Canadian Pipelines: Where Do They Go From Here?


Keystone and the Northern Gateway: major oil and gas projects that would serve two uniquely diverse trading partners, and both with the potential of having a massive economic impact on Canada’s economic core for generations to come.

As abundantly documented, the oil and gas industry has been a source of controversy for decades. On the one hand are some very influential groups who oppose the very existence of such an industry, based primarily on safety and environmental concerns. But the reality is that other forms of energy, renewables or otherwise, remains far away from being able to adequately withstand the massive energy requirements in today’s demanding international society. Throughout it all, the Canadian oil and gas industry has set international standards by which other nations aspire to achieve.

Two of the more substantial projects that have been held up in various forms of wrangling are the TransCanada Keystone XL project and the Enbridge Northern Gateway Pipelines Project, albeit for different reasons.

There stands to be increased competition by 2014, when Enbridge of Calgary and Enterprise Products Partners LP of Houston plan on building pipelines with the ability to distribute in excess of 800,000 barrels of crude oil each day from Canada to refineries on the Gulf Coast. These projects won’t have to deal with the same U.S. government meddling because the cross-border portions of their pipelines have already been built.

Keystone is a massive pipeline system project designed to transport synthetic crude oil and diluted bitumen from the Athabasca Oil Sands in northeastern Alberta to a number of destinations in the United States, including high-capacity refineries in Illinois. Despite assertions to the contrary, the biggest obstacle has not been accentuated by genuine concern for safety and the environment; it’s all about political gamesmanship, with the United States gearing up for a federal election this November. The part of the pipeline that doesn’t require government approval is already a go, which means the rest of it will assuredly be built.

As it now stands, U.S. President Barack Obama has delayed talks on Keystone – the section requiring American government approval. The project itself has gone through three separate environmental impact statements, all confirming it’s a good project without significant side effects. After some last-minute intense lobbying on the part of Obama to several wavering Democrats, the U.S. Senate narrowly rejected a Republican amendment to a transportation funding bill that would have got things kick-started. Senate rules require 60 votes to pass an amendment in the U.S. Only 56 votes were cast in favour.

Obama denied the U.S. State Department permit for the nearly 2,700-kilometre pipeline from Hardisty, Alberta, to the U.S. Gulf Coast back in January. An amendment brought forth by North Dakota Republican Senator John Hoeven would have fast-tracked construction of the project and deemed it in compliance with necessary environmental regulations. But it’s become obvious this delay has nothing to do with environmental concerns and everything to do with politics, which means it will be resolved – eventually.

As previously reported in CBJ and elsewhere, Republican presidential contenders Mitt Romney and Newt Gingrich said Obama’s stance on Keystone would cost thousands of construction jobs and lead to higher energy prices. According to TransCanada, it’s estimated the Keystone pipeline project would create about 20,000 temporary construction jobs. The number of employees needed to operate the pipeline could range from as low as 20 to as many as several hundred.
Brenda Kenny is president and CEO of the Canadian Energy Pipeline Association. During an interview from her Calgary office, Kenny told CBJ that with the issue of safety having been clearly addressed, it leaves few other options outside of political wrangling.

“It is state of the art engineering and an extremely safe design,” Kenny says of the pipeline infrastructure. “I think that anyone who felt they wanted to make a decision could safely do so and know the evidence has been thoroughly tested several times over.”

When looking purely at the logic of the job creation and the fact the U.S. imports a very large portion of its crude oil needs, it stands to reason this and other similar projects will need to move forward. The world’s dependence on fossil fuels will remain high for many more years, even with aggressive policy action towards renewables, something Kenny says we must all come to properly understand.

“I think logic says this is an important piece of infrastructure to connect to a solid trade partner with transparent environmental regulation,” she says. “Clearly decision-making in the political realm is not always logical as obviously was indicated during the debate on Keystone. There’s a group of individuals in the U.S. who have a mythological view of the pace of change and suggest that being off fossil fuels within even two years is plausible. That, in my view, is a strategy of hope rather than practicality.”

Kenny also is quick to defend many of the large CEPA corporate members who are also heavily invested in renewables.

“Look at TransCanada as a corporation,” Kenny advises. “They are into a variety of renewables as well as coal fire generation and Bruce Nuclear; large energy companies who are moving aggressively towards alternatives. But in the meantime, logic would suggest this is a very good project at a very good time.”

There is a deeply ingrained suspicion – and at times outright paranoia – by a percentage of the general population when it comes to energy studies. The desire is for a much more rapid transition towards alternatives. But none of the alternative options have proven to be an effective replacement with respect to quantitative needs. The basis for distrust seems most often centred around concerns of vested interests by those conducting the studies as opposed to practical things such as capital turnover rates and energy pricing for consumers. It’s a perception that is an ongoing battle for those in the oil and gas industry and has become an accepted norm.

Educating – the Key to Better Understanding

“We have a gap in energy literacy,” Kenny states very matter-of-factly. “But in fairness, we have a bit of a gap on government policy towards change. I think the main feature of the politicization of Keystone was a very large frustration on the part of the environmental community that despite hopes Obama would turn the page such things as coal fire generation which is of course the number one cause of omissions in the U.S. that very little was actually achieved in light of the very toxic politics playing out in their lawmaker forums.”

Due to immense frustration from both sides, it would seem the implementation of a Canadian energy strategy is something that would be embraced by those in the industry and environmental groups. It would help provide a better idea of where this country intends to go as we develop and capitalize our endowment of natural resources. Hopefully, that in turn would lead to proceeds being spent towards lower emissions technologies and further job creation.

Another key aspect facing this industry is the need to diversify. As of now, about 99 per cent of Canadian oil exports head to the United States. While the U.S. has always been a loyal trading partner, a basic rule of thumb is that you never put all your eggs in one basket. The development of the Enbridge Northern Gateway Pipelines project would go a long away in helping to extricate Canada from such a position. The project would represent about 580,000 barrels of oil per day and would provide a strong green-field option aimed towards trade with Asia.

“It’s now in the midst of a regulatory process, which at this point in time is largely engaging local communities on opinion and later it will turn to actual hard evidence and science-based discovery of whether or not concerns raised have been addressed, so the decision-making time frame is out there,” Kenny notes.

Once all the regulatory processes have been seen to their completion, the next step would be to go to the federal government for its final decision. After the March 29 budget, it was announced that final decisions – either aye or nay – will be made within a two-year time span. No more endless debates and stonewalling. If it’s viable and safe, it will go forward. If it falls short, the project is terminated.

“Keep in mind that we have a current facility that has been operating safely for almost 60 years – the TransMountain Pipeline System which has trade routes through the Burrard Inlet and out to sea and some of that crude currently goes to Asia; much of it goes to the U.S,” Kenny mentions.

“What I think we’re really looking for in Canada is that the current production rates of all of our oil are set to grow,” she continues. “Some would debate whether that ends up at four or five million (barrels) a day but in any event we will need more pipeline capacity and frankly whether that is crude oil or diluted bitumen or refined products it still needs a tube of steel to carry it safely to its destination on a most economic method.”

The opportunity with Asia will provide Canada a much stronger bargaining position with a wider variety of international markets being pursued with Canadian crude currently being discounted considerably.

“I look at it as a Canadian and say every day we’re writing a cheque to the Americans anywhere in the area from $20 to $40 million depending on the discount rate that day,” Kenny says. “I’d personally rather be investing that in Canada rather than a free pass to U.S. buyers. Canadians need to get their heads around this being our endowment, our natural resources being developed with the help and support of foreign direct investment in private companies in a very efficient, effective way.”

There’s a lot at stake in terms of how the industry continues to be developed and how we gain better competition for our products. One of the main obstacles that continually seem to clog the process is the habit of being in repeated déjà vu situations whereby the regulatory decision is the time-limiting factor on these projects.

“Ultimately, it would be most beneficial for Canada and for commercial choices to imagine a world where the regulatory decision-making is actually not a rate-determining step,” Kenny notes. “It would be an important part of the process but such that there’s a decision a year or two in advance of when you absolutely need it commercially. That would allow you to triage with your shippers the actual right time to proceed.”

It would also negate the risk of missing important windows of timing in the market. Pipelines are high-cost initial investments, but those investments are depreciated over 30 years or more. Timing is vitally important with the need to coordinate the in-service dates and match them with increased production rates and where customers are receiving it all at the end of the chain into refineries or their markets if it’s gas. Kenny specifically cites one such prime example.

“As we saw with the Mackenzie Pipeline, we unfortunately in this go-around missed an important commercial window,” Kenny states. “It may be that it can still proceed with some second look at the overall economics. But if it had been approved in a timeframe that was more like three years rather than six years, it may well have been a marker that laid down an energy highway that Canadians could have taken advantage of for half a century or more. Unfortunately, that becomes a big problem now.”

The Mackenzie Valley Pipeline is a natural gas initiative aimed at transporting gas from the Beaufort Sea through Canada’s Northwest Territories and pipelines in northern Alberta. The original concept for the project was brought forth more than 30 years ago, but was mothballed for a number of legal reasons. Eight years ago it was resurrected under an amended plan to move gas through the Arctic. It’s been estimated there could be as much as 2 trillion cubic metres of natural gas reserves in the region.

The Northern Gateway project continues to make its way through the regulatory process but further discussions are anticipated with a number of First Nations communities, who stand in opposition. But as part of Finance Minister Jim Flaherty’s budget, that project is also covered by the new two-year rule, so a decision on it will come much sooner than expected prior to the budget reading. Keystone had been moving along smoothly during most of the process, but it was the main objections came near the end – not the beginning.

“The myth-making came near the end,” Kenny declares. “As example, the allegation that diluted bitumen is somehow more corrosive or abrasive in pipelines – something that was put out by the Natural Resource Defence Council. But the allegation was not meant to be truthful; the allegation was meant to create doubt and fear, and that’s the strategy.”

Regulatory Reform

The one thing all sides seem to agree upon is the need for more effective regulatory reform. After the budget, the timelines issue has been resolved, once and for all. CEPA views this as essential because it’s otherwise not possible to adequately look at financing and procurement and market development for a large project that might have been decided in two years or it might have been decided in eight years. The other key factor is best-place regulator, which includes a process that is done by a robust, credible regulator in a way that combines the features that you are looking at getting answers for, including environmental assessment.

“What we don’t support is one arm of the government doing an environmental assessment, and a different arm doing safety analysis and a third arm doing economic analysis,” Kenny remarks. “If you do that you see fractioning of environment, social and economic interests that completely breaks down the objective of sustainable development, which is integrated decision-making.”

Safety is the utmost objective on the agenda for CEPA and Kenny welcomes hard questions coming from the general public, because they have a right to know what is real and what is fabricated.

“Canadian pipelines are among the safest in the world when we benchmark against the U.S. and Europe. That’s borne out of the fact Canada is blessed with a number of very robust large pipeline companies; that is their profession and that’s what they do. They really know the space well and they address and advance technologies very aggressively. Our goal is zero incidents.”

It might be an easy assumption to think that an older pipeline facility would be more prone to safety concerns, but Kenny used the analogy of comparing an older home to that of a new one. If an older home is properly maintained, it can be just as safe and just and comfortable as a new one. There have been very few problems with the older pipelines thanks to continued maintenance and that includes looking at the interior infrastructure.

“It’s a bit like going to your doctor for an MRI,” she says a comparative. “You may not need intervention right away but you want to track what’s going on and decide when you need maintenance, and we do the same with pipelines.”

In Alberta there is a carbon tax that is designed to fund scientific studies into clean air, soil and water technology studies. Kenny knows first-hand about this initiative, serving on the board of directors for the Climate Change and Emissions Management Corporation, which was set up as a not-for-profit arms-length organization to reinvest that carbon tax. Virtually all of the carbon tax goes towards funding research of new technologies with the objectives of reducing emissions, greening production and looking for alternatives as well as adaptation.

Alberta Carbon Tax

“In Alberta, as with other provinces, we have a large agricultural community and we need to know that we’re paying attention if there is climate change, as to what’s going to happen for those crops,” Kenny says. “I think the numbers we’ve invested are about $250 million from that carbon tax and leveraged it up to over $1 billion in investment. That’s apart from the $2 billion Alberta has invested in the CCS projects it’s addressing, so it’s a $3 billion investment so far in green energy.

The carbon tax is simple, clear and direct and provides substantial funding to ensure greening technology research continues to remain at the forefront. But of course, doing anything right costs money.

“Most of the analysts who look at carbon tax as a tool to stimulate behaviour change will acknowledge your carbon tax level would need to be up at $60 or $80 a ton to stimulate that kind of behaviour change. At the consumer level, the problem is I don’t think our society is quite ready to face the price shock at the gasoline pumps that comes with that, so we have a lot of work to do socially on how we stimulate advanced policies that would stimulate change.”

For now, policies such as those in Alberta are quite efficient. It involves a process of tracking down the large emitters. The current penalty is $15 per tonne and the plan is to raise it to $25 per tonne, with even further increases a possibility. The investments are leveraged and it all goes towards green technologies.

On a smaller scale, British Columbia and Quebec have also dabbled with taxation revenues going towards green technologies, but Alberta is certainly the frontrunner.

Expansion to the East

Intense focus has been placed on further pipeline development into the United States and more recently Asia, with China at the top of the list. But recently there have also been more questions raised about the possibility of more development heading to eastern Canada, and specifically the Maritimes. Oil prices have remained high and there has been a voice coming from the east about further expansion there.

“I know Enbridge has a pipeline in Ontario and Quebec that they have applied to the National Energy Board to reverse to bring western crude into refineries in Montreal eventually, and there’s no reason why that couldn’t be continued further on to connect with say Irving Refineries in New Brunswick,” Kenny says. “I think eastern Canadians should rest assured that they are well served with a variety of choices.”

“By far the safest and most economic mode of transport is the pipeline, which by the way is run about a metre below the ground,” says Kenny. “Many people think these transmission lines are above ground, but that’s only in rare circumstances where there’s unusual topography like in northern Alaska. We know what we’re doing, the proven safety is world class and the ability to serve the needs of all Canadians is there.”