Alberta’s oil is selling these days at a discount to mid-continent oil (North Dakota, Colorado etc.), which is selling at a discount to oil West Texas Intermediate, which is selling at a discount to North Sea Brent. The inability of Alberta producers to get close to world price for their oil has turned out to be one of the great management and regulatory errors of recent times in Canada’s energy industry. The Alberta current oil discount is reminiscent of Alberta natural gas discount from the 1980s and 1990s.
Canada’s eastern seaboard refineries are suffering from the disadvantage of not being able to access the discounted crude now available on pipeline routes with access to North America’s newly productive oil fields. Several refineries in Montreal have closed and the future of several eastern refineries is in doubt.
Pressure from Alberta producers to get their oil out and pressure from eastern refineries to get access to discounted crude creates a risk that Canadian taxpayers might be railroaded into subsidizing extensions of the continental pipeline network.
One of the most attractive options to get some of Alberta’s oil to the sea is to convert part of the TransCanada Pipelines Mainline gas system to transport oil.
TransCanada is a top tier international energy company but its management of the Mainline system has been serious deficient. Since it went into service in 1958, Mainline still has a very large portion of the original capital left undepreciated. First, the Alliance-Vector pipeline and more recently the shale gas revolution have pushed Mainline toward obsolescence. Alliance-Vector provides more efficient transportation service for any gas that does need to move from BC and Alberta to markets in Chicago and points east, such as the Dawn Hub in Ontario. With vast amounts of production available in eastern North America, there is a declining need to carry gas from Alberta to the east. As the capacity utilization of Mainline declines, tolls on remaining users are rising. The economic burden of the under-utilized capacity, if unresolved, threatens the service to customers in Northern Ontario who are dependent on Mainline. (The problems with Mainline were addressed previously on this site here.)
Converting part of Mainline to carry oil has the potential to salvage significant value from the system and might help preserve service to gas customers captive of Mainline. Eastern oil needs now met by tankers could be displaced by Alberta oil, potentially reducing the aggregate amount of oil movement by sea. Where oil must be moved, moving it by pipeline is safer for the environment than any other method of transportation. I argued on CBC radio’s “Mainstreet” show in Halifax on February 13 that improving Alberta’s oil transportation options strengthens Canada. I also disagreed with the perspective offered by a representative of Wilson Fuels that extending the oil pipeline infrastructure will reduce fuel costs for drivers in the Maritimes.
Although converting part of Mainline to move oil potentially could have national benefits, it does not follow that taxpayers should have any involvement in the investment.
As soon as the mid-continent oil gets to tide water, the value of that oil will rise to world price.
Even if mid-continent oil comes east in big amounts, refineries in St-Romuald (across the St. Lawrence from Quebec City) and the Maritimes are still going to have to pay world price for it.
Any oil that makes it as far east as Montreal is unlikely to make it even as far the refinery at St-Romuald because Montreal is connected by an existing pipeline to a deepwater port at Portland, Maine.
As skeptical as I am about discounted mid-continent oil making it to St-Romuald, I am more skeptical about the discounted oil making it to the Maritimes.
Drivers in the Maritimes shouldn’t expect discounted fuel from Alberta oil but neither should they have to contribute financially to the extension of the pipeline network.
Here is an example of a western Canadian oil producer — in this case Cenovus — firing up its lobbying campaign for bringing oil east.
From the perspective of western oil producers, TransCanada Pipelines, and Ontario/Montreal refining interests, dangling the prospect of a sea-to-shining-sea pipeline system would be a great lobbying strategy to get federal support for bringing oil east. When a lobbyist like Frank McKenna raves in the Globe & Mail about getting oil to the Maritimes, he may actually be working for refiners in Montreal but every Maritime politico will be helping him.
Here is an example of NB’s Premier Alward lobbying for an eastern pipeline. Alward’s effort to build Saint John into an oil export terminal seem unlikely to succeed.