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Matt Slowikowski

Matt Slowikowski

Matt Slowikowski is the founder of the energy analytics blog enernomics.org. He specializes in economic analysis of the energy industry and energy projects.

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The Best Way To Unlock Canada’s Crude Exports

Northern light

Anyone who has ever tried to start a car in -40?C weather knows the challenges of living in the true white north. Oil becomes almost solid, and all the tried and true tips like maintaining your battery, using thinner oil, and block heaters are tested for their true worth. It is in this environment that most of Canada’s new pipelines are to be laid – and the struggles of the north are nowhere better epitomized than by the story of Sam McGee by Robert W. Service:

There are strange things done in the midnight sun by the men who moil for gold
The arctic trails have their secret tales that would make your blood run cold

Since the Yukon gold rush, much has changed in the north: husky sleighs have been replaced with public consultation meetings, snowmobiles, and ice roads. Although much has changed in Canada, the urge to conquer and tame the north has never ceased. However, once a society has become civilized and has felt the easy life, it develops a “not in my backyard” attitude, and further development proves difficult. This has been the situation in Canada, with its attempts to build a new pipeline to advance its oil extraction from Alberta.

Kinder Morgan: The trials for the Trans-Mountain Pipeline expansion

Kinder Morgan’s trans-mountain pipeline (KM TMP) was originally built at a time when the cities of Vancouver, Burnaby, and Victoria were much smaller and younger, and were still looking for development to expand. Now Vancouver has expanded, and almost tripling the capacity (300,000 bpd to 890,000 bpd) of the KM TMP through the city of Burnaby is seen as a huge liability. All three cities (1, 2 and 3) now oppose the expansion, and are looking for ways to derail the project. The chances that this project will be developed with such a swelling of discontent is minimal, even though the pipeline would be a private-funded stimulus for the Canadian economy.

A new, easier way of life is evolving in Canada’s west coast that is more and more incompatible with oil. The final outcome of the expansion is still in front of Canada’s National Energy Board (NEB), and a decision is expected in December.

Although much has been said about money from the U.S. through the Rockefeller Brothers and the Tides Foundation funding anti-pipeline and anti-oil sands groups, these seeds of doubt have landed on fertile soil. Meanwhile in the U.S., oil extraction is happening at a record rate, and was only slightly disturbed by the drop in oil prices in late 2014. New extraction facilities and pipelines have been developed throughout the U.S., while environmentalists have been courted to protest Canadian pipelines.

Keystone XL – The election question

Although Barak Obama stalled and then cancelled the new 750,000 bpd border-crossing Keystone XL, and Hillary Clinton has indicated that Obama’s words are set in stone, Trump has called for a reversal of the Keystone decision. Although these words are rhetoric at this point, there is some recognition in the U.S. that Canadian oil companies and U.S. coal companies have been taking the brunt of Obama’s energy policy. At this point, the chances for Keystone are nil to next-to-nil, though the process brought to light some oil market dynamics.

 

(Click to enlarge)

Northern Gateway: Through the heartland of Canada’s most active native tribes

When a few chiefs from the Haida nation sent letters to Canada’s National Energy Board indicating their support for the Northern Gateway, the Haida nation stripped away their titles, indicating that this was not representative of the whole nation’s stance. A court ruling in July of 2016 reneged the approval of the Northern Gateway pipeline, but also asserted that the current approvals process is fine the way it is. This suggests that the NEB’s decision for the trans-mountain will hold. December will prove to be a contentious month, when the decision comes out.

Energy East – the potential to unite or further sever inter-provincial relations

After its difficulties with Keystone XL, TransCanada has looked to develop another 100-percent Canadian pipeline, the Energy East. This $15 billion 1.1 million bpd line would run through some of the most anti-oil sands provinces, Ontario and Quebec. The plan is for Alberta Oil to be upgraded and refined in refineries currently operating in New Brunswick. TransCanada has developed a different strategy for this line: more collaboration and less confrontation. Its original proposal was presented in both official languages to show comradery with Quebec, and the company has also shown it is willing to change the official route to advance the project. Indeed, TransCanada has already changed the specifics of the route over 100 times to appease local concerns, such as moving around Edmundston, New Brunswick’s water supply. Related: ’Like A Rollercoaster’’ Hyper-Volatile Oil Funds See Popularity Spike

The process is going to take some time, and final arguments aren’t expected to be presented in front of the NEB until at least October 2017. With many of the current projects under question, on the surface, the potential to expand Canada’s oil supply looks severely hampered.

Canada’s oil MacGyver: Enbridge

Over recent years, Enbridge has shown itself to be industrious and creative when it comes to expanding Canada’s oil network. A prime example is the Line 3 replacement program, which did not require a presidential decree, as it was not a new cross-border crossing, but rather replacing and expanding an existing line. The line would run from Alberta through Saskatchewan, North Dakota, Minnesota, and eventually through to Superior, Wisconsin. The NEB approved the replacement and expansion of the pipeline in April, and the company is looking for approval in Minnesota, where approvals are proving to be more difficult. The replacement would expand the capacity by 370,000 bpd to 760,000 bpd and increase the pipe diameter from 34 to 36 inches, at a cost of $7.5 billion. However, approval for further expansion from the edge of Lake Superior at Superior, Wisconsin or Michigan is proving difficult with local groups.

However, the Bakken Pipeline System may prove to be sufficient to transport the extra oil south to Texas, and on August 2, 2016, Enbridge signed on as a partner for the line’s construction. The pipeline system is expected to be completed before the end of the year. Enbridge will own 27.6 percent of the 470,000 bpd line, which will transport crude oil from North Dakota to Texas. Enbridge could connect part of its expanded line 3 to the line to transport its product.

Enbridge still has further tricks up its sleeve with line 83 and the potential reversal of line 26. New capacity from Enbridge is set to be the next pipeline capacity for Canadian oil entering international markets.

Railed-up: avoiding another “Lac Megantic”

Quebec’s Lac Megantic rail disaster proved the perils of shipping oil or bitumen via rail. 2016 has proved to be a difficult year for exporting Canadian oil via rail: exports have fallen year on year for the past two years, from 157,000 bpd for May 2014 to 71,000 bpd for May 2016. This disaster has prompted Transport Canada to phase out the use of the DOT-111 type oil train-wagon, with the TC-117 tank car as the preferred type of oil-rail transport.

The tank car has many enhanced safety features which would have prevented much of Lac Megantic. With these enhanced safety features, oil-by-rail could be the next way to expand Canada’s oil supply, and some analysts are expecting oil-by-rail to double in 2017 and reach 450 000 bpd by 2018. With expanded pipeline capacity in the U.S., oil by rail only needs to travel to the nearest pipeline with spare capacity, rather than to a refinery.

If you can’t move it, refine it

Just north of Edmonton, the first of three phases of a state of the art refinery is expected to come online in 2017 with 50,000 bpd refining capacity. Using some of the world’s heaviest oil, the NWR Sturgeon Refinery will create some of the cleanest diesel, and partially offset its carbon using carbon capture technology. This is Canada’s first new oil refinery in over two decades, and will provide some of the fuel for the heavy machinery that Alberta uses to power its industrial complex. Once all three phases have been installed, the refinery is set to process 150,000 bpd of oil capacity: although not a significant amount, this will have a direct effect on Canada’s balance of payments as less diesel fuel transported cross-border for Alberta.

The option exists for transporting Canada’s oil through the arctic port in Manitoba, however the province has proven that it does not value the Port of Churchill as neither the province nor Ottawa funded the continued operation of the northern port.

The road to Tuk: The cold hard, new northwest passage

There are many communities in the Canadian far North that are only connected to the outside world during the winter, often operating from mid to late December until late March to late April. There is in fact, a natural gas pipeline between the towns of Wrigley and Fort Nielsen, while only an ice road connects the communities to Canada’s road network. Related: The Eagle Ford: Down But Not Out

(Click to enlarge)

With the new road from Inuvik to Tuktoyaktuk being completed next year, and the next leg from Wrigley to Norman Wells set to start around the same time, a road connection along the Mackenzie valley to the Arctic is soon to become a reality. The NEB recently announced that unconventional shale reserves at a realistic 3 percent recovery rate in Canol and Bluefish shale around Norman Wells would be around 4.35 billion barrels of oil. The road to Norman Wells could spark the development of these shale reserves, and could be the spark for long-term development of the Canadian oil and gas industry.

With a population of around 20,000 in the valley and a population that is looking for good jobs and road connections to lower living costs, this path may prove to be the next large oil pipeline development in Canada. Highly prospective land and a collaborative government can prove to be the impetus to drive development in the valley from oil and gas companies.

With the current ice conditions, a ship could traverse the northern waters both through the Bering Strait and through to Baffin Island and Greenland any time after July and before Mid-October. Although this will limit the time that oil products can be sent by ship, Canada has devoted $1.3 billion to build a new icebreaker to help develop the Arctic.

With so many different paths, the Canadian oil industry will in no doubt see slow and steady growth over the coming years. However, another large pipeline will prove challenging against local discord. Energy East may prove an easier sell than the TMP or the Northern Gateway. However, with a population of only around 20,000, the Northern “Arctic Gateway” may prove to be the next large oil pipeline that Canada installs.

As a fellow Canadian, Ontarian, and green energy advocate, I recognize the need to continue developing Canada’s oil industry as the transition to a greener economy continues. Although a purely green-energy economy is the preferred path, at this point, Canada needs a diversified approach: allow for the investment in oil and gas by private companies to pay for further green developments. Canadian companies like TransCanada understand this, and have used oil funds to develop wind farms, hydro facilities, and other green energy projects.

By Matt Slowikowski for Oilprice.com

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Leave a comment
  • GregSS on August 26 2016 said:
    I never understood why they didn't just twin the existing Keystone P/L, it had to have been an easier option to use existing right of ways etc
  • Andrei on October 02 2016 said:
    A country like Norway can extract oil and is a rich civilized country.

    The real problem is that most Canadians do not feel they have a real stake in the oil sands. Rather there is a clear narrative that mostly foreign oil sands owners want to export cheap oil while paying the minimum royalties. And the oil sands cleanup will be left for the next generation to pay.
    Ditto for the pipelines: we would be in for any catastrophic accident cleanup but not for the profits.

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