During his visit to the Irving Refinery on August 8th, Prime Minister Stephen Harper stated that the Energy East pipeline was not just about moving Alberta’s energy to markets, but that (the government) would, “(make) sure that Canadians themselves benefit from these projects and from that gain in energy security.” That got me to thinking about energy security, what it means, and how we might benefit (or lose) from what it implies. In what follows, I argue that there are some potential benefits, but there are also some false-economies and pitfalls in terms of delivering energy security with Energy East.
When it comes to energy security, Michael Levi* at the Council on Foreign Relations is one of the world’s leading experts. In his May 2009 paper on The Canadian Oil Sands: Energy Security vs. Climate Change (long one of my favorite sources), Levi identifies a list of 6 security and economic consequences of oil consumption and production and then examines how increased oil sands production and exports to the US would mitigate or exacerbate these impacts. I thought it would be a useful exercise to use a modified version of Levi’s checklist to think about Energy East and its impact on Canadian energy security, so here we go:
1. Oil revenues empower exporting states whose interests often conflict with our national interests.
The trade impacts of Energy East depend on what you view as the alternative scenario, but let’s take the most likely – barrels shipped on Energy East would otherwise be shipped south or east by pipe or rail, and these barrels displace barrels which would otherwise be imported from a similar set of countries as we import from today. At the same time, this would imply an increase in imports into the United States from countries other than Canada to replace the foregone barrels. The countries from which we imported the largest volumes into Ontario, Quebec and the Atlantic provinces over the previous 12 months are shown below:
Certainly there are many points of disagreement between Canada and many countries on that list. However, if you are worried about empowering these nations, you really want to worry about whether Energy East affects their ability to sell oil much more than you want to worry about whether they are selling it to Canadians or to someone else. In that sense, the net effect on world oil demand of Energy East is what matters, and it would be negligible. If the construction of Energy East also does not put significant new supply into the world market, it will not have a material impact on the revenues collected by other oil producing nations either. So, the impact on the empowerment of rogue states is likely a wash.
2. Economic growth is hurt by oil price volatility.
Volatility in any price is costly, so its worth asking whether Energy East would reduce oil price volatility significantly. Assuming there is no further legislation affecting oil trade, Canadian firms (producers, distributors, and refiners) would remain exposed to the world’s oil markets, but that exposure would change. Energy East would allow eastern refiners to purchase oil in western Canada, increasing their market size, and allow western producers to export product from the east coast, or sell to eastern refiners, again increasing market size. It will also aid in reducing the recent disconnect between mid-continent and coastal oil prices, but that’s not really a volatility effect. For western heavy oil and bitumen producers, tidewater access may have an important stabilizing effect as it would greatly expand the market for the product, which has previously been subject to large price swings motivated by refinery or pipeline outages in the midwest. For eastern refiners, it’s not clear that access to 1.1 million barrels of oil by pipeline will have a large impact on volatility, although a wider market will always lead to some reduction in volatility. Over the past 25 years, there has been lower crude price volatility in the mid-continent regions than on the coasts (WTI vs. Brent), so there may be some improvement here, at the margin.
People often confound the heavy-light differential with oil price volatility. Canadian heavy trades at a discount to world prices largely because it is heavy oil and thus less valuable to refiners. Since Canadian light oil has also been discounted to world prices in the last couple of years, the heavy (WCS) discount has looked even larger. However, no matter what you think this pipeline will do, I can promise you that it won’t convert heavy oil to light oil.
3. Economic growth is hurt by wealth transfers resulting from a lack of national infrastructure
Here, we again need an exercise of follow-the-money. Absent Energy East, assume we take a barrel of oil and sell it in the US for the world price, and buy a barrel of oil for world prices on the east coast, perhaps from one of the countries listed above. In terms of wealth transfers (ignoring price differentials), that’s a wash for us and a loss for the US and a gain for the country from which we buy oil on the east coast. If, instead of that trade, we ship the barrel of oil east. The US still ends up out the cost of a barrel of oil which they have to purchase from the world market instead of us, the exporting country ends up with the revenue from a barrel of oil, and Canada ends up with an offsetting revenue and cost. In other words, unless there are significant price differentials, the wealth transfers avoided by Energy East will be small. The project effectively contributes to reducing its own impact here, since its existence will ensure differentials are lower than they would otherwise be. If the price differential would otherwise be larger, then Energy East eliminates a wealth transfer from Canadian producers and taxpayers to mid-western refiners. In that sense, there would be an economic growth impact from eliminating that wealth transfer.
4. Barriers to well-functioning oil markets, including but not restricted to price manipulation by OPEC or by national governments, raise oil prices and hence hurt the economy.
From the perspective of Energy East, Canada is simply electing to sell oil to itself (presumably at world prices) rather than importing at world prices on the east coast and exporting at (eventually, hopefully) world prices in the west. Unless you are supposing that, with Energy East, there will be some sort of domestic consumption priority akin to the crude oil export ban in the US, there is no reason that Canadian crude would be sold at or below its market price to Canadian refiners. If it were, for whatever reason, that would still not constitute a gain for the economy overall, but rather an introduction of an inefficient price signal and a wealth transfer from west to east (a policy which would no doubt bring out the bumper stickers in Alberta again). If what the Prime Minister has in mind when he says energy security is a Canadian oil market isolated from the world market, it will come as a surprise to western producers and to the Irvings who have pledged to build an export terminal in Saint John, and he will need some additional legislation to make it so.
5. Canada is potentially vulnerable to supply disruptions resulting from states’ decisions to withhold oil supplies from world markets or from damage to oil supply chains by nonstate actors or natural disasters.
Peter Terzakian wrote a couple of days ago about Canada’s failure to maintain oil self-sufficiency, and tells us that, “it’s naive to think that global oil disruption can’t happen again.” Sure, it’s possible that an event will lead to a very high temporary value for west-east infrastructure. What should also be mentioned here is that insurance comes at a cost – had we decided in the 1970’s to build significant west-east oil infrastructure and ensure domestic priority, we would have lost out on a winning trade with the US – for 23 out of the past 25 years, oil prices have been higher in the US Midwest than at eastern Canadian ports (adjusted for quality) and the US midwest is closer to Alberta. Yes, we’d have been well-prepared for an oil crisis that has yet to re-emerge, but we would have lost money month after month on insuring ourselves. We should account for any insurance value which is provided by the pipeline, but we should also remember who is underwriting that insurance. If you believe that, in times of crisis, a West-East pipeline will provide eastern refiners at oil below the world price, you are assuming that western producers will sell oil below world prices in times of crisis. That’s not preventing damage – it’s transferring damage.
6. Dependence on oil from unstable regions may necessitate military expenditures to ameliorate risk.
This isn’t as big an issue for Canada as for the US, and certainly not my area of expertise, so I will rely more heavily on Levi here. Levi writes that as a justification for enhancing domestic and North American oil production, “the underlying argument is weak. While U.S. commitments in the Middle East may have strong historical ties to oil, current U.S. commitments are anchored in other fundamental problems. In particular, the long-term challenges posed by transnational terrorism, by Iran’s pursuit of nuclear weapons, and by threats to Israel’s security will require strong U.S. security commitments in the Middle East regardless of whether oil is also a major regional concern.” To apply this to Energy East, you have to go back to the questions above as well. First, as Levi puts it, oil is far from the only reason for US military involvement in oil producing regions. Second, Energy East is unlikely to change the amount of oil imported to North America from these regions. Insofar as our military interests remain reasonably aligned with the US, it’s hard to see how Energy East brings about a material change.
In a 2010 piece discussing the impact of climate change legislation on the US, Levi and Trevor Houser write that, “energy security is notoriously difficult to define and thus serves as the perfect weapon for attacking legislation.” It seems that is largely the case here, albeit as a weapon for supporting pipelines – if you can promise someone that the pipeline will enhance energy security, they are more likely to smile and nod than to ask you to define it, so you can get away with it as a soundbite. Canadians would be much better served to ask what it means when someone says it, especially if that someone is the Prime Minister.
*Since I have borrowed so heavily from Levi in this post, you may be interested in his book Power Surge. Check it out here.
Andrew;
An interesting post, but honestly, its largely rather nebulous socio-political speculation (some of which I am biased to accept). It is devoid of quantifiable facts, such as (by my analysis of publicly available information):
1) Energy East and Line 9 together propose to deliver to eastern Canada an amount of dilbut (1.4M bbl/d) which is twice the current eastern Canadian crude imports (from NEB). Further, new vehicle standards (EnvCda, 2017 & beyond, i.e. before these pipelines flow) should further depress the Canadian demand, making these predominantly export pipelines.
2) Since 93% of eastern Canadian crude imports are light crude (NEB), the added GHG burden on Canadian emissions reduction targets resulting from the extraction, transport, and refining of the dilbit to replace the imported light crude alone will add 19.5M tonnes of GHGs to Canada’s emissions (~80kg/bbl x 667,700bbl/d x 365d) (80kg/bbl is averaged from numbers published by GPC). In pursuit of the Copenhagen commitment, we have so far reduced by less that 40M tonnes/yr, and have 7 years to reduce by another 70M+ tonnes/yr. This action makes the target 19.5M tonnes further away.
3) The other more-than-half of the dilbit destined for these two pipelines that will be exported will generate a further 21.4M tonnes/yr GHG deficit for Canada to overcome.
4) None of the above deals with the petcoke which will accumulate at the Irving refinery (and others that this dilbit is destined for). If it is all used to fuel electrical plants, as the recent Detroit petcoke is being used to fuel New Brunswick’s plants, that will add another 51M tonnes/yr to Canada’s receding target for GHG emissions reductions (100kg/bbl, extracted from PriceofOil.org). That brings the total Canadian GHG emissions deficit due to these two pipelines to as much as 92M tonnes/year (a 13% increase in GHG emissions from where we currently are, rather than the Copenhagen commitment of a further 9% reduction).
5) Since these two pipelines together represent slightly less than 20% of the currently planned pipelines from the tar sands (G&M, Feb. 17 2013), it is not difficult to see why James Hansen called it “game over for the climate”. That criticism applies to Energy East itself more than it applies to KeystoneXL. The entire planned pipeline capacity (7.5M bbl/d) will enable Canada to increase TOTAL WORLD GHG emissions by 16% from current levels.
6) The current TransCanada Mainline (i.e. the one proposed for repurposing as Energy East) carries 4.2Bcf/d of natural gas to eastern Canada (TransCanada.com). It is the only Canadian pipeline that runs from the Western Canadian Sedimentary Basin (WCSB) to eastern Canada. Much is being made of the security of Canadian oil independence, but this pipeline reversal also results in a new Canadian utter dependence on US natural gas pipelines. It also coincides with a diversion of 10Bcf/d of WCSB natural gas to the tar sands to support the bitumen extraction. (That’s right, more water than the city of Toronto, and 2.5 times the natural gas of eastern Canada.) North America’s natural gas demand is projected to increase by 15Bcf/d over the near term horizon, and this increased flow from te WCSB to the tar sands must surely represent a very large and incestuous fraction of that.
It seems to me that the ramifications apparent from a thorough examination of the details surrounding these pipeline projects can lead to much more tangible issues than this Michael Levi template supports.
David
David,
Thanks for reading. A few quick replies.
1) It’s unlikely that the combined Energy East and Line 9 conversion would tranport all dilbit. Primarily, this is because eastern refineries as currently configured can’t run much of it. If the lines are shipping dilbit, it’s because eastern refiners can access imported crude more cheaply than they could via the pipeline, and western producers can fetch more for dilbit by shipping east.
2) It’s not a simple transition – you can’t simply replace light with dilbit. If we wanted to import heavy on the east coast, we could.
3) Depends on your view of the alternative scenario. YOu are assuming that this product would not be produced in the absence of the line. I don’t believe that to be the case, in particular for bitumen projects, for which the economics of crude by rail are much better than for light oil.
4) Yes, petcoke is generated from coking units. See point 3 above.
5) I see your correction above. Yes, and increase in oil sands production to 7.5 million bpd would increase GHGs in a roughly proportional manner. Again, see point 3 above.
6) The reason the project makes sense is that the gas line is undersubsribed because gas is much more cheaply sourced from closer-by. Hard to see how you would increase eastern Canadians’ “energy security” by locking them into paying a higher domestic price for natural gas.
So, overall, you are concerned mostly about GHG impacts. I get that, and have written a lot about it. Thing is, you have to make the case that this line, relative to the most likely alternative, leads to a significant increase in GHG emissions. It’s simply incorrect to assume that, absent this pipline, 1.1mmbbl/d of oil sands would not be produced, and further to assume that some decrease in oil sands production would not be offset by some increases in production from elsewhere.
Andrew
Andrew;
Correction: To item 5, final line (transcription error): “TOTAL WORLD GHG emissions by 16%” is incorrect. Should be “TOTAL WORLD GHG emissions by 2.3%”.
Apologies
/david
Andrew;
Thanks very much for taking the time to make a thoughtful reply, but (yes, there is a but)…
Let me express a fundamental discomfort that I experience with the kind of responses you have given, on grounds that “if you can’t measure it, you don’t understand it”. While I recognize the complexity in the matter which leads you to the uncertain cautions you have given, and I acknowledge that the political vagaries don’t excite me as much as they do you, let me push the matter a little further. We can be fairly certain of some things.
On 1) While you state that Line 9 and Energy East are unlikely to both carry dilbit, I would suggest that together they offer a 1.4 M bbl/d increase in Alberta dilbit shipment capacity, and I don’t see a boom out there in drilling new light crude wells, so I wonder what you expect those pipelines might otherwise do if not carry dilbit. Regardless, it is highly reasonable to argue that those two pipelines enable an increase of 1.4 M bbl/d in dilbit shipments even if you argue that the eastbound pipes may not be carrying only dilbit to their full capacity. And don’t we need disclosure of the truth of all of this anyway? After all, 2 months ago the argument that ’72 rail cars filled with “crude oil” are unlikely to bomb the downtown core of Lac Megantic’ would have been thought a supportable position, but now we know that there is much more to know about under the covers, including that the “crude oil” label on the transport might be, uh, misleading.
2) I am fully aware that not all eastern refineries are capable of refining dilbit, but there are also refinery investment projects already announced, and others which may yet be announced before these pipeline conversions begin, and which can overcome that. And in any event, inadequacy in dilbit refining capacity in eastern Canada just supports the argument that these pipelines will be more for export, but it certainly does not undermine my points regarding the increased Canadian GHG emissions.
3) I think you are slipping into the discredited State Department hand waving argument that ‘oh well (shoulder shrug) it’ll get shipped anyway so why bother scrutinizing for the damage’. What I have done is put a stake in the ground that accounts for all of the current tarsands pipeline plans, and identifies the GHG emissions that will result relative to an alternative in which only light crude is consumed (independent of source). That is, my GHG analysis was only to do with replacing light crude from wherever with the dilbit that these 7.4 M bbl/d of pipelines, originating in the tarsands, will carry. I have also identified how much of that will be Canadian emissions due to a full conversion of eastern Canada from light crude (currently at 93% light crude actually), or as per 1 above, by shipping an equivalent amount to that imported out of the country while calling it ‘energy independence’.
3) Well, I neglected oil-by-rail in my response above because of its lesser significance, but since you raise it, my information indicates that as of today, oil by rail capacity out of Alberta is of order 10’s of thousands of barrels per day (out of the current 3M bbl/d), i.e. a percent or so, and that there are proposals to increase that to perhaps a capacity near that of LIne 9 (300,000 bb/d), the smallest of the proposed Canadian dilbit pipelines. Assuming the proposed 7.4M bbl/d pipeline capacity (Kinder Morgan, Northern Gateway, KeystoneXL, Line 9, Energy East, Enbridge Mainline), current rail capacity plans will supplement those pipelines by only a few percent, and will certainly not replace them. Full replacement would require over 100 trains per day, each of 120 cars or more. And the result would be still greater GHG emissions I suspect than for the pipeline case, not to mention the railway overbuild and maintenance efforts.
4) I stand by my petcoke analysis. In fact an interesting perspective on the stuff is that it is compositionally almost pure carbon. Every tonne of petcoke burned will consume from the atmosphere 2.67 tonnes of atmospheric oxygen in order to contribute 3.67 tonnes of CO2 to the world’s atmosphere. It is the antithesis of carbon capture and storage, which begs the question, “why bother trying to develop CCS? Just burying the petcoke is a good start.” Yes, I understand that it is burned for energy, but that places the energy versus environment conflict in very clear terms. Destroy the oxygen to get energy out of the petcoke, and warm the planet. Faint hope of recapturing the CO2 and reburying it in economically end energy efficient ways, eh?
5) Yes, I assume that this product WILL be produced as part of a tarsands expansion program to 7.4M bbl/d and which has many aspects, including this pipeline. And I see reconsideration of pipeline plans as obstructive to the production of the biyumen. Beyond that, see 3 above and note that the prospects for oil by rail in Canada, at a level of 15 trains per day of upwards from 120 cars each running from Hardisty to Sarnia, New Brunswick, and places in between, are currently trivial. That’s what it would take to replace Energy East alone. Public opposition would match or exceed the pipeline opposition (understatement, eh?).
6) I suggest the project makes economic sense only as long as the boundaries around it are tightly drawn and the “externalities” are ignored (I’ve done my share of business cases). If the increased GHG emissions from leakage at frack sites (which may be huge) was taken as a cost, and the sacred cow of the tarsands program was also challengeable, a reduction in anticipated tarsands demand might make the 4.2 Bfc/d eastern Canadian market very attractive. Face it, the pipeline’s capital cost is absorbed so the operating profit cannot be a problem – apart from a desire for more. In principle, this reduction in natural gas capacity is just as likely to result in increased cost to consumers anyway. Let’s just admit that production cost is not what limits price, it is control of the market. The fact is that the WCSB has 143 Tcf reserve, so it really isn’t that we’ve “got a glut of” fracked gas. We’ve always had a glut of gas. Price is not so much controlled by the volume or the cost of extraction, and reducing shipping capacity will have a noticeable impact on price.
So what is put forth as a number of related but independently assessed activities does not stand up to scrutiny when taken as a whole. Just as the Canadian Western Select discount has as much to do with Canadian operations selling at a discount to their US counterparts, where world price applies, in order to manage their tax and royalty liabilities, there is too much hidden in the cracks of these piece by piece analyses too.
The whole issue of Canadian energy supply is peppered with what I see as disingenuous arguments about keeping energy costs down, a frankly promotes vain hope. What megalomaniac thinks Canada will be permitted to add significantly to the GHG burden of the entire world while everyone else reduces, and while pretending to do so for security of domestic supply reasons and to protect domestic consumers prices? And all while world energy prices rise and domestic suppliers argue the ideology of world price for everyone. (Clearly, we’re not talking about NEP2 here are we?). I get that the geo and socio political aspects of this ignite you, but I think you’ve gotta look at this from 50,000 feet or higher Andrew, without losing the impacts of the details. In any event, thanks for the exchange and the interesting thoughts that triggered it.
BTW: the one valid criticism that you might have made about my assessment is that some of the proposed pipeline capacity will be given over to diluent import. If that turns out to be the case, then my figures would have to be scaled back somewhat (about 30% in some cases). You didn’t make that point, so I will for you, while asking whether “ethical oil” remains as pure and upstanding after it has been diluted with 30% unethical diluent, and whether Canadian energy independence remains unsullied after that?
All the best…
/david
David,
Good discussion. Thanks. Let me attempt to respond in order.
1) Right now, no one has announced a coker addition in Eastern Canada (although I expect Suncor will in short order), and so the quantity of domestic heavy oil consumed is likely to be very small east of Toronto. As a result, I would expect to see some dilbit for export, some lights and synthetics from both light-tight plays and oil sands upgraders. The pipeline adds 1.4 MMbbl/d of new offtake capacity from the west, no dispute there. It just is unlikely that this particular destination will be desirable for dilbit.
2) To assess the GHG emissions impact, you need to ask how much of the product would be shipped absent this pipeline. That’s not something which can be proven, but which is determined by assumption. Yours might be different from mine, and that’s fine. However, if your assumption is that any new oil sands development would not happen unless there were a pipeline, I think you should look harder at pipe vs. rail economics for bitumen.
3) It would not be a railway overbuild if there were no other pipelines built – it would likely be higher GHGs, although the rail industry argues this is not true, especially for shipping bitumen (more to come on that in the weeks to follow). No, it’s not the ideal option, but it’s not an infinitely expensive option either. If you increase transport costs by 10-15/bbl, you would see some production plans fall away, but not all of them.
4) Yes, petcoke is emissions-intensive, dirty fuel. No mystery there. Again, whether petcoke is an energy east issue depends on your view of the alternative. If you believe that no energy east=no oil sands expansion = no other heavy oil production from other places = less petcoke generated, that’s fine. Not my view of the world.
5) Why take industry expansion forecasts at face value? They have over-estimated development even though a time where they underestimated price by a factor of 2. I would not expect to see 7 million bpd in the oil sands any time soon. Certainly not as a result of Energy East.
6) Yes, there is plenty of gas out west. Right now, eastern canadians can source gas for much cheaper from the US, and they are doing so. Right now, gas returns higher revenue when sold to oil sands production than through the TCPL mainline. As a result, the dynamics you see of the pipeline downward spiral are occurring – less volume, higher tolls, lower netbacks, less volume, higher tolls, lower netbacks… The asset is likely to be mothballed as a gas pipeline either way. TCPL has some strategic advantages to suggesting they would keep operating it, but I can’t see how.
On your last point, the pipelines you cite would not be used for diluent backhaul. That will be by different systems (Gateway would have a backhaul pipe, ENB Southern Lights, and rail). I have little to no interest in the Ethical Oil argument, so I won’t bother with that one.
Andrew
Andrew;
Again, thanks for the very useful exchange. And in particular, thanks for the enlightening nuances to the overall story delivered in this last response.
I can acknowledge that the roll out of these plans is unlikely to be as currently presented. Stuff happens. Still, accepting the industries plans as currently offered betrays, by my view, a complete disregard for the climate issue, and all such proposals have no place in public consideration without a framework in place for accepting the realities of the climate issue. Copenhagen is but a tepid start. I am confident that my comments above closely represent the climate ramifications for the plans tabled, so that is as good a starting point for considering a framework as I’ve yet seen. Your comments on the uncertainties ahead are good guidance for keeping abreast as things develop, but I cannot see how a very Canadian middle ground will be a compromise acceptable to the atmosphere.
Glad you didn’t bite on that last point. We don’t need to go there again. Have a great rest of the weekend.
/david