark night” for Albertans, she said, and twinning the 1,150-kilometre pipeline from Edmonton to Burnaby finally promised “some morning light.”
“We are getting a chance to break our landlock,” she said. “We’re getting a chance to sell to China and other new markets at better prices.”
It’s a claim frequently repeated by proponents of the $7.4-billion project that will increase the pipeline’s capacity from 300,000 barrels a day to 890,000. But is it true? And is there still a business case for the project more than four years after the National Energy Board received an application to expand the line? Like most things, it depends whom you ask.
Kinder Morgan, the Texas-based company whose Canadian division owns and operates the pipeline, said that nearly all the oil produced in Western Canada currently gets sold to the United States at a discount to the world price for similar products.
“The simple truth is that Canada’s oil will fetch a better price if we give ourselves the option of shipping more of it via Trans Mountain’s Pacific tidewater terminal in Burrard Inlet,” the company said in a statement.
A document posted on the project’s website adds: “Twinning the Trans Mountain pipeline will increase the value of Canadian oil by unlocking access to world markets where higher prices are paid for oil, resulting in greater tax revenue for Canada.”
Not everyone agrees. David Hughes, an earth scientist who spent 32 years with the Geological Survey of Canada, said industry and government officials are relying on faulty assumptions.
Historically, he said, there has been little difference between international and North American oil prices and, once transportation costs to Asia get factored into the equation, any price advantage disappears.
If anything, Hughes said, the transportation costs to Asia mean Canada is likely to get a lower price for heavy oil in overseas markets.
“The whole Asia price-premium argument is false,” he said.
The oil industry, however, touts the long-term benefits of diversifying its business, reducing Canada’s reliance on the U.S. market, and opening up access to growing markets in Asia.
Tim McMillan, president of the Canadian Association of Petroleum Producers, said the International Energy Agency in Paris predicts that oil and gas consumption will continue to grow for years to come, with most of that growth occurring in China and India.
Canada, he said, is sitting pretty to meet that demand with the world’s third-largest reserves of crude oil and the country’s strong environmental and regulatory standards.
“We believe that the solutions that we’re all working toward globally — Canada is best-positioned to help meet those challenges and to be a supplier of energy for the growing demand in the world.”
The risk, he said, is that Canada won’t be able to get its products to the international market unless the Trans Mountain pipeline gets built.
“Today, we are 100 per cent reliant on the U.S. as a market and as a broker for us,” he said.
“As a Canadian, strategically we should have our own sovereignty over our resources and not rely on the U.S. Gulf Coast to decide whether they would refine it or export it or export their own products and keep Canada’s discounted products.
“I just think it’s a narrow world view that would want to knee-cap Canada’s opportunities going forward. The U.S. have been great partners. They have been good customers. But it isn’t good business or good for our nation just to have one customer.”
McMillan, who has an economics degree from the University of Victoria, said Canada is already losing out. He cited a Scotiabank report from February that found Canada’s oilpatch has too much oil and too few pipelines to transport it, creating a bottleneck that is driving down the value of Canadian crude.
“Pipeline approval delays have imposed clear, demonstrable and substantial economic costs on the Canadian economy,” the report said. “If maintained at current levels, the discount on Western Canadian oil would shave $15.6 billion in revenue annually from the sector.”
Skeptics like Hughes, however, say Trans Mountain is no longer needed to ease the bottleneck, because the federal government has approved two other pipeline projects — Enbridge’s Line 3 replacement project from Edmonton to Superior, Wisconsin, and TransCanada’s Keystone XL pipeline from Hardisty, Alta. to Steele City, Nebraska.
If those two projects go ahead, Canada will have a surplus of pipeline capacity without having to increase the number of oil tankers off B.C.’s coast, Hughes said in an interview.
“So, yes, pipelines are full, but nobody talks about the fact that there’s double the capacity of Trans Mountain coming online — probably in the same time frame that Trans Mountain could be built,” he said. “[The other new pipelines] have a lot lower risk; I mean we’re not talking about radically increasing the number of tanker trips into Burnaby.”
Jeff Rubin, a former chief economist at CIBC World Markets, said that of the three pipelines, Keystone XL makes the most sense since it will take Canada’s oil to the concentration of heavy oil refineries on the U.S. Gulf Coast that are designed to process heavy oil and will offer the best price.
“The notion that getting oil either to Europe or Asia with the Trans Mountain pipeline [will] unlock greater pricing power just empirically is not true,” he said. “It has not held in the past.”
But Kevin Birn, an oil market analyst at IHS Markit, said there are risks associated with having a single customer.
The U.S. is expected to consume a lot more of Canadian heavy oil in the years to come and there will come a point when refineries on the U.S. Gulf Coast will have to make modifications to handle the increased flow, he said.
“The question then comes: ‘Who pays for those modifications?’ If Canada is wholly reliant on the Gulf Coast, they’re going to price that into the barrel.”
But, if Canada has access to a different market by moving it to Burnaby and shipping it to whomever will pay the highest price, U.S. Gulf Coast refiners will be forced to pay for any upgrades themselves, Birn said.
The important thing, he said, is that if Western Canada producers can get their crude oil to the coast it’s then free to move to the highest price point in the world, whether that’s China, India or some place else.
“There is an obsession about where it goes and I understand that,” he said. “But from an economic standpoint, once it’s [at the coast] it will move to the highest price point.”
In any event, Birn believes Canada will need all three pipelines to handle increased oilsands production in the years ahead — even with Canada’s and Alberta’s efforts to keep a lid on greenhouse gas emissions.
“We think this is going to incent investments in improving oilsands carbon intensity,” he said. “We also think it’ll drive capital preferentially to better oilsands assets. Lower carbon assets are the ones that will be developed.”
Rubin, on the other hand, believes global efforts to fight climate change threaten the very viability of the oilsands and raise questions about the need for any new pipelines, let alone Trans Mountain. If countries follow through on their commitments to keep a lid on emissions, world oil consumption will contract rather than expand, he said.
Rubin noted, for instance, that a number of countries have pledged to ban the sale of gasoline- or diesel-powered cars over the next 20 years. In that scenario, oilsands producers will struggle to compete against lower-cost producers like those in Saudi Arabia and other OPEC countries, he said.
A number of big players have already pulled out of the oilsands, and Rubin argues that if they’re struggling today, “the economics is highly questionable in the future when more and more countries have pledged very significant emission reductions.”
McMillan, president of the producers association, disagrees. He said all credible projections show global demand for oil continuing to grow over the next two decades, and it’s a myth that oilsands producers can’t compete with others around the world. Unlike wells that produce oil early and then decline very quickly, oilsands operations require higher capital costs up front, but they produce for longer periods of time with low operating costs, he said.
“So it’s a different model. I would say it’s mischaracterized if people would call it ‘high-priced energy.’ It’s not.
“The oilsands can compete, head to head, with the world markets today.”
As to why big companies are pulling out of the oilsands, McMillan maintains that it has nothing to do with the viability of the resource.
“Canada is getting a reputation as a country that is unwelcoming of investment,” he said, citing the cancellation of the Northern Gateway and Energy East pipelines as examples.
“It’s not about the resource,” he said. “It’s about our country’s ability to get projects built."