January 9, 2012 4:07 am

Eastern Canada could be gateway for Alberta oil if Keystone pipeline gets nixed

EDMONTON – For Alberta’s oil industry, here’s the perfect storm.

The Obama administration nixes the proposed Keystone pipeline south to the U.S. Gulf Coast after the 2012 elections and the Gateway pipeline to the West Coast gets bogged down for years in messy hearings.

How then does all the oilsands bitumen get to market?

Look East, say some high-profile public policy experts.

Sending more Alberta crude to eastern refineries, then shipping it across the Atlantic – where there is already lots of tanker traffic – could mean better prices for the product. From the East Coast, tankers could carry the oil to booming Asian markets through the Panama Canal.

Even if the oil wasn’t sent offshore, it could replace the millions of barrels that Eastern Canada relies on from Venezuela and the North Sea.

But Jack Mintz, head of the School of Public Policy at the University of Calgary, says moving the oil East doesn’t make much economic sense.

With production slated to increase over the next three years to three million barrels a day from about 1.7 million, everyone agrees that Alberta needs to diversify its market for bitumen beyond its sole export customer, the U.S. Midwest.

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“Obviously, the most economic route to Asia is via the West Coast, but what if that gets delayed so long that customers look elsewhere?” asks Eddie Goldenberg, who noted that the on-again-off-again Mackenzie Valley proposed pipeline in the North took 10 years to review.

India and China, the two largest emerging economies, have massive demand for oil. They aren’t sitting around waiting for public hearings on new pipelines to be completed but are looking for sources of oil now, says Goldenberg, a former adviser to Jean Chretien. Canada got a wake-up call this fall when the Obama administration delayed approval to the Keystone pipeline that would take another 800,000 barrels a day from the oilsands in Alberta to U.S. refineries.

“Everyone agrees we should not put all our eggs in the basket of one customer,” says Goldenberg, now a lawyer at Bennett Jones, a Calgary-based law firm.

It’s not just about market access, but also about price. Right now, Alberta bitumen sells into the U.S. Midwest at $10 to $20 a barrel less than the world price for oil, partly because a glut of oil there is pushing the price down.

That price disparity is costing Canada’s economy billions, and government’s huge amounts in lost royalties. A new study from the University of Calgary says Canada would gain $131 billion in gross domestic product from 2016 to 2030 if Alberta crude gets sold to new markets at the world price. That underscores the importance of pipeline expansion.

The only way to get that world price is to give Alberta oilsands products easy access to overseas markets, says Frank McKenna, former ambassador to the U.S. and former premier of New Brunswick.

Even if the western Gateway pipeline, the fastest route to the Coast and on to China, gets approved, Canada also needs new pipeline capacity to Eastern Canada to truly diversify its markets and get the best price, he says.

He points out that Canada’s largest refinery, the Irving refinery in Saint John, N.B., already handles heavy oil and could be modified to upgrade bitumen from the oilsands.

History and economics may work against shipping more oilsands product East. For years, Eastern Canada has relied on foreign oil that has been cheaper to import via tankers into Montreal and the East Coast. Meanwhile, Alberta has built its marketing on the North-South corridor into the lucrative and large U.S. market. A decade ago, U.S. companies began to modify refineries on the U.S. Gulf coast to take Alberta bitumen for upgrading.

But there are signs of change, and Enbridge wants to ship more Alberta crude to the East.

During the years of the national energy program, at the request of the government, Enbridge built a pipeline (Line 9) from Sarnia, Ont., to Montreal refineries to take western oil to the East. These days, that line carries African and Middle Eastern crude from Montreal to Sarnia.

Enbridge wants to reverse Line 9 to take western light crude oil to refineries in Ontario at Nanticoke. That could include synthetic crude from the oilsands.

Enbridge can deliver Alberta crude for up to $10 to $15 a barrel cheaper than East Coast refineries can buy offshore oil. The pipeline reversal, which must be approved by the National Energy Board, would bring an additional 150,000 barrels a day from the West.

There’s also been talk of extending that route closer to an Atlantic port by reversing a line from Montreal to the coast at Portland, Maine.

Mintz, an influential voice in Calgary’s oilpatch, says that’s interesting but not very helpful.

Given the small scale of the Enbridge pipeline reversal, it’s only a small part of the solution to meet demand from Asia.

“Our advantage is go to the West,” says Mintz, who is optimistic Gateway will go ahead.

That comment is echoed by Greg Stringham at the Canadian Association of Petroleum Producers.

“Nothing is off the table, but it’s an extremely long way around,” Stringham says of exporting oil to Asia via the East Coast. “Our strategic advantage is off the West Coast.”

Also, Mintz is convinced the price discount on bitumen sold into the U.S. won’t last long, so the economic advantage of shipping Alberta product East will be short-lived.

“If they (the U.S.) really did block us, I think we’d be looking at lots of different solutions and an East Coast solution might be one of them,” says Mintz, noting that there’s even been talk of moving oil through the port at Churchill, Man.

There are financial drawbacks to an East Coast route, primarily because of transportation costs to Asia. Exporting from the East would put Alberta in competition with Mexico and Venezuela, which would be closer to Asian markets, Mintz says.

There are ways to ship bigger volumes of western oil to the East: expand existing East-West pipelines or taking over a natural gas pipeline run by TransCanada Pipeline from Alberta to Toronto. It could carry about 600,000 barrels a day.

That’s technically feasible, but that pipeline is still carrying about five billion cubic feet of gas to Toronto, says Brenda Kenny, president and CEO of the Canadian Energy Pipeline Association in Calgary.

“So we’d have to think about that and how to switch it out and what to do with the gas,” Kenny says.

More capacity could be added along existing pipeline corridors, she says. Mostly, the decision depends on the demands of the market, she added.

“The market will find a way to meet the needs,” Kenny says, though public policy can occasionally influence decisions.

Mintz doesn’t underestimate the environmental issues of getting the Gateway pipeline through B.C. The issue of tanker traffic, long resolved on the East Coast, will be hard fought in B.C.

“The politics of going East are good and the economics are lousy,” Mintz notes.

But getting Alberta crude to the Atlantic may also get a rough ride. Environmentalists are already lined up to oppose the expansion at the National Energy Board hearings on Line 9 in January. 

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