Alberta government commits $5 billion for pipeline east

EDMONTON – The Alberta government is backing TransCanada’s Energy East pipeline to the tune of $5 billion – the cost of transporting up to 100,000 barrels a day for 20 years.

“We’ve made a commitment to sell barrels of bitumen,” Alberta Energy Minister Ken Hughes said in an interview. “100,000 a day, for 20 years. By the time this pipeline gets built, we’ll have access to some four times that available to be used.”

“We’re not committing $5 billion,” explains Richard Dixon, Executive Director of the Centre for Applied Business Research in Energy and the Environment.  “We’re committing to shipping 100,000 barrels a day.”

“The companies go and they get subscriptions, and the subscriptions have to be usually 20 to 30-year subscriptions,” Dixon adds. “So, in other words, you’re going to guarantee that I’m going to supply the pipeline company … 100,000 barrels a day.” Dixon says, once the company can account for at least 60-70 per cent of that pipeline’s capacity, that becomes part of its application to the government to get permission to build the pipeline.

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The commitment has many feeling optimistic about the future of the pipeline, which would carry bitumen from the Alberta oilsands to refineries in Quebec and New Brunswick.

“This is the first tangible sign we’ve seen of real dollars behind the proposed west east pipeline,” said Saint John Mayor Mel Norton.

The proposal would convert a 3,000-kilometre natural gas pipeline to carry bitumen, and extend it an additional 1,400 kilometres to Saint John. According to TransCanada’s website the pipeline’s total capacity would be between 500,000 and 800,000 barrels a day.

“That’s a significant amount of the pipe that they’re committing to reserve,” said New Brunswick Energy Minister Craig Leonard. “They see the economic benefits of a west east pipeline and we certainly hope the vast majority of the producers see it in the same manner.”

“It’s absolutely critical that we have access to global markets,” Hughes said. “We’ve been well served by having the United States as our single market for pretty well all of our existence as a province. Now we’re at a stage where the United States is becoming increasingly self-sufficient, and we need to find other markets, and so we need to get to the ocean where we can sell our product at world price. That’s the only way we’ll get the best price for our product.”

But the $5 billion commitment doesn’t mean the pipeline is a sure thing. TransCanada may not even submit an application with the National Energy Board before end of year. Now, the company has 60 days to go through the commitments it has received to gauge long-term interest in the pipeline.

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TransCanada’s “open season” for long-term commitments ran from April 15 to June 17. The company wouldn’t comment on the Alberta government’s commitment – “from our perspective, those talks are confidential,” said spokesperson Grady Semmens.

“They don’t build pipelines and hope to fill them,” said John Herron, President of the Atlantica Centre for Energy. “They need indications that that pipeline capacity will be paid for, and the Alberta government has sent a signal that they want to be part of that equation.”

Herron said Alberta’s commitment sends a message that it’s vital to have a diversified market. For the most part, he explains, Canada is constrained to one customer: the United States, and that means Canada is forced to sell its product at a huge discount.

“The rate of return they would get in royalties is considerably less today than it would be if they had access to international markets,” Herron said.

Alberta Premier Alison Redford met with her New Brunswick counterpart Premier David Alward last month, and toured Saint John’s Irving Oil Refinery. She did not mention Alberta was making a financial commitment to the pipeline – and had signed a memorandum of understanding to that effect in March.

“Depending upon approval to construct the pipeline and the [Alberta Petroleum Marketing] Commission’s final capacity commitment, under the take-or-pay obligation, the Commission would pay up to approximately $5 billion in tolls over the 20 year term,” the Alberta Energy Dept. said in an annual report released last week.
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Alberta gets some of its royalties in crude instead of cash as part of the province’s Bitumen Royalty in Kind program. It’s using some of these barrels to back a refinery project near Edmonton – the province’s first in decades. The barrels promised to TransCanada would come from the same pool.

“It is a strategic move for the province, they want to show their commitment in trying to find access to new markets,” said Dinara Millington, senior research director at the Canadian Energy Research Institute. If it lifts the price of Alberta oil, the province gets more money on the barrels it sells and more taxes from more prosperous companies.

“Whether it makes fiscal sense, it’s too early to tell.”

Alberta’s NDP is also weighing the risks of this commitment with the rewards.

“This is an important pipeline for Alberta and moving our resources to market,” says NDP MLA David Eggen. “We just want to make sure that we get a fair return for our energy resources and a fair return for taxpayer investment to the pipeline.”

With files from Tino Makris