Are Canada’s big oil pipeline projects needed?

Author: Stefan Baumgarten


Pipeline construction in Alberta
A former government official pushes private investment for three lines tied to Alberta's oil sands, while others champion climate promises. (Global Warming Images/REX/Shutterstock)

TORONTO (ICIS)--Canadian experts disagreed this week over the need for additional pipeline capacities to transport growing production from the oil sands in Alberta province to markets.

Joe Oliver, a former finance minister, argued that three planned pipeline projects Energy East, Northern Gateway, and Trans Mountain are the best way to drive the country’s GDP growth going forward, and to get a better price for Canada’s oil.

But officials at an Alberta-based research institute counter that new pipelines are not needed as massive oil sands expansions are not compatible with Canada’s climate ambitions. Parkland Institute notes that Canada pledged in last December's conference in Paris to reduce its greenhouse gas emissions to 30% below 2005 levels by 2030.

However, Oliver argues that the new pipelines would open up new export markets and reduce Canada’s dependence on the US as the largest market for its oil.

Canada’s economy is losing billions of dollars because of the unfavourable oil price differential for Canadian crude on the US domestic market vis-à-vis world market prices. The pipelines would help export Canada’s oil, at better prices, elsewhere, he said.

"As long as the US is the only export market for Canadian oil, this sector is dependent on a market that is itself producing more and more oil," Oliver said in a research paper.Joe Oliver, House of Commons on Parliament Hill, Ottawa, Canada - 12 May 2014 (Canadian Press/REX/Shutterstock)

Oliver, a former federal finance and natural resources minister under a conservative government that was ousted last year, is now senior fellow at Montreal-based L'Institut économique de Montréal (IEDM). His paper was co-authored by the economic institute's research director.

Importantly, the oil pipeline projects, totaling an estimated Canadian dollar (C$) $34bn ($27bn), are private investments, Oliver said.

As such, their impact would be much more meaningful in stimulating the economy than the public investments financed by deficits that the incumbent Liberal government under Prime Minister Justin Trudeau is proposing, Oliver said. For the current fiscal year alone, Canada’s projected budget deficit is almost C$30bn.

Public investments, Oliver said, are mostly aimed at fulfilling promises of job creation, and their purpose is first and foremost political.

Public infrastructure investment projects regularly run into difficulties, such as cost overruns and delays – at the expense of taxpayers. He added that the economic activity generated by private investment contributes to government tax revenue.

Furthermore, when government competes less with the private sector in the recruitment of workers and the use of capital, private investment takes over, Oliver said. "Indeed, economic research shows that public spending cuts have positive effects on economic growth."

Despite relatively low oil prices and setbacks such as last month’s devastating wildfires in Alberta’s Fort McMurray oil sands region, the province’s oil sands production is projected to grow in coming years. Some studies project output to nearly double.

However, in its own study this week, Parkland Institute argues that Canada could not double oil sands production, along with rising emissions, if it is serious about meeting its climate change commitments.

The institute also disagreed with claims that new pipelines would significantly increase the prices Canada receives for its oil.

Rather, researchers said, Canada’s primary oil export, Western Canada Select (WCS), is a lower quality grade of oil that requires more effort to refine and comes with higher transportation costs than the West Texas Intermediate (WTI) benchmark.

Canadian oil therefore commands a lower price, and this discount will occur regardless of whether the oil is sold in the US or to international markets in Europe or Asia, the institute said.

A group of protesters gathers outside the Northern Gateway hearings in Prince Rupert, B.C. on December 10th 2012 (JONATHAN HAYWARD/REX/Shutterstock)
Protesters gather outside Northern Gateway hearings in Prince Rupert, British Columbia, on 10 December 2012. (JONATHAN HAYWARD/REX/Shutterstock)

All three pipeline projects have run into opposition from environmental and other groups.

However, Canada’s federal energy regulator last month approved Kinder Morgan’s proposed massive expansion of its Trans Mountain pipeline in western Canada subject to 157 conditions.

Capacity of the Trans Mountain pipeline from Edmonton in Alberta to an export terminal in Burnaby, near Vancouver, would be nearly tripled to 890,000 bbl/day.

Meanwhile, Energy East would ship oil from Alberta to markets in eastern Canada and to an export terminal in New Brunswick province, and Northern Gateway would run from Alberta to an export terminal in northern British Columbia.

There are also plans for a big natural gas pipeline project from the Mackenzie Delta in Canada’s Northwest Territories to Alberta. However, that project is not likely to be realised in the near term, given the market outlook for natural gas in North America.

($1 = C$1.27)

INSET IMAGE: Joe Oliver, House of Commons on Parliament Hill, Ottawa, Canada - 12 May 2014 (Canadian Press/REX/Shutterstock)