From Nationalism to Capitalism
A couple of weeks ago TransCanada formally filed their Energy East pipeline application – all 30,000 pages. For those who like reuse and recycling – and not just paper – this is your project. Energy East aims to repurpose the now-dormant portion of TransCanada’s 55 year-old natural gas Mainline into a cross-country oil artery.
It’s about time. We’ve only been waiting since the Diefenbaker era for a made-in-Canada, cross-country pipeline that keeps more of the value of our oily energy systems contained inside our borders. Besides leaking refining value into our southern neighbour, we have also been forfeiting energy sovereignty. Any country reliant on insecure oil supplies from corrupt, war-torn and authoritarian producers must shake their head when they see that Canada is only energy independent in paper barrels and not in any liquid sense. Most of Western Canada’s production heads straight south to the United States; not much goes east of Ontario.
Energy East proposes to move Canadian, and North Dakotan, crude oil to Eastern refiners, including those in Montreal, Quebec City and Saint John. Aside from the virtues of retaining value and enhancing North American energy security, Energy East will – for the first time – be able to take Canadian oil to Canadian tidewater ports. Repatriating Canadian oil is important, because domestic producers can also have direct access to higher value international markets without experiencing deep discounts realized by going through US infrastructure. In the absence of Energy East, the Canadian oil supply line will continue to forfeit value – including the unrealized potential of higher income taxes and royalties – to American pipelines, railroads, refineries and ports.
North American oil supply, from end-to-end is very dynamic right now. In 2013, Quebec and Atlantic refiners imported over 660,000 B/d of foreign crude, only 15% of which was from the United States. Remarkably, the barrel accounting has now changed significantly: Today almost 50% of the imports east of Ontario are being sourced from the prolific US oil boom. For Eastern Canada there are two issues to consider in light of this dramatic change. First, Eastern Canada is now becoming heavily dependent on American tight oil. Although this new, politically friendly and stable source of oil is surging in production, there is no guarantee it will continue to flow prolifically to Canadians in the future. Some analysts suggest that US tight oil supply may start declining in the early part of the next decade. We won’t know until we get there. But why wait for the answer? Energy East will be able to deliver oil for many decades, and if needed, the Western provinces can supply all of confederation with certainty for that long and beyond.
The second issue is that Eastern refiners are now receiving more than half of their oil by rail or US Gulf Coast tanker. But these deliveries come at a cost. Based on the tolls released in the Energy East NEB filing – delivering crude oil to the east coast by Energy East would save $10.00/B over rail; savings compared to US Gulf tanker shipments would be of a similar magnitude. Lower transportation costs will benefit both Canadian producers and Eastern refiners. Note that for Eastern refiners, a lack of competitiveness has taken prisoners: Two Eastern refineries – Imperial Dartmouth and Shell Montreal – have been shut down since 2010.
There are many reasons, from nationalism to capitalism, that make Energy East an important Canadian infrastructure project. Add one more thing to the value-add list: Energy East recycles the Mainline.
TransCanada’s cross-country natural gas pipe, the renowned Mainline, is now running half the volumes it used to in its heyday. The math is such that the lower the Mainline’s capacity utilization, the higher the cost to transport a thousand cubic feet of Canadian natural gas from one end of the country to the other. That’s a big reason why end-of-pipe producers in places like Northeast BC can no longer compete with US shale gas in Eastern markets. Converting part of the Mainline to oil – as is proposed in Energy East – will put more of the relic pipe to use and help offset the high cost of transporting Canadian natural gas. So it’s a bonus: What’s good for the nation’s oil supply is also good for its natural gas.